In Malaysia, Islamic finance has become a cornerstone of the national economy, with Shariah-compliant assets now accounting for almost half of total banking assets. Indonesia, the world’s most populous Muslim-majority country, combines vast scale with a burgeoning fintech sector, creating an ideal environment for Islamic finance to flourish.

But today’s growth isn’t just about size – it’s about speed and adaptability. Islamic financial institutions are increasingly pressed to modernize. Legacy systems, fragmented infrastructure, and the challenge of integrating Shariah principles with digital innovation slow progress. To remain competitive, the sector must leap ahead of these obstacles and embrace tech-driven transformation.

Banking-as-a-Service (BaaS) offers an effective solution. By allowing institutions to offer advanced financial services through API-driven platforms without overhauling legacy systems, BaaS enables seamless and scalable integration of digital banking. With Malaysia and Indonesia leading the way in both technology and finance, the question remains: how will they shape the next phase of Islamic finance?

Malaysia – Leading the Charge in Islamic Finance

BaaS offers a clear path for institutions to modernize while staying true to their roots. It enables organizations like KAF Bank to introduce digital services alongside existing systems, significantly reducing time-to-market without compromising Shariah compliance. These platforms are designed with mobile-first consumers in mind, ensuring convenient, on-the-go access to financial services.

With strong regulatory support, Malaysia is seeing a resurgence in its Islamic finance sector, spurred by strategic frameworks and industry partnerships. For example, Bank Negara Malaysia’s inclusion of Islamic finance in its Financial Sector Blueprint 2022-2026 has further advanced value-based finance. Partnerships like the one between audax and Maybank Islamic are reshaping the industry, demonstrating how tradition and technology can work in harmony.

Thanks to its robust governance, progressive regulations, and the rapid adoption of BaaS, Malaysia is leading the way in digital Islamic finance. Its top ranking in the 2024 IFDI further underscores the country’s role in setting global standards where innovation and tradition thrive side-by-side.

Indonesia – Paving the Way for Financial Inclusion

Indonesia’s fintech scene is brimming with potential, yet it remains fragmented, especially when it comes to Islamic banking. While demand for Shariah-compliant services is on the rise, access remains uneven – particularly in rural and underserved areas, where banking infrastructure is lacking. This gap underscores the limitations of traditional banking models and highlights why scalable BaaS solutions are crucial to bridging Indonesia’s expansive archipelago.

BaaS makes it possible for banks and fintechs to deliver essential services like onboarding, payments, lending, and compliance through seamless APIs, driving rapid innovation. A prime example is audax’s collaboration with Standard Chartered and Bukalapak, which led to the creation of BukaTabungan – a digital banking service that offered savings accounts via a BaaS model. This initiative successfully tripled the bank’s customer base in just six months, with 98% of new customers coming from previously untapped segments.

This model offers a promising path for Islamic finance in Indonesia. By embedding Shariah-compliant services such as digital savings, investments, and zakat payments into everyday apps, BaaS can extend Islamic finance to millions who have been excluded from the formal system. Platforms like LinkAja Syariah are already making this vision a reality, demonstrating that BaaS isn’t just a digital solution – it’s infrastructure for nationwide financial inclusion.

Twin Engines, Unified Vision

While Malaysia and Indonesia are at different stages of development, they share a common goal: to drive the future of digital Islamic finance. Malaysia brings regulatory clarity and depth, while Indonesia offers unmatched scale and digital innovation. Together, these two nations are not just growing Islamic financial assets – they are revolutionizing how Shariah-compliant services are delivered in a digital-first world.

With strong regulatory support, thriving fintech ecosystems, and increasing consumer demand, both countries are poised for even greater innovation. From embedded finance to digital lending and micro-investments, both Malaysia and Indonesia are proving that regulation can drive innovation. Malaysia’s regulatory sandbox and its top IFDI ranking reflect its commitment to aligning technology with Shariah principles, while Indonesia’s FSTI framework does the same, embedding Islamic values into its digital finance strategy.

As both nations move forward, they set a powerful precedent: inclusive, technology-driven Islamic finance is not just possible – it’s already underway. Southeast Asia is no longer merely a growth market – it’s becoming the global benchmark for the future of Islamic finance.