Analysis on the Opportunities of Sharia Financing in Indonesia and How to Enter the Market
Last month, the Indonesian government officially launched Bank Syariah Indonesia (BSI), the country’s largest sharia bank. With 87% of the Muslim population, Indonesia is seeking to boost its sharia economy development to cater to the increasing demand for halal products and services. The launch of the new bank is also expected to create a strong sharia lender in Indonesia and in the global finance industry to increase the growth of Indonesia’s sharia finance industry.
The Financial Services Authority (OJK) data shows that the market share of sharia financial service contributes up to 9.03% in 2020 to Indonesia’s financial system. Thus, in this article, we will discuss the landscape of Indonesia’s sharia finance industry, its opportunities, challenges, and how to enter the world’s largest Muslim population market.
The Launch of Indonesia’s Largest Sharia Bank
On 1 February 2021, President Joko Widodo officially launched the operations of BSI to boost the development of Indonesia’s sharia finance industry. The bank was formed by merging Islamic bank units of Indonesia’s state owned sharia bank BNI Syariah, BRI Syariah, and Bank Syariah Mandiri.
The merger has combined IDR 240 trillion (USD 17.13 billion) in assets and a core capital of IDR 22.6 trillion (Nasdaq, 2021). This makes BSI the seventh biggest lender in Indonesia and is expected to serve an estimated 15 million costumes to develop Indonesia into a sharia finance hub (The Jakarta Post, 2021).
Sharia Economy in Indonesia
Indonesia’s sharia economy has grown steadily over the past decades. A key factor in its growth is the increasing number of the Muslim population that is estimated to reach 12% of the 23% of the Muslim population globally by 2022 (Deloitte, 2019). Indonesia’s sharia economy is estimated to worth IDR 12.800 trillion (USD 910 billion) making it the largest contributor to the Central Bank of Indonesia (Bank Indonesia) by 80% (BI, 2019).
However, compared to other Organization of Islamic Cooperation (OIC) countries, Indonesia is lagging in terms of Sharia-compliant bonds (Sukuk) and Islamic funds asset under management (AuM). Seeing the challenges, Indonesian President Joko Widodo in 2016 has established the Komite Nasional Keuangan Syariah (KNKS) or National Sharia Finance committee to encourage financial inclusion growth. As of 2019, Indonesia is ranked third in terms of the highest sharia business fund among other Muslim majority countries at IDR 1.7 trillion (USD 120 million) (Antara News, 2019).
Opportunities in Sharia Finance Industry
As of April 2020, the market share of Indonesia’s sharia finance industry contributes up to 9% to the country’s financial system. The total asset excluding Islamic capital is around IDR 1.5 trillion with the Islamic banking and Financial Industry Non-Bank (IKNB) contributed at IDR 534 trillion and IDR 109 trillion (Bisnis, 2020). Thus, with 47 million underbanked and 92 million unbanked adults (Google Temasek), Indonesia offers huge opportunities in sharia finance products.
Indonesia’s Islamic finance rank has improved exponentially. Sharia finance shows a positive increasing trend during the pandemic. OJK said that as of December 2020, total sharia financial assets (excluding sharia stocks) had reached IDR 1,802.8 trillion (Jakarta Post, 2020).
In 2020, the total assets of the Islamic bank industry in Indonesia reached IDR 524 trillion showing significant growth despite COVID-19. With the benefits of waived administrative fees and fairer credit card exchange rates, some customers will surely be interested to switch. It is estimated that loans from sharia banks grew 9.5% year on year (YoY) in 2020 while conventional banks decreased at 2.41% (OJK, 2020).
It is estimated that there are 60 million unbanked adults who own mobile phones in Indonesia, which is a big opportunity for investment in mobile payment and transactions. In Indonesia, the number of sharia financial technology (fintech) companies in Indonesia is growing. It is estimated that as of 2019, there are 29 sharia focused fintech companies in Indonesia of which nine companies have been registered within OJK. Investors could take advantage of existing sharia cash transactions through digital technology.
The Challenges of Indonesia Sharia Economy
Despite the achievement, the country still struggles in tackling the challenges to develop sharia finance and the sharia economy.
Lack of Public’s Knowledge
This can be seen from the amount of sharia financial inclusion, which remains at the amount of 9.10%. This rate is way proportional to the standard financial inclusion of 76.19%. Another indicator is shown by the extent of sharia’s financial literacy of 8.93% compared to the standard, which reached 38.03% (Voice of Indonesia, 2020).
Lack of Human Resources
The authorities assess the readiness and availability of human resources who understand sharia financial principles remains lacking in Indonesia’s sharia financial industry. It is estimated that 70% of sharia bank employees currently come from conventional banks and/or non sharia educational backgrounds (Dussan et al., 2016). A particular quality of sharia human resources with high power is required to extend sharia finance’s competitiveness, especially in accelerating the digitization of products and services during an outbreak (Voice of Indonesia, 2020).
