A new digital bank could instill VC faith in Indonesia’s Shariah fintech

When Indonesian peer-to-peer lender (P2P) Alami raised its pre-seed funding in early 2019, it went where no local Shariah fintech startup had gone before.

The Jakarta-based company became the first of its kind to secure venture capital backing. This was expected to open the doors for more VC bets into a bustling industry that’s tapping into the world’s largest Muslim market.

Almost three years on, however, Alami remains an anomaly, as VCs seemingly remain unconvinced by the promise of Shariah finance – an industry that’s worth US$2.2 trillion globally.

Photo credit: Alami

Now, as the company makes its ambitious foray into digital banking following its acquisition of a Shariah rural bank, it hopes to finally lure more capital into the world of Islamic finance.

“Investors are waiting to see how this Shariah digital bank will go. If this can go strong and better than the big players, it will be a gold mine for the early believers,” says Alami co-founder and CEO Dima Djani.

VC skepticism

Indonesia is home to the world’s largest Muslim population, but Shariah banking is still an exception rather than the norm in the country. According to a 2020 report from Otoritas Jasa Keuangan (OJK) – Indonesia’s financial services authority – Shariah banks comprise just 6.5% of market share, a small number compared to fellow Muslim-majority country Malaysia at 37%.

Incidentally, Malaysia topped a recent global Islamic finance list from research and advisory firm Dinar Standard. Indonesia, meanwhile, placed sixth in the ranking, which measures the overall development of the Islamic economic sectors by assessing performance in line with broader social obligations.

But there are signs pointing to change. For instance, the OJK report shows that in terms of assets, financing, and third-party funds, the growth of Shariah banks is outpacing that of its conventional counterparts. Perhaps more crucially, Indonesia is also seeing a societal and cultural trend in recent years, where more young, middle-class Muslims embrace a somewhat more conservative take on Islam – a movement commonly termed hijrah, which means migration in Arabic.

Coupled with Indonesia’s unbanked population of 51%, the time may be ripe for Shariah fintech companies. But while Alami’s investors – which comprise the likes of Golden Gate Ventures, AC Ventures, and Quona Capital – see its promise, they appear to be the only ones. Out of the Indonesian Sharia Fintech Association’s 36 members, only Alami has received institutional VC funding, while the others have been restricted to angel investments and grants.

One one hand, some Shariah fintech startup founders are indifferent to or outright skeptical of VCs. Case in point: Ramadhoni Chandra Utama, founder and CEO of Oneshaf, says that VC funding is a solution, but not a necessity. In his view, equity crowdfunding is more in line with the “Shariah spirit of sharing rewards and risks.”

Digital banking ambitions

Battling the heavyweights