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Islamic Finance in ending poverty & fighting inequalities:

Indonesia experiences

IDB Global Forum on Islamic FinanceJakarta, 16th May 2016

2Foreword

• This presentation will focus on the segment of Islamic finance that has been left behind because of - but not limited to, that the particular sector has been mispercieved to be less powerful in sustaining economic development.

• As a result of that misperception no one has put sufficient attention on this sector particularly in the area of institutional governance.

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Empowerment steps:1. Assessment2. Capacity buliding3. Zakat allocation4. Mentoring

Framework

Zakat

Utilization framework of Islamic Finance in ending poverty, fighting inequality and achievingother UN Sustainable Development Goals (SDGs).

Awqaf(land, cash, etc)

consumptive

productive

Zakat recipients

Social: school, hospital etc

Bussines & investment

Zakat payers

Profit

Awqaf-linked sukuk

elevated

zakat empowerment

awqaf utilization

Notes on UN SDGs:#1 No poverty#2 No hunger#3 Good health#4 Quality education#10 Reduced inequality

4Productive Zakat: Micro-business EmpowermentMicro-business empowerment approaches: 1. Individual approach

Offering qardul hasan financing or other Islamic financing contracts to individual mustahiq.

1. Collective approach Zakat Community Development (ZCD) programme, offering Islamic financing based on:a. Community – group of mustahiq with common activities.b. Demographic –group of mustahiq that segmented by ethnicity, gender, etc.c. Geographic –group of mustahiq that segmented by area, such as cities, rurals, etc.

ZCD Realization in 2014: 49 villages in 9 provincesSource: BAZNAS

Hence: Considering the size of potentials, a solid governance framework is necessary!

5Awqaf Utilization

Social and philanthropic

spirit

Corporate management

Legal base

Managing awqaf-asset productively

Providing broader social

benefits

Maintaining validity & solid accountability

Effort to boost productive waqf optimality:1. Waqf Act 2004 and various government

regulations regarding menagement on waqf-land and waqf-cash.

2. Waqf-cash collection through authorized agencies and Islamic banks to broaden collecting points.

3. Regulating awqaf-organizer colaboration with corporate sector in order to manage awqaf-asset productively.

4. Proposing alternative project-based funding: awqaf-linked sukuk.

5. Designing accountibility framework: Waqf Core Principle (WCP)

6Ensuring accountability: ZCP and WCP

To ensure zakat and awqaf management accountability, a robust governance frameworkis a necessity: Zakat Core Principle (ZCP) and Waqf Core Principle (WCP).

The development of the Islamic financial system can be optimized when it is integrated into the national policy and get synchronized with the surrounding regulatory framework. It has to stand at the same par to other financial sub-sectors.

Areas of Regulations Principles

Legal foundation ZCP-1, ZCP-2, ZCP-3

Zakat supervision ZCP-4, ZCP-5, ZCP-6

Governance ZCP-7, ZCP-8

Disbursement process ZCP-9, ZCP-10

Risk management ZCP-11, ZCP-12, ZCP-13, ZCP-14

Sharia Governance ZCP-15, ZCP-16, ZCP-17, ZCP-18

ZCP has been constructed, next step is WCP

7Challenges

1. “Lack of knowledge “ about zakat and awqaf: some still manage zakat and mostlywaqf in traditional way:

• neglecting government regulations

• appointing awqaf-organizer with unwritten contract

2. Low quality of awqaf-organizer in managerial aspects and spirit of entrepreneurships.

3. Education and socialization of productive zakat and awqaf is limited.

4. Shortage of quality human capital for mentoring the empowerment process.

To summarize the 4 above points, we need to have strategic development plan to make the development effort getting more effective.

Some solutions1. Enhancing knowledge in a modern context on zakat and awqaf by inclusion of zakat

and awqaf moduls in formal education.

2. Implementing ZCP and WCP and formal auditing mechanism.

3. To have an international standards for zakat and awqaf and an international body that provide standardised regulatory-framework (Indonesia will be the host).

4. Having good governance in place the next step is to put this sector in the national policy which enable the government to measure the impact and to formalise the strategy to make it more significant to the national economic development.

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Thank You