Building a Disaster-Responsive Ecosystem and Economic Sustainability Through Islamic Finance
By: Iwan Rudi Saktiawan, Islamic Economics Observer and Policy Analyst at KNEKS
JAKARTA – We cannot choose our geological destiny, and for the Indonesian nation, that destiny is to breathe above a perpetually restless “Ring of Fire”. September 2026 once again reminded us of this inescapable reality. Four volcanoes across the archipelago erupted within almost the same period.
Anak Krakatau raged to the point of disrupting flight routes, Semeru in East Java once again spewed volcanic ash 1,000 metres high, whilst Mount Ibu in North Maluku recorded an eruption column reaching approximately 400 metres above its summit, or around 1,725 metres above sea level.
As a religious nation, this string of natural events is certainly a moment to draw closer to the Almighty Creator. However, spiritual closeness alone is not enough; it must be translated into tangible and measurable earthly endeavours.
It must be acknowledged that, thus far, our response to disasters has often stalled at a purely charitable approach. We flock to send instant noodles, erect tents and distribute blankets, then feel our humanitarian duty is complete once the emergency response period is lifted. Yet disasters do not merely tear down the walls of houses. Disasters seize livelihoods, destroy local economic supply chains and fundamentally paralyse communities’ productive capacity.
The question then becomes: how do we build a recovery system that does not stop at momentary compassion? This is where we need to recognise Islamic finance more deeply, so that we can build a sustainable disaster-management ecosystem.
Inclusive and Comprehensive
Why Islamic finance? Because at its core, it is not merely a relabelling of financial products. Islamic finance possesses distinctive mechanisms that can therefore build an ecosystem of community recovery. Unlike other financial systems that are oriented solely towards maximising profit, Islamic finance is guided by values that include anti-greed, social solidarity (ta’awun) and sustainability.
It must be underlined from the outset that the Islamic financial system is an inclusive one. It exists as rahmatan lil ’alamin (a blessing for all the world). Followers of all faiths and groups can receive its benefits whilst also playing an active role within it. Therefore, recognising and adopting Islamic finance as a disaster response model means designing a humanitarian solution for all elements of the Indonesian nation, without any dividing barriers.
This approach offers a comprehensive roadmap. In the emergency response phase, Islamic social funds (DSS) act as first responders, or the first line of defence. Zakat, infak and sedekah—mobilised through institutions such as Badan Amil Zakat Nasional (BAZNAS) and Lembaga Amil Zakat (LAZ)—serve as a safety net so that lives can be saved. This assistance takes the form of nutritious food, medical services and temporary shelter to ensure that no affected resident goes hungry.
Of course, the presence of DSS instruments does not negate the strategic role of the government, the State Revenue and Expenditure Budget (APBN) or regional budgets (APBD). The presence of the state is absolutely necessary as the principal conductor. However, DSS and Islamic social institutions provide an extraordinary complementary support. Whilst bureaucratic budget disbursement sometimes takes time, DSS can move nimbly to distribute aid massively and immediately, so that gaps in needs during the critical period can be swiftly patched.
From “Feeding” to “Reviving the Market”
The real test only begins once the refugee tents are dismantled. It is at this point that Islamic finance refuses to stop at the mere distribution of basic foodstuffs. Borrowing the spirit of “Build Back Better” that once drove the post-Aceh-Nias tsunami reconstruction, post-disaster recovery demands strategic planning—not only regarding the rebuilding of physical infrastructure, but also the rescue of survivors’ livelihoods.
Entering the rehabilitation and development phase, the handling paradigm must shift drastically: from merely “feeding victims” to “reviving the market”. At this crucial stage, Islamic Financial Institutions (LKS) such as Sharia Commercial Banks, Sharia People’s Economy Banks (BPRS) and Baitul Maal wat-Tamwil (BMT) take the helm together with waqf nazirs and Zakat Management Institutions (LAZ).
LKS have an essential role in pulling communities out of the abyss through business empowerment and financial inclusion. For vulnerable communities whose assets have been swept away by pyroclastic flows, LKS can disburse qardh hasan (benevolent loans without margin)—a rescue instrument that is an exclusive strength of the Islamic financial system.
Implementing Blended Finance and Profit-Sharing Contracts
For groups that have begun to be productive, a blended finance approach can be applied. This concept combines Islamic Social Funds (DSS) with the commercial contracts of LKS. DSS act as a “subsidy” for upfront Islamic insurance and administration costs, whilst also funding non-financial support such as training, market access and technology adoption. The result is that the business capacity of surviving MSMEs increases, which in turn safeguards the smoothness of their instalment payments to LKS.
Furthermore, the disbursement of profit-based financing is essential to maintaining business continuity. In the early recovery period, MSME income is naturally not yet stable. However, over time, the shared profits can grow exponentially. This scheme instils a sense of fairness for both parties. Conversely, if from the outset MSMEs are immediately burdened with contracts carrying fixed returns (such as murabahah or ijarah), their business recovery will actually be hampered, because the obligation burden is equated with normal business conditions.
Financing Innovation: Collaborative Projects and SRIA
As an applied example, in the development phase, LKS can design business projects of economic scale involving surviving farmers with private companies as standby buyers (off-takers). DSS are used to finance training and technology. Meanwhile, moral hazard risk can be prevented because the cash flow—from procurement through to receipt of harvest proceeds—is fully centralised through the LKS.
To align payment schedules with agricultural cycles (such as the pay-at-harvest or yarnen system), LKS can utilise SRIA (Sharia Restricted Investment Account) products. Through the mudharabah muqayyadah contract, fund depositors (investors) act as capital providers for these specific projects. The funds are locked in for the financing of the related commodities, thereby preventing sudden withdrawals. From a risk perspective, as long as there is no negligence on the part of the LKS or fund managers, potential losses or surplus profits will be borne together proportionally.
Waqf and Sustainable Disaster Mitigation
Beyond MSME financing, waqf instruments can be optimised to rebuild permanent infrastructure supporting basic needs, such as clinics, schools and communal farmland. Through perpetual disaster waqf funds, our ecosystem will possess financial independence in facing crises.
Going further, this Islamic finance ecosystem ultimately functions as the most rational mitigation tool for the future. We often witness heartbreaking tragedies that keep repeating themselves: communities defiantly returning to settle and farm in volcanic “red zones” purely because of economic hardship.
Through collaboration within this ecosystem, that deadly cycle can be broken. The solidarity of social funds combined with productive capital allows communities to be relocated without having to sacrifice their economic future. They are facilitated with new, safe land through waqf assets, given start-up capital from productive zakat, and injected with sustainable financing from LKS. As a result, they are freed from the necessity of risking their lives under the shadow of volcanic debris.
We indeed cannot tame volcanic eruptions, but how we rise from the rubble of disaster is a choice. Islamic finance offers a way out: from mere sympathy towards true self-reliance. We are not only saving today’s victims, but building them into resilient economic actors for decades to come. Because a dignified economic system is one that does not leave anyone behind alone while the ground beneath their feet is shaking.