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The Indonesian government announced that it would merge the syariah units of three state-owned lenders to create the country’s seventh-largest bank. Pending approval by regulators, the syariah units of Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia will join forces by February to form a lender with roughly 215 trillion rupiah (S$19.8 billion) in assets. The move is part of an ongoing effort among Indonesian officials to capture a bigger slice of the market of religiously observant Muslims.

Indonesia's planned merger of three state-owned Islamic banks will create an entity with scale comparable with the biggest local lenders. The proposed merger between Bank BRIsyariah, Bank Syariah Mandiri and Bank BNI Syariah will create an entity with between 220 trillion rupiah and 225 trillion rupiah in assets. Bank BRIsyariah will be the final entity after the merger, expected to be completed by February 2021. It will be Indonesia's seventh or eighth biggest bank by assets. Analysts expect more M&A activity within the Indonesian banking space, mainly for smaller banks to remain competitive. Currently, the nation's biggest banks are Bank Central Asia, Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia.

Indonesia's three state-owned banks will merge their sharia banking units to create one of the country's biggest lenders. Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia have signed a conditional merger agreement for their Islamic banking units. The new bank will have combined assets of 207 trillion rupiah ($14 billion), making it the eighth-largest lender by assets in the country. The merger is slated to complete next year and is still subject to approval from regulators and shareholders. Indonesia is keen to position the country as the hub of the region's Islamic economy. The country's five-year master plan aims to increase the market share of Islamic financing in the country to 20% by 2024.

The role of Fintech platforms and services in supporting public services in Indonesia has become more prominent and relevant due to the global COVID-19 outbreak. Fintech service providers are now offering more digital payments options which allow Indonesians to pay for everyday expenses. Fintech investment platforms have also been launched. Financial tech startups have also announced that they’d like to help the nation’s government with disbursing Coronavirus related relief aid packages. Despite the efforts to establish a regulatory sandbox, there’s still a growing threat of illegal Fintech businesses. The Fintech sector in Indonesia remains focused on enabling greater financial inclusion by providing reliable payments and lending services to those who may be underserved by the traditional banking sector. However, these services must be well-regulated to ensure consumer protection.

Asosiasi Fintech Pendanaan Bersama Indonesia (AFPI), which is an association of 156 Fintech lenders, is reportedly planning to work cooperatively with the Indonesian government to distribute funds that are meant to offset the economic problems and challenges created due to COVID-19. As of September 2020, the Indonesian government has issued 25% of the planned IDR 695 trillion (appr. $46.8 billion) it has set aside for COVID-related financial relief for local businesses. Most of the AFPI members offer peer-to-peer (P2P) lending services. As of June 2020, there were 161 licensed or registered P2P lenders operating in Indonesia. The nation’s P2P lending platforms have managed to help around 20.6 million borrowers by connecting them with 539,460 lenders.

As a respected elder figure among the Muslim grassroots, Indonesian Vice President Ma’ruf Amin was initially expected to play a significant role in enacting policies that could benefit the country’s majority-Muslim population. But analysts have suggested that Ma’ruf could still do more to promote the sharia economy and finance. The government launched a masterplan for the sharia economy last year, which provides a five-year development roadmap. The plan hopes to transform Indonesia into a net producer of halal goods and services, instead of merely being a big market for them. According to analysts, Ma’ruf should encourage the state to focus more on developing the sharia economy, particularly in providing stimulus programs among sharia-based businesses and strengthening sharia institutions.

Indonesian personal finance assistant PT Solusi Finansialku plans to launch a dedicated Islamic feature to capture a broader base of investors. Finansialku currently has more than six certified financial planners focused on Shariah-compliant investing but lacks a dedicated Islamic section on its app and platform. Its app has been downloaded 203,000 times since April 2017 and it is targeting 4 million downloads by 2022. Finansialku started in 2013 and only digitalised in 2016, moving its services online and to an app. Its advisors are CFPs certified by the national authority the Financial Planning Standards Board (FPSB).

