Islamic Finance Comparative Guide

1. Legal framework

1.1 What laws and regulations govern Islamic finance in your jurisdiction?

In Indonesia, financial services can be provided based on either general or Islamic/Sharia principles, which generally must comply with the prevailing laws and regulations in Indonesia as overseen by the Financial Services Authority (OJK). In addition to general rules as issued by the OJK and Islamic/Sharia principles, finance businesses must comply with certain Islamic/Sharia laws and regulations, including:

• Law 21/2008 on Sharia Banking as amended by Law 6/2023 on the Stipulation of Government Regulation in Lieu of Law 2/2022 on Job Creation into Law and Law 4/2023 on the Development and Strengthening of the Financial Sector;
• Law 19/2008 on Sharia Government Bonds;
• OJK Regulation 15/POJK.04/2015 on the Implementation of Sharia Principles in the Capital Markets;
• OJK Regulation 11/2023 on Spin-offs of Sharia Units of Insurance Companies and Reinsurance Companies; and
• OJK Regulation 10/POJK.05/2019 of 2019 on the Business Implementation of Sharia Funding Companies and Sharia Business Units of Funding Companies.

Islamic/Sharia-based financing activities must also comply with fatwas (ie, guidance) of the National Sharia Council of the Indonesian Ulama Council (DSN-MUI). Although DSN-MUI fatwas do not have the same power as laws and regulations, they must be complied with to ensure that financing activities are carried out in accordance with Islamic principles.

1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for Islamic finance in your jurisdiction?

To date, we are not aware of bilateral and/or multilateral treaties or trade agreements of relevance to Islamic finance in Indonesia. There are no specific trade agreements on Islamic financing. However, of significance in this regard is the Preferential Trade Agreement among the Developing 8 Member States - that is, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan, Nigeria and Türkiye, all of which have mostly Muslim populations.

1.3 What regulatory or administrative bodies play a particular role in Islamic finance your jurisdiction? What powers do they have?

The OJK supervises all finance activities in Indonesia. Under Law 21/2021 on the OJK, as amended, the OJK was established to regulate and supervise financial services operations in the banking, capital markets, insurance, retirement fund, financing institution and other sectors, based on both general and Islamic principles. As such, the OJK is authorised to regulate and supervise Islamic financial institutions in Indonesia.

The DSN-MUI is an agency that issues fatwas on Islamic finance. It oversees the implementation of fatwas and promotes the advancement of Islamic finance in Indonesia. The first fatwa in the Islamic capital markets was issued by the DSN-MUI in 2001. In 2003, the DSN-MUI issued Fatwa 40 regarding the Capital Markets and General Guidelines on the Implementation of Islamic Principles in the Capital Markets. In 2011, the DSN-MUI issued Fatwa 80 concerning the Implementation of Islamic Principles in the Equity Trading Mechanism at the Stock Exchange's Regular Market.

To enhance legal certainty regarding the application of Islamic principles in the Indonesian capital markets and ensure that they are enforceable, the OJK issued OJK Regulation 15/POJK.04/2015 regarding the Implementation of Islamic Principles in the Capital Markets.

1.4 What is the government's general approach to Islamic finance in your jurisdiction?

The Indonesian government is strongly supportive of the growth of Islamic finance. Since 2008, it has continually issued regulations to promote the development of the Islamic finance industry. Together with the Bank of Indonesia, the Ministry of Finance and the National Sharia Economy and Finance Committee, the OJK released the Report on Indonesian Islamic Finance Development 2022, which thematically focused on "Sharia Economic System Empowerment and Digitisation to Champion National Economic Endurance". The government has firmly committed to enhance the country's economic resilience and drive the Sharia financial industry with a focus on post-pandemic recovery. The Report on Indonesian Islamic Finance Development 2023 highlighted the accelerated growth of Sharia finance following the implementation of Law 4/2023 on the Development and Strengthening of the Financial Sector.

One development which reflects the government's support of the Islamic financial services industry, especially the banking sector, was the establishment of Bank Syariah Indonesia (BSI) in 2021. BSI was established through the merger of BRI Sharia Bank, Mandiri Sharia Bank and BNI Sharia Bank. BSI has played an important role in the development of Indonesia's Islamic finance industry as it is the only state-owned bank based on Islamic principles.

