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Southeast Asia, Islam and Economy in

Mohamed Aslam Haneef
Oxford Islamic Studies Online What is This? Online-only content developed by noted scholars is continuously added to the site, part of our ongoing efforts to expand our coverage of the Islamic world.

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Southeast Asia, Islam and Economy in

Southeast Asia has a total population of approximately 600 million, with about 40 percent being Muslim, hence making it the largest religion in the region. This article will discuss the role of Islam and the economy primarily of the area historically known as the Malay Archipelago (Malaysia, Indonesia, southern Thailand, southern Philippines, Brunei, and Singapore) but will focus primarily on Malaysia, where the most significant developments have taken place over the last thirty years, and to a lesser extent Indonesia. As a result of the colonial legacy, countries in Southeast Asia adopted either capitalist or socialist economic structures. After gaining political independence following World War II, the modernization thesis—wherein the secular development path was promoted—emerged and seemed to be in place by the 1950s and 1960s. Islam as a religion was reserved primarily for “ceremonial purposes.” However, since the late 1970s, this modernization thesis has been challenged. Rather than the diffusion of secular norms, the region witnessed a clear rise of Islamic consciousness. In addition, clear Islamic reforms became evident, with four important ingredients necessary for them: political will, credible initiators and communicators, the establishment of Islamic economic and financial institutions, and support for legal, educational, and social reforms. Hence the simple “decline in religion” hypothesis of the modernization/secularization theses may not apply in the case of the countries of Southeast Asia with Muslim majorities, namely Malaysia, Brunei, and Indonesia. This change was first initiated in Malaysia.

Political Will

In 1981, the administration of Malaysian Prime Minister Mahathir Mohamed announced that it would be setting up an Islamic Consultative Body (ICB) “made up of Islamic experts in administration, law, economics, medicine, engineering, agriculture, sociology, Islamic philosophy and politics” that had the task of analyzing and evaluating the then policies and technology with the intention of modifying them to ensure that national development programs conformed to Islamic values. This gave the impression that the government was attempting some kind of “sifting” or quality testing for all development policies at the national level.

Later in 1981, together with the Look East Policy (learning from the good practices of the Japanese and Koreans), the government announced its Inculcation of Islamic Values (IIV) Policy, which was meant to cover government administration to enable the country to have an effective, strong, just, and progressive administration. This was to create a dynamic work ethic that would increase productivity. The important values stressed were Trustworthiness, Responsibility, Sincerity, Dedication, Moderation, Diligence, Cleanliness, Discipline, Cooperation, Integrity, and Thankfulness. Rather than imposing Islamic law or some other external aspects of Islam, the IIV policy was an attempt at improving individuals in their thinking, behavior, and value orientation. Thus, culture (including values and attitudes) and religion were seen to play an important role in determining the success or failure of economic policies. These value-policies are central in understanding the Malaysian attempt at modernization.

Initiators and Communicators

Credible leaders and popular support were also ingredients needed in any reform agenda. Possibly one of the most important successes at the time was the co-option of Anwar Ibrahim, the then president of the Muslim Youth Movement of Malaysia (Angkatan Belia Islam Malaysia, ABIM), to join the government in 1982. Not only was Anwar instrumental in the Islamic initiatives of the federal government, he was also their main spokesperson. Some may say that his co-option, followed by the support of Islamic NGOs, provided the foundation of all future Islamic reforms in the next decade and a half. The parting of ways between Mahathir and Anwar, leading to the sacking and subsequent imprisonment of the latter in 1998, proved disastrous for Malaysia and the federal government, as far as its Islamic credentials were concerned. There was a huge backlash against the federal government and especially in the United Malays National Organization (UMNO).

Political will and credible initiators and communicators were also important in Indonesia. Although a decade later, a similar unfolding happened in Indonesia. In the early 1990s, the Suharto regime absorbed elements of Muslim social organizations such as Muhammadiah and smaller groups such as Ikatan Cendakiawan Muslim Indonesia (ICMI) that saw a clearer Islamic reform agenda for Indonesia. ICMI was led by B. J. Habibie, who later became deputy president and, for a short period when Suharto was ousted, president. Like Anwar in Malaysia, Habibie and his connections to the Islamic organizations in Indonesia led the Islamic reform agenda.

The Establishment of Islamic Institutions

Political will and credible initiators were crucial to the Islamic reforms undertaken both in Malaysia and Indonesia. The area of focus was very much economics, rather than issues relating to the Islamic state and sharīʿah law, although there were groups asking for these. However, the focus on economic reforms seemed to be both politically expedient, and from a development point of view, important and timely.

