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Southeast Asia

Indonesia and Islamic finance: The sleeping giant stirs

Indonesia’s ambitions of being Asia’s Islamic finance hub have long been hobbled by lack of infrastructure and support. But can a recent change in government attitude spur the industry?

Indonesian President Joko Widodo Visits Australia
Indonesian president Joko Widodo is spearheading an Islamic finance transformation.
Photo: Tracey Nearmy/Getty Images

For a country that is home to the world’s largest Muslim population, Indonesia has made only limited strides in developing its Islamic finance market.

Out of a population of 270 million, 87% are Muslim (the other 13% in officially secular Indonesia include Protestants, Catholics, Buddhists, Hindus and Confucians). Yet the Islamic banking industry accounts for only 7% of the overall banking sector, up marginally from 6% in 2019, according to a research note put out by Fitch Ratings in April 2021.

“[Islamic banking] has been growing, but it is at a very slow, very snail pace,” says Fauziah Rizki Yuniarti, a lecturer at the Faculty of Economics and Business at University of Indonesia and an Islamic economic researcher at the Institute for Development of Economics and Finance.

And yet it has enormous potential, leading Raja Amir Shah Raja Azwa, chief executive of HSBC Amanah, to call Indonesia a “sleeping giant” when it comes to the Islamic financial market.

But