2. Market snapshot

2.1 How mature is the Islamic finance market in your jurisdiction?

Indonesia's Islamic finance market is quite mature. The development of Islamic finance can be traced back to the 1990s, when Bank Muamalat - the first Indonesia bank based on Islamic principles - was founded in 1991. Since then, the Islamic finance market has experienced rapid growth, especially since the issuance of several laws and regulations on Islamic finance in 2008.

In 2000, the Jakarta Islamic Index (JII) was launched as the first Sharia stock index, comprising 30 of the most liquid Sharia stocks in Indonesia. The National Sharia Council of the Indonesian Ulama Council (DSN-MUI) issued Fatwa 20 in 2001 on Guidelines for the Implementation of Investments in Sharia Mutual Funds. In 2003, the agency issued Fatwa 40 on the Capital Markets and General Guidelines for the Application of Sharia Principles in the Field of Capital Markets.

The rise of Indonesia's Sharia-based capital markets continued in 2011 when many innovations were launched, including:

• the Indonesian Sharia Stock Index; and
• the Sharia Online Trading System (SOTS). SOTS is the first system in the world developed to facilitate Sharia investors in conducting stock transactions in accordance with Islamic principles.

According to the Report on Indonesian Islamic Finance Development 2023, Indonesia's Sharia finances and economy are internationally recognised as some of the best in the world, as reflected by Indonesia's third-place ranking in the 2022 Islamic Finance Development Indicator.

2.2 Are there any bodies in your jurisdiction that issue guidance, codes, or policy statements on Islamic finance? If so, are these widely followed?

The Financial Services Authority (OJK) and the DSN-MUI play crucial roles in issuing guidance, codes and policies statements on Islamic finance. Please see questions 1.1 and 1.3.

2.3 What are the primary obstacles to the development of the Islamic finance market in your jurisdiction?

Typical obstacles to the development of Islamic finance market in Indonesia include the following:

• Low Islamic finance literacy and inclusion: Earlier in 2024, the OJK published the National Survey of Financial Literacy and Inclusion 2024, which reveals that while Islamic finance products are well known to potential customers, they are still failing to attract customers' interest. According to the survey, Islamic financial literacy among the public stands at around 39%, but participation in Islamic finance is only about 12%. The survey does not specify the reasons for this discrepancy. This is one of the primary challenges to be addressed by stakeholders in the Islamic financial sector in Indonesia.
• Lack of competent human resources: There is still a gap between the skills levels of university graduates in economics and the skills required to implement Islamic finance in the workforce and to operate in the Islamic financial industry.
• Geographical issues: The vastness of Indonesia is also a challenge for business actors, which must ensure that experts are evenly distributed and not only concentrated in big cities.

2.4 What significant Islamic finance transactions have taken place in your jurisdiction in recent times?

Based on the Report on Indonesian Islamic Finance Development 2023, Indonesia's Sharia financial industry has total assets of $4.5 billion and grew by 11% in 2022.

In November 2021, Bank Syariah Indonesia obtained the OJK's permission to open a branch office in Dubai. This move is expected to support its global expansion, given that the United Arab Emirates is among the main centres of global Islamic finance.

The Report on Indonesian Islamic Finance Development 2023 also states that the issuance of government Sharia bonds/securities (state sukuk) has played an important role in:

• reducing the state budget deficit;
• funding infrastructure projects; and
• fostering the development of 999 projects in the Islamic financial market with a total value of IDR 34 trillion.

3. Islamic finance providers

3.1 Who are the key providers of Islamic finance in your jurisdiction?

In Indonesia, the key providers of Islamic finance are as follows:

• Islamic commercial banks;
• Islamic business units;
• Islamic rural banks;
• Islamic insurance companies;
• Islamic financing companies;
• Islamic venture capital companies;
• Islamic pension funds;
• Islamic fintech companies;
• Islamic investment management companies;
• Islamic investment management units;
• the sovereign sukuk/sharia bond issuer;
• corporate sukuk/Sharia bond issuers;
• Islamic mutual funds; and
• other Islamic non-banking financial institutions.