Indonesia's government launched retail sukuk SR013 to raise Rp 5 trillion (US$343 million) to fund the state budget in the face of the COVID-19 pandemic. The tradable debt papers, set to mature on Sept. 10, 2023, offer a fixed annual yield at 6.05%. Investors can buy the bonds for Rp 1 million to Rp 3 billion from Aug. 28 and Sept. 23 at 31 partnering distributors, which include conventional and sharia-compliant banks, as well as online investment platforms. As of Aug. 6, the government has issued Rp 236.82 trillion in domestic sukuk, which nearly topped last year’s issuance of Rp 258.28 trillion. The government raised in July Rp 18.33 trillion from government retail bond issuance ORI-017, the highest proceeds ever recorded in an online bond offering by the country.

Credit rating agency Moody’s Investors Service expects Indonesia’s sukuk issuance to increase to US$27 billion this year from $16 billion last year. Lead analyst Thaddeus Best said on Tuesday that he expected Indonesia’s sukuk issuance to increase by about 68.75% as the government unveiled a Rp 695.2 trillion (US$47.3 billion) stimulus package to fight the pandemic. To help fund the package, the government is planning to raise Rp 900.4 trillion in the second half of this year to cover for a widening budget deficit of 6.34% of gross domestic product (GDP) this year. The option-adjusted spread of Indonesia’s US dollar-denominated government sukuk had fallen to almost 150 basis points (bps) as of July compared to its highest spread of 400 bps in March.

Vice President Ma'ruf Amin has appealed to Islamic economic and financial actors to hone their digital literacy skills to survive amid the changes arising from the COVID-19 pandemic. He gave a speach at the virtual opening of the 2020 Sharia Economic Festival and Indonesia Sharia Economic Festival (ISEF) in Jakarta. Amin affirmed that digitalization was conducted in the wake of the changes in the current life order, including shopping for basic necessities online or through social media with the use of the internet. Amin noted that in terms of products, health and hygiene aspects were of absolute importance and offered enormous opportunities for the halal product industry. Not only for sharia economic players, but this year's ISEF was also held virtually to adjust to the current conditions to thwart the transmission of COVID-19.

Despite its potential in sheer numbers of underbanked Muslims, Indonesia has been a slow starter in Islamic finance and is about a decade behind Malaysia. Only in the last few years, there have been some visible steps to support Islamic finance and lift its market share in terms of asset volume beyond the current 6%. The government of Indonesia on June 17 issued its latest Islamic bond, a $2.5bn global sukuk, amid strong interest from investors especially from other Asian countries and the Middle East. The sukuk was issued in three tranches, one of which was a five-year green sukuk worth $750mn. Thomson Reuters sees high future potential for foreign direct investment in Indonesia’s Islamic banking industry, for both the retail and the corporate sector.

The government of Indonesia issued $2.5 billion in wakalah global sukuk in three tranches. The 5-year paper of $750 million was sold as a green sukuk, while the other two tranches consisted of a 10-year tenor of $1 billion, and a 30-year maturity of $750 million. The sale was welcomed by investors with an order book that reached $16.66 billion, nearly 6.7 times the target amount. This global sukuk will be listed on the Singapore Stock Exchange and NASDAQ Dubai and the settlement will be carried out on June 23, 2020, with yields of 2.30% for the 5-year tenor, 2.80% for the 10-year tenor and 3.80% for the 30-year tenor.

Indonesia raised 9.5 trillion rupiah ($681.74 million) from sukuk, more than the indicative target of 7 trillion rupiah. The weighted average yields for the sukuk sold on Tuesday were lower than comparable notes sold at the previous auction on May 18. Incoming bids reached 28.64 trillion rupiah, compared to 18.85 trillion rupiah in the previous auction.

The steady rise and adoption in Sharia Fintech has transformed Indonesia’s trillion dollar economy. The majority of Shariah-compliant Fintechs in Indonesia use the P2P model, which usually works well with the profit-sharing model. Sharia Fintechs tend to focus on initiatives that support low-income and underserved segments of the population. Dody Dedy Waluyo, deputy governor of Indonesia’s central bank, says that there should be even more demand for halal or Islamic financial products. He notes that around 40% of the country’s GDP is generated from the Sharia economy.

