Indonesia’s fintech industry is one of the most competitive and dynamic in ASEAN, as evidenced by the emergence of four unicorns and one decacorn. Despite its infancy, the country is home to 20% of all Southeast Asian fintech companies, which are expected to generate US$8.6 billion in revenue over the next five years. In Indonesia, fintech is classified as either conventional or sharia fintech. Islamic fintech growth in Indonesia is continuing, albeit at a slower pace than conventional fintech.
A banking and financial services platform has launched a research series to understand what people think about the key trends driving the development of financial services. In the third edition of the platform, the firm conducted a global survey of 2,000 members of the younger Muslim community, primarily Gen Z and millennials, to better understand what Islamic finance means to them and their expectations of this sector.
Moreover, Islamic finance, one of the fastest-growing financial industries, continues to expand in size and influence far beyond the Middle East, into Muslim-majority countries in Asia and Africa, as well as parts of Europe and beyond. Total assets have surpassed US$2 trillion as a sector and are expected to reach US$3.8 trillion by 2023.
Greater awareness of Islamic finance, combined with improved legal and regulatory structures in many markets, is assisting the sector’s growth. To date, the Indonesian Islamic finance market has struggled to compete with the country’s conventional financial services industry. The good news is that, according to the survey, embracing digital technologies can help to improve financial inclusion across Indonesia while also boosting the country’s Islamic finance market.
OpenGov Asia in an article reported that the chairman of the Indonesian Joint Funding Fintech Association (AFPI) said that sharia fintech services are growing rapidly and Indonesia is a market with significant growth. He feels that the large potential of the sharia fintech market in Indonesia is because of the large Muslim population and its attractive values. Data shows that Muslims in the country increased from 209.12 million in 2010 to 229.62 million last year.
In addition, the growth of sharia fintech in the country is driven by millennials. The share of borrowers aged 21-30 years reaches 47% of the total. The next age interval of 31-40 reached 36% and the remaining 12% were in the age bracket of 41-50 years or generation X. In addition, the association considers that there is quite a lot of interest in Islamic financing schemes in Indonesia. Consumption and exports of Indonesian halal products increased respectively by 3.6% and 19.2% in 2017 according to the State of The Global Islamic Economic Report.
Sharia fintech, with technological capabilities, can contribute to the growth of Islamic-based financial services, said the Lead Research Economist of the Islamic Development Bank. Digitisation has also become more massive during the COVID-19 pandemic, including financial services. Islamic finance contributed 8.69% of the total financial industry in 2019.
Compliance with Islamic law remains a challenge for Indonesia’s Sharia fintech companies. Despite the exponential growth of the Sharia fintech scene in Indonesia, only nine of the 165 fintech companies registered with the government through the Financial Services Authority (OJK) are Sharia-compliant. The Indonesian government has attempted to address this by establishing the National Committee of Islamic Finance (Komite Nasional Keuangan Syariah, KNKS), which is chaired by the president and vice president of Indonesia. The primary responsibility of KNKS is to invest in Sharia-compliant fintech companies and increase their compliance rate.
Nevertheless, with the onset of the COVID-19 pandemic, KNKS’s budget was reduced by nearly 60%. This significantly hampered the government’s efforts to expand the country’s Sharia fintech scene. Nonetheless, the future of Sharia fintech firms in Indonesia remains bright. Indonesia’s massive market size, growing conservative Muslim population, low Sharia banking penetration, and government investment will almost certainly see the sector through this pandemic.