3.2 What requirements and restrictions apply to providers of Islamic finance products in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the provider is domestic or foreign?

The requirements and restrictions applicable to Islamic finance providers in Indonesia are similar to those applicable to conventional finance business providers and may vary across sectors. However, Islamic finance providers must also comply with additional requirements and restrictions relating to Islamic principles, as follows:

• Form of business: Companies can engage in Islamic finance business by establishing:
• • an Indonesian legal entity (ie, a limited liability company); or
  • an Islamic business unit within a limited liability company.
• Foreign entities and/or individuals can participate in the shared ownership of Indonesian legal entities.
• Line of business: The articles of association of an Islamic finance provider must specify the activities and types of business to be carried out, which must comply with Islamic principles. An Islamic business licence will then be issued, which can take the form of:
• • an Islamic business licence; or
  • an Islamic business unit licence.
• Minimum paid-up capital: The minimum amount of paid-up capital varies across sectors. The minimum amount of paid-up capital for an Islamic insurance or reinsurance company, for example, is IDR 500 billion.
• Sharia supervisory board: An Islamic finance provider must establish a Sharia supervisory board to supervise the implementation of Islamic principles within the company.

In general, the transactions and products of an Islamic finance business should not:

• contain or involve:
• • interest (riba);
  • excessive uncertainty (gharar); or
  • gambling (maysir); or
• harm society.

3.3 What requirements and restrictions apply to takaful and retakaful operators in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the provider is domestic or foreign?

Takaful and retakaful operators in Indonesia are Islamic insurance or reinsurance companies. Takaful and retakaful business is regulated by Financial Services Authority (OJK) Regulation 23/2023 on Business Licensing and Institutionalisation of Insurance Companies, Sharia Insurance Companies and Sharia Reinsurance Companies. Based on the regulation, only domestic limited legal companies, cooperatives and collective business are eligible to be Islamic insurance or reinsurance operators in Indonesia. Foreign entities and/or individuals can participate in the shared ownership of such domestic legal entities.

Only Islamic insurance and reinsurance businesses in the form of limited liability companies or business unit, have been comprehensively regulated by the OJK. Other types of entities (ie, cooperatives and collective businesses) are not subject to specific regulations.

4. Islamic finance products

4.1 Which Islamic finance products are most embedded in your jurisdiction?

In Indonesia, the Islamic finance industry can be divided into three sub-sectors:

• Islamic banking;
• Islamic non-bank finance (ie, insurance, financing companies, other Islamic non-bank institutions); and
• the Islamic capital market (ie, state sukuk, corporate sukuk and Islamic mutual funds).

4.2 What are the advantages and disadvantages of these different types of products?

In general, the advantages and disadvantages are mostly determined by the demands and financial goals of Islamic customers. However, one common advantage is that Muslim customers can fully adhere to their religious principles in economy and business. The disadvantages are that:

• customers may take extra effort in researching these products, as their use is not yet common in Indonesia; and
• the benefits which are usually associated with interest (riba) are unavailable.

4.3 What other factors should parties bear in mind when deciding whether to opt for Islamic finance?

One key factor in choosing an Islamic or Sharia product is that it must not contain or involve:

• interest (riba);
• excessive uncertainty (gharar); or
• gambling (maysir).

(Please see question 3.2.)

In practice, Islamic products may not result in high profits or benefits compared to conventional products.

5. Islamic finance contracts

5.1 How do the following types of Islamic finance contracts or arrangements operate in your jurisdiction, and what requirements and restrictions apply to each?

(a) Murabaha

Murabahah can be executed as either:

• transaction contracts based on the availability of the goods/rights owned by the seller (bai'al murabahah al-'adiyyah); or
• transaction contracts based on the purchase order of the prospective buyer (bai'al murabahah li al-amir bi al-syira').

The requirements for both types of Murabahah contracts are identical:

• The contract must be explicitly stated by the seller to the prospective buyer;
• The seller (al-Ba'i) and the buyer (al-Musytari) must be an individual or a legal entity;
• The owner of the goods/rights that are sold (wilayah ashliyyah) or the proxy authorised by the owner (wilayah niyabiyyah) must have the authority to perform the transaction contract; and
• The transaction price (ra's mal al-murabahah) must be stated accordingly at the time of the contract.

