Strengthening Indonesia's Shariah financial sector

Jakarta, 19 September 2024 – The Shariah segment, integral to Indonesia’s financial sector, presents vast market potential, driven by increasing Shariah financial literacy, which surged from 9%¹ to 39%² between 2022 and 2023.

The government is strongly advancing its support in the Shariah sector, including the issuance of POJK 10-12/2023, mandating the separation of Shariah Business Units within financial institutions such as banks, insurance companies, and guarantee corporations. This initiative is expected to encourage Shariah Business Units to undertake various developments in procedures and business processes to strengthen institutional aspects, creating a stable and competitive Shariah business, and capable of addressing the dynamic and complexity of the banking industry.

There are three alternatives for the separation of Shariah Business Units: (i) submission of new business licence, (ii) acquisition of Shariah licensed company, and (iii) portfolio divestment. Each of the alternatives requires thorough evaluation across a range of factors, including industry growth, spin-off feasibility in commercial, financial, tax, legal, and other aspects, and their strategy post-spin off.

PwC Indonesia hosted an event titled “Spin Off Unit Usaha Shariah” to provide valuable insights into the newly enforced regulations and potential alternative structures for Shariah Business Units separation.

Radju Munusamy, PwC Indonesia Advisory Deals Partner, added, “Shariah finance undoubtedly promises significant potential for growth. A robust yet untapped market base means opportunities for Shariah-based financial institutions. With the new regulation on Shariah unit separation, PwC recognises that it is necessary for organisations to not only adapt to the new regulation but also use this as a trigger to create value and chart out a path to success.”

Islamic banking has demonstrated its performance in navigating crises and has a positive influence on socio-economic aspects. However, this great potential has not yet been fully optimised. Therefore, Islamic banking needs to undergo a transformation by focusing on two main aspects that need enhancement: resilience and competitiveness, as well as socio-economic impact.

The first aspect involves enhancing resilience and competitiveness, which can be achieved through the consolidation of Islamic banks, strengthening resilience and prudential measures, and continuously innovating to differentiate products and services. Additionally, Islamic banks must bolster risk management and Shariah governance to face challenges more robustly and efficiently.

The second aspect focuses on improving socio-economic impact through synergy within the Shariah economic ecosystem, actively participating in optimising Islamic social finance to increase financial inclusion, and supporting sustainable finance initiatives.

To close, Radju said, “By addressing these areas, Islamic banking is expected to contribute more positively to inclusive and sustainable economic development. This transformation is carried out as an effort to realise Islamic banking that is sustained, efficient, has integrity, and is competitive, while also providing a positive impact on the well-being of society.”

¹ Otoritas Jasa Keuangan. (2022). Survei Nasional Literasi dan Inklusi Keuangan Tahun 2022. 

² Otoritas Jasa Keuangan. (2024). Survei Nasional Literasi dan Iklusi Keuangan Tahun 2024.