Sharia Economics: A Long-Term Fiscal Solution for Islamic-Majority Countries like Indonesia

Mohammad Nur Rianto Al Arif
Professor at UIN Syarif Hidayatullah,
Secretary General of the Indonesian Lecturers Association (DPP)
Assistant to the President's Special Envoy for Food Security

Over the past decade, the Islamic economy and finance in Indonesia have experienced significant expansion. Indonesia is currently acknowledged as one of the nations with the most significant sharia market potential globally. The State of the Global Islamic Economy (SGIE) Report 2024/2025 ranks Indonesia among the top three countries worldwide in the advancement of the sharia economy.

Nonetheless, institutional problems persist behind these accomplishments. The National Committee for Islamic Economics and Finance (KNEKS) has thus far overseen the coordination and advancement of Islamic economics. This institution is officially under the President, with the Vice President acting as the Daily Chairman.

The committee has implemented various policies that promote the halal industry, enhance sharia financial literacy, and assist in the advancement of productive waqf. KNEKS contributes to fortifying the halal supply chain ecosystem, integral to the national halal sector strategy.

Nonetheless, its constraints are equally evident. KNEKS, as a committee, lacks direct executive authority and mostly functions as a coordinator and facilitator. The advancement of Islamic economics necessitates an institutional impetus capable of making direct choices, managing autonomous budgets, and executing plans expeditiously.

Within the framework of our frequently sluggish bureaucracy, the KNEKS position sometimes lacks the strength to surmount technical obstacles in the domain. Notwithstanding its strategic significance, many perceive the KNEKS structure as merely a "coordinating committee" with constrained executive power.

The newly elected administration of President Prabowo Subianto introduces several major initiatives, including free nutritious meals (MBG) and extensive downstream processing of natural resources. In such a context, Islamic economics ought to occupy a key position. Not only should Islamic economics serve as a representation of the Muslim majority, but also as a tangible economic asset capable of bolstering food security, energy, and development financing.

In this context, the idea emerged to transform KNEKS into a Sharia Economic Agency with an expanded mission, similar to a non-ministerial state entity, which would allow it to more effectively advance the Sharia ecosystem.

This essay further evaluates the necessity of creating the new entity, including its advantages, disadvantages, and future consequences for Islamic economics in Indonesia.

Indonesia possesses a remarkable demographic advantage: a Muslim population over 230 million, establishing it as the largest halal market globally. Nevertheless, this significant potential has not been entirely transformed into tangible economic power.

In the Islamic financial sector, despite constant expansion, the market share of Islamic banking was approximately 7.31% as of May 2025. This figure remains much below the previously established 20% threshold. The attainment of a market share over 5% was facilitated by conversions executed by multiple institutions, including Bank Aceh Syariah, Bank NTB Syariah, and Bank Riau Kepri Syariah.

The halal industry in Indonesia is experiencing increasing consumption among Muslim populations for halal food, cosmetics, Muslim fashion, and sharia tourism. Ironically, the majority of halal products available are still imported. Halal pharmaceutical raw materials are significantly dependent on foreign sources, despite substantial domestic demand.

There exists a paradox, however: significant potential does not inherently result in supremacy inside the domestic market. This is partially due to the insufficient strength of the organizations that manage and promote the Islamic economy.

Since its establishment under Presidential Regulation 28/2020, KNEKS has assumed a coordinating function, directing efforts, enhancing synergy among Bank Indonesia, the Financial Services Authority, and several Ministries/Agencies, and supervising strategic agendas.

Coordination devoid of execution is like a conductor lacking an orchestra; the score exists, however the notes frequently remain disorganized. KNEKS is neither a regulatory body nor the operator of a cross-sectoral program with an independent budget. In a bureaucracy characterized by a pronounced sectoral ego mentality, the committee model frequently lags significantly behind the requirements of the field.

KNEKS possesses a comprehensive role, which includes the development of policies for Islamic economics and finance, coordination across ministries and agencies, program monitoring and evaluation, and fostering collaboration among regulators, industry, and the community.

Nonetheless, the essence of KNEKS is solely that of a coordinating committee. This indicates that it lacks direct executive authority, including the issuance of rules, independent allocation of substantial funds, or comprehensive management of cross-sectoral initiatives.

Numerous policies ultimately rely on technical ministries and organizations. This condition prompts certain parties to assert that KNEKS's performance is frequently confined to the development of roadmaps, coordination forums, and the ceremonial initiation of programs, resulting in a lack of robust implementation enforcement.

