Islamic Finance

Low level of Islamic banking literacy barrier to Indonesia’s Islamic finance growth: survey

Photo: A man walks past a poster of a one hundred thousand Rupiah banknote inside Indonesia's central bank, Bank Indonesia, in Jakarta, November 17, 2016. REUTERS/Beawiharta

JAKARTA – The financial literacy index for Islamic banking in Indonesia that stands at 6.63 percent is lower than the 9.61 percent for the sector's inclusion, revealed the 2016 National Survey on Financial Literacy and Inclusion (SNLIK) by the country’s Financial Services Authority (Otoritas Jasa Keuangan, OJK).

The literacy index measures how well Indonesians understand the sector and its products and services, and the inclusion index measures their access to and use of Islamic banking.

Deden Firman, Director of Research, Development, Management and Licensing of Islamic Banking at OJK told Salaam Gateway the gap between Islamic banking inclusion and literacy is an opportunity for the sector.

“This could be an opportunity for Islamic banking to offer more products. Currently most customers only use basic products including savings and micro-financing but they are still unfamiliar with more advanced products like deposits and bank notes,” said Firman.

He hopes customers can understand and access more Islamic banking products to boost the market share of Islamic financial assets.

According to latest estimates form OJK, total Islamic banking assets currently stand at 340 trillion Indonesian rupiah ($25.5 billion), equal to just over 5 percent of the country’s total banking assets. This is still far from the 9 to 12 percent government target in the mid-term.

Overall, the Islamic literacy index was 8.11 percent, while Islamic inclusion stands at 11.06 percent.

Islamic banking scored highest on the Islamic literacy index at 6.63 percent followed by takaful at 2.51 percent, Islamic pawnbroking at 1.63 percent and other Islamic non-banking financial institutions at 0.19 percent. 

On inclusion, Islamic banking also scored highest at 9.61 percent followed by takaful at 1.92 percent, pawnbroking at 0.71 percent and other Islamic non-banking financial institutions at 0.24 percent.

East Java scored highest in literacy at 29.35 percent. Aceh scored highest for inclusion at 41.45 percent followed by North Maluku at 24.73 percent.

OJK will use the findings from the survey to better map the national education program for Islamic finance across Indonesia’s cities and villages.

“It doesn’t mean regions with higher literacy will perform better on the inclusion index. Regions with the highest concentration of Muslims, such as Aceh and North Maluku tend to have more financial institutions so they perform better on the inclusion index,” he added.        

Overall, more Indonesians have access to and are aware about financial services. The overall literacy index jumped to 29.66 percent from 21.94 percent in 2013 and the inclusion index reached 67.82 percent from 59.74 percent in 2013.

OJK aims to improve inclusion to 75 percent by 2019.

2016’s survey was the first to include Islamic finance inclusion and literacy.

The National Survey on Financial Literacy and Inclusion (SNLIK) 2016 involved 9,860 respondents in 64 regions and 34 provinces. Each respondent answered questions on both conventional and Islamic financial products. OJK used 47 questions, based on OECD and World Bank standard templates. Started in 2013, the national survey is conducted every three years.

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Financial inclusion
Financial literacy