Indeed, it is true that a significant number of Indonesian Muslims can be labeled ‘cultural Muslim’, locally known as Muslim KTP, meaning they do not practice Islam but do retain an attachment to elements of Islamic culture due to their family background or the social and cultural environment in which they were raised, or, in which they are still living today (similarly, there are also ‘cultural Christians’, ‘cultural Hindus’, and ‘cultural Buddhists’ in Indonesia).

Nonetheless, with Islam being the dominant religion in Indonesia, the impact of Islamic teachings and values is felt throughout society. In fact, a process of Islamization has been ongoing in Indonesia basically since the arrival of Islam to the Archipelago around eight centuries ago.

Islamization brings opportunities. In earlier reports, Indonesia Investments already discussed the potential for Indonesia’s Islamic fashion industry and halal tourism. Meanwhile, there is another industry that rapidly comes to mind when discussing business activities that are in accordance with Islamic principles, namely Islamic banking or Sharia banking. But – rather remarkably – despite having the world’s largest Muslim population and despite forming a dynamic emerging economy, Indonesia plays a small role only in the global Islamic banking industry. Islamic banking apparently has a hard time taking off in Southeast Asia’s largest economy.


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This article discusses:

 Indonesia is home to the world's biggest Muslim population, yet Islamic finance has not been developed. How come?
Difference between conventional banking and Islamic banking
 Growth of the global Islamic finance market
 Despite the low penetration of Islamic finance in Indonesia, the country now ranks first in the Islamic Finance Country Index; how come?
 Indonesia recently launched the Masterplan of Sharia Economy 2019-2024. What does it propose in terms of Islamic finance?
 What are the challenges for further development of Islamic finance in Indonesia?