BSI, a merger of three banks formed in February 2021, is struggling to achieve economies of scale (farzand01/Shutterstock).

Islamic Finance

Newly merged Indonesian Islamic bank has potential for the world’s largest Muslim market

Aims for Bank Syariah Indonesia (BSI) to be among the world’s top Islamic banks within three years.


Jakarta: Despite its promising outlook and early results, Bank Syariah Indonesia (BSI), Indonesia’s largest Islamic bank, has its work cut out to achieve the economies of scale demanded to compete nationally and globally where the knowledge of Sharia-compliance banking systems remains poor.

BSI was formed in February 2021 following the merger between the Islamic banking units of Indonesian state-owned banks Bank Syariah Mandiri, BRI Syariah and BNI Syariah, producing the country’s seventh largest bank with a 2.5% share of industry assets. Medium-term plans are to be among the top 10 Islamic banks globally by 2025.

However, analysts and officials said this could be challenging as the share of Islamic services in the overall Indonesian banking market remains stagnant – less than 7% over the past few years. This is despite its status as the world’s largest Muslim-majority nation with nearly 90% of its 270 million people following the faith.

By contrast, the market share of Islamic banking in neighbouring Malaysia is around 30%.

“The merger has not resulted in an increased market share for Islamic banking in Indonesia. There are more steps that need to be taken by the government to that end, including increasing capitalisation of Islamic banks to improve the economies of scale and make them more competitive vis-à-vis conventional banks,” Aziz Setiawan, a researcher in Islamic finance at the SEBI School of Islamic Economics, West Java, told Salaam Gateway.

This includes unique business models; investment into digitisation and improved human resources as key elements to future growth. He said for Indonesia to be a global Sharia financial hub, it must increase the market share of its Islamic banks and make bold regulatory steps.

Among its innovations to achieve goals would be allowing Islamic banks to improve product and service quality by working in synergy with conventional banks in areas like information technology (IT), networking and other infrastructure.

Setiawan believes this would enable BSI to expand on the real growth that has occurred since its launch. The bank recorded a 33% increase in net profits in the first-half of 2022, boosting confidence in sustainable future growth, the bank said in a statement late April.

Hery Gunardi, SBI president director (CEO), added that cost efficiency and expansion of cheap funds had supported healthy and solid financing.

Earlier this year BSI opened a representative branch office in Dubai, United Arab Emirates, as part of its efforts to tap into the Middle Eastern Islamic banking market and expand its customer base.

“This proves people are increasingly interested in experiencing Islamic banking services in all segments. The growth is also an injection of enthusiasm for BSI to expand its market globally with Dubai being the first,” Hery said.

The bank’s assets grew 15.73% year-on-year in the first quarter of 2022 to Rp 271.29 trillion rupiah ($18.6 billion), while capital adequacy rose to 150.09% and the efficiency ratio to 75.35%.

BSI operates under the Islamic tenets that forbid charging and paying interest, as well as trading assets deemed haram. In Islam wealth can only be generated through legitimate trade and investment in assets meaning making money from money is forbidden.

Hery said this year BSI would focus on developing the Islamic ecosystem by expanding its reach to mosques, hajj and umrah pilgrimage travel industry, alms and donation payments, Islamic educational institutions, as well as the modest fashion and halal industries.

He added this was a potential segment on which BSI must continue to work; having the uniqueness and characteristic to develop a halal and Muslim ecosystem.

Meanwhile, the number of people using the bank’s BSI mobile app (available to any device with an Indonesian phone number) grew 124% year-on-year to 3.77 million in the first quarter of 2022. The bank said the increase was driven by people switching to BSI mobile e-channels from ATMs and internet banking with more than 96% of its customers now digital savvy.

Going digital, expanding global network

The bank had also taken steps to improve online user experience, allowing customers to not only use basic features such as opening accounts or making payments, but also access “spiritual” features including prayer times; the direction toward Mecca for prayer and technical assistance when contributing to charities.

It was also creating a network of financial institutions to raise its profile. In March the bank signed cooperation agreements with several Dubai-based banks including the Abu Dhabi Islamic Bank, UK-based Standard Chartered Bank’s Islamic section and Malaysia’s Maybank Islamic to expand its network.

These innovations will enable BSI to improve its position, but its small domestic market base may mean it takes time to realise the ambitious growth goals, said Lucky Ariesandi, analyst at Fitch Ratings, the global credit rating agency.

“Growth potential for BSI is big in line with the potential for the Islamic banking sector due to its small market share and a strong preference for Islamic banking. However, growth will be gradual because there are still many processes that need to be addressed before Islamic banking can reach its potential,” he said.

Notably, Indonesia is a long way off from becoming a global hub for Islamic finance, he said. BSI’s focus was on improving its local competitiveness to compete for less exploited banking sub-segments like corporate and retain banking. Given the bank’s current phase, the Indonesian Sharia ecosystem may still require time to improve.

Lucky said BSI might help small Muslim entrepreneurs, currently reluctant to bank because of their religious views, gain access to funding. However, this would only benefit BSI if the bank could reach and provide value-add to those communities.

This included providing loans with affordable yields without sacrificing pricing for the risks the bank took.

Yet, there is little doubt Islamic banking was growing in Indonesia. Overall assets grew 12.3% in 2021 to Rp 646.2 trillion ($44.4 billion), according to the Financial Services Authority of Indonesia (OJK – Otoritas Jasa Keuangan).

“There are growing opportunities for Islamic banking development, supported by a vast growing in the halal industry and rapid technological advancement,” said the OJK in its Indonesia Islamic Banking Development Roadmap 2020-2025 report.

However, the OJK warned it may struggle to maintain such growth, given “the strategic issues currently facing Islamic banks, such as …low competitiveness”. Islamic banking in Indonesia was impeded by a lack of business model differentiation, sub-par manpower quality and low financial inclusion and literacy, said the regulator.

Islamic banking services also lacked digitalisation compared with conventional banks, stemming from lower supporting IT infrastructure capacity. However, as with any challenge in an immature market, should solutions be discovered, success would follow.

The OJK said following its 2019 regulation on banking synergy that allows Islamic banks and their affiliated conventional banks to optimise resources, Islamic banks are expected to leverage the available infrastructure from any corresponding parent bank.

This meant they performed a gap analysis of existing digital banking services and compiled an action plan for services to be developed. While BSI does not have a parent, should it follow such a sensible strategy, growth will surely follow.

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Islamic Banks
Indonesia digital economy
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Ahmad Pathoni