The Sharia financial sector has not been fully integrated yet into the ecosystem of the halal industry. This then impacted increasing the limited market share of sharia finance, where in December 2020, it had been still 9.9% (Voice of Indonesia, 2020). Moreover, the industry has also had difficulty expanding due to weak government management (a lack of ministerial-level coordination), an uncertain legal environment, and the lack of highly qualified human capital, innovation, and creativity within the country (Indonesia Investment, 2020)
Low Financial Literacy of the Indonesian Population
One key problem in Indonesia’s banking sector (not only confined to the Islamic banking sector) is the Indonesian population’s low financial literacy. Hence (general) banking penetration remains at a comparatively low level. Supported data from the World Bank, only 36.1 per cent of Indonesia’s adult population owned a bank account in 2014 (Indonesia Investment, 2020).
The prospect of the Indonesia sharia economy
The sharia economy is increasing rapidly. It could strengthen the country’s economic resilience. The sharia economy could have enormous potential in enhancing national financial stability and improving public welfare.
Prospects of Islamic banking
Amid the COVID-19 pandemic, it is pleased to be told that Indonesian Islamic banking’s performance continues to record stable growth, which Islamic banking has managed to grow, even above conventional banking. Amid the COVID-19 pandemic, the Islamic banking system marked a 10.9% YoY growth in assets or above conventional banking that recorded a 7.7% growth (Jakarta Post, 2020).
Prospect on Indonesia’s Sharia FinTech
The mission of most sharia-focus fintech businesses is to bridge the financing gap within the Muslim community. The number of sharia fintech companies that operate in Indonesia starts from crowdfunding and investment services. In contrast, others withdraw from providing easy financial transactions for the unbanked, including electronic donation (zakat) like DuitHape that unitedly with Dompet Dhuafa. Those companies are working towards stabilizing and generating Indonesia’s economy, especially the sharia economy. Conventional banks also participate by partnering with them to push this expansion, like Bank Negara Indonesia (BNI) with DuitHape (Deloitte, 2020).
How to Enter The Market?
The establishment of sharia finance laws in Indonesia is more button-up and does not have a positive role in the state. On November 1, 1991, Sharia Rural Credit Bank (BPRS) signed the deed of multinational PT Bank Muamalat Indonesia. The accumulated capital as the paid-up of the capital commitment for PT Bank Muamalat is IDR 106 billion. Furthermore, on May 1, 1992, Bank Muamalat Indonesia began to operate. After the reform of 1998, came sharia-based banks, namely Bank Syariah Mandiri, also Bank Mega Sharia in the year 2004, and other banks (Prayogo, 2018).
Legal support for the event of sharia banking in Indonesia is not as strong, needless to say, by the sharia economic community. This is often evident from the slow pace of sharia banking regulation independently. Since the establishment of Bank Muamalat Indonesia in 1991, the new sharia banking features a special law associated with sharia banking in 2008 with the issuance of Law No. 21 of 2008. The Banking Act of 1992 mentions a small amount of banking with the profit-sharing system, as stated in Article 13 point (c) saying that one among the rural Banks (BPR) businesses provide financing service for their customers based on the principle of profit-sharing. According to the Government Regulation (PP) No. 72 of 1992 concerning the Bank, it supported the sharing principle. Article 6 of state Regulation No. 72 of 1992 mentioned:
- Commercial Banks or Rural Banks whose business activities are solely supported share principles shall not engage in business activities that don’t seem to be supported profit-sharing principles.
- Commercial banks or Rural banks whose business activities are not supported by shared principles are allowed to conduct business activities sponsored by the guide of profit-sharing (Hakim, 2017). supported Law No. 7 of 1992, sharia banking performs its role by about the interpretation issued by Bank Indonesia through Bank Indonesia Circular Letter No. 25/4/BPPP dated February 29, 1993, which includes:
- Whereas banks supported share principles are Commercial Banks and Rural Banks which are conducted based solely on the principle of profit-sharing;
- The principle of intended share is that the focus of claim supported sharia;
- Banks supported share principles shall have Sharia Supervisory Board (DPS);
Commercial Banks or Rural Banks whose business activities are solely supported by share principles are not allowed to conduct business activities that do not support the principle of share.
On the opposite hand, a billboard Bank or a Rural Bank conducting business, not on the idea of share (conventional), is allowed to conduct business activities supported by the profit-sharing principle. Law No. 7 of 1992, then was revised with another law. The birth of Law No. 10 of 1998 concerning Indonesia Banking (Abacademies, 2018).
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This article is Co-Written with Alifia Berizky