Islamic economic/financial institution

By the end of 2009, the Islamic financial system in Malaysia was represented by twenty-one full-fledged Islamic banks (four being foreign, but locally incorporated), an Islamic interbank money market (established in January 1994); and nine takāful (Islamic insurance operators), including one international operator, offering more than forty financial products, and four retakaful (Islamic reinsurance companies). To complement the Islamic banking system, the capital market has also seen a rapid growth of Islamic debt securities and equity markets, with the Labuan Islamic Offshore Financial Centre (subsequently renamed Labuan Financial Services Authority) being set up in 1990 and offering Islamic facilities since 2001. Takāful has seen an annual growth of about 68 percent over the 1986–2000 period but still commands only a very small (11 percent) percentage of the total market. The Financial Sector Masterplan of the nation set Islamic banking and takāful to capture 20 percent of the market share by the year 2010, a goal that was achieved. Malaysia also has made reforms to its capital market, money market, foreign exchange market, and commodity market. For example, almost 65 percent of all ṣukūk (Islamic bonds) issued in the global ṣukūk market are in Malaysia. Although not totally protected, Islamic finance as a whole has shown a better performance to the post-2008 financial crisis that has plagued the developed markets.A decade after Malaysia’s establishment of Islamic financial facilities, Indonesia is fast following along the same path. The growth of Islamic banking and finance is phenomenal, held back only by the inability to meet demand and by limits on human resources. For various economic reasons, Islamic banking represents about 2 percent of the total sector in Indonesia, similar to Malaysia’s position about fifteen years after it had introduced its first Islamic bank. There are all indications that Indonesia, since recovering from the 1997–1998 financial crisis, is on the right track economically and is politically more mature than Malaysia. Hence, it will be a natural choice for the development of the Islamic capital market over the next decade or so.

Zakāt and Baitul Mal

The institutions of zakāt (obligatory religious tithe) and the baitul mal (historically the “treasury”) have also seen many reforms. In Malaysia, these started in the 1980s. Zakāt, which is a fundamental tenet in Islam, basically requires those who have more than a stipulated amount of wealth to give to those who are entitled. The various state baitul mal have also undergone management and administrative improvements over the last three decades and in some states like the Federal Territory of Kuala Lumpur and Selangor, there have been major reorganization efforts that have utilized modern management practices and knowledge of finance and investment to create more professionally run organizations and are now contributing to economic development activities in the country.

In addition, there is also a sharīʿah compliant stock index called the Kuala Lumpur Shariʿah Index (KLSI) representing “sharīʿah approved” stocks according to criteria set by the Shari’ah Panel of the Securities Commission. For more than a decade, Malaysia has, for all practical purposes, had a functioning Islamic financial system running parallel to the conventional one, something that many other Muslim countries are also moving toward.

Indonesia has also seen many reforms of the zakāt and wakf (religious endowment) institutions. Two institutions deserve mention: the government Badan Zakat Nasional (BAZNAS) and the private entity,Dompet Duafaʾ have both mobilized zakāt and waqf as institutions playing a greater role in the socioeconomic uplifting of people. In the case of Indonesia, this is even more important due to the widespread problem of poverty and the relative inadequateness of government policy since the 1960s to combat the problem.

Noneconomic/Financial Institutions

While economic/financial institutions are a very large component of the Islamic reforms undertaken in the last twenty-five years, there have also been very important developments in supporting areas, especially in the education and legal spheres.

Educational/research institutions

The first development in the education sphere was the establishment of the International Islamic University Malaysia (IIUM) in 1983. To date, the IIUM offers an integrated curriculum in courses such as economics, law, Islamic revealed knowledge, education, human/social sciences, engineering, architecture, medicine, and basic sciences, taught in English (with some courses in Arabic). The underlying mission of the university is to produce graduates who are not only professionally competent, but imbued with good values, from an Islamic perspective. Since 1987, the IIUM has so far produced more than fifty thousand graduates who have joined both the public and private sectors globally. In 1987, through the IIUM, the government set up the International Institute of Islamic Thought and Civilization (ISTAC) with the objectives of promoting and undertaking more serious research in the fields of Islamic thought and civilization. In 1992, the Institute of Islamic Understanding (IKIM) was set up under the auspices of the Prime Minister’s Department with the objective of providing a proper understanding of Islam, its principles, and values to all Malaysians, especially the non-Muslims. In the mid 1990s, the government also set up the Islamic University College of Malaysia (Kolej Universiti Islam Malaysia), which was recently renamed Islamic Science University of Malaysia (Universiti Sains Islam Malaysia). All these efforts were ostensibly to undertake educational reforms in the country that tried to integrate religious and other areas of modern knowledge.

Indonesia preceded Malaysia in the area of Islamic educational and intellectual history. However, due to many reasons, including politics and economics, the dual education system prevalent in most Muslim countries also plagued Indonesia (as well as Malaysia). The traditional Islamic schools and institutions of higher learning were not able to produce the kind of human resources needed for development. However, since the Islamic reforms of the 1990s, there has been an increase in focus on Islamic education. Many pesantren modern as well as Islamic universities are being set up, and many are being revised. The approach is similar to that in Malaysia where both Islamic heritage and modern disciplines are being taught.

