New Efforts to Boost Sharia Banking in Indonesia

Although between 85 and 90 percent of the Indonesian population is Muslim, Islamic banking, also known as sharia banking (financing activity that is in line with Islamic principles), remains underdeveloped in Indonesia. In 2016 sharia banking assets only accounted for 5.3 percent of total assets in Indonesia’s banking sector. Meanwhile in countries like Saudi Arabia and Malaysia these figures are much higher at 51.1 percent and 23.8 percent, respectively.

 

In order to boost Islamic banking in Indonesia President Joko Widodo formed the National Committee for Sharia Finance (in Indonesian: Komite Nasional Keuangan Syariah, or KNKS). This institution was installed to investigate and tackle the challenges surrounding sharia banking in Indonesia.

Together with the Indonesian Islamic Economy Expert Association (in Indonesian: Ikatan Ahli Ekonomi Islam Indonesia, or IAEI), KNKS is tasked to unite the vision and strategy of all stakeholders in this industry and turn Indonesia into a global center for Islamic banking.

General Chairman of the IAEI is Bambang Brodjonegoro (who is also Indonesian Minister of National Development Planning). He said the challenges in Indonesia’s Islamic banking industry involve both the supply and demand side. The lack of business sectors that are based on Islamic banking makes it tough for the industry to develop, he added.

Therefore, the KNKS wants to focus on the development of the sharia-based retail sector. Brodjonegoro said this would not only involve halal products (for example food products that are made in line with Islamic principles) but also halal services, such as halal tourism (Muslim friendly tourism). It is then hoped that there emerge many new entrepreneurs that become active in such sectors. However, normal market mechanisms will be safeguarded, he added. Hence conventional banking is allowed to play its part in the development of the sharia-based retail sector.

Secondly, KNKS will focus on the deepening of sharia-compliant financial markets. Several instruments available in conventional banking are not present in Islamic banking and therefore new sharia-compliant instruments need to be added in the Islamic banking sector in order to meet corporate and individual demand. One example is Islamic micro-finance.

The third topic that will be dealt with by KNKS is the strengthening of research and education related to Islamic finance. Currently, many residents in Indonesia (especially in the eastern parts of the country) have limited – or no clue at all – about sharia banking (in fact also in terms of conventional banking many Indonesians lack financial literacy). Therefore, awareness of Islamic banking needs to be raised among the population.

Banking Assets in Indonesia (in trillion IDR):

2011
2012 2013 2014 2015
Islamic Commercial Banks & Islamic Business Units  145  195  242  272  296
Total Banking Assets (conventional + sharia) 3,653 4,263 4,954 5,615 6,133
% sharia assets of total assets 3.98% 4.58% 4.89% 4.85% 4.83%

Source: Financial Services Authority (OJK)

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