Why Islamic Finance in Indonesia is Interesting

The initiative of the establishment of the Islamic Finance industry in Indonesia began in 1990 by the Indonesian Council of Ulama (MUI). Bank Muamalat Indonesia is the first Islamic bank in Indonesia that was established in November 1991 and officially operated in May 1992.

Indonesia is a latecomer to establish Islamic banks compared to other Muslim-majority countries such as Philipines (1973), and Malaysia (1983). According to the Islamic Finance Country Index (IFCI) 2019, Indonesia was in the 1st position. However, Indonesia has moved into second place behind Malaysia in 2020.

The government’s National Sharia Economy and Finance Committee’s (KNEKS) implementation of the Islamic Economic Masterplan 2019–2024 has increased the number of Islamic Finance events and reflected the country’s knowledge and awareness level.

Islamic Banking in Indonesia

According to the World Bank (2018), only 48.9% of Indonesian adults have bank accounts. Moreover, Islamic financial service providers currently made up only 9.9% of overall banking sector assets at the end of November 2020. During January- November 2020, the Islamic Finance industry grew 21.58% to 1,770.32 trillion rupiahs. The growth showed a significant increase compared to the year 2019 which was only 13.84% raise.

Even though Indonesia’s first Islamic bank, Bank Muamalat, was founded in 1992, many people did not know how it works. After introducing the Shairah Banking Law in 2008, the number of Islamic banks has doubled from 241 to 517. While some banks offer both Islamic and Conventional banking services,11 banks provide fully Shariah-compliant offerings at present. Still, Indonesia has a great potential to attract more clients for its Islamic banking and financial services.

In 2021, Indonesia took a giant leap on the megamerger of the country’s three largest Islamic Banks. The government merged Bank Syariah Mandiri (BSM), BNI Syariah, and BRI Syariah to establish the new large Islamic Bank called Bank Syariah Indonesia (BSI). The objective of this merger is to establish a state-owned Islamic bank. The establishment of BSI is to serve more than 230 million Muslim population by providing better Islamic financial services compared to the conventional counterpart.

In addition, Indonesia has more than 65 million MSMEs which represents 99% of the total enterprises and contribute to 60% of the country’s GDP in 2019. Therefore, Islamic microfinance is at the forefront of Islamic Banking in Indonesia. This will help in the expansion of the rural sector, adding to the country’s economic growth.

Sukuk Issuance

Indonesian Sukuk issuance increased by 37% in 2019. After Covid-19, Green and Socially Responsible Investing (SRI), Sukuk has become more important in 2019 since both governments and corporates strived to achieve the United Nations’ Sustainable Development Goals (SDGs). In collaboration with Dubai holding group Majid Al Futtaim, the Indonesian government issued their first green Sukuk in 2019. Indonesia’s issuance of two green Sukuk constituting US$2 billion was in harmony with the government’s economic master plan. Because the master plan intended to find innovative sources of financing for domestic infrastructure projects. Moreover, Indonesia issued its next green Sukuk in June 2020, totalling US$750 million to recover its losses in the period of the Covid-19.

Islamic Finance Education in Indonesia

Indonesia owns the world’s largest number of Islamic finance education institutions. Indonesia is a hoe for 214 universities and other Islamic finance institutions. Moreover, Indonesian researchers produced many research papers on Islamic finance. For instance, State Islamic University Syarif Hidayatullah Jakarta and Airlangga University contributed 13% of the papers. The researchers are encouraged to publish more papers on Islamic finance by governmental support.

The Indonesian government plans to increase public literacy in Islamic finance. Because many people are illiterate on Shariah-compliant financial products, especially in Islamic banking. Any efforts to increase Islamic finance literacy are supported by the National Shariah Economic and Finance Committee (KNEKS) as part of the Islamic Economic Masterplan 2019-2024.

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