Indonesian Institute: Islamic Finance Needs Institutionalization in IIFC

Nur Hidayah, head of the Center for Sharia Economic Development at the Institute for Development of Economics and Finance (CSED Indef), believes Indonesia's proposed International Financial Center (IIFC) needs more than just a mention of Islamic finance. She argues that Islamic finance must be institutionalized through a clear framework of institutions and governance to give the IIFC a competitive edge over other global financial hubs.

Hidayah outlined three levels of debate surrounding the IIFC's design. At the macro level, she questioned the IIFC's legitimacy in attracting global funds, citing risks like money laundering and tax evasion. On the meso level, she pondered the IIFC's unique selling proposition if it merely adopts international standards. The micro level concerns the specific role and positioning of Islamic finance within the center.

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From the macro level, is this IIFC necessary? There is a contestation of legitimacy of potential global funds versus the risks of money laundering, tax revenue erosion, and accession hurdles to the OECD. On the meso level, there is a question, what is the differentiator if all rules copy international standards, where is the uniqueness of the IIFC? If it only relies on fiscal incentives, that has proven to be fragile. Then on the micro level, if for example the IIFC is Islamic, where exactly is the Islamic aspect? Islam is mentioned as a business sector, but it has not been institutionalized as an institutional principle and governance.

She expressed particular criticism regarding the reliance on fiscal incentives, such as zero percent tax. Hidayah asserted that true differentiation should arise from unique products and a robust ecosystem, not from lenient rules. She warned that global trends toward a minimum tax for large multinational corporations could diminish the benefits of such incentives for investors, while the country might still face risks of lost tax revenue.

Furthermore, Hidayah noted that fiscal facilities could create a "spillover effect," prompting businesses outside the designated zone to demand similar benefits. These incentives might also disproportionately benefit high-income and highly educated groups, potentially excluding micro, small, and medium-sized enterprises (MSMEs). "If fiscal investment is structurally fragile, then the attractiveness of the IIFC must be built on legal certainty, institutional quality, and product uniqueness. These are precisely the elements that a mature Islamic finance architecture can provide," she concluded.

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If fiscal investment is structurally fragile, then the attractiveness of the IIFC must be built on legal certainty, institutional quality, and product uniqueness. These are precisely the elements that a mature Islamic finance architecture can provide.