Transaction contracts for both methods restrict payments based on fake transactions; and the objects of the transaction must conform to Islamic/Sharia principles and applicable laws and regulations.

See Fatwa DSN-MUI 111/DSN-MUI/IX/2017 on the Sale and Purchase of Murabahah Akad.

(b) Tawarruq

The National Sharia Council of the Indonesian Ulama Council (DSN-MUI) has not yet adopted the Tawarruq principle, for the following reasons:

• The Islamic Fiqh Academy Jeddah 17th Conference has generally prohibited the practice of tawarruq munadzzam if the purpose is merely to obtain cash;
• It depends heavily on a third party in the transaction, resulting in potentially excessive uncertainty (gharar) and a lack of transparency as required by the principle of muamalah maliyah; and
• It is deemed to result in more disadvantages (mafsadah) than advantages (maslahah).

(c) Mudaraba

Mudharabah can be performed through four different approaches:

• limitations on the business type, term period and/or place of business in conducting the investment (mudharabah-muqayyadah);
• no limitations in conducting the investment (mudharabah-muthlaqah);
• direct performance of the investment between the capital provider and the capital manager (mudharabah-tsuna'iyyah); or
• participation of the capital manager by injecting the capital (mudharabah-musytarakah).

The following requirements apply in each case:

• the capital provider (shahib al-mal) and the capital manager (mudharib) must expressly stated in the agreement;
• Each party must have legal capacity;
• The capital manager must possess the necessary expertise for this role;
• The capital must take the form of money, objects or a combination of both;
• The business activities must be conducted in accordance with Islamic principles and deemed to be halal; and
• Any business losses must be borne by the capital provider, unless they were caused by the capital manager's negligence.

With regard to restrictions, the parties to mudharabah must take into account the following:

• Mudharabah-tsuna'iyyah cannot be conducted without the prior consent of the capital provider;
• The capital manager is prohibited from using his or her own name;
• The capital funds cannot take the form of receivables;
• The lending or gifting of mudharabah capital cannot be conducted without the prior consent of the capital provider; and
• Any profits (nisbah) in distribution cannot be based on percentages or nominals.

See Fatwa DSN-MUI 115/DSN-MUI/IX/2017 on Akad Mudharabah.

(d) Musharaka

The following requirements apply to musyarakah contracts:

• The contract must be executed explicitly by each party;
• The parties must have legal capacity to perform as wakil (representatives) and manage the partnership's assets;
• The operational fees must be borne collectively by the parties;
• Any business losses must be borne collectively by the parties;
• The profits made by the partnership must be distributed proportionally as agreed by the parties;
• The parties must conduct the respective activities on behalf of themselves and their partners; and
• The positions of the parties must be stated explicitly in the contract.

In a musyarakah contract, the parties are prohibited from:

• lending, donating or gifting capital to other parties without the consent of all parties;
• making unilateral disbursements or investments of the capital for personal interest; or
• carrying out collateral encumbrances (unless performed by an Islamic financial institute).

See Fatwa DSN 08/DSN-MUI/IV/2020 on Musyarakah Financing.

(e) Ijarah

An ijarah contract can be performed by the lessor (mu'jir) and lessee (musta'jir) through:

• a lease on the benefits of goods (ijarah 'ala al-a'yan);
• a lease based on labour services (ijarah 'ala al-a'mal);
• an ijarah contract based on the benefit of goods followed by the transfer of ownership of the goods to the lessee at the end of the contract (ijarah muntahiyyah bi al-tamlik);
• an ijarah contract based on the benefit of goods and/or services, which at the time of entering into the contract mentions only the nature and specifications of the goods and/or services (ie, quantity and quality) (ijarah maushufah fi al dzimmah); or
• an ijarah contract based on the benefit of goods not followed by any transfer of ownership of the goods to the lessee at the end of the contract (ijarah tasyghiliyyah).

The following requirements apply:

• The contract must be explicit and understood;
• The parties must have legal capacity;
• The lessor must have the authority to lease the goods;
• The services (types, specification and terms) must be specified;
• The lessee must have the capacity to perform the payments; and
• The payment (ujrah) of the ijarah must be clearly specified in the contract.

