Indonesia, in the Midst of Mainstreaming Islamic Social Finance

Midst of Mainstreaming Islamic Social Finance

By Abigail Masters, Ebi Junaidi and Muhammad Ishak

With Indonesia being home to the world’s largest Muslim population the role Islamic Social Finance plays a dynamic and significant part in the nation’s development landscape. In recent years, Indonesia has witnessed a shift towards state implemented social security and increased social welfare policies. The Asian Financial Crisis and now the COVID-19 pandemic has created a high demand for ways to address poverty and inequality amongst Indonesian populations.

At present, social security policy structures being in their formative years, alternative solutions must be looked for. Islamic social finance, in particular Islamic Non-Governmental Organizations (NGOs), have long played a vital role in providing much-needed services and development programs in necessary areas such as healthcare, education, religious infrastructures, disaster relief and entrepreneurship.

In the present day, this opportunity for Islamic social finance to be considered as a pillar within the development is not just being realised by NGO’s but also by the government of Indonesia itself, setting up institutions to centrally regulate as well as manage and distribute Islamic social funding. Badan Amil Zakat Nasional (BAZNAS) concentrated on the Islamic financial obligations or zakat and Badan Wakaf Indonesia (BWI) concentrated on the Islamic endowment fund or waqf. The realm of Islamic social finance represents an exciting and relatively unexplored opportunity for development initiatives within Indonesia, however, there are many factors to consider and unique challenges that arise with
this opportunity.

Global comparison


Indonesia is not entirely unique in its social policy. In many ways, there are several elements that are somewhat similar to social welfare systems and policies seen around the world. Before the introduction of Sistem Jaminan Sosial Nasional (SJSN) in 2004 and the implementation of universal healthcare in 2014, there were very few social security policies in place, other than small scale, temporary programs for those living in extreme poverty. Where the similarities between the two states conjoin is in the emphasis on NGOs as key stakeholders in the development and as service providers that would otherwise be the responsibility of the state itself. What differs, however, is the scale. According to the U.S. Department of State, there are approximately 1.5 million registered NGOs in America alone (2021). Additionally, the scale of these NGOs is in general, much larger with some of the largest NGOs in America such as the Red Cross, bringing in annual revenues of over 2 billion USD from 2018-2019 (Forbes, 2020).

With such a disproportionate difference in NGO landscapes, the question begs about what can be done to bolster NGOs in Indonesia. The answer is not simple yet, a look towards philanthropy culture is necessary. Institutionalised philanthropy is still very new in Indonesia, with very little focus given to the private sector and instead to public individuals (Davis, 2013). One of, if not the major factor contributing to this, is the legal barriers and lack of incentives for companies to participate in philanthropy. In 2015, Indonesia ranked 56 out of 64 countries in terms of philanthropic freedom, indicating that the regulations and barriers in place did not easily allow institutionalised philanthropy (Hudson, 2015). This is despite donation and giving being entwined in the Muslim majority country’s essence.

Corporate, foundation and high income individual-based philanthropy are incredibly effective methods of fundraising for NGOs in the United States.

In 2018, Indonesia ranked first in the CAF World Giving Index, and in 2019 (Charities and Aid Foundation, 2019) was acknowledged as the only country in the past decade that had consistently improved its score. The rationale for this report focuses on the general public’s giving behaviour, assessing things such as time volunteered, charity donations and helping a stranger. When considering that Indonesia is the sixth greatest country of wealth inequality in the world (Oxfam, n.d.), it is not the general public at fault for the lack of funding for NGOs, but rather a systematic concentration of wealth at a top-level, and a lack of incentive for said wealth to be distributed.

