Indonesia Islamic Economic Project: A Disruptive Initiative for a more Just, Inclusive, and Impactful Finance

By Banjaran Surya Indrastomo

Indonesia Islamic economic project was initiated in the periphery and has been expanding significantly in different spectrums generating both authentic and Islamic version of financial institutions. With the recent move by the government to accelerate the development, it has to acknowledge its nature to reach its most potential.


Common presumptive mistake that general observer of Islamic economic in Indonesia would typically have is on the belief that Islamic economic is naturally flourished and accommodated in the most populous Muslim country. Although it is not entirely erroneous to have such initial thought, the fact that the penetration of Islamic finance was considerably low in a country of 219.9 million Muslim,1 with Islamic banking leading at around 5.3% by end 2016, set a contradicting reality on the ground.2 Even, Indonesia was not among top five countries of Islamic finance by size. This opposing fact might suggest the assumption that Islamic economics is naturally fitted in Muslim majority context does not always stand. Nevertheless, one could not take away the condition and the context over which Islamic economic realisations are taking place in different parts of the world and this is where Indonesia’s story is unique in particular. While most of Islamic economics project elsewhere were initiated by either Muslim regime or dominant Muslim group,3 the inception of the concept and its articulation in Indonesia happened through a bottom-up process involving processes of experimentation, collaboration, negotiation, and institutionalisation. This is where the story is becoming interesting as the Indonesian experience depict more of a civil initiative rather than imposed project in the setting where it could be assumed to be at its most welcomed and synchronised environment. In particular, this initiative was fuelled with spirit to realise just, inclusive, and impactful finance.

This opposing fact might suggest the assumption that Islamic economics is naturally fitted in Muslim majority context does not always stand.

Indonesia is a late comer in the global Islamic economic wave compared to other experiences. While the first experimental trial in the form of social bank came in Egypt in 1963, Indonesia’s experience began in early 1980s with cooperative-acting-as-microfinance providing Islamic-based financing at a time where Islamic Development Bank and the first Islamic-commercial bank in Dubai have already been established. The first Islamic bank of Indonesia was established ten years after in 1992, causing another delay for expansion and consolidation. This delay was not without a reason: at a time when the regime was consolidating the economy through a centralistic approach, such an idea integrating an experiment into a national plan was not a popular path in developmental planning. A negative stigma to initiative that carry Islamic agenda as a result of unpopular political Islam in the past is worsening any attempt to bring this case legitimate. Hence, when it first came into ground as a micro-level experiment, it is out of the initiative of small group of Islamic economic enthusiast influenced by global spread that was aware with the limited opportunity available for pushing for a bigger agenda of a messo-level institution. Therefore, this particular early stage development was uniquely bottom-up pushed within an available opportunity and rather unconducive environment.

Even though global influence was strong in Indonesian case, the initiative moved within the context of local problem that is already in existence in the ground. In coming with cooperative-acting-as-Islamic-Microfinance that later widely known as Baitul Maal Wa Tamwil, this small group of proponents of Islamic economics was aiming at addressing problems aroused from informal money lending practices that is considered zalim (unjust). This condition was substantiated as a problem aroused out of Riba, a forbidden practice within a transaction that was initially touching upon multiplying the payment from the principal that was popular in the medieval time and then later include the practice of interest taking in the modern time.4 The solution offered to this unacceptable practice is a partnership type of arrangement that resets the predetermined rate on giving financing by bringing together individual or groups and financial institution to share both potential risks and return under either Mudharabah or Musharakah contract.5 This arrangement is expected to eliminate injustice practice that burden those in need of capital through sharing risks rather than transferring risks. With its nature being an experiment, such initiative faced challenges and difficulties, resulting in series of failures.6 Nonetheless, the pursuance for a better model continued, triggering for institutional experiment and emergence in differing part of Indonesia with particular concentration in Java. This was indeed an indication of its focus on the impact.

While the micro expansion continued until end of 1980s, early 1990s period marked the beginning of collaborative initiative in developing Islamic economics through Islamic finance. With the lead of Scholar council, coalitional power that consist of civil leaders, technocrat, and Muslim intellectual was formed.7 This sparked new form of initiative that not only brought together different spectrum of influences but also targetted a higher objective within meso and macro level. Two achievements can be highlighted out of this: (i) a recognition of sharing practice in banking Act during deregulation process, and (ii) the formation of the first Islamic bank in Indonesia. These achievements were made possible due to consolidated attempts in different lines to assure that all required changes were there to support such action. For instance, a continuous approach to the regime was facilitated by the link and support from the Muslim intellectual circle whose influence was extended to the presidential circle. Indeed, those progresses were not possible without the consent of the regime. When the regime was on board, the president Suharto himself led the fund raising for the establishment of the bank.8 Beyond this process, the success of this collaboration took place through contextualising the presence of Islamic meso and macro products with the existing problem. One of the reason for that collaboration was on the fact this initiative was seen as a common solution to inclusivity in finance. This sourced from the belief that low financial deepening was contributed by religious reason related to prohibition of Riba. As such, Islamic bank in Indonesia was foreseen as a solution to this issue by regulator or regime at a time. On the other hand, Islamic bank was seen as a start for empowering Muslim in Indonesia through equitable financing. Hence, common ground could be reached between those with differing motives.

