The Paradox of Islamic Financial Inclusion: Literacy Does Not Equal Participation

There is good news from the 2026 National Survey of Financial Literacy and Inclusion (SNLIK), but also a paradox worth reflecting on. National financial literacy rose from 66.64% in 2025 to 69.57% in 2026. Financial inclusion also increased from 92.74% to 93.61%. Indonesia is getting closer to a point where almost the entire population has contact with formal financial services. However, a different story emerges for Islamic finance. Islamic financial literacy actually dipped slightly from 43.42% to 43.07%, whilst its inclusion rate fell from 13.24% to 13.13%. The figures may have shifted only marginally, but the message is significant: when the national financial ecosystem is becoming more inclusive, Islamic finance is not fully enjoying the momentum. This finding is even more critical because SNLIK 2026 was based on a much broader statistical base, covering 75,000 households across 38 provinces and 514 districts/cities, a major increase from the 10,800 samples in the previous survey. Literacy here does not merely measure whether someone has heard of a financial product; it encompasses knowledge, skills, confidence, attitudes, and behaviour. This raises a more fundamental question: why has knowledge about Islamic finance not yet translated into participation? The issue is shifting from a literacy gap to a conversion gap. Low penetration of Islamic finance has often been explained as a literacy problem. The simple assumption was that people do not use Islamic products because they do not understand them. The answer, therefore, was socialisation, education, seminars, campaigns, and knowledge enhancement. SNLIK 2026 invites us to re-examine this assumption. Islamic literacy has reached 43.07%, yet inclusion is only 13.24%. There is a 29.83 percentage point gap between those classified as literate and those who actually use Islamic products or services. Knowledge is not automatically translating into usage. This can be termed the Islamic finance conversion gap. From a behavioural economics perspective, humans do not always make decisions based on their knowledge and normative preferences. A person can understand the benefits of saving but still not save; understand the importance of insurance but not buy a policy; even have a preference for halal products but still choose non-Islamic financial services because they are easier, cheaper, more familiar, or available on the apps they use daily. This phenomenon is close to the intention-behaviour gap: the distance between what someone knows or intends and their actual actions. Recent research in Malaysia using the Theory of Planned Behaviour found that social-cognitive factors strongly explain the intention and adoption behaviour of Islamic banking; perceived behavioural control is an important predictor of intention, whilst intention itself strongly influences behaviour. Literacy remains important, but knowledge alone is not enough. Therefore, the challenge for Indonesia’s Islamic finance industry seems to be shifting from a mere awareness problem to a conversion problem. International comparisons clarify the issue. Malaysia did not just build its Islamic finance industry through education; it embedded it into the main architecture of the financial system. As of July 2025, its Islamic banking assets reached RM1.58 trillion, or 38.7% of total banking assets. More interestingly, Islamic financing has commanded 47.5% of the total loans and financing in the Malaysian banking system. This means Islamic products in Malaysia are increasingly not treated as an alternative product solely for Muslim consumers; they are becoming part of the mainstream financial choice. Network integration is also crucial. For illustration, CIMB Islamic leverages the operational integration and network of its parent group; by the end of 2025, Islamic financing contributed 32.1% of CIMB Group’s total financing. Pakistan offers another comparison. By the end of 2025, Islamic banking institutions had controlled about 23% of assets and 27.8% of deposits in the banking system. Its network grew by 1,545 offices in just one year to reach 7,562 branches. In the UAE, Islamic bank assets in April 2026 were around AED989 billion, or about 18% of the banking system’s assets. The government has even placed the expansion of digital services as one of the strategic elements for developing its Islamic finance industry. Türkiye shows that a large Muslim population does not automatically result in high penetration. Participation banking is growing rapidly, with assets reaching around TRY4.3 trillion by the end of 2025, but the previously targeted 15% market share for 2025 was not achieved. This experience reminds us that demography is potential demand, not effective demand. The comparison is not entirely apple-to-apple: SNLIK measures usage at the individual level, whilst the comparison figures above mainly describe the banking industry’s share. However, both illustrate the same problem from two sides: how far public preference has been successfully converted into the industry’s economic scale. The World Bank distinguishes access from usage. In a broader conception, financial inclusion concerns access to and usage of suitable and affordable services, whilst quality, financial capability, and consumer protection determine whether that access is truly beneficial. Global Findex 2025 further confirms this transformation. As many as 79% of the world’s adults now have a financial account, up from 74% in 2021. Digitalisation has made access easier, but the new challenge is whether accounts are actively used and whether they improve welfare.