Indonesia’s Ministry for Economic Affairs is teaming up with the country’s largest Islamic organization Nahdlatul Ulama (NU) to set up 10,000 grocery stores in the next 4 years. The ministry’s vice deputy Gede Edy Prasetya estimates that it will cost around 40 million rupiah to establish a new grocery store under the new partnership. Amid the COVID-19 outbreak this year, the government is seeking new potential eligible beneficiaries for its micro credit schemes. This year, it aims to disburse 190 trillion rupiah ($13.6 billion) as part of the scheme. It has already disbursed 34.2 trillion rupiah in loans as at the end of April, with a non-performing loan rate of 1.23%.

Indonesia’s state-owned BNI Syariah plans to add overseas representative offices to run trade finance, and financial institutions and remittance services. The Islamic bank will leverage the branch offices of its parent company, Bank Negara Indonesia, in Singapore, Tokyo, Seoul, Hong Kong, London and New York. The bank can now expand its international banking services after it received a non-cash capital injection of 255 billion rupiah ($17.5 million) in March. This moved it up to Tier 3, for banks holding core capital of 5 trillion rupiah (around $342.5 million) to 30 trillion rupiah. The lender is also eyeing markets outside its current geographies, such as Malaysia, Saudi Arabia and Taiwan. Alongside expanding its international presence, the bank is mitigating downside risks by optimizing its digital banking channels.

The Indonesian government has issued a regulation for the relief fund to the banking sector to cope with the financial impacts of the Covid-19 outbreak. The regulation states that the government may channel fund to the so-called participating banks. The participating banks will in turn pass the fund on to the “executing banks”, smaller banks who meet certain requirements. President Joko Widodo has earlier urged banks to loosen their terms on debtors and restructure loans as many are unable to repay in time amid massive job losses or salary cuts due to the outbreak.

Indonesia’s National Sharia Economy and Finance Committee (KNEKS) will suspend non-urgent programs this year after its budget was slashed by a third as the government allocates resources to fight COVID-19. The committee will conduct a series of webinars focused on the impact of COVID-19 on the Islamic economy. KNEKS will also engage Indonesians to participate more in Islamic social finance by promoting Shariah-compliant fintechs such as LinkAja Syariah. Indonesia’s government has set aside 405.1 trillion rupiah ($24.65 billion) out of the state budget as a support and stimulus package to help the economy. It has re-allocated and re-focused 95.5 trillion rupiah from ministries and other government institutions as part of efforts to fund the package.

The spread of COVID-19 is expected to hit Indonesian banks’ performance this year, but analysts remain hopeful that the industry will still be resilient. The Financial Services Authority (OJK) recorded gross non-performing loan (NPL) ratio at 2.79% in February, the highest level since May last year. Loan growth, meanwhile, stood at 5.93% in the month, reflecting the lowest expansion since November 2009, as demand plunged. The rise in bad loan ratio is also expected to increase pressure on banks’ profitability, even on Indonesian banks, which are considered to be some of the most profitable in the world. Although Moody’s expects bank profitability to decrease, vice president Alka Anbarasu also said Indonesian banks could still survive during the challenging climate as they could absorb the increase in credit costs.

An official of Indonesia’s National Committee for Islamic Economy and Finance (KNEKS) says that Islamic finance instruments and domestic retail sukuk are more sustainable financial support alternatives for COVID-hit MSMEs than loans from multilaterals. Indonesia’s government last week announced a 405.1 trillion rupiah ($24.65 billion) financial package to support households and businesses affected by the coronavirus pandemic. The potential of zakat in Indonesia is valued at around 286 trillion rupiah a year, according to the national zakat body BAZNAS. But actual collection is a far cry, at around only 9.5 trillion rupiah ($577.3 million) in 2019. On the possibility of a domestic retail sukuk, there are ongoing discussions on the instrument’s structure and mechanisms.