Indonesian Islamic Banking Innovation Strategy in the Digital

Economy Era

Milawati

and Setyabudi Indartono

Graduate School of Economic Education, Yogyakarta State University, Yogyakarta –Indonesia

Keywords: Innovation Strategy, Islamic Banking, Digital Economy Era

Abstract: Digital economy adaptation seems to be almost pervasive in all sectors, including the financial and banking

sectors. Islamic banks as one type of financial institution that provides sharia-based banking services to

customers also need to adapt and innovate technology to be able to compete. The aim of this study is to

analyze the innovation strategies that have been implemented in Islamic Banking in Indonesia in the Digital

Economy Era. The strategy is intended to create more advanced technology-based services to adapt in the

digital economy era. By doing so, it is expected that more customers will place their funds in Islamic banks

and Islamic banks can continue to grow in the Digital Economy Era.

1 INTRODUCTION

The existence of a Sharia Bank in the Indonesian

banking system is a commercial bank based on

Islamic sharia (legal) principles, in line with the

enactment of Law Number 21 of 2008 concerning

Islamic banking providing a legal basis for Islamic

Banks both in terms of institutions and operations.

Furthermore, with the enactment of Law Number 23

of 1999 which has been amended by Act Number 3

of 2004 concerning Amendment to Law Number 23

of 1999 concerning Bank Indonesia, Bank Indonesia

can implement a policy of monetaryization of sharia

principles, Bank Indonesia can affect liquidity

through Islamic banks

Post-Law No. 10 of 1998 Regarding banking, the

banking level continues to grow. Islamic banking

assets are expanding. In 2017, the growth of Islamic

banking assets is quite large, surpassing the growth

of conventional asset banks. Data from the Financial

Services Authority (OJK) recorded until October

2017 noted that the growth of Islamic banking assets

reached 19.79% on an annual basis to Rp395.89

trillion. In the same period, the growth of

conventional banking assets amounted to 11.20% to

Rp. 7,183.77 trillion (Simbolon, 2018)

But at this time in the digital economy era, the

competition in the banking industry in Indonesia was

very tight. The digital economy was born and

developed through the use of information and

communication technology that can also globalize

the world. According to Dalle (2016) world

economic history has gone through four eras in

human life, namely the era of agricultural society,

the era of machinery after the industrial revolution,

the era of oil hunting, and the era of multinational

corporation capitalism. The previous four economic

waves have exclusive characteristics and can only be

achieved by certain elite groups. Digital economic

waves are present with sloping topography,

inclusiveness, and spread the equality of

opportunities.

This characteristic has a competitive concept

which is an industrial spirit that is easily lifted by

startups who prioritize collaboration and synergy.

Because of that, the digital economy is an 'economy

of sharing' which raises many small and medium

businesses to enter the business world.

At present the government is proclaiming

Indonesia as the largest digital economy in 2020 and

becoming the largest in Southeast Asia. One of the

cornerstones of national development in this

declaration is the digital sector. The government

targets e-commerce transactions to reach US $ 130

billion and create 1000 technopreneur with a

business value of US $ 10 billion in 2020 (Balitbang

Kominfo, 2017)

Therefore, to achieve a credit card, you can make

many choices to use financial services for

customers. Product and service innovations carried

out by banking institutions. Apart from developing

technology, community needs are increasingly

Milawati, . and Indartono, S.

Indonesian Islamic Banking Innovation Strategy in the Digital Economy Era.

DOI: 10.5220/0009511706610666

In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 661-666

ISBN: 978-989-758-432-9

661

complex. For spending with innovations made by

Islamic banking. As a bank of choice for Muslim

communities, Islamic banking offers many services

that provide benefits to increase the life force in

business in Indonesia.

Based on the description above, the purpose of

this study is to analyze innovation strategies that

have been implemented by Islamic banks in

Indonesia.