The progress made was an important milestone for proponent of Islamic economics as their marginal aspiration was institutionalised in later stage. This achievement managed to raise confidence level of those who believe with such structure. Albeit the hurdling regulatory environment within the frame of banking and other financial institutions, the continuous expansion of both Islamic banks and Islamic micro-economic institution along with other supporting institutions such as takaful, Islamic-version of insurance, has allowed the project to strengthen their presence. The collaboration even managed to be extended within Islamic finance ecosystem by fund channelling and other harmonisation attempt to back up those within the ecosystem. This collective mobilisation of capacity and resources in supporting each part has brought that recognition for Islamic finance industry as a legitimated industry. When Asian financial crisis hammered Indonesia in 1997-1998, a positive wave for reforming the financial sector has placed the industry on upper hand as the success of its Islamic bank to pass the crisis was seen as an avenue to strengthen the soundness and resilience of financial system.9 Since then, the project has seen an active involvement of regulatory body, especially Bank Indonesia, in facilitating further expansion of the industry and creating public awareness with various programmes. The expansion also stretched beyond intermediary institution toward other platform such as capital market. Regulator of capital market also innovated to allow Islamic capital market to grow with Islamic mutual fund and Sukuk to come together with Jakarta Islamic Index. Choiruzzad considered the leadership of regulatory bodies as timely given the decline of Muslim intellectual presence providing resources and authority to further institutionalised Islamic finance mode through collaboration.10

Indonesia Islamic capital market also recorded tremendous growth with increasing issuance of sukuk, especially government one that raised Rp. 87.31 Trillion, as a highlight.

With regulatory body driving the expansion of Islamic finance, the penetration of Islamic finance became visible as institutional presence soar with the market size of both banking institutions and other micro-oriented Islamic financial institution. In 2016, Islamic banks reached 34 units along with 163 Islamic rural banks spread across Indonesia.11 Non-banking institutions also grew in numbers with Takaful companies reaching 58 in number while Shari’ah financing companies and venture capital hit 40 and 7 in total. The total assets of Islamic finance in Indonesia accounted for around Rp. 897.1 Trillion by first quarter of 2017.12 Indonesia Islamic capital market also recorded tremendous growth with increasing issuance of sukuk, especially government one that raised Rp. 87.31 Trillion, as a highlight. This does not include around 4,500 to 5,500 BMTs that spread both in urban and remoted areas opening access of financing to those sub-prime individuals and groups.13 It remains a mystery of the size of the total assets of these institutions, yet, some have been growing in size up to the level that it could not be categorised as micro institution. Hence, the expansion of Islamic finance not only happened through mainstreaming process but it also consistently pushed in the periphery serving underprivileged beyond middle class urban Indonesian.

The expansive nature of Islamic economic project of Indonesia finally attract the attention of the central authority. They realise the potential of such project in contributing to developmental agenda of the nation. In July 27th, 2017, the government formed Komite Nasional Keuangan Syari’ah (“National Committee of Shari’ah Finance”) as a coordinating body in facilitating the development of Islamic economic and finance involving multiple stakeholders.14 This committee function to ensure that the masterplan of Shari’ah finance architecture that officially introduced in World Islamic Economic Forum 2016 can be executed. Within this mandate, this committee worked toward synergising regulators, government and industry, creating a synergised and progressive Shari’ah financial system that accommodate development, implementing the agenda of the masterplan, and integrating with halal-based industry.15 This move marked the beginning of government leading initiative within a movement that was bottom-up in nature. It is indeed a timely move considering the stagnancy of the industry since it is going mainstream which was contributed by structural issue related to regulation and incentive mechanism within taxation system.16

The expansive nature of Islamic economic project of Indonesia finally attract the attention of the central authority. They realise the potential of such project in contributing to developmental agenda of the nation.

Although the formation of KNKS demonstrate government commitment to foster the expansion of Islamic finance in having stronger presence and contribution to other expanding and halal industries, this move should be observed carefully in relation to disruptive nature of its development so far within the motives to reach just, inclusive, and impactful finance. It could not be denied that this alignment has been long awaited by some proponents of this Islamic economic project. Nevertheless, one should realise that this initiative was indeed periphery nature and concern toward reforming finance to go beyond its business as usual providing access and opportunity for greater masses that happened to be Muslim. When this frame was seen as a mode to mobilise capital, the purpose of this process should not only limit toward money making purpose but also toward a contribution that is in line with the goal of Shari’ah, which is Maqasid itself. This brings finance toward a greater dimension of responsibility to account for stakeholders, especially the underprivileged. For instance, in relation to recent discussion over the use of Hajj fund for development,17 this should be seen as a positive step stone as such funding would not only strengthen the capitalisation of Islamic financial industry but also exposed toward better management and disclosure standard. The challenge would be on its professionalisation to the extent that any allocation of investment should not only consider pay off but also its effect as well as liability management. As perpetual fund with particular mandate, the utilisation of the fund should first map its liability exposure and construct strategy accordingly without neglecting its responsibility toward national development, including in relation to infrastructure project. Such careful consideration is for the purpose of providing necessary space for Islamic economic project to remain disruptive and impactful in nature opposed to being conformist and structurally determined. Hence, a top-down approach should ensure that enabling mind-set should be put forward in facilitating further expansion of Islamic economic project in Indonesia with such a promising prospect in the future.


Featured Image: Bank Indonesia, the central bank of the Republic of Indonesia © Wikipedia

About the Author

Banjaran Surya Indrastomo is an Islamic Political Economist by training with research focus on Islamic Economics, Islamic Economic Sociology, and Indonesia Islamic Economic experience. He is an Awardee of the Indonesia Endowment Fund for Education (LPDP) and is registered in the doctoral programme in Islamic Finance at Durham University Business School.



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11. Otoritas Jasa Keuangan, Laporan Triwulanan Triwulan I – 2017,—2017/Laporan%20Triwulan%20I-2017.pdf, (August 10, 2017)
12. Ibid
13. Bappenas, Komite Nasional Keuangan Syariah untuk Percepatan Pengembangan Ekonomi dan Keuangan Syari’ah Indonesia (Jakarta, 2017)
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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.