Rupiah Weakness Poses Threat to Indonesian Islamic Banking, Says Academic

The Indonesian rupiah's slide to Rp17,698 against the US dollar is creating significant pressure on the nation's Islamic banking industry. Academics at Universitas Muhammadiyah Yogyakarta (UMY) note that the weakening currency now challenges the stability of financing and liquidity in Islamic banks, not just conventional ones.

Dimas Bagus Wiranatakusuma, an economics lecturer at UMY, explained that the rupiah's depreciation triggers a chain reaction. It drives up the prices of imported goods, impacting the real sector and businesses' ability to meet financial obligations. While Islamic banks' cautious principles offer initial protection, the inflationary effect of imported goods still disrupts the quality of their financing.

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The rupiah's depreciation brings a chain effect through rising prices of imported goods which then affects the real sector and business capacity in fulfilling financing obligations.

Businesses that are primary customers of Islamic banks, particularly those dependent on imported raw materials, production machinery, energy, and dollar-denominated capital goods, face increased production costs and reduced profit margins. This directly weakens their capacity to repay loans to Islamic banks, potentially leading to a rise in non-performing financing (NPF).

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In such a situation, the ability of customers to pay their financing obligations to Islamic banks also weakens. This is where the risk of problematic financing or non-performing financing (NPF) starts to increase.

The trade, manufacturing, textile, pharmaceutical, and import-reliant small and medium-sized enterprises (SMEs) are most vulnerable. If the situation persists, the strain on Islamic banks' financing quality will intensify. However, Dimas suggests Islamic banks still hold advantages due to their limited exposure to foreign exchange instruments and international derivatives. Nevertheless, liquidity pressures can emerge when Bank Indonesia maintains high interest rates to stabilize the rupiah, increasing the cost of fundraising even for non-interest-based institutions.

This challenging environment could serve as an opportunity for Islamic banks to enhance their financing quality and risk management. Principles like financing based on underlying assets, risk-sharing, and prohibiting speculation can fortify the Islamic financial industry. The focus should shift towards supporting domestic productive sectors such as SMEs, local halal industries, agriculture, and renewable energy.

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In a situation of high uncertainty, people become more cautious in placing their funds. If not managed properly, liquidity pressure can also be felt by the Islamic banking industry.