Journal of Central Banking Law and Institutions

ASSESSING THE ROLE OF ISLAMIC BANKING IN DRIVING INDONESIA’S ECONOMIC GROWTH DURING COVID-19

2025-04-01T10:56:44+00:00

This study examines the role of Islamic banking in supporting Indonesia’s economic growth during the unprecedented disruption caused by the COVID-19 pandemic from March 2020 to May 2023. The study employs the Autoregressive Distributed Lag (ARDL) model to investigate the relationship between key Islamic banking indicators and economic performance, as proxied by the Industrial Production Index (IPI), in both the short and long term. The empirical findings suggest that Islamic bank financing, as measured by the financing-to-deposit ratio (FDR), gross fixed capital formation (GFCF), and total assets, has a significantly positive impact on long-term economic growth. However, its short-term effects were relatively limited. These results underscore the importance of strengthening regulatory frameworks and promoting profit-and-loss-sharing mechanisms to enhance the resilience and developmental impact of Islamic banking, particularly in supporting economic recovery following financial shocks. By focusing on a crisis, this study offers novel empirical insights into the stabilizing role of Islamic banking during periods of economic turbulence and contributes to promoting economic resilience.

DATA GOVERNANCE FOR ARTIFICIAL INTELLIGENCE IMPLEMENTATION IN THE FINANCIAL SECTOR: AN INDONESIAN PERSPECTIVE

2025-05-06T02:06:48+00:00

The fast-evolving landscape of Artificial Intelligence (AI) is transforming industries worldwide, including Indonesia’s financial sector. While AI presents immense opportunities for innovation and efficiency, it also poses complex challenges in data governance. This paper explores the need for Indonesia to establish a comprehensive and forward-thinking data governance framework tailored to AI implementation in the financial sector. Using a literature review method and drawing on global and local regulatory developments, the paper outlines key principles for AI-related data governance, including transparency, accountability, specificity, enforceability, and adaptability. By reimagining its approach to data governance, Indonesia can mitigate the risks of data misuse, enhance personal data protection, and foster an environment conducive to responsible AI innovation. The research addresses the foregoing issues by offering a conceptual foundation for policymakers, regulators, and financial institutions in Indonesia to develop better rules and practices for managing AI-related data to strengthen Indonesia’s technological sovereignty, particularly in the financial sector. The study finds that Indonesia’s current data governance framework in the financial sector is not yet optimal for supporting AI implementation. Indonesia’s data governance framework requires adjustments in key areas, namely specificity, enforceability, and adaptability, while also promoting stronger cooperation among stakeholders.

ANALYSIS OF ARTIFICIAL INTELLIGENCE IN FINANCIAL REGULATION IN MALAYSIA, INDONESIA, AND THE UNITED STATES

2025-05-06T02:15:59+00:00

This study examines the regulatory frameworks governing artificial intelligence (AI) in financial markets in the United States, Malaysia, and Indonesia using a doctrinal method and a structured questionnaire with 403 respondents. Grounded in institutional theory, this study examines the regulatory, normative, and cultural-cognitive pillars that influence AI adoption, systemic risk management, and consumer trust. The findings revealed significant disparities across jurisdictions. In the United States, robust doctrines, such as the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and FTC Guidance on Algorithms and AI (2020), ensure transparency, accountability, and systemic risk mitigation, fostering higher operational efficiency and consumer trust. In contrast, Malaysia’s 2020 Risk Management in Technology (RMiT) Guidelines and 2021 Capital Markets Master Plan 3 demonstrate partial effectiveness due to limited enforcement. Indonesia’s framework, including the 2108 Digital Finance Innovation Roadmap and the 2020 National AI Strategy, remains underdeveloped to address AI-related biases and systemic risks. The results from the structured questionnaire highlight a strong relationship among transparency, accountability, and consumer trust in the U.S., while Malaysia and Indonesia exhibit weaker impacts due to regulatory ambiguity. This study advocates harmonised AI governance that integrates doctrinal principles with enforceable mechanisms to ensure ethical AI deployment, systemic resilience, and investor confidence.

