Shariah Fintech – A Case Study of Indonesia

Fintech has undoubtedly changed the world of finance in the 21st century. Its continued growth has ushered in a host of regulatory changes in the financial industry as existing regimes now have to be adapted to fit the practice and application of end-to-end fintech products.

The world of Islamic finance, while a less-talked about industry, is not immune to the changes heralded by technology. By definition, Islamic finance, or shariah-compliant finance, refers to financial activities done in accordance to the Islamic shariah law. The main principles of Islamic finance include the sharing of risk, sharing of profits and loss, and the prohibition of interest (or riba).

It is not unsurprising that fintech has permeated the Islamic banking industry. The global market for Islamic finance is estimated to be worth some USD 2 trillion, with estimates from Ernst and Young pegging the growth of Islamic banking assets at an annual rate of 17.6 percent between 2009 and 2013. This figure was predicted to continue growing at an average rate of 19.7 percent per annum until 2018.

Notably, a survey conducted by the IMF (International Monetary Fund) in 2010 found that Islamic banks were better able to weather the 2007-2008 global financial crisis. As one of the fastest growing segments of the global finance industry, Islamic finance is a prime case for the application of fintech solutions.

Case Study of Indonesia

These developments are particularly evident in Indonesia, the world’s most populous Muslim country, where in July 2018, deputy finance minister Mardiasmo plugged the term “Shariah fintech” at the country’s third annual Islamic Finance Conference in Makassar, in reference to financial technology that is compliant with Islamic laws and beliefs.

According to reports, the market share of Islamic finance remains stuck at less than 5 percent of the total finance and banking market. There is tremendous potential for Islamic financial institutions to unlock new business by catering to financial needs of halal economy stakeholders. But there are some impediments blocking this growth.


One is the presumption that certain fintech tools might not be compliant with Shariah law. Few Islamic banks have been open to adopting new technologies because even as technology itself is neutral from the Shariah perspective, the use cases and applications of fintech still need to be compatible with the nuances of Islamic principles.

For instance, cryptocurrency was initially deemed as a violation of Shariah principles. Several notable organisations, governments and people (including the Grand Mufti of Egypt, the Turkish government, Fatwa Center of Palestine) issued edicts denouncing cryptocurrency as haram, because Bitcoin is not considered legal tender. Therefore, any innovation using cryptocurrency as a financial unit was deemed against the principles of Islamic banking.

However, in April 2018, Muslim scholar Muhammad Abu-Bakar, the internal Shariah advisor for Indonesian Islamic micro-financing firm Blossom Finance, released a study exploring the functionalities of Bitcoin, concluding that it did indeed meet the requirements of accepted payments and mediums of exchange in financial transactions allowed under Islamic principles. Following the release of the report, the price of Bitcoin rose by more than USD 1000 in 30 minutes, a jump that media outlets attributed to the increase in Muslim traders in cryptocurrency following the release of the report.

According to Mardiasmo, there is a “need to deepen understanding of Shariah knowledge” among fintech players so that they can comply with Shariah-based regulations. But interpretation of Shariah law largely depends on fatwas or on what is said by eminent scholars. Without the acceptance of fintech tools by these communities and the Islamic banking industry at large, implementation of Shariah fintech tools will continue to meet resistance.

But with fintech acceptance, we can expect to see more applications of blockchain technology in Islamic financial services, automated halal investment and trading platforms, robo-advisers in Islamic finance, smart contracts to reduce costs at Islamic financial services firms, and Shariah-compliant cryptocurrencies and ICOs (initial coin offerings).

Role of Regulation

According to a report by Global Finance Mag, global Islamic finance assets are expected to increase by 72 percent to reach USD 3.8 trillion by 2022. Much like how other financial tools operate, it is important that the use of Shariah fintech is supported by the right infrastructure and governed by the right regulation.

The need for legislation, regulation and infrastructure support is especially important because Islamic fintech firms largely operate independently, supported by complex justifications on why their innovations are permissible or endorsed by specific fatwas. There needs to be a broader understanding of the fintech industry and what can constitute it, beyond the ill-defined stance that something is only impermissible if it is in clear violation of the basic finance rules of Shariah.

In recognition of the different nature of fintech landscape, Indonesia’s OJK (Financial Services Authority) is releasing a new set of regulations to govern the country’s burgeoning fintech scene, set to come into effect in August 2018. These rules, expected to improve consumer protection and maintain financial system stability, as well as boost anti-money laundering and counter terrorism financing efforts, will extend to Shariah-compliant fintech tools as well.

It is noteworthy that the primary drivers for Shariah fintech will not be the incumbent large banks but rather startups and entrepreneurs. This can also extend beyond banking, to non-bank products such as Islamic insurance, Islamic micro financing, and Islamic venture capital.

Better support and regulation for Shariah-compliant fintech will ultimately serve to boost the Islamic finance industry, increasing the share of Islamic banks in Indonesia’s financial services sector and ultimately making it more competitive.

Sharifah Nursyafiqah is a Senior Consultant for Singaporean due diligence startup Datarama, with a background in Indonesia research.

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