Consequently, there are multiple strategic justifications for the establishment of the Sharia Economic Agency. The primary rationale is to address policy fragmentation.

Sharia economics encompasses various industries, including finance, the halal industry, education, and tourism. At present, each sector is governed by a distinct ministry. In the absence of a robust executive branch, coordination is often sluggish. A dedicated body facilitates the expedited implementation of cross-sectoral initiatives.

The establishment of this entity is anticipated to enhance execution capabilities. In contrast to committees, bodies may be endowed with regulatory and budgetary management authority. This entity could administer halal research money, certification, or assistance for sharia SMEs without enduring protracted inter-ministerial bureaucracy.

The final rationale is to foster enduring consistency. Committees are generally vulnerable to political shifts or alterations in leadership personnel. Units structured as LPNK (Non-Ministerial Government Institutions) or their equivalents will exhibit enhanced stability due to the backing of more robust legal frameworks or governmental rules.

The subsequent rationale is to enhance Indonesia's branding as a global hub for Islamic economics, encompassing both the halal business and the Islamic finance sector. The establishment of an entity dedicated to advancing the Islamic economy is anticipated to expedite its aspiration to become a significant global contender.

The ultimate rationale is alignment with the vision of Golden Indonesia 2045. President Prabowo aspires for Indonesia to emerge as a significant global economic power by 2045. Islamic economics has the potential to be a significant driver, contingent upon the presence of competent institutions.

While the concept of creating a Sharia Economic Agency appears promising, it is imperative to recognize the potential hazards that must be foreseen. Initially, there exists the possibility of jurisdictional overlap with other Ministries or Agencies if the fundamental skills of this new entity are not properly delineated. This circumstance may exacerbate the bureaucratic complexities in the advancement of Islamic economics in Indonesia.

Establishing a new entity necessitates considerable expenditure.The national budget is presently constrained, with priorities focused on food, health, and education initiatives. Consequently, the imperative to form a sharia economic authority must be supported by precise assessments of economic advantages.

The subsequent risk that must be considered is the politics of vested interests. New institutions frequently transform into arenas for strategic positioning, thereby detracting from the core substance of Islamic economic development.

The ultimate risk pertains to institutional efficiency. Indonesia currently possesses a significant number of non-ministerial institutions. If every issue is addressed with an additional entity, the bureaucracy will become increasingly bloated.

Three institutional design alternatives must be evaluated. The initial alternative involves the comprehensive reform of KNEKS into an Islamic Economic Agency, analogous to a Non-Ministerial Government Agency with expanded authority. The primary benefit of this initial alternative is that the institutional component will be more robust due to its budget. Nonetheless, there exists a potential for overlap with other ministries and agencies.

The alternative is a cooperative holding structure with restricted executive duties. This entity solely conducts cross-sectoral programs that the ministries are unable to implement. The benefit of this alternative is its increased efficiency and reduced financial requirement. Its limitation is that it can only operate on designated programs.

The ultimate alternative is to reinforce KNEKS without establishing a new entity. The government can amend the presidential rule to grant KNEKS enhanced executive authority without establishing a new entity, including its budget allocation. This option's advantage is that it does not increase bureaucracy. Nonetheless, the limitation is that the program's efficacy is contingent upon the prevailing regulatory framework.

Indonesia possesses considerable potential to emerge as a global hub for the Islamic economy. However, in the absence of robust institutions, that promise may be overlooked. The establishment of a Sharia Economic Body to supplant the KNEKS may serve as a strategic remedy, provided it is meticulously crafted to prevent exacerbating bureaucratic encumbrance and genuinely emphasizes program implementation.

Provided that those requirements are fulfilled, Islamic economic institutions can significantly alter the landscape. This not only fortifies Indonesia's status as a global center for sharia economics but also yields concrete advantages for society, such as enhanced access to financing for MSMEs, increased availability of guaranteed halal products, more effective zakat and waqf funding, and the generation of new employment possibilities.

Ultimately, the significance lies not solely in the institution's name but in the efficacy of its programs and the audacity of their implementation. If this organization can enhance the halal sector, expand the market share of Islamic financing, and deliver tangible advantages to MSMEs and the broader community, then its establishment is imperative.

Nonetheless, if its establishment merely introduces structure devoid of utility, Indonesia's economy will be a sitting duck. Consequently, the imperative to build this entity necessitates a robust commitment from the government, the corporate sector, academia, and society to position the sharia economy as a fundamental pillar for Indonesia Emas 2045.

This article was published in CNBC Indonesia on Thursday (August 26, 2025).