2 THEORICAL FRAMEWORK

2.1 Digital Economy Era

Digital economy started in the 1990s along with the

growing usage of the World Wide Web, and also

called network economy. The drivers of digital

economy era such as network effects, critical mass

of users, standardization, interoperability and

globalization, and is enabled by the innovation of

technology (Stähler, 2002).

According to Tapscott (1996) in Schweighofer

and Ebner (2015), digital economy is a global

knowledge economy, which is based on brief cycles

of innovations and digital information stored in

networks. There are microeconomic processes of the

transition from the industrial society to the

information society made in digital network

economy. The structures of economic and social

systems are changing constantly, but there are

temporary phases with increased transformation.

This can be caused, by technical innovations that

causing the further developments in technical,

economic and social level by itself. The basic

innovations are made exclusively responsible for

these phases. However, the changes are only

possible due to the adaptation of behaviour in

society (Stähler, 2002).

Some authors use the term Internet economy to

describe the transformation in the 1990s. This

change is based on the information performance

boost of communication technologies and as a result

of digital network (Zerdick, et al., 2001). However,

the digital economy is a technology driven economy

or network economy. Brief innovation cycles of

technologies and applications or business models to

link users and to generate a critical mass of

participants in a net of collective interests are the

basic for increasing network effects. Furthermore,

vendors can continue to expand and get an

advantage against their competitors, although their

products reach the critical mass of users (Arthur,

1996).

The basic principles of those social or

economical networks are some drivers and laws. As

an example, direct network effects are generated by

standardization and interoperability. The value of

networks, business networks for users depends

primarily on the value of the utilization of the

applications or products. Metcalfe’s law postulates

that the number of participants and the value of the

network are related (Zerdick, et al., 2001).

Moreover, switching costs and network effects

produce lock-in effects (Schweighofer and Ebner,

2015). Thereby, not only material switching costs

are consider, but immaterial "switching costs" (e.g.

trust) have to be considered also.

These indirect and direct network effects cause

returns to increase continuously (Arthur, 1996).

Furthermore, attractiveness and its size also

increased by those effects. As a result, participation

of users are more encouraged in this network, and it

will in turn generate direct and indirect network

effects. These relationships form the core of the

positive feedbacks. (Zerdick, et al., 2001)

However, finally technology is the foundation of

new applications, business models and social

behaviour transformation. Furthermore, the rules of

the digital economy are the background of strategic

management in these markets or business models.

2.2 Inovation Strategy

Jaruzelski and Dehoff's (2007) research shows that

there are two factors that influence company

performance, namely strategic alignment and

customer focus. Strategic alignment refers to the

compatibility between innovation strategies towards

overall corporate strategy. While customer focus

refers to the company's efforts to pay attention to the

needs of consumers in each series at each phase in

the innovation value chain, from the stage of

extracting ideas, developing ideas to marketing.

Based on the two things above, namely strategic

alignment and customer focus, Jaruzelski and

Dehoff (2008) classify corporate innovation

strategies in three categories, namely need seekers,

market readers and technology drivers as shown in

Figure 1 below:

Figure 1: Three kind of Company Inovation Strategy

Profile

Source : Jaruzelski dan Dehoff (2008)

Each innovation strategy has very different

characteristics depending on the emphasis on

innovation priorities.

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1. Need Seekers

The company emphasizes that its products become

the first to enter the market (first movers) and

proactively explore input from consumers in

conducting product research and development. The

product produced is a radical development

(breakthrough).

2. Market Readers

Companies tend to make product changes in stages

(incremental) and quickly adapt products that are on

the market (fast follower). Like Need Seekers,

product development is also based on consumer

needs.

3. Technology Drivers

The company uses the technology superiority

approach to innovate and does not directly involve

input from consumers in the product development

process. The products produced are also radical

developments (breakthrough). Very large companies

invest in research and development to drive

innovation.

Fontana (2009) categorizes Need Seekers and

Market Readers as an innovator organization that

adjusts to market needs, while Technology drivers as

a type of pull power.

