Sharia Finance Key to Enhancing Indonesia’s Economic Productivity

Indonesia, the world’s largest Muslim-majority country, has been leveraging Islamic finance to drive its economic growth. With a significant portion of its population adhering to Islamic principles, the country is uniquely positioned to benefit from the integration of Shariah-compliant financial systems into its broader economic strategy. Rosy Wediawaty, the Director of Financial Services and BUMN at the Ministry of National Development Planning/Bappenas has been vocal in her support for this approach. She asserts that Islamic financial principles could significantly enhance Indonesia’s economic productivity.

In a keynote speech during the Sharia Economics and Finance International Seminar, Wediawaty outlined the vast potential that lies within the Sharia economy, saying, “The Sharia economy offers a new avenue for growth that holds substantial potential, which we need to harness collectively.” This sentiment echoes a broader governmental strategy that views Islamic finance as an essential component of Indonesia’s economic productivity.

The Rise of Indonesia’s Economic Productivity

Recent trends reveal promising growth within Indonesia’s Islamic finance sector. The country has witnessed a substantial increase in its halal exports, which grew by 9.05% in 2022 compared to the previous year. This increase comes amid relatively stable import levels, indicating that Indonesia is well-equipped to meet international demands for halal products.

This expansion of halal exports is part of a larger trend where the halal value chain’s contribution to Indonesia’s GDP has grown. Between 2017 and 2021, the halal sector’s share of GDP saw significant progress, reaching 25.44% by 2021. Although there was a minor setback in 2022, 2023 has already shown signs of recovery, with the sector accounting for nearly 23% of GDP. This indicates that the halal economy is becoming a key pillar of Indonesia’s economic structure.

Indonesia’s Leadership in Muslim-Friendly Tourism

Islamic finance’s impact in Indonesia extends beyond traditional financial services. It is also playing a vital role in positioning the country as a leader in Muslim-friendly tourism. Indonesia currently ranks first in the 2023 Global Muslim Travel Index (GMTI), a benchmark for countries that cater to the needs of Muslim travelers. Key factors that contribute to this ranking include ease of access to Muslim-friendly services, such as halal restaurants, airports with prayer facilities, and cultural sites designed to meet the needs of Muslim tourists.

Indonesia’s leadership in Muslim-friendly tourism is a significant achievement, as the global halal tourism market is expected to grow exponentially. The provision of amenities like prayer rooms, halal food options, and appropriate dress codes helps to attract Muslim travelers from around the world. This trend aligns with Indonesia’s broader economic strategy to tap into niche yet rapidly growing markets that align with Islamic values.

Challenges in Islamic Finance

Between 2017 and 2019, Indonesia’s Islamic finance sector experienced rapid growth, with an impressive 76.5% increase during that period. However, the sector faced a relative slowdown after 2019, which has led to calls for further strategic enhancements to sustain long-term growth. Despite the slowdown, Indonesia’s Islamic finance market still offers enormous potential, particularly with the strategic deployment of zakat (charitable donations), waqf (endowments), and profits from Shariah-compliant businesses.

The collection of Islamic social funds, such as zakat, has proven to be a valuable resource. It is estimated that the zakat collection could reach up to IDR 327 trillion annually, providing a significant financial base for development projects. These funds, if managed properly, could drive social welfare initiatives and reduce poverty, all while adhering to Islamic financial principles.

However, one of the key challenges facing Indonesia’s Islamic finance sector is raising awareness and education among the general public. Many Indonesians are not fully aware of how Islamic finance works or how they can benefit from it. This has led to lower adoption rates compared to conventional financial systems. Another challenge is the need for infrastructure to support the full integration of Islamic finance into Indonesia’s existing financial ecosystem. Financial literacy campaigns and public awareness programs are essential to addressing these gaps.

Indonesia’s National Development Plan

Looking to the future, Indonesia’s National Long-Term Development Plan (RPJPN) for 2025-2045 outlines ambitious goals for integrating Islamic finance into the national economy. The RPJPN envisions Islamic finance playing a crucial role in driving ethical and sustainable economic growth over the next two decades. The plan focuses on aligning Islamic financial principles with global trends such as sustainable financing and ethical investment practices.

Part of this strategy involves leveraging Islamic finance to address global issues like climate change, inequality, and poverty. Indonesia aims to position itself as a leader in ethical financing by offering Islamic financial products that cater to socially responsible investments (SRI) and green financing. This move could attract global investors who are looking to invest in ethical projects while complying with Shariah principles.

Islamic Finance in Indonesia’s Economic Productivity

One of the most promising areas for Islamic finance in Indonesia is infrastructure development. Indonesia’s infrastructure needs are immense, and the government has increasingly looked to Islamic finance as a solution for funding large-scale infrastructure projects. Sukuk, or Islamic bonds, have already been used to fund numerous public projects, including transportation networks, water supply systems, and energy infrastructure.

The use of Sukuk allows the government to raise capital for development projects while adhering to Islamic financial principles, which prohibit interest-based transactions. Sukuk holders essentially own a share in the project, and profits are distributed based on the project’s actual performance rather than through interest payments. This not only ensures compliance with Islamic law but also creates a more equitable and risk-sharing financial model.

Islamic Finance’s Role in Empowering SMEs

Another significant area where Islamic finance can make a difference is in empowering small and medium enterprises (SMEs). SMEs form the backbone of Indonesia’s economy, and Islamic financial products, such as profit-sharing contracts (mudarabah) and partnership contracts (musharakah), offer an alternative to conventional loans, which are often prohibitive for smaller businesses due to high interest rates.

These Shariah-compliant contracts enable businesses to access the capital they need while sharing risks and profits with their financial partners. This approach aligns with the Islamic principle of fairness and mutual benefit, creating opportunities for SMEs to thrive without resorting to interest-based loans. As a result, the promotion of Islamic financial products for SMEs could help foster entrepreneurship and drive economic growth in local communities.

The Future of Islamic Finance in Indonesia

Indonesia’s strategic focus on Islamic finance represents a key pillar of its economic development plan. From halal exports and Muslim-friendly tourism to infrastructure development and SME empowerment, Islamic finance is playing an increasingly prominent role in the nation’s growth story. As Indonesia looks ahead to its RPJPN 2025-2045, the integration of Shariah-compliant financial systems is set to become even more critical in driving sustainable and ethical economic development.

By fostering a financial ecosystem that aligns with both Islamic principles and global trends, Indonesia is well-positioned to become a global leader in Islamic finance. Through policy reforms, public education, and the promotion of ethical investments, the country can fully realize the potential of Islamic finance as a tool for inclusive and sustainable growth. The future of Indonesia’s economy lies in harnessing the power of Islamic finance to build a prosperous, equitable, and ethical society.