The Masyarakat Ekonomi Syariah (MES) designed three scenarios (a positive, pessimistic and normal one) regarding the development of Islamic banking in Indonesia next year. In the normal scenario, Islamic banking is projected to grow up to 15 percent (y/y) in 2016, while Islamic banking assets are expected to grow about 13.5 percent. Assets controlled by Islamic financial institutions in Indonesia are expected to remain just below the 5 percentage point mark (of the nation's total banking assets), showing that - despite having the world's largest Muslim population - Indonesia's Islamic banking industry lags far behind its conventional counterpart.

Growth Outlook Indonesia's Islamic Banking Industry in 2016:

Indicator Normal Optimistic
Assets 12.8 - 14.6% 14.6 - 17.1% 10.9 - 12.8%
Financing 13.1 - 15.0% 15.1 - 17.0% 11.1 - 13.1%
Third-Party Funds 12.8 - 14.7% 14.7 - 16.6% 10.9 - 12.8%
Finance-Deposit Ratio 90.9 - 99.7% 99.7 - 105.6% 82.0 - 90.9%
Market Share   4.4 - 4.6%   4.6 - 5.5%   4.2 - 4.4%

Source: Masyarakat Ekonomi Syariah (MES)

Islamic Banking Assets in Indonesia (in trillion IDR):

 2010  2011
 2012  2013  2014
Islamic Commercial Banks & Islamic Business Units   975  145.5  195.0  242.3  272.3
Islamic Rural Banks    2.7    3.5    4.7    5.8    6.6
Total Assets  100.3  149.0  199.7  248.1  278.9

Source: Financial Services Authority (OJK)

Coming from a low base, the market share of Islamic banking in Indonesia is expected to rise as foreign investors are eager to tap this industry, while Bank Aceh will become a full flung sharia bank in 2016. This bank, majority owned by the local Aceh province, controls more than IDR 20 trillion (USD $1.5 billion) in assets. Islam is the dominant religion in the province of Aceh (on the northern tip of Sumatra) where about 98 percent of the local population adhere to Islam. This region has been given a special status (autonomy) by the central government in 2001 (which made it possible for Aceh to implement sharia-law).

Due to the low penetration rate, Islamic finance in Indonesia is an attractive investment prospect. Currently, foreign investors cannot own more than 40 percent of Islamic banks in Indonesia. However, the country's financial authorities are considering to raise the ceiling in order to boost the Islamic banking industry in Southeast Asia's largest economy. The Dubai Islamic Bank increased its operational activities in Indonesia in October 2015, while Al Baraka from Bahrain is expected to do the same. The Abu Dhabi Islamic Bank is considering to enter the Indonesian market in 2016.

Dinno Indiano, Head of Business Development at the Indonesian Sharia Banks Association (Asbisindo), said Islamic micro finance was rather stagnant over the past two years, growing by an annual single-digit only. This is in stark contrast to the target set by Indonesia's Financial Services Authority (OJK) which initially projected a 25.8 percentage point (y/y) growth in Islamic finance. Indiano said the Islamic gross non performing financing ratio is too high at 4.73 percent in August 2015.

Further Reading:

Overview and Analysis of the Islamic Banking Industry in Indonesia