There were two situations that were expected to occur during 2022 when the COVID-19 pandemic is over and the economy begins to recover. In fact, the pandemic still exists and is still infecting many people; however, almost all countries have decided to revoke their pandemic status, in the hope that business activities will return to normal. Indonesia is one of the countries that made this decision.
According to an OECD report, as of the second quarter of 2022 year-on-year, the Indonesian economic growth was 5.6%, higher than the G20 countries’ 2.8% and OECD countries’ 3.7%. This prediction gives hope to the market that the Indonesian economy is doing well.
Review of 2022
The inflation rate that continues to rise (5.95% as of September 2022) and the decision of Bank Indonesia to increase the interest rate, even though business activities have not recovered to the levels as before the pandemic, will have an impact on the performance of Islamic banking. The merger of three state-owned banks into Bank Syariah Indonesia, in early 2021, has not yet had a significant impact on Islamic finance.
During 2022, Islamic banking is not expected to experience significant growth as there is a tendency to slow down. As of July 2022, Islamic banking assets grew by 3.9%, almost the same as the previous year’s performance.
In contrast, the Islamic capital market showed attractive growth. As of September 2022 year-to-date, the return on the Indonesian Sharia Stock Index was 8%, higher than the JCI stock composite index. The number of Shariah investors consistently grew by 8.5% to reach 114,000 investors, while the transaction value of stocks by Shariah investors increased by 24%. The Islamic capital market has the largest market share in the Indonesian Islamic finance industry.
Government Sukuk, both local and sovereign, are still the main driver of increasing Islamic financial assets in 2022. As of September 2022, government Sukuk assets increased by 14.5% with a market share of 20% of total government securities.
2022 was crucial as it transitioned from the pandemic to the new normal. If the foundations are prepared in accordance with market expectations, then the pressure on Islamic finance in Indonesia will not have a significant impact in the following year.
Preview of 2023
The shadow of a recession is a real threat that the world will face in 2023. Although it is predicted that Indonesia will not be one of the countries that will experience a recession, it is still important to take this condition into account for 2023.
The level of public consumption, which had begun to grow in the previous year, will slow down in 2023. The inflation rate, which is likely to continue to rise, is one of the factors. The performance of the Islamic capital market is likely to be disrupted because more public funds are saved, in addition to rising interest rates as well as a precaution against a recession.
Fortunately, Indonesia has a competitive advantage since as a country dominated by a young population, the foundation of the Indonesian market is retail. Evidently, over the last 10 years, the main driver of the growth of Indonesian Islamic capital market has been retail.
The spin-off Shariah business units of conventional banks into Shariah commercial banks, as mandated by law, will be a main issue in the Islamic banking industry in 2023. Bank Syariah Indonesia, the largest Islamic bank, will still face internal consolidation issues as a result of the merger. Therefore, the performance of Indonesian Islamic banking will not be much different.
Another thing that becomes a challenge is the low optimization of technology in the Islamic finance industry. There will still be a significant gap in the use of technology between the conventional and Islamic finance industries.
Conclusion
According to the Asian Development Bank report issued in September 2022, the Indonesian economy is estimated to grow 5% with the inflation rate remaining high in 2023. It means that even though the economy is predicted to grow, inflation and interest rates are expected to remain high.
Catching up in technology in the Islamic finance industry is another challenge that will also be faced in the new year. Financial technology is one of the keys to increasing the efficiency and level of deepening of the Indonesian Islamic capital market.
The low level of Islamic financial literacy and inclusion is still a major challenge that must be solved. Therefore, education is the main thing that needs to be done continuously by all stakeholders of Indonesian Islamic finance.
In addition, sustainable finance is still an issue in the development of the Islamic capital market. It could be that the existence of an ESG-based Shariah index will be one of the drivers of sustainable Islamic finance in Indonesia.
The Indonesian Islamic finance industry will face a challenging year in 2023.
Irwan Abdalloh is the head of the Islamic Capital Market Division at the Indonesia Stock Exchange. He can be contacted at [email protected].