Sharia fintech: Startups race to tap Indonesia growth by aligning with Islam

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Above, an alms box with a QR code for digital payments at Istiqlal mosque in Jakarta, Indonesia. (Reuters file photo)
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Men use their phones as alms boxes with QR codes are collected on a cart after Friday prayers at Istiqlal mosque in Jakarta, Indonesia. (Reuters file photo)
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Updated 03 March 2020

Sharia fintech: Startups race to tap Indonesia growth by aligning with Islam

  • Winning over loyalty in the world’s most populous Muslim-majority country is both a challenge and opportunity for fintech firms
  • To showcase the compliance of their services with Islam, fintech firms are organizing forums with Islamic scholars and sponsoring religious festivals

JAKARTA: Like millions of other Indonesians, Gandi Iswara had for years carried a wad of currency notes for dropping into donation boxes after prayers at mosques in suburban Jakarta.
From late last year, though, the 35-year-old engineer switched to a more convenient option: whipping out his mobile phone, firing up a digital payment app from Google-backed GoPay and tapping the QR code stickers that are now affixed to the boxes.
His digital conversion took some time, as Iswara initially held the view that all rewards and discounts offered by e-wallets conflicted with Islam.
“At first, I thought e-wallets resulted in usury, which is forbidden by Islam. But after a while I found them convenient in daily life,” he said.
Winning over conservative Muslims like Iswara in the world’s most populous Muslim-majority country is both a challenge and multibillion-dollar opportunity for fintech firms that are riding its mobile Internet boom and aim to sell financial services.
Of Indonesia’s 270 million population, half lacks bank accounts but most now have mobile phones.
Questions about compliance with Islamic law are a significant hurdle for the adoption of digital payments and other fintech services, industry executives say.
Known as Sharia, the law strictly prohibits charging interest, or “riba,” and clerics in Indonesia disagree on whether the popular cashback rebates and discounts given by digital wallets qualify. Social media videos in Indonesia on whether e-wallets are “haram” — prohibited by Islam — or incorporate “riba” rack up hundreds of thousands of views.
Indonesia’s top Muslim clerical body has even issued an edict deeming virtual money acceptable, as long it met specific conditions.
To showcase the compliance of their services with Islam, fintech firms are organizing forums with Islamic scholars and sponsoring religious festivals. Newer startups are tailoring services for Indonesia’s growing body of “born-again” Muslims, known as the “hijrah” movement at home.
GoPay, which is part of ride-hailing firm Gojek, has partnered with the Indonesian Mosque Council since November to enable digital donations, including “zakat,” or compulsory alms giving, in its 800,000 mosques, CEO Aldi Haryopratomo said. “Zakat” alone amounts to over $500 million annually in Indonesia.
“It has made it much easier for people to pay alms,” said Budi, chief administrator of Jakarta’s Istiqlal mosque, the largest in Southeast Asia, referring to digital payments services.
Rival LinkAja, which was formed by a consortium of Indonesia’s top state-owned firms, has launched similar donation efforts. It is now readying LinkAja Sharia, which will offer a range of financial services specifically targeted at conservative Muslims and only accept money from Islamic banks.
Backed by companies including telco Telkomsel and Bank Mandiri, LinkAja is currently seeking to raise $200 million in outside financing, sources told Reuters. The company declined to comment on its funding.
The scale of ‘sharia-fintech’ in Indonesia is small, so far, with Islamic fintech startups disbursing about 1 trillion rupiah ($73.15 million) in sharia-compliant loans in 2019, a four-fold increase from 2018, according to the Indonesia Sharia Fintech Association.
But with all forms of Islamic banking accounting for only 6 percent of Indonesia’s $580 billion in banking assets, there is room for growth.
The sector is also getting a policy push. The country’s vice president, cleric Ma’ruf Amin, took over Indonesia’s National Islamic Finance Committee in January and has cited the growth of Islamic fintech as a key national priority.
Some of the startups say they are finding their appeal extends beyond Muslims.
One of them is peer-to-peer lender ALAMI, created by three ex-bankers, which has disbursed over $7.5 million in sharia-compliant financing to small and medium enterprises since May, and plans to become a digital bank.
CEO Dima Djani said that although conservative Muslims are its main target, others also are choosing it as an ethical banking option.
“They see the fact we are focused on sharia principles as a sign of integrity,” he told Reuters.
Muhamad Fajrin Rasyid, president of Bukalapak, one of Indonesia’s top e-commerce companies which offers a sharia-compliant investing service, concurs.
“Many of our customers are from other religions,” he said. “Some people tell us that sharia is not only for Muslims, it represents ethical financing.”


Saudi Arabia looks to cut spending in bid to shrink deficit

Updated 01 October 2020

Saudi Arabia looks to cut spending in bid to shrink deficit

  • Saudi Arabia has issued about SR84 billion in sukuk in the year to date

LONDON: Saudi Arabia plans to reduce spending next year by about 7.5 percent to SR990 billion ($263.9 billion) as it seeks to reduce its deficit. This compares to spending of SR1.07 trillion this year, it said in a preliminary budget statement.

The Kingdom anticipates a budget deficit of about 12 percent this year falling to 5.1 percent next year.

Saudi Arabia released data on Wednesday showing that the economy contracted by about 7 percent in the second quarter as regional economies faced the twin blow of the coronavirus pandemic and continued oil price weakness.

The unemployment rate among Saudis increased to 15.4 percent in the second quarter compared with 11.8 percent in the first quarter of the year.

The challenging headwinds facing regional economies is expected to spur activity across debt markets as countries sell bonds to help fund spending.

Saudi Arabia has already issued about SR84 billion in sukuk in the year to date.

“Over the past three years, the government has developed (from scratch) a well-functioning and increasingly deeper domestic sukuk market that has allowed it to tap into growing domestic and international demand for Shariah-compliant fixed income assets,” Moody’s said in a statement on Wednesday. 

“This, in turn, has helped diversify its funding sources compared with what was available during the oil price shock of 2015-16 and ease liquidity pressures amid a more than doubling of government financing needs this year,” the ratings agency added.