The following restrictions apply:

• The utilisation (manfa'ah) of goods or services must not contain or involve non-Sharia elements; and
• Any sublease of the utilisation of goods or services to a third party must not be executed without:
• • the approval of the lessor; and
  • conformity with the applicable laws and regulations.

See Fatwa DSN-MUI 112/DSN-MUI/IX/2017 on Akad Ijarah.

(f) Wadiah

The following requirements apply:

• The contract must have the characteristics of a deposit;
• The capital must be in the form of cash, not receivables;
• Customers must be able to retrieve their deposits at any time (on-call) or with the approval of both parties; and
• The contract must not provide for compensation unless it is in the form of a voluntary gift (athaya) given by the bank/financial institution.

Further, the contract cannot be:

• made based on interest; or
• reduce the profit without the prior consent of the customer.

See Fatwa DSN 02/DSN-MUI/IV/2000 on Savings and Fatwa DSN 01/DSN-MUI/IV/2000 on Current Accounts.

(g) Kafalah

The following requirements apply:

• The parties must explicitly state their willingness to execute the contract;
• The guarantor (kafiil) may receive fees, provided that they are not a burden to the other parties (ie, the debtor (makfuul 'anhu) and creditors (makfuul lahu));
• The parties must have legal capacity to perform the kafalah contract;
• The collateral object must be assessable, quantifiable and clearly specified;
• The debtors should be known by the guarantor; and
• The collateral object must not be written off unless it has been paid by the debtors.

The following restrictions apply:

• Kafalah can be revoked without the other's prior consent, provided that kafalah is not made based on certain fee; and
• The collateral object cannot be haram (ie, non-compliant with Sharia).

See Fatwa DSN 11/DSN-MUI/IV/2000 on Kafalah.

(h) Wakala

The following requirements apply:

• The parties must explicitly state their willingness to enter into the wakalah contract;
• The contract must be binding and cannot be revoked unilaterally;
• The parties (muwakkil and wakil) must have legal capacity;
• The muwakkil must authorise the wakil to perform the activities; and
• The wakil must be able to conduct the authorised actions.

In terms of restrictions, the wakalah activities or objects cannot be haram (non-compliant with Sharia).

See Fatwa DSN 10/DSN-MUI/IV/2000 on Wakalah.

(i) Other

The Financial Services Authority (OJK) has also regulated the akads (contracts) that can be used in every issuance of Islamic securities in the Indonesian capital markets through OJK Regulation 53/POJK.04/2015. Basically, all contracts that fulfil Islamic principles can be used in the issuance of Islamic securities as long as they do not contradict the regulations of the OJK.

6. Sukuk

6.1 What requirements and restrictions apply to the issue of sukuk or other Islamic securities in your jurisdiction?

Based on the regulations of the Financial Services Authority, sukuk and other Islamic securities (ie, Sharia shares, Sharia mutual funds, Sharia securities-backed assets, Sharia exchange traded funds and Sharia real estate investment trusts) can be issued by either Islamic companies or conventional companies that do not conduct business activities that contravene Islamic principles. Such activities include, among others:

• gambling and games considered as gambling;
• providing ribawi financial services (ie, those involving interest);
• buying and selling risks that involve speculation (gharar) or gambling (maysir); or
• producing, distributing, trading and/or providing products or services that:
• • are forbidden because of their contents (haram li-dzatihi);
  • have been stated as forbidden by the National Sharia Council of the Indonesian Ulama Council (DSN-MUI);
  • could damage public morals or be harmful to the public; and/or
  • contravene Islamic/Sharia principles pursuant to the decisions of the DSN-MUI.

Companies must also meet the following financial ratios:

• total interest-based liabilities to total assets should be no more than 45%; or 9:20 and
• the interest income and other non-Islamic income to total revenue should be no more than 10% or 1:10.

The restrictions vary depending on the type of securities. In the case of sukuk, for instance, the underlying assets must not conflict with the following Islamic principles:

• The assets must be particular tangible assets;
• The assets must exist and provide beneficial values to the particular tangible assets (manafiul a'yan);
• The services (al khadamat) must already exist or will exist;
• There must be particular project assets (maujudat masyru 'mu'ayyan); and/or
• The investment activities must have been determined (nasyath ististmarin khashah).