Corporate, foundation and high-income individual-based philanthropy are incredibly effective methods of fundraising for NGOs in the United States. The National Philanthropic Trust estimates that approximately $309.66 billion USD was given by American individuals in 2019, with corporate America donating $21.09 billion and foundations contributing $75.69 billion (NPT, 2020). It is important to note that 2019 was exceptionally good for philanthropy in the U.S. which as a trend, tends to fluctuate depending on economic circumstances in the U.S. stock exchange. Regardless, philanthropy is a force to be reckoned with in charitable giving. All one has to do is look at the financial reports of high profile organisations such as the Red Cross to see the long list of names of high profile donators such as the Jordan Family, the Bullocks and Hiltons amongst a plethora of others. The endowments and foundations of high-income private individuals and or/families represent an astronomical pool of wealth. The Bill and Melinda Gates foundation alone is self reported to hold an endowment of $49.8 billion USD.

This isn’t to say that philanthropy in Indonesia is completely non-existent. Social Bella Indonesia a well known Indonesian beauty/e-commerce platform recently completed their #careonforward campaign. Which saw 10% of proceeds (in the form of care packages) from sales on their e-commerce site donated towards doctors, nurses and health care workers. The startup claimed they had raised over US$58 million dollars in funds for the campaign. This is but one example of a growing push for participation in philanthropy and corporate responsibility within Indonesia. Not to mention the donation worth IDR 40 billion given by Paragon Technology and Innovation, the producer of major Halal cosmetics Wardah, in the early time of the pandemic.

All of which, should be considered when attempting to use Islamic social finance as a primary source of development funding. While President Jokowi’s attempt to revitalize the zakat space with government-backed management and support, and while the funding pool in this space is vast, it may prove more effective to look towards other states such as the U.S. and prioritise corporate giving as well as high-net-worth-individuals (HNWI), rather than placing the sole responsibility on the shoulders of the people.

The recent launching of the National Movement of Cash Waqf has created controversy in public. Out of the announced IDR 180 trillion cash waqf potential, the middle-class Indonesian contribution was expected to mount IDR 130 trillion or over 72% of the potential. Although the controversy was claimed due to the political division and lack of waqf literacy, the story might be different if the launching was accompanied by the announcement of contributions by major Indonesian HNWIs, especially to those close to the current government, to existing waqf institutions. In the end, waqf’s role in reducing economic inequality can be realised by the encouragement of the country’s HNWIs to lend hands-on this movement. At the same time, Islamic teaching does emphasize the contribution of the best assets owned if a Muslim wants to contribute to this religious giving.

Islamic Finance Potential

Indonesia has the largest Muslim population in the world and therefore the role of zakat, waqf, and other forms of Islamic philanthropy or obligations should not be underestimated. Baznas estimated the potential of IDR 327.6 trillion of zakat collection in 2020. Some academics calculated even a higher figure, reaching up to 500 trillion. Yet, the realization was still a disappointing 10.2 trillion or around 3.1% (BAZNAS).

The same phenomenon has actually happened in waqf. BWI predicted that the annual contribution in waqf assets is IDR 2000 trillion and cash waqf will reach around 180 trillion rupiah. The realization figures by BWI is a low 819 billion since the law (UU No.41 2004) allows cash as an object of waqf. However, these potentials cannot be seen as impossible to be realized. The UNDP, for example, highlighted in its collaboration with BAZNAS, the opportunity for these areas to contribute to sustainable development goals is simply too large to ignore (Pickup & Rehman, 2018).

The steps towards implementing more effective, long term and targeted methods of regulating, collecting and distributing islamic social finance contributions could have a marked effect on development within Indonesia. An idea to implement it in tandem with corporations- in particular, those who benefit off of low wages and labour, as well as Indonesian high-net-worth-individuals (HNWIs)  should also be addressed in development. Whether it be by societal pressure or economic incentives in the form of regulation/taxation relaxation the distribution of wealth may be easier and become more popular.

