Indonesia: The Rising Star in Islamic Finance Leadership

As the fourth most populous country in the world and the biggest Muslim nation in the world, coupled with favourable demographics and transition to a middle-income country; Indonesia is expected to be the biggest market for IBF with greater leadership role in the global Islamic banking industry. Its importance in IBF is reflected by the fact that it has for the last 5 years featured in the list of top 10 leading countries in the Islamic Finance Country Index 2015 (Global Islamic Finance Report, GIFR 2015).

However, Indonesia has yet to realise its true potential in IBF, as at present Islamic finance industry makes up just less than 5% of its financial sector. However, the government under the leadership of the newly elected President Jokowi sparks hopes for further development of Islamic finance industry in the country.

In Indonesia, the newly formed Financial Services Authorities or Otoritas Jasa Keuangan (OJK) is developing a new blueprint to expand IBF in the country. It is expected that the blueprint will include additional benefits to current fee and tax incentives to revive the domestic sukuk market. The blueprint is said to also provide recommendations to address issues in IBF, including lack of economies of scale, consolidation opportunities, and the role of foreign ownership.

IBF in Indonesia can play a significant role in economic growth and development of the country, if the government devises a comprehensive plan similar to what its neighbouring country Malaysia has spearheaded over the last few decades. In fact, IBF should be central to the government’s agenda to stimulate economic growth, reduce poverty and income inequalities and enhance stability of the financial system.

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