Indonesia’s new halal law: Impact on thepolitical economy

Indonesia’s new halal certification lawwill be implemented by the end of 2019. What are the implications of theupcoming halal law on the country’s political economy and on Indonesia’sambition to be a global halal hub? Made Ayu Mariska and Jefferson Ng try toanswer these questions.

There are currently three developing issuesrelated to the rise of Islamic awareness of public goods in Indonesia. Theseare the laws on Islamic boarding schools (Undang Undang or UU Pesantren);marriages (UU Perkawinan); and halal certification (UU Sertfikasi Halal). Fiveyears since the passing of the Halal Product Assurance Law (Law No. 33/2014),Indonesia will be implementing compulsory halal certification from October 17.

Non-compliance will result inadministrative penalties after a three-year grace period. Compulsory halallabels will impact on the competitiveness of products imported from abroad aswell as Indonesian products exported to Muslim majority countries. Consumerproducts worth about $280 billion in the F&B, cosmetics, and pharmaceuticalsindustries will be affected by the legalisation of this new law.

The new halal certification process

The Jokowi administration is attempting toimprove process efficiency and reduce bottlenecks caused by too many businessesscrambling for certification. But businesses are likely to face significantshort-to-medium term impacts. Implementation is likely to raise costs andadministrative roadblocks and may prevent businesses from obtainingcertification by 2022, when the grace period ends.

Despite business concerns, strong politicalwill remains, regardless of who wins this April’s presidential election ? JokoWidodo and his running mate Maruf Amin, or their challengers, Prabowo Subiantoand his running mate, Sandiaga Uno. Halal law implementation is popular with asignificant number of Indonesian Muslims and could be critical for Indonesia’sambition to become a global halal hub.

In Indonesia, only about 20 percent ofproducts permissible for Muslims to consume are currently labelled halal. TheMajelis Ulama Indonesia (MUI), the highest Islamic scholars’ institution in thecountry, administers a voluntary halal certification scheme. This role will betaken over in October by a new state-owned entity.

A new halal certification system will beintroduced and administered by Badan Penanggulangan Jaminan Produk Halal or theHalal Product Assurance Agency (BPJPH), which will involve MUI and the HalalAudit Institutions (LPH) come October 2019. In the new arrangement:

The BPJPH will serve as the point ofcontact for companies to be halal-certified and the BPJPH willsupervise/coordinate with LPH and MUI;

LPHs are private or government entities(eg. state universities) accredited by the BPJPH to conduct inspections andcarry out halal audits. If products meet halal standards, BPJPH will submit theresults to MUI; and

MUI will examine LPH’s audits and assessthe halal-certification worthiness of products. If the product passes MUI’sexamination, BPJPH will issue the halal certification.

Challenges in navigating complex halalprocess

More Indonesian Muslims are expressingtheir piety and adherence to Islamic values in their lifestyles and consumptionpatterns. A bandwagon effect is underway as more companies respond to growingdemand for halal products, most memorably when Sharp Electronic Indonesiaintroduced a halal-certified refrigerator in mid-2018.

Businesses are likely to be concerned aboutadditional resources (time, money, manpower) needed to comply with the newhalal law. Current trends indicate a significant risk that some businessescould fail to obtain halal certification by October 2022, due to a mismatchbetween institutional capacity and the regulations required.

Non-compliance could mean administrativepenalties or reduced product competitiveness as Indonesians opt for halalcertified alternatives. The costs of compliance are also likely to beburdensome for smaller firms ? the Employer’s Association of Indonesia (Apindo)reckons that each halal certificate will cost about 15 million rupiah onaverage ($1,030).

BPJPH is also severely understaffed whilean estimated 1.5 million F&B companies require certification. This meansdelays as halal screening is a time-consuming process. For reference, MUIprocesses only about 6,000 certification requests annually. For products to bein line with Islamic principles, the entire production line (inputs, equipment,processing, storage, package, and distribution) needs to be scrutinised,including lab-testing for alcohol residue and pork.

The process of navigating certificationfrom BPJPH to MUI is also an additional complexity for businesses. Tostreamline the process, proposed regulations indicate that products certifiedby overseas halal agencies only need to be registered at BPJPH beforecirculation.

This is good news for importers, butdomestic producers that fail to get certification by 2022 could become lesscompetitive than imports.

Nonetheless, the convergence of politicaland economic interests is translating into strong political will to implementthe new halal law. Indeed, the vice-presidential candidate and running mate ofMr Jokowi, Mr Maruf Amin, who is also the chairman of MUI, recently re-affirmedsupport for compulsory halal certification in 2019 at an international halalexpo, asserting that he will push for the law’s implementation.

Impact on presidential election

In the context of the upcoming presidentialrace in April, the implementation of the halal law on consumer products andrelated services will burnish the Islamic credentials of the Jokowi camp.According to a recent poll by Poltracking Indonesia, 58.5 percent of voterswill consider the religious credentials of potential presidential andvice-presidential candidates.

Mr Jokowi’s choice of Mr Maruf Amin as hisVP candidate is a pragmatic realisation of the political reality thatcandidates cannot afford to ignore their Islamic credentials. If PrabowoSubianto wins the presidential election, his governing coalition will be builton a narrower base compared to Mr Jokowi as Mr Prabowo’s coalition comprises asmaller number of allied parties.

Backpedalling on halal law implementationwill cost him political capital which he cannot afford. Thus, political andeconomic indicators suggest that Indonesia will stick to the timetable forimplementation in October 2019.

All factors considered, it is unlikely thatIndonesia’s new halal law will be delayed in its roll-out. If BPJPH remainsill-prepared to execute its mandate even if proposed government regulations aresimplified and made more efficient, businesses need to adapt to the newpolitical and economic reality. But BPJPH must live up to its role as theeffective regulator and enabler of the new halal law.

Businesses should be prepared for potentialdisruption to non-halal inventory and account for delays and costs in obtaininghalal certificates. In the longer term, halal certification is a step forwardfor Indonesia as it positions itself to be a global halal hub.

Economically, compulsory halalcertification may allow Indonesia to leverage its market size to become aglobal halal hub and reap the dividends of the estimated $1.4 trillion globalhalal food industry. Like Sharp Electronic Indonesia, there are opportunitiesin disruption to tap into growing demand for halal products.

Made Ayu Mariska is a research associateand Jefferson Ng a graduate research assistant with the Indonesia Programme inthe S Rajaratnam School of International Studies (RSIS), Nanyang TechnologicalUniversity, Singapore. This comment first appeared in RSIS Commentaries and canbe assed in full at https://bit.ly/2DvGneb

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