‘Indonesia’s Islamic banking looks beyond niche status’
Industry observers say the focus is shifting from Sharia compliance alone to competitiveness, efficiency and customer experience
JAKARTA, Indonesia (MNTV) — Indonesia’s Islamic banking industry is approaching a pivotal moment, with the period leading up to 2026 widely seen as a transition from experimentation to consolidation and maturity, says Professor Mohammad Nur Rianto Al Arif of Syarif Hidayatullah State Islamic University.
After more than a decade of gradual growth, Islamic banking now accounts for close to eight percent of total banking assets, a figure that reflects steady progress but also highlights the sector’s untapped potential in the world’s largest Muslim-majority country, adds Nur.
Industry observers say the focus is shifting from Sharia compliance alone to competitiveness, efficiency and customer experience.
Structural consolidation underway since 2024 is expected to define the outlook to 2026. A major milestone is Bank Tabungan Negara’s (BTN) plan to form a new national Islamic bank through the acquisition of Bank Victoria Syariah and the spin-off of BTN’s Sharia unit.
The move is seen as a strategic effort to rebalance an industry long dominated by a single large player and to inject fresh competition into the market.
If executed successfully, the new BTN Sharia entity could leverage BTN’s strong mortgage franchise, nationwide branch network and broad customer base to accelerate growth in retail and micro, small and medium enterprises (MSME) financing. Analysts say stronger competition could also drive innovation and improve service quality across the sector.
At the same time, the planned spin-off of Sharia business units from conventional lenders such as CIMB Niaga — and potentially Bank Permata — is expected to reshape the industry landscape.
While these spin-offs may increase the number of Islamic commercial banks, they will also raise expectations around capital strength, governance and strategic clarity.
Regulators have signalled that institutions without sufficient scale and discipline risk becoming structurally weak.
The sector’s outlook is also shaped by lessons from Bank Muamalat, Indonesia’s first Islamic bank, which has faced asset quality pressures and restructuring. Its experience underscores that Sharia principles alone do not guarantee resilience, and that transparency, strong shareholders and regulatory support remain essential, says Nur.
Digital transformation will be another decisive factor by 2026. With younger customers demanding seamless digital services, Islamic banks are under pressure to match conventional peers on speed and usability.
Digital platforms also offer a cost-effective way to expand MSME financing and integrate with the growing Islamic fintech and halal economy ecosystem.
Looking ahead, moderate growth scenarios project Islamic banking’s market share rising to around nine percent by 2026, with more optimistic outcomes pointing to double-digit levels if consolidation and spin-offs proceed smoothly. More important than headline numbers, however, is the quality of growth.
With supportive public policy, sound governance and effective risk management, Indonesia’s Islamic banking sector has an opportunity to move decisively beyond its niche status and establish itself as a credible pillar of the national financial system by 2026, says Nur.
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