MEASURING THE URGENCY OF A DIGITAL RUPIAH: A SOCIO-LEGAL REVIEW

2025-02-09T15:30:46+00:00

This study evaluates the necessity of a Digital Rupiah, Indonesia’s central bank digital currency (CBDC), by addressing issues in the cryptocurrency system, including tracking, third-party involvement, and instability. The socio-legal methodology employed in this study examines the impact of CBDC policies on the social spheres associated with the widespread implementation of a Digital Rupiah through its approaches, including normative, contextualised, independent critical analysis, and comparative analysis. By examining the potential legal and social implications of a Digital Rupiah in Indonesia, this study assesses the potential legal shifts in normative habits that may result from its implementation. It investigates the social needs that could be met through the widespread adoption of a Digital Rupiah. The findings were evaluated using bounded rationality to determine whether there is an urgent need for a Digital Rupiah in Indonesia. The author argues that studies on CBDCs in Indonesia have mainly focused on systems and policy development. In contrast, this study extends this discussion by examining the pressing need for CBDCs, as outlined in the Digital Rupiah White Paper. This study argues that the socio-legal perspective adopted is distinct from prior studies, which have primarily focused on the design of systems and policies. It emphasises the importance of the legal aspects of CBDCs in general.

THE AI PARADOX IN CENTRAL BANKING: NEW POWERS, NEW VULNERABILITIES

2025-05-06T02:21:21+00:00

The integration of artificial intelligence into central banking disrupts the traditional bank regulator relationship, creating asymmetries that private institutions exploit. This paper examines how AI-driven market surveillance and predictive risk modelling erode private banks’ informational advantages, compelling them into a Schumpeterian race for survival in which innovation becomes imperative. Using a qualitative analysis of regulatory developments and financial market adaptations, this study argues that enhanced central bank AI capabilities paradoxically accelerate the emergence of opaque financial segments designed to evade oversight. The findings indicate that this shift transforms regulatory dynamics, positioning central banks as real-time market participants while private institutions develop increasingly sophisticated methods of regulatory evasion. This evolution generates systemic risks that existing regulatory frameworks struggle to address, necessitating adaptive oversight mechanisms. The study concludes that the imperative progressively drives financial innovation to maintain opacity in response to algorithmic supervision, underscoring the need for regulatory models that balance AI’s benefits with emerging vulnerabilities.

REVOLUTIONISING THE SHARIAH SECRETARIAT FUNCTION THROUGH ARTIFICIAL INTELLIGENCE: PROSPECTS AND CHALLENGES FOR MALAYSIA’S ISLAMIC BANKING SECTOR

2025-05-06T02:20:14+00:00

This paper examines the potential and challenges of integrating artificial intelligence (AI) as a transformative approach to revolutionising the Shariah Secretariat function in Malaysia’s Islamic banking sector. The Shariah Secretariat, as outlined by Bank Negara Malaysia’s Shariah Governance Policy Document, plays a vital role in facilitating and supporting the secretarial and administrative matters of the Shariah Committee. This study examines the potential of AI to significantly enhance the effectiveness of the Shariah Secretariat, particularly through process automation, document management, regulatory reporting, and decision-making processes. However, AI integration poses critical challenges regarding the clarity of accountability, liability, and ethical considerations due to the autonomous nature of AI-driven processes. The research underscores substantial gaps in Malaysia’s existing legal and regulatory frameworks governing the application of AI in Islamic banking. To address these challenges, the study suggests specific legislative changes and recommends that Malaysia’s National Guidelines on AI Governance and Ethics principles be made binding to ensure transparent, ethical, and accountable AI practices within Islamic banking. Drawing on international frameworks, including the European Union’s AI Act and the OECD AI Principles, this paper recommends a holistic approach to regulatory refinement in Malaysia, aiming to sustain technological innovation while safeguarding Shariah compliance, ethical standards, and public trust.

AI IN FATWA FORMULATION: TRANSFORMING SHARIA-COMPLIANT FINANCE

2025-03-08T04:08:27+00:00

Fatwas play a pivotal role in Islamic jurisprudence, serving as legal instruments to ensure that financial practices align with Shariah principles. For Islamic financial institutions, timely and accurate fatwas are essential to maintain compliance, operational clarity, and stakeholder trust. However, the fatwa development process is often time intensive. This study examines how artificial intelligence (AI) can be leveraged to enhance the efficiency and responsiveness of fatwa formulation. Using the Analytic Network Process (ANP), Shariah advisors and members of the Shariah Supervisory Board of Islamic Financial Institutions assessed the benefits, costs, opportunities, and risks associated with AI adoption. AI’s capacity for comprehensive data analysis is found to be the most weighted benefit. Key concerns include the cost of scientific verification, the risk of automating sacred decision-making, and the weakening of istinbath (legal reasoning) by scholars. To harness AI’s potential while preserving the integrity of Islamic jurisprudence, it is essential to have appropriate tools, training, and governance frameworks in place. AI has the potential not only to streamline the issuance of fatwas but also to transform the responsiveness and scalability of Shariah-compliant financial services. This study contributes to the literature on AI and Islamic jurisprudence by presenting an evidence-based framework for the responsible integration of AI in Shariah governance.