Spin-Off UUS: Sowing Strength Amidst Potential Vulnerability

The discourse that has emerged in recent weeks concerns a fundamental question: does the mandatory spin-off of Islamic Banking Units (UUS) risk creating a series of small-scale Islamic banks in the coming years? The question is simple yet fundamental: will this new configuration prove to be a blessing in the form of an Islamic banking network closer to communities, or will it instead be a new chapter of vulnerability in a financial system whose market share still hovers between 7%-8%?

Behind the frequently cited asset threshold of Rp50 trillion and the 50% parent asset limit lies a larger agenda: what are we truly aiming to achieve through the new architecture of Indonesian Islamic banking?

In public discourse, this issue is often oversimplified into a matter of “compliance or non-compliance with regulations”. Yet the UUS spin-off is not merely a technical matter of asset separation, but concerns the design of industry structure, the division of roles between large and small banks, and how our policies bridge Islamic idealism with market reality.

When law, structure, and market culture converge

Lawrence M. Friedman reminds us that a legal policy is effective only when three things function in harmony: institutional structure, the text of regulations, and the culture of the actors involved. In the context of the UUS spin-off, structure is filled by the OJK as regulator, the banking industry as actor, and coordinating bodies such as KNEKS that weave together the national Islamic economy agenda.

The substance of regulations is reflected in the shift from the regime of Law 21/2008 to Law P2SK and OJK Regulation Number 12 of 2023, which establishes asset thresholds and spin-off criteria. What often goes unnoticed is the cultural dimension: how some banks choose to “restrain” UUS growth to avoid quickly reaching the spin-off threshold, whilst the public hopes the Islamic economy will soon “move up” and become more present in daily life.

The tension between corporate caution and social expectations means that regulations that appear progressive at the policy table do not necessarily feel like a healthy new breath for the industry in practice.

If these three dimensions—structure, substance, and culture—are not aligned, what emerges is not a robust ecosystem, but a fragmented industry structure: the number of players increases, but many are weak, costly to supervise, and ultimately struggle to fulfil the original promise of the spin-off to strengthen Islamic banking itself.

Many small banks: strength or vulnerability?

From an industrial organisation perspective, the Structure-Conduct-Performance (SCP) paradigm explains that market structure (number and size of banks), behaviour (pricing strategies, financing, innovation), and performance (efficiency, stability, profitability) are interconnected. The mandatory spin-off will clearly change this structure: the number of Islamic banks increases, and most new players potentially fall into the KBMI 1 class with limited assets.

On paper, an increase in players can trigger competition, expand reach, and accelerate product innovation. In practice, much research shows that banks that are too small often face several challenges, such as high fixed costs of technology and compliance, limited capital to bear risk, and difficulty competing on price with larger banks.

If spin-off produces many small Islamic banks without clear business models and shared infrastructure support, our market structure could shift towards “many but weak”. However, this picture need not end pessimistically.

Small banks can actually become a strength if positioned as focused niche players, for instance as Islamic community banks close to micro, small and medium enterprises, the agribusiness sector, or certain halal ecosystems, leveraging lightweight and agile technology, and networking with large banks as funding anchors.

From this perspective, the proliferation of small banks is not an end in itself, but a consciously chosen way to reach groups that have hitherto been difficult for large banks to serve, without compromising the overall stability and efficiency of the system.

Testing policy against justice, certainty, and benefit

Gustav Radbruch offers three lenses for evaluating policy: justice, legal certainty, and benefit. Justice means UUS is given a fair opportunity to move up the scale to become a general Islamic bank, whilst also providing stronger protection for customers through clear separation of business between conventional and Islamic operations. Certainty arises when asset thresholds, procedures, and the spin-off timeline are regulated transparently, as in Law P2SK and POJK 12/2023.

The hardest test lies in benefit. Does the spin-off and the emergence of new Islamic banks truly expand productive financing, increase inclusion, and strengthen Islamic banking’s contribution to the real economy, or does it merely add to a list of bank names without substantive change in the field?

If the second scenario occurs, then using Radbruch’s lens, the policy needs correction at the implementation level, not by changing the regulatory text, but through a consolidation roadmap, strengthened governance, and infrastructure support that reduces the operating costs of small banks.

Beyond the Islamic label towards genuine benefit

Within the maqashid syariah framework, the ultimate goal of policy in the financial sector is to deliver benefit and minimise harm, including protection of public wealth. If the UUS spin-off produces many small yet fragile banks, easily shaken and prone to governance failures, it could actually increase harm to public deposits and confidence.

Conversely, a spin-off accompanied by capital strengthening, risk management improvements, and integration with Islamic social finance programmes can make new Islamic banks real channels for reducing inequality and strengthening the productive sector. At this juncture, the quality of implementation matters far more than the label of spin-off itself.