6.2 Have any such securities been issued to date in your jurisdiction?

In Indonesia, Islamic securities have been issued and actively traded since 3 July 1997, when Sharia mutual funds were first issued by PT Danareksa Investment Management. Jakarta Stock Exchange (now the Indonesia Stock Exchange) collaborated with PT Danareksa Investment Management to spearhead the Jakarta Islamic Index on 3 July 2000, in order to guide investors in Islamic securities.

Sukuk were regulated in 2002 with the issuance of Fatwa MUI DSN 32/DSN-MUI/IX/2002 on Islamic Bonds, followed by the issuance of the first sukuk by PT Indosat Tbk that same year. It is thus clear that Islamic securities have been issued and listed in Indonesia for many years.

6.3 How do bankruptcy proceedings impact on the holders of sukuk or other Islamic securities in your jurisdiction?

In the event of bankruptcy in Indonesia, distributions are made in the following order of priority:

• employees' salaries;
• preferred creditors and tax-related payments;
• separated creditors and payments related to secured creditors (eg, guarantees, collateral, fiduciary assets); and
• concurrent creditors and payments to unsecured creditors.

The nature of sukuk is essentially similar to that of bonds. The relationship between the sukuk holders and the issuer is that between debtor and creditor. Therefore, sukuk holders are considered as concurrent creditors in the event of insolvency, which means that they rank last in priority.

In terms of holders of other Islamic securities (ie, Islamic public listed shares), based on the Company Law, in case of the liquidation of assets upon bankruptcy, any payments/distributions to the Islamic public listed shareholders may be made only once the company has paid its creditors in full.

7. Takaful

7.1 What requirements and restrictions apply to takaful and retakaful in your jurisdiction?

As outlined in question 3.3, takaful and retakaful businesses are subject to Financial Services Authority Regulation 23/2023 on Business Licensing and Institutionalisation of Insurance Companies, Sharia Insurance Companies, Reinsurance Companies and Sharia Reinsurance Companies. Like other Islamic finance businesses, takaful and retakaful must comply with Islamic principles, which prohibit business, transactions and products that:

• are considered haram (non-compliant with Sharia);
• enforce riba (interest); and
• contain or involve gharar (excessive uncertainty), maysir (gambling), zhulm (unjust acts of exploitation) and risywah (a gift given to achieve certain benefit).

The fatwa of the National Sharia Council of the Indonesian Ulama Council also require for the companies engaging in takaful and retakaful businesses, to create tabarru funds (the collective funds) of policy holders. In managing tabarru funds (the collective funds), the company must:

• separate its assets and liabilities from the tabarru funds (the collective funds) to ensure that the tabarru funds (the collective funds) accord with ta'awun (helping each others or cooperation) and takaful (mutual guarantee) principles; and
• utilise the tabarru funds (the collective funds) for:
• • compensation payments to entitled participants;
  • reinsurance payments;
  • repayment of qardh (loans for the fulfilment of tabarru funds) to the company; and/or
  • tabarru refunds.

8. Disclosure and reporting

8.1 What disclosure and reporting requirements apply to sukuk, takaful and Islamic funds in your jurisdiction?

The Financial Services Authority (OJK), as the supervisory body in Indonesia, issues and discloses a List of Sharia Securities (DES) twice annually, in May and November, followed by its effective implementation between June and December on the OJK website and/or other mass media. The DES forms the basis for:

• parties issuing Islamic securities in Indonesia;
• investment managers of domestic Islamic portfolio investments;
• securities companies that engage in Islamic online trading; and
• other parties that manage domestic Islamic portfolio investments for their customers or other parties, as relevant.

For instance, companies issuing sukuk and/or Islamic public listed shares must provide the following disclosures and reports, among others:

• disclosure of any material fact to the public;
• regular submissions of financial statements to the OJK and the public;
• publication of the realisation from the use of proceeds;
• disclosure of any affiliated and/or material transactions; and
• disclosure of share ownerships in other companies by members of the board of directors and the board of commissioners.

9. Sharia compliance

9.1 Are Islamic finance providers required to establish Sharia supervisory boards? If so, can this function be outsourced?

