Is Islamic Fintech Catching On in Indonesia?

With a burgeoning population and a young, tech-savvy workforce, Indonesia is ripe for fintech growth. In recent years, the country has seen a boom in fintech startups, and the industry is now one of the most promising in the country.

The bustling economy in Indonesia has carved a clear path to leverage fintech startups and ride the wave of digitalisation. Fintech in Indonesia became one of the most promising industries, with a total investment of US$1.8 billion reported across 51 deals in 2022.

Indonesia – a natural market for Islamic fintech

Approximately 231 million Muslims reside in Indonesia; the archipelago is a natural market for companies offering fintech products and services that comply with Islamic law. 

But there’s one caveat: many of these startups are not compliant with Shariah, the Islamic law governing finance in the country. 

So far, Islamic fintech in Indonesia has yet to achieve the same level of success as in other Muslim-majority countries. There are several reasons for this, including the need for more clarity around Shariah-compliant, inadequate regulations; complicated permit procedures; rampant occurrence of illegal fintech businesses; and consumer disputes in the fintech sector. 

President Joko Widodo

In order to advance the Shariah economy, President Joko Widodo launched Bank Syariah Indonesia (BSI) on February 1, 2021, by merging three state-owned banks—Bank BRI Syariah, Bank Syariah Mandiri, and Bank BNI Syariah—making it the most prominent Islamic bank in the country. 

The president hopes the merger would support the country’s goal to become the Islamic financial hub. He also hoped the bank to be inclusive and digital-savvy to attract youth and expand banking penetration.

This policy is a strong indication of the government’s support for the development of a Shariah-compliant financial ecosystem in the country. However, there is still a long way to go before Indonesia can be called a leading country in the global Islamic economy.

Indonesia Islamic fintechs gaining traction

The question is whether Islamic fintech in Indonesia can take off in the same way it has in other countries with large Muslim populations, such as Malaysia and the Gulf Cooperation Council (GCC) countries.

Indonesia has the world’s largest Muslim population, but its shariah economy is still lagging behind other countries in the region. Despite having 12.7 percent of the world’s Muslims, Indonesia only has a fourth-place ranking in the shariag economy, according to the State of the Global Islamic Economy Report published in 2020 by Salaam Gateway.

However, there are signs that the situation is changing. Many new fintech startups are emerging in Indonesia and gaining traction with Muslim Indonesians. These startups are using digital platforms to reach Muslim consumers. They offer a wide range of shariah-compliant products and services, such as Islamic crowdfunding, peer-to-peer (P2P) lending, online Shariah investments, and financing for hajj and umrah (pilgrimage to Mecca). 

These companies are providing a much-needed alternative to traditional financial institutions, which have been slow to meet the needs of Indonesia’s Muslim population.

One such company is GoPay, part of ride-hailing firm Gojek, which has partnered with the Indonesian Mosque Council to enable digital donations, including “zakat.”

On the other hand, Alami has disbursed US$179.8 million in shariah financing to the country’s regional SMEs, with a majority from the telecommunication sector at 18.2 percent, halal food at 14.6 percent, and energy at 13.2 percent.

Alami is also the first tech company to have raised an undisclosed amount from Paragon Benava Investama, an arm of beauty company ParagonCorp which owns halal beauty cosmetics brands.

Another firm in this space is Investree which offers peer-to-peer (P2P) marketplace platforms for various business financing needs. In addition, the company has raised a total funding of US$23.5 million, and its latest funding round was a Series D round last for an undisclosed amount.

Islamic fintechs to succeed in Indonesia

Islamic fintech in Indonesia is still in its early stages of development and is less comprehensive than conventional platforms. To be fully shariah-compliant, these platforms must avoid interest-based transactions, which are common in the world of fintech. This restriction limits the products and services that Islamic fintech firms can offer.

Despite these challenges, Islamic fintech firms such as Ehis is collaborating with Islamic banks to bring Muslim communities into the financial mainstream. Ethis finalised its partnership with two Indonesian Islamic rural banks, locally known as Bank Pembiayaan Rakyat Syariah (BPRS), last year.

However, there are some disadvantages when it comes to Islamic banking. One is the increased compliance burden on Islamic finance institutions due to the extra due diligence required for these transactions. 

Conventional banking uses interest charged to lenders and other investments to turn over an income, while Islamic banking operates under different rules and regulations. These include Islamic teachings and laws, which levy profit rates instead of interest rates. This increased compliance burden comes at a cost, which is passed on to the customer in the form of higher transaction fees.

Ma’ruf Amin

Other challenges include more awareness of Shariah-compliant products and services, a supportive ecosystem, and regulatory clarity.

In spite of this, Indonesia’s vice-president, cleric Ma’ruf Amin, who took over Indonesia’s Islamic Finance Committee, has cited the growth of Islamic fintech as a key priority. Meanwhile, Indonesia’s top Muslim clerical body has even issued an edict deeming virtual money acceptable, as long it met specific conditions.

Despite these limitations, the potential for Islamic fintech in Indonesia is vast. With the right policies and regulations in place, Islamic fintech could play a significant role in inclusive economic growth in the country. 


Featured image credit: edited from Freepik here and here

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