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Is Indonesia's Sharia fintech industry here to stay?

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By Helena Kerr


Indonesia, the biggest emerging market in Southeast Asia, has already become a hub for new enterprises specializing in financial technology, or fintech. Many investors are lured by its huge market potential: the large population of 270 million people, 178 million internet and smartphone users and a government that is investing heavily in digital infrastructure.


The Indonesian Central Bank in Jakarta. Photo by CEphoto, Uwe Aranas / CC-BY-SA-3.0


According to the Asian Development Bank, Indonesia can boost its GDP by 2-3% by providing banking services to the 35% of its population that is currently unbanked. This is particularly important as 97% of the Indonesian workforce is in the small and medium-sized enterprise (SME) segment, which needs affordable access to financing. At present, 80% of the sector is unable to access these financing options.


A growing segment within fintech is sharia fintech: digital payment or peer-to-peer (P2P) platforms that abide by Islamic laws

Sharia fintech differs from conventional fintech in at least three defining ways. First, as charging interest is prohibited by Sharia law, Sharia fintech utilizes a profit-sharing model. The borrower will pay the lender the principal plus a percentage of the profits enabled through the loan. Most Sharia fintech firms in Indonesia are P2P, a model that suits this arrangement well.


Second, Sharia fintech companies are committed to investing profits in only halal investments, which exclude ventures in the alcohol, pork and gambling industries.


Finally, Sharia fintech companies are encouraged to invest in projects that help the low-income and underserved groups. Herston Powers, principal at Singapore-based fintech firm Tryb Group, predicts that Indonesia's Sharia banking assets will soon match or even exceed those in Malaysia, which reportedly include over 25% of the country's banking assets.


Most Sharia fintech companies also have a function allowing people to calculate their zakat, Islamic compulsory alms-giving, and enable them to direct payments to their mosques. These additional features in Sharia fintech are appealing to the growing conservative Muslim population.


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