The Development of Islamic Finance in Indonesia

Indonesia is a country with the largest Muslim population in the world. The majority of the Muslim population makes Indonesia a potential market in the development of Islamic finance. One that has now begun to develop rapidly is the existence of banks whose operational activities use sharia principles.

Islamic finance in Indonesia is projected to increase rapidly in line with the increasing rate of institutional expansion and the acceleration of the very high growth of Islamic banking assets and the increasing sukuk issuance volume based on data obtained from the Islamic Finance Country Index (IFCI). Here is the history of Islamic finance in Indonesia that you must know.

  1. 1983

In 1983, there were major events in the Indonesian banking world. Bank Indonesia (BI) gives banks the freedom to set interest rates. The government, through a banking deregulation policy, aims to create more efficient and strong banking conditions in sustaining the economy. In addition, the Indonesian government has planned to implement a “profit sharing system” in credit which is a concept of Islamic banking.

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  1. 1990

In 1990, the Indonesian Ulema Council (MUI) formed a working group to establish Islamic Banks in Indonesia. August 1990, the MUI organized bank and banking interest workshops in West Java. The results of the workshop were then discussed more in depth at the IV MUI National Conference in Jakarta in 1990. The MUNAS produced a mandate for the formation of a working group for the establishment of Islamic banks in Indonesia. The working group referred to is called the MUI Banking Team by being given the task to approach and consult with all relevant parties.

  1. 1991

As a result of the work of the MUI Banking Team, the first Islamic bank in Indonesia was PT Bank Muamalat Indonesia (BMI). In accordance with its deed of establishment, BMI was established on November 1, 1991 and operated on May 1, 1992. At the beginning of its operating period, the existence of Islamic banks had not yet received optimal attention in the national banking sector.

  1. 1992

The cornerstone of the bank’s operating law that uses the sharia system, when it was only accommodated in one of the paragraphs concerning “banks with profit sharing systems” in the Law (UU) No. 7 of 1992; without sharia legal basis details and types of businesses that are permitted.

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  1. 1998

In 1998, the government and the House of Representatives (DPR) made improvements to Law No. 7 of 1992 to Law No. 10 of 1998. The law explicitly states that there are two systems in banking in the country, namely the conventional banking system and the Islamic banking system. This opportunity was warmly welcomed by the banking community, which was marked by the establishment of several other Islamic banks, namely the IFI Bank, Bank Syariah Mandiri, Bank Niaga, Bank BTN, Bank Mega, BRI Bank, Bank Bukopin, BPD Jabar, BPD Aceh, and other Islamic banks.

  1. 1998–2010

Approval of several legislation products has provided legal certainty and increased the activity of Islamic financial markets. With the enactment of Law No. 21 of 2008 concerning Islamic Banking which was issued on July 16, 2008, the development of the national Islamic banking industry increasingly has a legal basis. An adequate Islamic financial regulation will significantly boost the economic growth of the community.

The development of impressive Islamic banking reached an average asset growth of more than 65% per year in the past five years. It is not surprising that the role of the Islamic banking industry in supporting the national economy will be more significant. The birth of the Sharia Banking Act encouraged an increase in the number of Islamic Public Banks (BUS). in 2009 to 2010, initially 5 BUS became 11 BUS.

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  1. 2010–2015

Since the development of the Islamic banking system in Indonesia, in the two decades of national sharia finance development, there have been many progresses, both from the institutional and supporting infrastructure aspects, regulatory tools and supervision systems, as well as public awareness and literacy of Islamic financial services. Our Islamic financial system is one of the best and most comprehensive systems recognized internationally.

At the end of 2013, the function of banking regulation and supervision moved from Bank Indonesia to the Financial Services Authority (OJK). Then the supervision and regulation of Islamic banking also turned to OJK. As the authority of the financial services sector, OJK continues to refine its vision and strategy for the development of the Islamic financial sector. The OJK developed the vision and strategy into the 2015-2019 Indonesian Syariah Banking Roadmap (RPSI) launched at the 2014 Syariah People’s Market.

The OJK expects RPSI to be a guide to the development of the Islamic financial sector. RPSI contains strategic initiatives to achieve the development goals set by the OJK. Initial results were seen in 2015, the sharia banking industry consisted of 12 Islamic Commercial Banks, 22 Sharia Business Units owned by Conventional Commercial Banks and 162 SRBs with total assets of Rp. 273,494 Trillion with a market share of 4.61%.

  1. 2015-2017

By increasing public demand for a transparent, practical and accountable financial system, OJK encourages developing technology-based financial innovations to meet these demands. The Financial Services Authority Regulation Number 77 / POJK.01 / 2016 concerning Information Technology-Based Lending and Borrowing Services is an OJK effort to build legality to increase public trust. The rule is for technology-based conventional financial companies that are developing.

At present the technology-based Islamic finance company does not yet have its own rules and still refers to the OJK Regulation. But it does not become a barrier for startup companies or startups to develop technology-based financial applications. SyarQ is a sharia-based financial technology (fintech) as a solution for usury transactions. Platform for providing product installment facilities without credit cards as an alternative option to meet the needs of buying goods. SyarQ is the main choice for Muslims to pay for products in online stores.

  1. The roadmap development 2017-2019 (still on progress)

The Roadmap for the Development of Indonesian Sharia Finance 2017-2019 is to realize a sharia financial services industry that is growing and sustainable, equitable, and contributes to the national economy and financial system stability towards the realization of Indonesia as the center of world Islamic finance.

Furthermore, to achieve this vision, the main mission that will be carried out in the 2017-2019 period is (1) to improve institutional capacity and product availability in a more competitive and efficient sharia financial industry, (2) to expand access to Islamic financial products and services to meet community needs, and (3) increasing inclusion of Islamic financial products and coordination with stakeholders to enlarge the market share of Islamic finance.

Those are the development of Islamic finance in Indonesia. In the future, Islamic finance in Indonesia is expected to be able to increase independence so that it can stand independently and its parent bank operational activities can be managed professionally and independently using principles that is truly sharia.