The path towards 15% asset share for Islamic assets in Indonesia banks was not clear as growth stalled in Islamic banking assets in the last year at the 5% level. A roadmap from the financial services regulator OJK is a significant step forwards and follows similar moves in Pakistan where the State Bank of Pakistan (SBP) set up a strategy paper with timelines for specific moves to implement to aid the development of Islamic finance. The development in Pakistan was followed with changes to the capital requirements for Islamic banks and windows to put them on equal footing. Hopefully the roadmap in Indonesia can lead to similarly concrete changes.
One of the areas that is of particular interest is the impact of education and training programs as well as efforts to combat low financial literacy that an OJK study found was limiting penetration of the industry. The area of education and training programs for Islamic financial institutions, on the one hand, and financial literacy on the other can be important for developing Islamic finance. To some degree, they work in parallel.
Building education of the staff of Islamic financial institutions can help them interact better with the bank’s customers and better help staff sell their products. It is important to have quality staff, but from the regulator’s perspective it can’t be the only priority. The increased knowledge of the products (at least to the extent needed to communicate their details with prospective customers) can produce a direct boost to the bottom line and can more easily be shown to add to profits.
However, if any of the countless examples including the US subprime mortgage bubble shows, making credit available and giving staff enough information to sell it effectively isn’t necessarily going to increase the overall assets of the Islamic banking sector in the best way. A regulator will also be concerned with consumer protection which is where the focus on financial literacy has an important role to play when done along with training and education of financial sector employees. By increasing the financial literacy of customers (and building consumer advocacy organizations in the process through the organizations providing financial literacy education), they can better understand whether they are being sold an appropriate or inappropriate product.
The balance between more training for front-line staff to more effectively understand (and sell) products and consumer protection (which requires more consumer financial literacy) applies in either Islamic or conventional situations. In theory, the Islamic financial products are designed to be more transparent in their mechanics but sometimes they are more opaque because the more complicated structures necessary to fit into conventionally-oriented regulatory & tax systems.
This heightens the need for more consumer financial literacy not just to understand their own individual financial needs, but to also understand how Islamic financial products differ and to know which ones are the best so that they cannot be improperly sold to customers solely on the basis of their Shariah compliance. The benefit, however, for increasing financial literacy of Islamic finance in particular, is that it would build awareness of Islamic banking and educate consumers about how it differs (and how it does not differ) from conventional banking.