Legal reforms

Besides the IIV policy and the institutions discussed earlier, there have been serious attempts to upgrade the status and scope of Islamic law in Malaysia and Indonesia. In the case of Malaysia, since the federal constitution states that “Islam is the religion of the Federation” (Art. 3 (1)), reforms have been carried out to enable Muslims to follow Islamic law in its entirety, albeit gradually. In this light, various acts and legislations have been amended to enable the Islamic institutions to function legally. For example, the Banking and Financial Institutions Act had to be amended and the Islamic Banking Act (1983) had to be introduced to enable Islamic banks to operate. Although these may seem to be simple matters, the fact that a large number of members of Parliament are non-Muslim indicates the political will and agreement and support from non-Muslims are needed to get these amendments passed. The status of sharīʿah courts have also been upgraded and are being reorganized with better qualified personnel. Attempts are being made to widen the jurisdiction of the sharīʿah courts, but this is being done very cautiously. Despite all caution, these legal reforms do create debate and concern among some parties about where this is taking Malaysia.

The same path is seen in Indonesia. Laws had to be introduced to allow for Islamic banks to operate in Indonesia. Similar enactments are being introduced to improve zakāt and waqf institutions, while staying away from some of the more sensitive issues such as ḥudūd.

The Crisis Years and the Renewed Attempt of Islamic Reforms

Interestingly, the crisis of 1997–1998 generated interesting developments in both countries. Islam as an ingredient in development policy and decision-making seems to have become embedded. People want Islam to play a bigger role in their daily life, including in the economic dimension. Are the four ingredients discussed above intact?

In Malaysia, the parting of ways between Mahathir Mohamed and Anwar Ibrahim, and the subsequent sacking and imprisonment of the latter had a profound effect on the development of Islamic reforms in Malaysia. Islamic elements in the administration, especially those perceived to be aligned to Anwar, were purged or chose to leave, many to join the opposition. Ironically, it was the Mahathir administration’s own IIV policy and the pro-Islam reforms that led many Muslims, including civil servants, to judge Mahathir’s actions as being “improper” and “unjust.”

In October 2003, Mahathir retired from office after twenty-two years. His successor, Abdullah Ahmad Badawi, introduced a policy called Islam Hadhari (”civilizational Islam”), a new approach to “returning” Muslims to the true teachings of Islam, one that promoted, among other things, peace, progress, and prosperity for all. It was to Badawi’s credit that he realized the importance of re-establishing the federal government’s credentials as the promoter of Islamic reforms. This new approach of presenting the progressive nature of Islam (and also coming after the 9/11 attacks) is based on ten core principles that cover both personal and public dimensions of life and range from personal piety/belief to public policy. Domestically, the report card has still not been finalized, although some Islamic credibility was salvaged between 2003 and 2008.

In March 2009, Abdullah Badawi stepped down as prime minister and was replaced by his deputy, Najib Abdul Razak. The main tagline of Najib’s first year in office has been his 1Malaysia campaign. As far as Islam is concerned, there has been no specific policy announcement. While Islamic finance has continued to be pushed as a main feature of the government, political will and especially the lack of credible initiators and communicators seems to be a stumbling bloc for the present government to carry out the reforms that were seen in the 1980s and early 1990s. Anwar Ibrahim, the central figure in the National Front’s Islamic reform agenda in those years is, in 2011, the opposition leader in the Malaysian Parliament. Together with the Islamic Party of Malaysia and the Democratic Action Party of Malaysia, his own Peoples Justice Party, managed for the first time in Malaysian history to deny the ruling National Front its usual two-thirds majority in Parliament in elections held in March 2008. The future political scenario, especially the role and position of Islam in development policy is still unclear, although it would seem that in the near future some form of consultation and cooperation from all parties is needed to succeed.

In Indonesia, the post-Suharto era has seen, albeit with much pain, an opening up of political and social space. Although Islam is an important factor in people’s lives, the more mature and open environment in Indonesia since the late 1990s has required political parties to move to bigger agendas such as freedom, good governance, and a clear anticorruption stance, rather than mere emotional sloganeering of Islam. In fact Islamic political parties faced a setback in Indonesia in their 2010 elections as voters were not impressed with their lack of ability to deliver.


Islam is an important factor in development policy in Southeast Asia. However, the present stage of development has required proponents to go beyond rhetoric. Malaysia, with a more advanced Islamic reform agenda, however, is politically, socially, and intellectually less mature than Indonesia. However, the economic challenges of Indonesia are more severe than that of Malaysia. How these dimensions play out and how the various actors in promoting Islamic reforms in those countries deal with the complex issues of Islam and development will be an important feature of the region in the near future.


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