From Niche to Mainstream: The Outlook for Indonesia’s Islamic Banking in 2026

Mohammad Nur Rianto Al Arif
Professor at UIN Syarif Hidayatullah Jakarta

Indonesia’s Islamic banking industry is entering a decisive phase. While its first decade was largely shaped by experimentation with form and scale, the period leading to 2026 represents a phase of consolidation that could elevate the sector to a new level of maturity.

The core narrative of Islamic banking is no longer limited to Sharia compliance. It now revolves around competitiveness within the modern banking industry—efficiency, digital innovation, risk management, and customer experience. By 2026, structural consolidation that has unfolded over recent years is expected to deliver tangible results.

By late 2024 and into 2025, Islamic banking’s market share had approached eight percent of Indonesia’s total banking assets. While this figure reflects progress, it also underscores the vast untapped potential. Given Indonesia’s Muslim-majority population and rising awareness of value-based finance, Islamic banking’s addressable market is significantly larger.

Growth to date has been gradual rather than exponential. This reflects two realities: Islamic banks have succeeded in establishing credibility and stability, yet their expansion remains constrained by limited scale, uneven financial literacy, and lingering perceptions that Sharia products are less competitive than conventional alternatives.

As 2026 approaches, these dynamics are beginning to shift. Institutional consolidation and stronger capital positions are enabling Islamic banks to pursue more assertive strategies, particularly in retail banking and MSME financing—two pillars of Indonesia’s real economy.

A key milestone ahead of 2026 is the formation of a new national Islamic bank through Bank Tabungan Negara’s acquisition of Bank Victoria Syariah and the spin-off of BTN’s Sharia unit. This move is more than a corporate transaction; it signals a strategic commitment by the state and industry stakeholders to position Islamic banking as a core pillar of the financial system.

The emergence of an additional large Islamic bank will rebalance the industry’s structure, which has long been dominated by a single major player. Increased competition is expected to enhance service quality, product innovation, and customer choice.

From a business perspective, the consolidated BTN Sharia bank brings advantages in branch networks, mortgage financing expertise, and a broad customer base. If these strengths are combined with digital innovation and competitive Sharia products, the bank could become a new growth engine for the industry.

Nevertheless, consolidation entails significant challenges. System integration, cultural alignment, and strategic coherence require careful execution. The success of this new national Islamic bank will largely depend on management’s ability to navigate the transition and establish a strong, credible brand.

Beyond consolidation, another major agenda toward 2026 is the planned spin-off of Sharia business units from conventional banks, notably CIMB Niaga and Bank Permata. For CIMB Niaga, the spin-off reflects a commitment to develop Islamic banking as an independent entity with a focused growth strategy. Bank Permata remains in the assessment phase, but regulatory direction suggests that spin-offs will eventually become unavoidable once sufficient scale is achieved.

While spin-offs will increase the number of Islamic commercial banks, they also raise the bar for capital adequacy, governance quality, and strategic clarity. Without these fundamentals, new Islamic banks risk being structurally weak and uncompetitive.

Amid optimism, the industry is reminded of the challenges faced by Bank Muamalat. As Indonesia’s first Islamic bank, Muamalat carries historical significance, yet asset quality pressures and non-performing financing have necessitated restructuring. Its experience highlights critical lessons: Sharia principles alone do not ensure resilience, transparency is vital for maintaining public trust, and shareholder and regulatory support are indispensable.

Digital transformation is another defining factor for Islamic banking’s 2026 outlook. Customer expectations—especially among younger generations—now center on speed, simplicity, and seamless digital integration. Islamic banks must compete not only on ethical foundations but also on user experience.

Digitalization offers a pathway to expand reach without extensive physical expansion, particularly through app-based microfinance and integration with Islamic fintech ecosystems. However, it requires substantial investment and skilled human capital. Institutions that fail to adapt risk being left behind.

MSMEs and the halal economy are expected to be the primary growth drivers. Islamic banks are well positioned to address MSME financing gaps through profit-sharing instruments, while the expansion of halal industries—from food and tourism to fashion and logistics—creates growing demand for Sharia-compliant financing.

Yet the journey to 2026 is not without risk. Post-merger integration, potential increases in non-performing financing, margin pressures, and global monetary tightening must be carefully managed. Sustainable growth will depend on disciplined governance and prudent risk management.

Under a moderate scenario, Islamic banking’s market share could rise to eight to nine percent by 2026. In a more optimistic scenario—assuming smooth consolidation, successful spin-offs, and effective restructuring—market share could reach double digits. Ultimately, quality of growth matters more than numbers. A resilient, innovative, and inclusive Islamic banking sector can make a meaningful contribution to Indonesia’s economic equity and long-term development.

Public policy will play a decisive role. Regulatory oversight, Sharia-compliant monetary instruments, fiscal alignment, and financial literacy initiatives must work in concert. If supported by coherent policy and professional governance, Islamic banking can move beyond its niche status and emerge as a core component of Indonesia’s financial architecture.

By 2026, Indonesia’s Islamic banking industry stands at a moment of maturation—facing substantial challenges, yet holding even greater promise to scale up as a credible and competitive force within the national financial system.

Artikel ini telah dipublikasikan di CNBC Indonesia pada Selasa, 16 Desember 2025.