ABSTRACT
In December 2023, the market share of Islamic banking in Indonesia reached 7.38%. To support the growth of Islamic banking, Islamic Banking Law No. 21/2008 required conventional banks with Islamic windows to undergo a spin-off after 15 years of the law's enactment (2023) or when their assets reached 50% of their parent banks’ total assets. This mandatory spin-off sparked debate, as many Islamic windows opposed it due to concerns that it would result in numerous small, fully-fledged Islamic banks with limited capital and a shortage of skilled human resources. This paper assesses the spin-off policy using interpretive policy analysis, focusing on arguments from key stakeholders, particularly regulators and industry players. The findings reveal differing perspectives: regulators prioritised quantitative growth, while industry players emphasised quality. This debate was resolved by amendment of the spin-off requirement in Law No. 4/2023 on the Development and Strengthening of the Financial System (P2SK Law), changing the spin-off from a mandatory obligation to an optional strategy. Islamic windows are now only required to spin off if their assets reach 50% of their parent banks’ assets. This policy adjustment reflects a more flexible approach, accommodating the dynamic growth of the Islamic banking sector and promoting greater efficiency in supporting Sustainable Development Goal 8: Decent Work and Economic Growth.
