Indonesian Banking System

As the country with the largest Muslim population globally, Indonesia has a vital capacity in Islamic banking. There is also a significant potential for developing financial products and services that will support the increase in this capacity. When countries are considered according to how Shariah banking services are implemented, they are generally divided into two groups. In the first group of countries, the entire financial system works according to the principles of Shariah finance while conventional finance is prohibited. In the second group of countries, there is a dual financial structure. Indonesia is in the second group because dual banking operates in the country. In this sense, the country's total value of Shariah banking corresponds to 37.7 billion dollars (2020). The Shariah Banking System in the country is regulated by the Financial Services Authority (OJK), which was established by the Indonesian Government in 2012 together with Bank Indonesia (Central Bank, 1953). In addition to this, the National Islamic Board of the Indonesian Ulema Council issues fatwas on certain Islamic products and transactions.

The Shariah banking sector in the country is made up of 14 full-fledged banks, 34 windows, 196 regional banks and 33 micro waqf banks. According to a decision taken in 2018, Shariah windows will be converted into independent Shariah banks nationwide by 2023. In addition, there are 12 takaful and one retakaful company operating in Indonesia, 47 takaful windows and two retakaful windows. As with Shariah banking windows, takaful windows are aimed to be transformed into independent takaful institutions by 2023. In addition, Indonesia is taking several initiatives to accelerate the development of Shariah banking. For example, the 2019-24 Shariah Economics Master Plan (MEKSI) was prepared by the National Islamic Economics and Finance Committee under the chairmanship of Indonesian President Joko Widodo. In line with the plan, strengthening the sector's licensing authority and regulatory/supervisory tools is expected. In addition, the 2020–25 Shariah Banking Development Roadmap was put forth by OJK in Indonesia in February 2021. This map has been prepared in line with key objectives such as halal products, Shariah finance, the SMEs sector and strengthening the digital economy. In February 2021, Bank Syariah Indonesia was formed by merging three state-owned Islamic banks, namely Bank BRI Syariah, BNI Syariah, and Bank Mandiri Syariah. This formation has made the bank the largest Shariah bank and 7th largest bank in Indonesia with its total assets (214.6 trillion IDR/$15.04 billion at the end of 2021).

Association of Indonesia Shariah Banks (ASBISINDO) also operates in the country. ASBISINDO is the hub of communication between Shariah banks in the country. It aims to increase Shariah finance literacy within the scope of cooperation with various sectors. It also acts as a regulator to strengthen Regional Shariah Banks (BPRS). When observing the seven sectors (Shariah finance, halal food, halal media, modest fashion, halal tourism, halal pharmaceuticals and halal cosmetics) that reveal the indicators of the Islamic economy, Shariah finance is the largest with IDR 1.438 trillion among the total Islamic economy in Indonesia with a total of 4,300 trillion IDR. However, we see that the market penetration of Shariah banking in Indonesia lags behind the Middle East countries and even Asian countries with 6.48%. Nevertheless, looking at the period between 2018 and July 2021, it is seen that Shariah banking in Indonesia has shown a flexible financial performance. When we look at the financial literacy rate, we see that the literacy rate in conventional banks increased to 38% in 2019 from 29.7% in 2016. However, in Shariah banking, while it was 8.1% in 2016, it increased slightly to 8.9% in 2019. When we look at the coverage rate, while conventional banking was 67.8% in 2016, it increased to 76.2% in 2019. In Shariah Banks, while it was 11.1% in 2016, it increased to 19.1% in 2019. When we look at the ratio of financial services provided to the country's population, it is seen that Shariah financial services are 1/133,038 and conventional banking services are 1/9,769. When we look at the information technology (IT) and digitalisation indicators, it is seen that Shariah banks do not have as robust an infrastructure as conventional banks and have not yet reached an ideal economic scale. However, Indonesia launched three Islamic fintech initiatives in 2019 under the MEKSI plan. In this context, a digital payment system called LinkAja Syariah has been developed, which will serve to use regional Shariah banks as clearing banks. In addition, a central digital platform was established for the digital zakat payment system and Shariah cooperatives.

Dilek Sülün

TKBB International Relations Deputy Specialist