Yes, Islamic finance providers must establish a Sharia supervisory board (DPS) consisting of at least three members or, for small and medium-sized businesses, two members. The DPS cannot be outsourced to any person or institute other than members of the National Sharia Council of the Indonesian Ulama Council (DSN-MUI) through recommendation.

9.2 What requirements and restrictions apply to the members of a provider's Sharia supervisory board in your jurisdiction?

As outlined in question 9.1, the DPS cannot be outsourced to any person or institute other than members of the National Sharia Council of the Indonesian Ulama Council (DSN-MUI) through recommendation. Certain qualifications are required before persons can be elected as members of the DPS, including:

• a statement letter from the DSN-MUI;
• a Sharia supervisory basic training certificate (Sertifikat Pelatihan Dasar Pengawas Syariah) issued by the DSN-MUI; and
• a Sharia supervisory competence certificate issued by the Professional Certification Institute of the MUI.

In terms of restrictions, DPS members are prohibited, among other things, from:

• having a dual position as a member of the board of directors or board of commissioners or a DPS in another financial provider (the requirements differ depending on the financial business); or
• having a conflict of interest.

9.3 Is there a specific body in your jurisdiction which monitors whether Islamic products and transactions are compliant with Sharia law? If not, how is such compliance monitored?

Yes, the Financial Services Authority (OJK) and the DSN-MUI are responsible for monitoring Islamic products and transactions in Indonesia.

9.4 What penalties and remedies are available where it is found that an Islamic finance product or transaction is not in fact Sharia compliant?

Non-compliance with Islamic requirements will result in the imposition of administrative sanctions on Islamic finance providers by the OJK. Non-compliance with Islamic principles in relation to sukuk, for example, will result in sanctions such as:

• a warning letter;
• a fine;
• the restriction or suspension of business activities;
• cancellation of approval and registration; or
• revocation of business licences.

As another example, if a Sharia bank or a conventional bank with a Sharia business unit fails to comply with Sharia principles, it will face administrative sanctions imposed by the Central Bank of Indonesia ranging from a warning letter to fines and even revocation of a business licence.

10. Takeovers

10.1 What requirements and restrictions apply to takeovers of Islamic finance providers in your jurisdiction?

The requirements and restrictions governing takeovers of Islamic finance providers are the same as those governing other companies, which are generally regulated by the Company Law. A takeover should:

• be approved by the general meeting of shareholders;
• not be objected to by relevant creditors; and
• be announced to the employees.

In addition, a takeover will be subject to the applicable regulations in the relevant sector. For example, takeovers of banks (including Sharia banks) are regulated under:

• Law 28/1999 on the Merger, Consolidation, and Acquisition of Banks; and
• Financial Services Authority Regulation 41/2019 on the Merger, Consolidation, Takeover, Integration, and Conversion of Commercial Bank.

The general restriction is that such transactions

• may not contain or involve:
• • interest (riba);
  • excessive uncertainty (gharar); or
  • gambling (maysir); and
• should not cause any harm to society.

The parties are also required to respect the principles of fair treatment.

11. Governing law and jurisdiction

11.1 What law typically governs Islamic finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

To be fully enforceable in Indonesia, Islamic finance agreements are generally governed by Indonesian law. The Financial Services Authority (OJK) and the National Sharia Council of the Indonesian Ulama Council (DSN-MUI) have adopted Islamic principles in issuing relevant regulations on Islamic finance businesses.

11.2 Is a choice of Sharia or foreign law or jurisdiction valid and enforceable? In such case, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

Islamic/Sharia and/or foreign laws and/or jurisdictions are not enforceable in Indonesia. The OJK and the DSN-MUI have adopted Islamic/Sharia principles in their regulations on Islamic finance businesses in Indonesia. As such, all parties conducting Islamic finance business in Indonesia may obtain legal protection under the laws and regulations of:

• the Indonesian government;
• the OJK; and
• the DSN-MUI.

The Indonesian courts do not implement or rule on matters that are unrelated to Indonesian law. The choice of a foreign jurisdiction is limited to the alternative dispute forums set out in Law 30/1999 on Arbitration and Alternative Dispute Resolution (ADR), as further supplemented by Supreme Court Regulation 3/2023 on Arbitration. In such cases, submission to the laws of a specific jurisdiction during ADR must be agreed by both parties, as evidenced by a document signed by both parties.