3 RESEARCH METHOD

This type of research is library research, namely a

series of studies relating to library data collection

methods, or research whose research objects are

explored through a variety of library information

(books, encyclopedias, scientific journals,

newspapers, magazines and documents)

(Sukmadinata, 2009).

Literature review or library research is a study

that formulates its theoretical and methodological

contributions to specific topics from critically

reviews or examines knowledge, ideas, or findings

from academic-oriented literature.

4 ANALYSIS & RESULT

4.1 Potential and Challenges of the

Digital Economy Era

The development of the digital economy in the

world is so rapid that it is reflected in several

indicators. The value of investment in the

telecommunications sector is quite high and the

trend is still increasing. OECD (2015) noted that the

investment value in the telecommunications sector

in the world since 2000 reached an average of 200

billion US dollars per year. In line with this, the total

telecommunications connections consisting of

analog, digital (ISDN and DSL) telephones,

modems, fiber, and cellular reached approximately

2.1 billion connections in 2013. This indicates that

the world community's preference for cellular

phones is getting higher . The number of internet

users has increased, especially in Asia. In 2009

internet users in Asia numbered 713 million people,

in 2015 it increased by more than 200 percent,

namely 1,445 million people (Wirabrata, 2009).

In terms of consumers, Indonesia is also a very

potential market. As a country with the 4th largest

population in the world, domestic market power

certainly cannot be underestimated. Moreover, the

per capita income owned by the Indonesian people

shows an always positive trend increasing since

2006. The digital industry will certainly be even

more excited about this condition.

The growth of the middle class and internet

penetration also cannot be ruled out. The World

Bank notes that Indonesia has experienced a

fantastic growth in the middle class since the

monetary crisis in 1998. The growth of the middle

class is predicted to continue to increase until 2030

with a population of 141 million.

As mentioned earlier, the potential of the digital

economy is also inseparable from the current

internet penetration. The Indonesian Internet Service

Providers Association (APJII) noted that in 2014,

the number of internet users in the country had

reached 88.1 million with a penetration of 34.9

percent, an increase of around 16 percent from 2013

of 71.2 million with a penetration of 28 , 6 percent.

This number is predicted to continue to increase

along with the advancement of technology in

Indonesia. The Kompas R & D predicts that the

number will continue to increase and in 2017 the

number will be 117 million. This makes Indonesia a

very potential market for traders or digital trading

businesses.

This great potential certainly will not be able to

be used optimally if stakeholders do not anticipate

future problems. One potential problem is the loss of

potential taxes and the legal vacuum that regulates

the process of digital trade transactions.

The Initiative Study Center estimates that the

potential tax that can be extracted from this industry

can reach IDR 10-15 trillion per year. This number

is certainly not a nominal amount. The Director

General of Taxes in Circular Letter Number SE / 62

/ PJ / 2013 concerning Confirmation of Taxation

Terms on e-Trade Transactions states that there is no

new tax on e-Trade transactions so that general

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provisions apply and there is no difference in the

application of tax laws between conventional and

electronic transactions. This certainly causes the

government to lose the potential for state revenue. It

is important for the government to innovate related

to new and more applicable tax collection for digital

transactions.

The issue of regulatory vacancies also deserves

mutual attention. In the memory of March 2016,

there were demonstrations by conventional taxi

drivers over the presence of online taxis. Many

people think that online taxis damage the existing

economic order, but not a few also feel that they

benefit from the presence of online taxis. This

debate can certainly be solved by the presence of a

regulation.

On the one hand, the application of digital

technology increases productivity and reduces

production costs. On the other hand, the

conventional way of doing business generally

absorbs more labor. The application of digital

technology has the potential to replace conventional

business so that it can reduce employment. In this

case Government policy is needed to ensure the

development of the digital economy has a positive

impact on the overall economy.

4.2 Inovation Strategy of Sharia Bank

In Digital Econmy Era

Islamic banks as one type of financial institution that

provides sharia-based banking services to customers

also need to adapt and innovate technology to be

able to compete.