Challenges to Islamic Social Finance

As with many other social finance initiatives, Islamic social finance faces a range of challenges both unique to the system and not. One of the challenges that Islamic finance institutions face is trusting namely, regarding the distribution of programs such as zakat, waqf, and sadaqah. To begin with, there is already a lack of awareness regarding the obligation under Islam to participate in giving zakat. It is estimated that only 4.4% of the potential total of zakat was given in 2019 (Yuniarti, 2021). Combined with a lack of awareness is the challenge of calculating zakat itself. Zakat encompasses not just liquid wealth or salary but the value of one’s accumulated assets, both liquid and hard. For many, this can prove difficult to calculate and not just for the individual but institutions as well. In short, literacy is the key starting point to mainstreaming Islamic social finance into Indonesia development framework.

Additionally, a major issue when considering obligations such as zakat is that many people prefer to give their money directly to the beneficiary, whether this be a person in need, a colleague or a friend. Some argue that this was due to the lack of trust in large organisations- it is estimated that only approximately one-quarter of zakat is given through formal organisations (Noor & Pickup, 2017). We also found that such a direct method is also being encouraged by the teaching of Islam. Indeed, direct distribution to those in need from the rich to the poor has been a source of social capital in many parts of Indonesian. We need to also acknowledge that the detailed demographic data that identify the needy is not simply available, to enable NGOs to lend their hand to those in need. The practice of direct giving is thus needed to lessen those who were left behind due to the data challenge.

A major issue when considering obligations such as zakat is that many people prefer to give their money directly to the beneficiary, whether this be a person in need, a colleague or a friend.

Reliable data as well as continuous donour, indeed, provide many challenges for sustainable and effective development within Indonesia. Without effective, centrally and formally managed channels for such large pools of funding the potential for implementing long-term, targeted programs and initiatives is much lower. Government institutions such as Badan Amil Zakat Nasional (BAZNAS) have attempted to remedy this by providing a verified, government-run institution to centrally manage Islamic social finance. However, the department still faces hurdles the government and President Joko Widodo himself have pushed hard in recent months to bring Islamic social finance and BAZNAS into the spotlight (Yuniarti, 2021).

The issue of funding for Islamic social finance institutions (NGOs in particular) also provides a very large challenge in times of crisis. Many Islamic social organisations rely heavily on zakat contributions or from government/IGO funding. In 2018, Dompet Dhuafa the largest Islamic NGO in Indonesia gained approximately 48% (Dompet Dhuafa, 2019) of their annual revenue from zakat alone but for most NGOs, some surveys have suggested that 80-85% of funding comes from international donors (Davis, 2013). A lack of diversity amongst funding sources contains a significant risk for charities and NGOs, particularly in Indonesia. The risk of global crises or natural disasters, to which Indonesia is extremely vulnerable has the potential to devastate the financial stability of Indonesia’s NGO systems.


As previously discussed, the role of Islamic Social Finance is not without its challenges yet represents a viable option to help bolster the Indonesian development sector. Islamic Social Finance and all that comes underneath its umbrella do not represent a finite solution to the many challenges that have arisen in the development sector both pre and post COVID-19 but instead raise large opportunities for innovation. So too does the potential for improved and more comprehensive social security policies within Indonesia. The role of NGOs as primary on-the-ground suppliers of essential services is not sustainable in the long term without diversifying funding sources, this will prove difficult, if not next to impossible if the government does not actively participate in relaxing regulation or providing alternative solutions that encourage corporate philanthropy. With the effects of COVID-19 still developing it is essential that the development sector and support for social security continue to be prioritized in the coming months.

About the Authors

Abigail Masters

Abigail Masters is a Bachelor of International Studies Student at RMIT University, Melbourne. Currently completing her final year she is also an intern with CORE Indonesia.

Ebi JunaidiEbi Junaidi is currently Director of Islamic Economics and Finance for Center of Reform on Economics (CORE) Indonesia. He is a lecturer at the Faculty of Economics and Business, University of Indonesia. His research interest is on Islamic social finance, Waqf, Risk and Time Preference and Financial Decision.

Muhammad Ishak

Muhammad Ishak is a researcher at CORE Indonesia, Jakarta, Indonesia. He completed his master in Islamic economics from University of Malaya. He is mostly interested in macroeconomics, monetary, and Islamic economics.


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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.