Indonesia takes on Islamic fintech agenda with new digital platforms

Determined to break itself out of the ‘5% trap’, a term market practitioners have used to describe Indonesia’s years-long inability to grow its Shariah banking market share beyond the 5% range, President Joko Widodo took it upon himself to set up and lead a dedicated national Islamic finance committee which has identified the Halal digital economy as a strategic pillar of its robust strategy to become a force to be reckoned with in the global Islamic finance sphere.

Indonesia’s National Islamic Finance Committee (KNKS) was the brainchild of President Jokowi launched two years ago with the purpose of positioning the Republic as an international Islamic finance hub, rivaling neighboring Malaysia. Initially focusing solely on the financing sector, KNKS however has widened its outlook to include the entire Halal value chain on the basis that the growth of Shariah finance in the Muslim country of 264 million goes hand-in-hand with the Halal industry. This paradigm shift culminated in the Master Plan for the Indonesian Islamic Economy (MEKSI).

Over a year in the making, the MEKSI was finalized and launched in May 2019, with digital economy enhancement as a key component of the multipronged plan. Although not the first sovereign to champion an Islamic digital economy agenda (Dubai and Malaysia both stake claims to this title), it is however the first to include concrete Islamic fintech measures to advance its Shariah digital economy agenda.

IFN Fintech has learned that there are at least three national-level Islamic fintech initiatives in progress: a digital Zakat platform, Islamic cooperative platform and a Shariah compliant digital payment ecosystem.

Zakat platform
KNKS has conceptualized the Zakat platform as serving three core functions: a Zakat data integration platform to facilitate the development of a comprehensive national policy on religious taxation; to increase the accountability of Zakat institutions; to enable the payment or collection of Zakat through a seamless digital avenue.

It is understood that the committee will collaborate with existing platforms to fulfil the latter two objectives. This means, potentially partnering with the likes of BAZNAS (state Zakat organization) and Registered LAZ (public Zakat organization) to utilize their proprietary or third-party systems.
“On the other hand, many e-commerce and social crowdfunding platforms also have Zakat payment features,” explained Dr Sutan Emir Hidayat, the director of financial education and research at KNKS, adding that platform development standardization would be a crucial element of focus for the committee. “With standardization in place, it is expected that data interconnection and good performance reporting can be easily carried out.”

Islamic cooperatives platform
The vision for the Islamic cooperatives, or Baitul Maal wa Tamwil (BMT) platform is relatively more ambitious. KNKS intends to develop a centralized system to synchronize and integrate existing BMT core systems.

“The objective of the plan is simply to build a central real data management [system] of every BMT institution nationally, so that [supervision] of this industry could be run optimally,” according to Dr Sutan. The government has yet to decide on who will operate this system.

Islamic digital payment system
The driving purpose for this initiative is to enhance digital payment services to Shariah-conscious retail consumers.

While the digital technology infrastructure in the consumer transaction space is developing rapidly in Indonesia, it has mainly be an endeavor of conventional banks and financial institutions, with Islamic banks often left out of the equation and lagging behind their conventional counterparts, according to Dr Sutan.

“Therefore, with this digital payment system, Islamic financial customers can also enjoy the new world of digital payment, and on the other side, we can maintain the market share of Islamic bank assets/funding,” he said.

Keeping up with KNKS
These are certainly ambitious measures the KNKS is embarking on and while it remains to be seen if these can be delivered, it is certainly encouraging that there are concerted efforts at a national level to drive fintech for Islamic finance. Indonesia could very well be setting a precedent for its Muslim peers to follow suit.


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