A country-level approach to regulating sharia-compliant financial services was pioneered by Malaysia in 1997 and is gaining traction elsewhere as authorities try to standardise industry practices and improve consumer perceptions.
The agreement would support efforts by Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), to formulate rules governing Islamic financial services, said OJK chairman Muliaman Hadad.
This would help create new sharia-compliant products, develop a wider pool of sharia scholars, and support education and awareness efforts in the industry, he added.
Indonesia’s national sharia board has traditionally focused on broader religious matters, although it has issued 95 rulings relating to Islamic finance services, 14 of those related to the capital market.
But authorities want to encourage a wider product range to help Islamic banks grab a bigger share of the market, as the sector plays catch-up to more mature markets in Malaysia and the Middle East.
Indonesia has the world’s biggest Muslim population but its Islamic finance market lags well behind that of Malaysia. Indonesia’s Islamic banks held 4.9 percent of total banking assets in the country last year compared with more than 20 percent for their Malaysian counterparts.
A centralised model to supervising Islamic finance is increasingly being adopted across the global industry, although it remains a rarity in the Gulf region.
Previously, many countries left sharia boards in individual Islamic banks and financial firms to decide whether their products and activities obeyed religious principles.
This approach has been criticised for inviting potential conflicts of interest, and for producing conflicting rulings that confused investors.
Last month, Oman’s central bank set up a five-member sharia board to help oversee the sultanate’s Islamic banking industry, while Pakistan’s securities commission established a nine-member sharia board in May of last year.
Morocco and Nigeria have made similar moves, while the United Arab Emirates plans to develop an independent authority which will be backed by specific legislation.
Authorities in Indonesia want to reshape the country’s Islamic finance industry by encouraging consolidation and building a new regulatory system. Regulators are finalising a five-year roadmap to be presented this month to industry players, who have repeatedly called for clearer laws. -AFP