Digital banking adaptation coupled with the

management of sharia-based funds will be an

advantage of Islamic banks. If this is not done,

Islamic banks will lose (or even die) face

competition from conventional banks that have

adapted to digital banking or even defeated by

fintech companies. This is not impossible, because

there is a theory known as disruptive innovation.

The theory says that old markets with old

technology will be replaced with newer and more

innovative ones that will create new markets.

According to Fatahilah (2018), seeing existing

digital economy developments, financial technology,

and digital banking raises the question of whether

Islamic banks in Indonesia can implement them. At

least until now, we have not been able to find

Islamic banks that can provide facilities and services

like the two bank products mentioned earlier. For

this reason, Islamic banks in Indonesia have to begin

developing products and facilities that lead to digital

banking immediately.

Digital banking that has developed to date, such

as ATMs, internet banking, mobile banking, video

banking, phone banking and SMS banking. Some

banks have also launched officeless financial

services (branchless banking) which are primarily

intended for people who do not have access to

banking (unbanked).

If in the future Sharia Banks only sell sharia-

based management then it is not enough to be able to

survive in the digital economy era. Consumers need

other facilities to support their various needs. The

ease and speed must be a major concern for Islamic

banks in order to continue to grow or at least survive

in the era of competition like now.

Coupled with competition with conventional

banks that can provide a lower cost to customers.

Rational consumers will certainly prefer cheaper

rates with better facilities and conveniences.

On this basis, Islamic banks must start investing

to create more advanced technology-based services

to adapt to the digital economy era. Islamic banks

must also be able to operate efficiently so they can

provide competitive products to customers. By doing

so, it is expected that more customers will place

their funds in Islamic banks and Islamic banks can

continue to grow.

Some sharia banking terms that encourage digital

technology, among others, and banking concepts in

terms of transactions, require separate ways of

inclusion and literacy. The community needs literacy

in order to have an easy and correct understanding

that the Islamic banking system is more profitable

than conventional systems. Because literacy is a

process to increase knowledge (knowledge) and add

insight, beliefs (beliefs), and skills (skills) of

consumers and the wider community who are able to

manage finances better.

We involve the public using digital methods that

make it possible to carry out easy and practical

ways, fast, safe, not queued, simple and more cost-

effective and borderless and more custom-made.

Listening to consumers more carefully is the key to

continuing to compete. In particular, in the midst of

increasingly fierce competition and shifting choices

in payment methods that are increasingly becoming

the challenges of the Islamic banking industry.

The community is accustomed to using the

internet through cell phones and computers with the

largest internet users in the group of students (87%)

and students (69%). However, the group predicted to

contribute the largest revenue to the banking

industry and financial services in the next 10 years

(McKinsey, 2015). Trends in the use of growth

services for people with people, people and students.

According to Salam (2018), the technology

service that is the mainstay of the bank is online

banking. The expansion of Islamic banking through

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sharia service units (office channeling) in branch

offices makes online banking a standard of service.

Online banking can be an added value for Islamic

bank products. Technological innovation can reach

microfinance rural areas or can be used as a tool to

help small and medium business enterprises to

develop. There has been banking competition

leading to branchless banking to reach people in the

region.

Digital capabilities that can create these values in

practice can be used as follows: First, digital

technology increases bank connectivity not only

with customers but also with employees and

suppliers. This extends from online interactivity and

payment solutions to cellular functions and

opportunities to increase the bank's brand on social

media. Second, digital withdrawal on large data and

sophisticated analysis to expand and improve

decision making. This kind of analysis is being used

by the most innovative banks in many fields,

including sales, product design, price and

underwriting and truly extraordinary customer

experience designs. Third, direct processing, which

automates and digitizes a number of repetitive

processes, low value and low risk. Process

applications, for example, increase productivity and

facilitate regulatory compliance, while direct

imaging and processing processes lead to lighter and

paperless workflows. Fourth, digitalization is a

means to encourage innovation across business

products and models, including social marketing

with the support of crowd sourced and digitally

centered business models.

