The COVID-19 pandemic has changed the rules of the game in both business transactions and social activities in 2020. Restriction of activities, whether at the micro, country or global level, has changed the way people interact. Technology has become a very important thing in human life, both in social and business activities.
According to the World Bank’s June 2020 report on global economic prospects, the pandemic is expected to plunge most countries into recession. The IMF in its World Economic Outlook report in October 2020 forecasted that global GDP will decline by 4.4%. Nevertheless, the effect is predicted to only be short-term; both the World Bank and IMF forecast the economy will bounce back in 2021.
Review of 2020
Indonesia’s economy in 2020 is not as scary as predicted by many. It is true that negative growth has occurred in many sectors but with the incentives, subsidies and right policies by the government, the impact is not too worrying.
According to data from the Central Bureau of Statistics, Indonesia’s GDP growth by the second quarter of 2020 (Q2 2020) was negative 5.32%, but the current year inflation rate in September 2020 was only 0.89%. The interest rate declined from 5% in 2019 to 3.8% in Q2 2020, while non-performing loans were still well controlled at 3.2%. Hence, Indonesia is one of the countries predicted to experience the least impact from the pandemic.
As of July 2020, despite the COVID-19 outbreak, the assets of the Islamic finance industry, excluding Islamic stock market capitalization, increased 10% compared with the previous year, from US$98 billion to US$108 billion. The asset value of the Islamic capital market was greater than Islamic banking with a market share of 61% of total Islamic finance assets. This increase was driven by the intensive issuance of government Sukuk during 2020. Apart from the regular issuance of Sukuk, the Indonesian government is still consistent in issuing green Sukuk, both sovereign and retail.
There were three retail Sukuk issuances in 2020, more than in previous years, all of which were oversubscribed by the youth. Other than that, the government of Indonesia issued a new retail Waqf Sukuk facility. There was an anomalous condition in the Indonesian Islamic stock market when the Islamic stock indices grew negatively, but the performance of transactions increased significantly, higher than the previous year.
Preview of 2021
The Roadmap of Indonesian Islamic Capital Market 2020–24 that was recently issued by the Financial Services Authority (OJK) will encourage the development of the Indonesian Islamic capital market to be more focused on the retail market, product innovation and financial technology without neglecting the compliance with Shariah principles.
Therefore, the Islamic capital market is still predicted to grow significantly in 2021 regardless of whether the pandemic has ended or not. The involvement of young people as Shariah investors will increase due to the easier way to conduct Islamic securities transactions. Islamic financial literacy activities will be more intensive by using two channels simultaneously: online and offline. The public has become accustomed to online-based activities during the pandemic and this is a competitive advantage for conducting online literacy activities.
Other than that, the Indonesian Islamic banking industry will enter a new phase due to the government’s decision to merge three state-owned Islamic banks. Several local government-owned banks are in the process of migrating from conventional to Islamic. The non-bank Islamic financial industry will further develop with the inauguration of the Indonesian Sharia Fintech Association by the OJK. The use of blockchain to reach financing for the micro and SME sector will increasingly become a reality because the regulator, along with the association, is conducting research on this matter.
With the hope that a vaccine for COVID-19 will soon be found and can be used for the public in 2021, this will certainly accelerate global economic growth. Referring to the IMF report in October 2020, it is predicted that the global economy will recover in 2021 with a projected GDP growth of 5.2%. Meanwhile, Indonesia is estimated to experience economic growth of 6.1% in 2021, higher than the global growth. This prediction will provide a positive impact to the growth of Indonesian Islamic finance.
As the fourth-most populous country in the world, Indonesia has a competitive advantage where 68% of the population consists of youths. Therefore, the development of Indonesian Islamic finance should focus on the retail market by increasing technology-based literacy and optimalization of Islamic fintech. Government support in the form of providing incentives, easiness for market players to innovate and legal certainty is important so that Indonesia will become the center of global Islamic finance in the near future.