Indonesia, home to the world’s largest Muslim population of more than 230mn people or about 88% of the country’s total inhabitants, is eventually waking up to give Islamic finance a much-needed kick start to become a more disseminated form of banking and investing in the Southeast Asian nation. And the potential is there, prompting analysts to label the nation as a “waking giant” with much of the future global growth in Islamic finance believed to be contributed by Indonesia.
Despite its potential in sheer numbers of underbanked Muslims, Indonesia has been a slow starter in Islamic finance and is about a decade behind Malaysia in terms of development of the sector. Only in the last few years, there have been some visible steps to support Shariah-compliant finance and lift its market share in terms of asset volume beyond the current 6% — as compared to close to 40% in Malaysia.
Indonesia’s first Islamic bank, Bank Muamalat, was established only in 1992, some legal regulations were set in the following years and a dual banking system for conventional and Islamic banking was recognised in 1998. 
The country’s central bank was allowed to make use of Islamic instruments as part of its monetary policy in the same year and issued its first sovereign sukuk, which was followed by the first retail sukuk in 1999. 
But the sector remained widely unregulated until 2014, when Islamic banks alongside conventional financial institutions came under the supervision of the Financial Services Authority, the country’s financial market watchdog. Later on, in 2016, the Indonesian government set up the National Islamic Finance Committee to support and promote the development of Shariah finance in the country.
When the regulations set in, the sector came finally into gear, with especially the sukuk market in local currency growing with new issuances coming out annually, the number of Islamic banking outlets – including Islamic windows – doubling over the past decade and Islamic finance generally enjoying higher growth than the conventional sector. 
The expansion was helped in recent years by a sizeable sectoral expansion of the industry, including Islamic microfinance, rural Islamic banking and Islamic lending cooperatives, Shariah-compliant financing for small and medium enterprises, as well as the growing innovative potential with the advent of Islamic fintechs and the adaption of sustainable Islamic finance and impact investing, shown by the issuance of green sukuk.
The government of Indonesia on June 17 issued its latest Islamic bond, a $2.5bn global sukuk, amid strong interest from investors especially from other Asian countries and the Middle East. The sukuk, launched as part of the country’s efforts to meet coronavirus-induced funding requirements, was issued in three tranches, one of which was a five-year green sukuk worth $750mn. The issuance was oversubscribed by 6.7 times, reflecting the strong international investor appetite for the Islamic bond. 
This issuance has been carried out “to accommodate budget needs in handling the impact of the Covid-19 pandemic, as well as to strengthen Indonesia’s position in the global Islamic financial market and support the development of Islamic finance in the Asian region,” said Indonesia‘s director of Islamic finance at the finance ministry, Dwi Irianti Hadiningdyah.
Thomson Reuters in a recent analysis saw high future potential for foreign direct investment (FDI) in Indonesia’s Islamic banking industry, for both the retail and the corporate sector. In retail, there is particular potential for products enhancing financial inclusion, such as direct banking, mobile banking, consumer loans, direct takaful, as well as for wealth management and Islamic social finance, including zakat- and waqf-related products, as well as microfinance. In the corporate sector, the analysis saw investment opportunities for Islamic funding of infrastructure and private-public partnership projects, as well as for agricultural, energy and mining ventures. 
Other promising sectors were business takaful, corporate sukuk and Shariah-compliant corporate asset management. On a macroeconomic level, the analysis also underlined the potential of impact investing in Indonesia, namely in the halal industry, including halal tourism, halal food and halal fashion.
Going by the numbers, things are looking good for Indonesia. The United Nations Conference on Trade and Development in its annual world investment report for 2019 issued on June 12 found that Indonesia attracted a record $23.4bn in FDI last year, up nearly 14% from 2018 which made it the only Islamic country in the top-20 global economies in terms of FDI volume.
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