Indonesia

While banking makes up over 70% of the world’s Islamic finance sector, Malaysia dominates the sukuk, or Islamic bond market sector, which accounts for 17% of the global total, according to research by Thomson Reuters. The sector has seen increasing interest from Western countries in recent years, with the U.K. in 2014 becoming the first non-Muslim country to issue sukuk.

Indonesia’s $900 billion economy, though only roughly the same size by some measurements as that of Tokyo, is nonetheless by far the biggest in Southeast Asia. Not only is Indonesia the world’s biggest Muslim majority country in terms of population, its economy, which is slightly bigger than Turkey’s, is the biggest of any country with a Muslim-majority population.

Speaking at the same forum as Finance Minister Indrawati, Indonesia’s Planning Minister Bambang Brodjonegoro said that the government was serious about boosting the country’s Islamic finance sector.

“It is time the government of Indonesia together with the financial regulators embark on expanding our Sharia financial system into a broader dimension, market and playing field,” he said, announcing a new action plan aimed at pulling together a range of previously announced ideas. One of these, announced in mid-2015, included a committee on Islamic finance led by the president, five-year “roadmap” that aims to triple the market share of Islamic banks to 15% by 2023.

Other aspects of the Islamic economy are growing in popularity in Indonesia — sectors such as halal fashion — which may in turn help raise awareness of Islamic banks.

Also in 2015 Indonesia and Turkey jointly proposed setting up a World Islamic Infrastructure Bank, which would fund infrastructure development in Muslim countries. But plans to set up the bank have stalled, due partly to political turmoil in Turkey. Turkey recently tried to pressure Indonesia into closing nine schools linked to Fethullah Gulen, a U.S.-based cleric accused by the Turkish government of instigating an attempted coup in July — pressure that Jakarta rebuffed.

Plans and reality

Just as the international effort has stalled, it is unclear how quickly the government can implement its domestic Islamic finance plans.

“There is a huge gap between potential and reality,” said Irfan Syauqi Belik, director of the Center for Islamic Business and Economic Studies at Bogor Agricultural University. “Often in Indonesia one government regulation conflicts with another, so this harmonization is needed if Indonesia is to develop its Sharia finance.”

Playing catch-up with the neighbors will not be easy. During three decades of autocratic rule under the late President Suharto, Indonesia mostly ignored religious norms as a basis for policy-making. The tenor of Indonesian Islam, usually described as “moderate,” means that Indonesia is culturally very different from societies across the Middle East and North Africa.

Although the cultural differences between Indonesia and Malaysia are less overt than those between Indonesia and Arab nations, there are divergences that help explain why Islamic finance has boomed in Malaysia but not in Indonesia.

“Islam is not central to identity politics in Indonesia as it is in Malaysia. Here 90% of the population is Muslim, there is no other major demographic group,” said Azyumardi Azra, a leading Indonesian scholar of Islam.

Unlike in Malaysia, where Malay Muslims and non-Muslim Chinese Malaysians have had a fraught relationship over many decades, “in Indonesia there is less of an obligation among Muslims to go to an Islamic bank,” Azra said, explaining that many Indonesian clerics differentiate between usury and interest, regarding the latter as permitted by the Koran.

Malaysia became a global leader in Islamic finance after nurturing the sector for decades. “Malaysia passed its Islamic banking act in 1980. We did not get our first Islamic bank until 1992 and the Islamic banking act here was not passed until 16 years later,” said Irfan.

According to the World Bank, less than 40% of Indonesia’s adult population had a bank account as of 2014, another limit on the potential spread of Islamic finance, given that the sector is dominated by banking.

“We need more state intervention,” said Irfan. “Our financial literacy, even in the conventional banking sector, is still low.”