What will Indonesia, and Indonesian banking, look like in 2040? Indonesia is among the largest economies in the world, a G-20 member, and home to a large banking sector. It is also the most populous country with a Muslim majority. In fact, its Islamic citizens—young, traditional, religiously minded, and increasingly digitally savvy—are expected to help drive Indonesia’s continued upward trajectory.
We can expect that over the next two decades, Indonesia will become an even more important driver of economic growth (the country’s population is forecast to approach 320 million people by 2040), with an increasing number of consumers who require a suite of banking services. But we can expect, too, that its consumers will be distinguished by distinctly Indonesian and Islamic preferences—not least, for Islamic banking products, which have developed under Koranic prohibitions on interest and guidelines for more socially conscious transactions.
It was with the future in mind that Indonesian financial institutions Bank Rakyat Indonesia Syariah (BRIS), Bank Syariah Mandiri (BSM), and Bank Negara Indonesia Syariah (BNIS) merged in early 2021 to become PT Bank Syariah Indonesia Tbk (BSI). This single, merged bank will seek to meet and facilitate the increasing demand among Indonesian citizens for Islamic banking products. Hery Gunardi, CEO of BSI, shared his thoughts on the merger and the opportunity with McKinsey’s Kenneth Bonheure and Guillaume de Gantès. An edited version of the conversation follows.
McKinsey: Why was the decision taken to effect this merger now?
Hery Gunardi: Indonesia is the country with the highest Muslim-majority population in the world; about 87 percent of the population is Muslim, which adds up to almost 210 million people. And citizens, particularly younger people, are proudly and actively Muslim. A great many live in halal villages, and throughout Indonesia, halal cosmetics, halal food, and halal travel are popular.
Yet penetration of Islamic banking products in Indonesia is currently surprisingly low: about 7 percent. That’s remarkable when we compare Indonesia with other countries. Take Malaysia, where the share of Islamic banking is around 30 percent, or Brunei, where it is more than 50 percent. Islamic banking is, of course, also very popular in the GCC [Gulf Cooperation Countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates]. So, particularly at this moment, the business opportunity is wide open for Islamic banking products in Indonesia. That’s all the more reason we wanted to move quickly.
McKinsey: How did you deal with the challenges of integrating three companies?
Hery Gunardi: I can’t say there weren’t headaches and stress [laughs]. A hard deadline; three banks; a very diverse group of stakeholders, including not only the government but also employees of three companies; and groups across the Syariah ecosystem, such as the Indonesian Ulema Council, to ensure we were meeting Syariah standards—and all during the COVID-19 pandemic. We made sure that we followed two principles. First, be highly disciplined, and second, understand that we’re all in this together.
On the first point, discipline was a must right from the start. The merger plan was announced in mid-October 2020, and we had a firm deadline to close on February 1, 2021. Fortunately, my background is in building ventures across different businesses at Bank Mandiri, so I have pretty broad experience and an understanding of different challenges. In fact, I love the challenges of a PMO [project-management office]; I think it’s in my DNA. I love building; I love the adrenaline. I think this helped as the project moved forward and we transitioned from a PMO to an IMO [integration-management office]. It certainly helped me think about how to balance the management of work streams. With exceptions for matters that we had established at the start as having to be elevated to me, every single work stream was not only held accountable for accomplishing a set list of tasks but also empowered with the authority to accomplish those tasks.
The second point I constantly wanted to communicate is a feeling of family: we’re all in this together. I tried always to articulate that the benefits are much greater than the pain. Our employees recognize the positives and bring that spirit to work. They recognize the positives of working in a bigger, better bank. These positives are not just that we can bring the best of each bank’s business model, which are quite significant—the legacy BRIS bank is a leader in SME [small and medium-size enterprises] and microfinance; legacy BNIS is strong in mortgages and credit cards; BSM is a leader in wholesale banking—but also that we’re now bringing together the best of each bank’s capabilities, from risk management to talent management. And of course, we’re dramatically improving our digital technology and platform for mobile banking.
Our employees appreciate that because of the merger, we’re a better bank. They appreciate working for one of the flagship banks in Indonesia. That feeling also connects with a sense of national purpose: building BSI taps into a new energy for Indonesia. Our employees see not only that they are benefiting economically but that we are all, together, benefiting Indonesia’s economy and creating economic advantages for more people.
McKinsey: What has been the response from customers?
Hery Gunardi: The response has been especially positive from customers, particularly for Islamic banking products. Frankly, a common past perception from customers had been [that these were] small banks, with complicated products—and they were reluctant to use Islamic banking. But now, the perception is changing dramatically.
It’s not just that our branding is better, though it is much better: we have a bright, sharp color scheme and an improved branch experience and layout. Don’t underestimate how important a nice branch is to a large segment of our customers, particularly older customers, and how informed they are about good services, competitive products, and competitive prices. But it’s not just that the physical experience is sharper. Our product portfolio is sharper. It’s now much more simplified. Think about this: we merged three banks and halved the total number of products.
We want the user experience for Islamic banking products to be easy and customer friendly. And by the way, Islamic banking products are not just for Muslims; the social principles are inclusive and universal. For example, we are part of what I’d call a “global sukuk”; a sukuk is analogous to a bond but in line with Islamic spiritual values and banking principles. With a global sukuk, enterprises in Indonesia or in the Middle East or worldwide have access to funding with the assurance of a strong Indonesian bank: BSI. In fact, as a practical matter, our products can be used by everyone in everyday transactions, including for trading, leasing, mortgages, and sector finance. We have or are discussing products such as ijarah, Syariah-compliant leasing; murabaha, cost-plus financing; musharaka, a form of profit-and-loss sharing; and other solutions. Some of the most exciting solutions are in sector finance. And the opportunity for future product improvement is still wide open as we optimize our Syariah wholesale-banking and retail-banking offerings.
McKinsey: How are digital and mobile banking affecting Syariah banking?
Hery Gunardi: The changes are transformative; we are entering a new era in Islamic banking. BSI is optimizing and dramatically improving our customers’ Islamic banking experience. For example, customers can click on a product and see the underlying Syariah principles and learn more about them—and have translations between Bahasa and Arabic. Customers can not only use the basic features, such as opening up accounts or making payments, but also have access to what I’d call “spiritual” features: seeing prayer times; seeing qibla, or the direction toward Mecca, for prayer; being able to contribute to charities through an app; and being part of a community.
Syariah banking is a very broad, deep, spiritual value proposition. It’s also one that spans borders. We are the largest Muslim-majority country, but even with a country as large as ours, we’re conscious that Islamic banking is a global proposition. Of course, we’re mindful of other banks that operate in Indonesia, and we respect them. But with Islamic financial products in a digital world, our ultimate competition is not here—or not only here—in Indonesia.
The opportunities for BSI, its customers, and Indonesia are local and international. BSI will be the first bank from Indonesia to have a representative office in the Middle East: we plan to open a representative office in Dubai, and we are in the final stages of obtaining permission from the Dubai Financial Services Authority [DFSA] to open that representative office. As Indonesia’s largest Islamic bank, we hope to realize the full potential of the world’s Islamic markets. We want to be among the main players in encouraging and growing Indonesia’s Syariah economy so that Indonesia itself can become a major figure in the global Syariah economy. The presence of BSI in Dubai is an international step, and a strategic step: BSI is building its track record abroad. Our mission is to become a top ten global Islamic bank, in terms of market capitalization, by 2025.
Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.