When Muslims in Banda Aceh gather to break their fast during Ramadan, the act is more than a religious observance, it signals a broader consumer and economic transformation taking place across Southeast Asia.
Increasingly, they are influencing financial choices. This shift is reflected in the explosive growth of Islamic finance, which reached a global total of US $4.9 trillion in assets in 2023, following a decade of consistent double-digit growth.
Among the regions leading this charge is Southeast Asia, where Islamic finance reached US $859 billion in 2023, up from US $754 billion just three years earlier.
Demographics and Digital Connectivity Drive Demand
At the heart of Southeast Asia’s Islamic finance boom are two major forces: demographics and policy. The region is home to more than 280 million Muslims, approximately 40% of its total population, making it one of the largest Muslim populations outside the Middle East.
Importantly, this population is young, urban, and highly connected. In Malaysia, mobile connections in 2024 exceeded the total population by nearly 30%, while Indonesia added almost six million new internet users in a single year.
This widespread digital adoption is serving as the gateway to a wide array of Shariah-compliant financial services, from mobile micro-savings apps to digital insurance platforms.
Malaysia has long set the standard in the region, underpinned by strong regulatory frameworks.
Its Shariah Governance Policy introduced in 2019, along with the work of the Securities Commission’s Shariah Advisory Council, has created a secure environment for the growth of sukuk (Islamic bonds), Islamic equities, and takaful (Islamic insurance).
Meanwhile, Indonesia has been catching up rapidly. With its MEKSI 2019–2024 masterplan, the country has integrated its halal economy with financial services, resulting in innovations like LinkAja Syariah, Indonesia’s first Islamic digital wallet.
Capital Markets and Islamic Banking on the Rise
Southeast Asia’s success in Islamic finance is most visible in its capital markets. Global sukuk volumes stood at US $863 billion in 2023, with new issuances in 2024 projected between US $170 and US $180 billion.
Malaysia remains the dominant force, holding a commanding 63% share of global sukuk. Indonesia, while smaller in total volume, has become a leader in the green sukuk market, accounting for over a quarter of all sovereign sustainability sukuk worldwide.
Islamic banking is also becoming a major force, particularly in Malaysia. By 2024, the country’s Islamic banking assets reached approximately US $380 billion, representing nearly half of the entire banking system.
The Malaysian market also boasts more than 800 Shariah-compliant listed companies and a takaful market worth US $19 billion.
Indonesia, in comparison, is still in the early stages. Its Islamic banking assets were recorded at US $64 billion in 2024, just 7.7% of the national banking sector. However, this relatively low starting point reveals vast room for growth.
Bank Syariah Indonesia, the country’s largest Islamic bank, holds about US $27 billion in assets and is seen as a key player in driving further market penetration, particularly among the underbanked.
Takaful: A Frontier of Innovation
Though often overlooked, the Islamic insurance sector, or takaful, is emerging as a major growth frontier. Malaysia has already achieved notable penetration in family takaful products.
In Indonesia, the potential lies in its massive informal workforce, including gig economy workers who are increasingly accessing financial services through digital platforms.
Micro-takaful schemes, distributed via e-wallets or ride-hailing apps, may provide a low-cost, scalable solution for millions of uninsured individuals.
Comparing with the Gulf: Contrasts and Opportunities
While Southeast Asia’s Islamic finance industry is expanding rapidly, it still lags behind the Gulf Cooperation Council (GCC) countries in sheer size.
Saudi Arabia alone holds US $1.6 trillion in Islamic assets, followed by Iran and the UAE with US $1.3 trillion and US $850 billion, respectively. In contrast, the combined Islamic finance assets of Malaysia and Indonesia remain below US $450 billion.
Yet, the region’s diversity and fragmented markets, far from being a weakness, have fostered innovation.
Unlike the Gulf, where Islamic finance is the default system, Southeast Asia’s pluralistic environment has led to the development of digital Islamic banks, green sukuk, and tech-enabled micro-insurance products.
A Future Beyond the Niche
Looking ahead, Southeast Asia’s Islamic finance sector is expected to surpass US $1 trillion in assets before the end of this decade. Malaysia is likely to retain its position as a regulatory and capital market leader.
Indonesia, with its youthful population and digital momentum, is poised to become the region’s growth engine, particularly in retail finance.
Global fintech players are taking notice. Companies like Mambu are already partnering with institutions such as Bank Islam in Malaysia and Bank Jago in Indonesia.
As Shariah-compliant services become embedded in the mainstream financial ecosystem, what was once considered a niche market is now central to the future of finance in Southeast Asia.
