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Debating Islam ( 27 Apr 2015, NewAgeIslam.Com)

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Profiling Islamic Economy and Its Potential


By Ali Rama

April 27 2015

According to the Pew Research Center’s Forum on Religion & Public Life in 2010, the world’s Muslim population is expected to increase from 1.6 billion in 2012 (23.4 percent of the global population) to 2.2 billion by 2030 (26.4 percent).

The study projected that the Muslim population globally would grow at about twice the rate of the non-Muslim population over the next decades. Sixty percent of Muslims live in Asia, 20 percent in the Middle East and North Africa, 15 percent in sub-Sahara Africa, 2.4 percent in Europe and 0.3 percent in the Americas. It clearly indicates that the Muslim population is an important part of the world economy.

A large population from a marketing perspective has a big market potential. The Muslim population tends to be an exclusive segmented market for certain industries.

Currently, some segmented markets have emerged based on the religious aspect or social and ethical values. In the financial sector, for example, there are the Ethical Fund, the Credit Suisse Christian Fund, Islamic finance and others.

Today, the Islamic economy has captured substantial interest in the market, particularly after its sub-sector, Islamic banking and finance, showed a significant increase worldwide. Moreover, the industry has expanded globally to countries with smaller Muslim populations, such as the UK, Germany and the US.

The question is what “Islamic economy” refers to. One thing to note is that the Islamic economy is not just another name for Islamic finance. From a commercial perspective, it naturally encompasses all the sectors driven by the Muslim population’s adherence to some form of faith-based activity that has a market impact.

So, Islamic economy refers to economic activities driven by the Islamic lifestyle, consumer behavior, business practices in accordance with sharia principles and one that has market value (see Thomson Reuters’ Report, 2013).

In 2013, Thomson Reuters issued a special report on the state of the global Islamic economy. The report used “Islamic economy” as a term representing economic sectors driven by the Islamic lifestyle in accordance with Sharia principles. This article is intended to review the report on the global Islamic economy and its potential.

Thomson Reuters (2013) in its special edition classified Islamic economy into several sectors, namely finance and banking, food, family-friendly travel, fashion and clothing, cosmetics and personal care, pharmaceuticals and media and recreation.

Indonesia’s Islamic banks held only 4.85 percent of the country’s total banking assets in 2014.

These sectors are most affected structurally by religious drivers or Islamic values through global Muslim population expenditure.

The report estimated that global Muslim expenditure on food and beverages to be US$1,088 billion in 2012, which was 16.6 percent of global expenditure. Indonesia was documented as the largest Muslim food consumer with $197 billion followed by Turkey ($100 billion) and Pakistan ($93 billion).

Islamic banking and finance has attracted the attention of global finance while becoming a major economic driver for the economies of Muslim-majority countries. Islamic finance assets are currently estimated to be $1.35 trillion. Islamic finance institutions cover banking, sukuk, takaful, insurance, funds and other sectors. Another important and growing sector of Islamic finance is Waqaf (Islamic endowments).

There is a growing trend reflecting the young Muslim demographics desire to keep their faith in a modern, presentable and creative way. The market itself is significant. Muslims globally are estimated to have spent a total of $224 billion on clothing and footwear in 2012, representing 10.6 percent of global expenditure.

 Global Muslim spending on tourism was estimated at $137 billion in 2012 (excluding the haj and minor pilgrimage), representing a significant 12.5 percent of global expenditure. However, the opportunity of the Islamic economy is not just about the needs and preferences of Muslims, but could be transcending the religion’s boundaries for all consumers who seek ethical trade and a wholesome experience.

The potential consumer of the Islamic economy is not limited to Muslims, but also extend to those outside the Islamic faith who share similar values. As such, the Islamic economy transcends geographic, cultural and even religious boundaries, and is emerging as a new economic paradigm that is likely to have a significant global impact over the next decade. This new paradigm will naturally be accepted and implemented in the future.

Indonesia, with the largest Muslim population in the world, can take the economic benefits from the development of the global Islamic economy today.

The Islamic economy’s so-called Sharia industries in Indonesia have captured substantial interest in the market. The business itself can be classified into banking and finance, fashion, halal products, travel and tourism and media and entertainment. Currently, the Sharia industries are growing at an impressive rate in the country.

In banking and finance sector, several regulations have been made to support the industry, namely Wakaf Law No. 41/2004, Islamic Banking Law No. 21/2008, Sovereign Sukuk Law No. 19/2008, Zakat Law No. 23/2011 and Management of Haji Fund Law No. 34/2014.

According to Financial Services Authority (OJK) data, Islamic banking in Indonesia has become the largest retail Islamic banking sector in the world, having 25 million customers and 2,997 bank offices in 2014.

Unfortunately, having the world’s largest Muslim population and experiencing sustained economic growth does not contribute significantly to the increase of market share of Islamic banking in the country. Indonesia’s Islamic banks only held 4.85 percent of the country’s total banking assets in 2014.

While in the capital market, Indonesia’s sharia stock index was launched in 2011. This index reflects stocks that are sharia compliant. The index comprises 237 sharia stocks that account for 53.5 percent of the total stocks listed on the Indonesia Stock Exchange. Its market capitalization reaches Rp 2.11 quadrillion, representing 56.5 percent of total capitalization.

Therefore, Indonesia can benefit from the development of global Islamic finance to boost the country’s Sharia industries. It could invite the Muslim investors, especially from Arab and Gulf countries, to invest in Indonesia. A Sharia compliant plan needs to be developed, such as sukuk, in order to absorb funds from Muslim countries to finance infrastructure projects in the country.

This would be in line with the main program of the President to develop infrastructure.

In terms of halal foods, the House of Representatives and government enacted the Halal Product Law last year. The law will be a challenge for local entrepreneurs to provide and supply global halal products, especially for the Muslim community as well as the global community concerns about pure and ethical food and products.

Another emerging sharia industry is Muslim fashion. There are many young Muslimah who are very creative in designing modest and modern Muslim fashion.

They have held fashion shows at the national and international level. They combine Islamic fashion with local content.

Ali Rama is a lecturer at the School of Economics and Business at UIN Syarif Hidayatullah Jakarta