Diversification of Islamic Financial Insturments
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3.2. CASE STUDY: INDONESIA
3.2.1 SUMMARY
Being the world’s most populous Muslim country, the emergence of Islamic finance industry
has come somewhat late. Only in the 1990’s, Indonesia established its first Islamic bank,
namely Bank Muamalat Indonesia. The demand largely came from the public, which wanted to
eliminate interest from their financial practices. The Islamic finance industry in Indonesia
consists of Islamic banking, Islamic insurance (Takaful) and Islamic capital market segments.
The growth of Islamic finance industry is quite impressive, although the market share captured
is relatively small. Looking at the potentials and increasing demand from the public,
Indonesian authorities’ attempts to strategically increase the size of industry and bring the
industry to higher level in the country’s financial system. It is observed that in general the
development of Islamic finance industry in Indonesia is very bright. Many players have looked
up Indonesian potentials in Islamic finance sector and Indonesia has successfully attracted
foreign investment in domestic Islamic finance industry which the policy reforms by
Indonesian Islamic finance authority is recognized. Nevertheless, to improve further the
industry and to bring it to higher level, financial engineering and innovations to answer the
demand and need of the industry, consolidation and further enhancement in term of legal and
regulatory framework, and market education and awareness appears inevitable.
Indonesia is the fourth most populous country in the world after China, India and the US. It is
home to the world’s largest Muslim population of approximately 210 million people (about
87.18% of the total population).
Being the world’s most populous Muslim countries, the emergence of Islamic financial
institutions arrived somewhat later than they did in other Muslim-majority countries. Islamic
finance in Indonesia officially emerged in 1992 with the establishment of its first Islamic
commercial bank, Bank Muamalat Indonesia.
Nevertheless, the development of Islamic finance industry in Indonesia is very bright, with
strong potential. The large number of Muslim population (+85% of total population) is
considered as one of the reasons for investors to invest in Islamic financial services in
Indonesia. Besides, internationally, Indonesia is also considered as one of top 10 countries
which are a potential big market in Islamic finance industry. Indonesia, together with UAE,
Saudi Arabia, Malaysia and Bahrain, is considered in a position ‘to offer lessons’ to other
countries in developing Islamic finance industry. Additionally, Indonesia, together with Qatar,
UAE, Saud Arabia, Malaysia and Turkey (QISMUT) are considered as pushing factor countries
in the future Islamic finance industry (ICD 2014). In addition, Indonesia is also ranked as
number Six (6) out of the 48 ten countries in Islamic Finance Country Index 2016 (GIFR, 2016).
In Indonesia, the Islamic finance industry consists of Islamic banking (regulated by Islamic
Banking Act 2008), takaful (Islamic insurance) (regulated by Insurance Act 2014) and Islamic
capital market (regulated by National Shariah Securities Law 2008).
The central authorities in Islamic finance industry in Indonesia are Otoritas Jasa Keuangan
(Indonesian Authority of Financial Services) concerning financial institutions supervision and
regulations, and Bank Indonesia (concerning the macroeconomic aspects of financial
stability). In addition, the Islamic finance industry in Indonesia also has various stakeholders