4.3 Obstacles and Challenges of

Implementation Inovation Strategy

of Sharia Bank In Digital Economy

Era

The Financial Services Authority (OJK) said that

there are at least three challenges faced by banks in

Indonesia in digital banking services, namely the

evaluation of Bank Indonesia (BI) digital banking

service trials related to bank information systems,

network availability, and consumer education and

protection (Salam , 2018).

In addition to the three challenges related to

digital Bank Indonesia above, in digital practice

banks still face various obstacles that disrupt the

digital development of the Islamic banking

economy, including network infrastructure that is

less extensive so that it cannot be accessed by

everyone. The low interest of the Indonesian people

who carry out digital economic activities, only about

35% of the Indonesian people conduct financial

digital transactions. Business contributions in the

digital sector are still minimal for Gross Domestic

Product (GDP).

The next challenge is facing bank CEOs to take

leadership in the development and implementation

of a comprehensive change program that

simultaneously addresses the culture, systems and

capabilities needed. Some of the digital economic

challenges to the development of banking business

are the security or security department. With the

increasingly sophisticated security technology along

with the increasingly sophisticated theft technology

in the digital realm. One of the most common crimes

is identity theft or phishing. Phishing is the theft of

other people's important data such as full names,

residential addresses, and telephone numbers used to

break into customer accounts. All that is done by

users (users) who are not responsible, such as the

emergence of new criminal acts in the form of

threats hacking websites to steal company data,

rampant fraud under the guise of online business and

so on.

The development of technology and the internet

that is increasingly fast and agile is actually very

helpful for effectiveness and efficiency in efforts to

inclusion and financial literacy of Islamic banking

operations. However, various technical and

operational obstacles must be interpreted as

challenges and must be used as a trigger to create

and produce something that will help human work

more organized and directed. The digital world has

entered the financial industry such as e-commerce,

which is increasingly increasing transactions from

day to day.

People in this digital era want and like

convenience. They will openly accept all openness

and technological progress. In the financial industry,

there are already various electronic money that is

intended to facilitate various daily human activities.

Ranging from electronic money attached to mobile

phones to balances in certain applications to

facilitate payment. Opportunities and challenges in

this digital era will be felt by all sectors including

the financial industry and the Islamic banking

industry.

To overcome the various problems mentioned

above, there are at least several steps that can be

taken by Islamic banking as an effort to develop

digital banking: First, consumer experience, namely

digital companies must give the best impression to

consumers in using their services. Because

consumers in the digital world are very easy to turn

to other companies. Second, cyber security, namely

banking together with the government must work

together in providing security for transactions

carried out.

Third, connect online with offline. Fourth,

companies must also use data-based analysis to

Indonesian Islamic Banking Innovation Strategy in the Digital Economy Era

665

determine the needs, behavior and desires of

consumers. Fifth, various companies and

governments must have started to build digital DNA.

So, the government and company must issue

regulations that support digitalization.

With the digital bank, it is expected that banks

can make it easier to store and analyze customer

data. So that it can help banks to maintain

relationships with consumers, better deal with

consumer complaints, and be able to develop more

appropriate products or services more quickly,

cheaply, clearly and transparently for consumers.

Banks are more efficient because they no longer

invest in branch offices and customers do not have

to bother to branch offices for example to transfer

money to families in different regions.

5 CONCLUSION

Islamic banks as one type of financial institution that

provides sharia-based banking services to customers

also need to adapt and innovate technology to be

able to compete. If in the future Sharia Banks only

sell sharia-based management then it is not enough

to be able to survive in the digital economy era.

On this basis, Islamic banks must start investing

to create more advanced technology-based services

to adapt to the digital economy era. Islamic banks

must also be able to operate efficiently so they can

provide competitive products to customers. By doing

so, it is expected that more customers will place

their funds in Islamic banks and Islamic banks can

continue to grow

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