Sharia-compliant finance is a form of financing activity that complies with Islamic principles. It views traditional lending as a relationship that unfairly favors the lender. Sharia-compliant loans must not feature any element of interest or usury by the lender. It can also involve the lender sharing in the profit and loss of the enterprise it underwrites.
In 2019, the World Bank and International Finance Corporation estimated that Indonesian MSMEs had access to just US$57 billion in credit, leaving a huge financing gap of US$165 billion. This illustrates there is still much work to be done in terms of making sure small and mid-sized companies have access to working capital. This is where sharia-compliant fintech platforms like ALAMI aim to soup up the nation’s sharia finance sector.
The opportunity is large, but tapping into the local market does not come without challenges. From a lack of awareness to myths about who can use sharia-compliant financing, startups in the sector must address several issues to realize their full potential.
On a recent episode of Indonesia Digital Deconstructed hosted by Michael Soerijadji of AC Ventures, Dima Djani, co-founder and CEO of ALAMI, discussed some of the main challenges faced by the industry, what his company is doing to address these issues, and more.
Building trust in the sharia finance market
Coming from an investment banking background, starting ALAMI came as a somewhat natural next step for Dima. But his general interest in sharia finance came much earlier.
“My mom enrolled me in an Islamic boarding school in West Java when I was in junior high. That was mostly because I was a naughty child in primary school and she thought this would help instill some discipline in me,” said the entrepreneur.
“When I started exploring the finance world in Indonesia, I realized that sharia penetration was surprisingly low, despite us being a majorly Muslim country. No one had really cracked it in this sector and I leveraged my background in Islamic education to jump-start ALAMI,” he explained.
Back in 2019, ALAMI started as a sharia-compliant peer-to-peer lending platform for SME financing. Today, it has already acquired a local bank and disbursed more than US$200 million to more than 10,000 MSME projects, with an impressive 0% default rate across the board.
Challenges faced in sharia banking
Dima and his team realized that, from a product perspective, there were many headwinds faced by the industry.
“First of all, sharia finance is deemed to be more expensive due to the higher cost of funds,” he shared. “One, the positioning is not unique enough and a lot of incumbents mostly follow conventional banking playbooks. Two, while they are using the same playbooks, they have far fewer resources and much less manpower. Hence, they fall behind.”
Dima explained, “As disruptors in the industry, we strengthen our branding and unique positioning. This helps build trust not only in how we conduct the finances but also that we are really committed to upholding sharia principles. From that trust comes a segment where we are not necessarily yielding the highest returns for our funders but we are getting high-quality SME borrowers and these funders are happy with what they are getting. We are also able to keep the cost of financing low.”
Dima believes that customer education is key in this market. He added, “Leading investor apps in Indonesia, in general, are spending a lot on customer education and we are in the same segment. This means we need to have a keen focus on creating awareness.”
Invest with us
AC Ventures is a leading venture capital firm investing in early-stage startups focused on Southeast Asia. We are a generational partner to founders driving positive environmental, societal, and economic impact. If your institution seeks to deploy smart capital in the market, please get in touch.