Please see question 12.4 regarding the enforcement of foreign judgements in Indonesia.

11.3 Are waivers of immunity enforceable in your jurisdiction?

Indonesian law recognises a waiver of immunity only in the context of a waiver of diplomatic immunity for diplomatic officials under Articles 29 and 32 of Vienna Convention, as ratified through Law 24/2000 on International Agreements. Otherwise, it is assumed that all entities, both foreign and national, are subject to Indonesia's jurisdiction and cannot benefit from immunity in any context.

12. Disputes

12.1 In which forums are disputes relating to Islamic finance heard in your jurisdiction?

There are three forums for dispute resolution in the context of Islamic finance:

• Religious courts: As per Law 3/2006 on Religious Courts and Sharia Banking Law, the religious courts have absolute competence over all matters relating to the Sharia economy (including Sharia banking and financing).
• District courts: A dispute relating to Sharia finance can be settled before a district court if this has been agreed between the parties and stated in the relevant agreement.
• Alternative dispute resolution (ADR) forums: Law 30/1999 on Arbitration and ADR specifies that arbitral awards, including those relating to Sharia disputes, originating from ADR forums can be enforced and ratified by submitting them for enforcement to the local district courts. Furthermore, the Financial Services Authority has introduced ADR forums for the financial services sector, including forums for:
• • mediation;
  • arbitration; and
  • binding opinions.
• These forums can be used for Sharia financing disputes.

12.2 Which law typically governs such disputes?

• Indonesian laws and regulations; and
• the Civil Code (specifically on agreement).

12.3 What issues do such disputes typically involve?

Usually, such disputes revolve around a party's failure to perform its obligations as per the agreement that binds the parties.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

Under the ADR Law, foreign arbitral awards can be enforced in Indonesia by:

• registering them with the Central Jakarta District Court; and
• obtaining the approval of the chief judge.

Approval will be granted if the following requirements are satisfied:

• The award was issued by an arbitrator or arbitration forum in a country that is a party to a bilateral or multilateral agreement on the enforcement of foreign awards with Indonesia. Indonesia is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Awards of 1958 and ratified it through Presidential Decree 34/1981;
• The scope of the award is limited to commercial matters (ie, banking, trade, finance, capital investment, industry and intellectual property); and
• The award does not conflict with public order.

If Indonesia is a party to the award, the award can be enforced only upon receiving an order from the Supreme Court to delegate such executory power to the Central Jakarta District Court. Once an exequatur has been obtained from the Supreme Court, enforcement is delegated to the Central Jakarta District Court.

In addition, any foreign judgements are not recognised or enforced in Indonesia.

12.5 What significant Islamic finance disputes have arisen in your jurisdiction in recent times?

No significant Islamic finance disputes have arisen in recent times.

13. Trends and predictions

13.1 How would you describe the current Islamic finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The prevailing trend in the Islamic finance landscape is the accelerated growth of national Islamic/Sharia finance following the issuance of Law 4/2023 on the Development and Strengthening of the Financial Sector, which aims to:

• promote the development of the Islamic financial services sector;
• increase digital innovation which accommodates Islamic/Sharia principles;
• strengthen the Islamic economic ecosystem; and
• improve Islamic/Sharia finance literacy and inclusion.

The aim is to turn Indonesia into a global centre for Islamic finance and sustainable investment.

14. Tips and traps

14.1 What are your top tips for the smooth conclusion of an Islamic finance transaction in your jurisdiction and what potential sticking points would you highlight?

• Ensure compliance with:
• • all regulations discussed in this Q&A; and
  • the general Islamic restriction that transactions must not be haram or contain or involve gharar (excessive uncertainty), maysir (gambling), zhulm (unjust acts of exploitation) and risywah (a gift given to achieve certain benefit).
• Abide by the Civil Code in interpreting and ensuring the validity of agreements.
• Ensure that any dispute forum is experienced in reviewing Islamic transactions to facilitate more satisfactory awards/verdicts that reflect Islamic principles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.