BI Governor Agus Dermawan Wintarto Martowardojo said recently the central bank was now focusing on developing zakat (alms) and waqf (endowment) to reach the unbanked population, which mainly consisted of poor people.

The social fund will be used as a catalyst to finance businesses owned by poor people, and if their businesses escalate to the next level, commercial financial institutions can tap into their financing.

The central bank issued "zakat core principles" and "technical notes for good amil (Islamic social fund managers) governance" last year as a guide to develop their capacities and governance.

"We all know the size of sharia banking is only 5 percent that of conventional banking. So it is imperative to push for the development of Islamic social finance to eventually help the Islamic finance industry," Agus said.

The sharia financial service began in 1991 with the establishment of Bank Muamalat Indonesia. After 27 years and despite a rapid growth of sharia-based financial institutions and instruments, the size of the service is still far behind conventional banking.

Indonesia has developed Islamic banks, takaful (sharia insurance) and sukuk (Islamic bonds).

According to recent data from the Financial Services Authority (OJK), total assets owned by sharia banks reached Rp 401.45 trillion in November last year, up by 18.30 percent from Rp 339.34 trillion in the same period of 2016. The number is dwarfed by the total assets of conventional banks, which grew 9.73 percent to Rp 7.22 quadrillion, from Rp 6.68 quadrillion in November 2016.

Agus said the central bank would also actively develop the Islamic microfinance institutions in pesantren (Islamic boarding schools) to finance micro businesses run by students. BI would also provide accounting guidance for microfinance institutions.

National Alms Agency (BAZNAS) chairman Bambang Sudibyo said zakat collection in Indonesia reached Rp 5.2 trillion (US$390 million) in 2016, and was expected to increase to Rp 6 trillion in 2017. Between 2001 and 2016, the average growth of Indonesia zakat collection was 27 percent annually.

However the collection is still far from Indonesia's full potential of Rp 200 trillion annually, Bambang said.

"We hope more people pay their zakat through the government alms agency and certified zakat agencies, as our middle class and upper class are growing at a fast pace," he said.

Other than BAZNAS, Indonesia has 52 registered private zakat management institutions.

However, many people still distributed their own zakat despite the existence of professional amils who could ensure a fairer distribution to those in need, said Bambang.

“It is better to pay zakat through official institutions because we have a list of those who are eligible to receive it,” he said.

He added that the financial reports of all registered zakat institutions had been audited by public accountants to ensure good governance.

Indonesian Ulema Council (MUI) chairman Ma’ruf Amin praised BI’s initiative to develop sharia finance, as he considered the bottom-up approach was expected to be a better catalyst to expand the industry.

“We are starting a new wave from the bottom up. In the past, we were waiting for a wave from the top but it did not come,” he said.

He added that the MUI was ready to support new ideas for Islamic finance development by issuing new fatwas (edicts).

“Now we already have 116 fatwas for Islamic finance. I heard that our number is the highest in the world, very productive. We even still have eight fatwas relating to Islamic finance in the pipeline,” he said.

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