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LEGALITY: JURNAL ILMIAH HUKUM
Journal homepage: http://www.ejournal.umm.ac.id/index.php/legality

Local Government’s Role in Aceh’s Sharia
Banking Transition: Legal and Institutional
Perspectives
Istianah Zainal Asyiqin1*, Yanis Rinaldi2

1 Faculty of Law, Universitas Muhammadiyah Yogyakarta, Bantul, Yogyakarta, 55183, Indonesia
2 Faculty of Law, Universitas Syiah Kuala, Banda Aceh, Aceh, 23111, Indonesia
*Corresponding Author: istianah@umy.ac.id

Abstract

Article
Keywords:
Sharia Economy; FPIC
Principle;
Local
Governance; Indigenous
Legal
Framework;
Indigenous Communities.

This study examines the Aceh Government’s authority in converting conventional
financial institutions into Sharia-compliant entities under Aceh Qanun No. 11
of 2018 and evaluates its practical implementation. Employing a normative legal
research approach, the study analyses statutory regulations, legal principles, and
doctrinal interpretations while incorporating historical context and relevant
precedents. The findings confirm that the Aceh Government is legally mandated to
oversee this financial transformation. However, several critical challenges impede
its execution, including inadequate infrastructure, limited Sharia-compliant
financial products, restricted access to Sharia banking capital, minimal adoption
by non-banking financial institutions, and low financial inclusion. Among these,
Article History
the lack of financial infrastructure and product diversity emerge as the most
Received: Jan 18, 2025;
significant obstacles. To enhance the effectiveness of this transition, strategic
Reviewed: Feb 2, 2025;
interventions are necessary. These include expanding Sharia banking
Accepted: Apr 8, 2025;
infrastructure, introducing diversified and innovative financial products, facilitating
Published: Apr 11, 2025.
broader capital access for Sharia-compliant financial institutions, and
strengthening financial literacy programs. A multi-stakeholder approach,
integrating government agencies, financial institutions, and the community, is
essential to establishing a robust and sustainable Sharia financial system in Aceh.
Copyright ©2025 by Author(s); This work is licensed under a Creative
Commons Attribution-ShareAlike 4.0 International License. All writings
published in this journal are the authors' personal views and do not represent
the views of this journal and the author's affiliated institutions.

INTRODUCTION
The transformation of Aceh’s financial institutions under Aceh Qanun No. 11
of 2018 represents a major step forward in the province’s efforts to comprehensively
adopt Islamic Sharia. The Aceh government, financial institutions, and stakeholders

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must work together to overcome implementation challenges and realise the objective
of a Sharia-compliant economic system for the Qanun to succeed despite the strong
legal basis it provides for this transformation (Sulistiani et al., 2023).
As a province with special autonomy within the Unitary State of the Republic of
Indonesia, Aceh holds a unique legal status that allows it to implement Islamic law
(Sharia) comprehensively. This distinction is rooted in its historical background and
the socio-political developments that have shaped its governance. The formalisation
of Aceh’s authority to enforce Islamic law was reinforced through the Helsinki
Memorandum of Understanding (MoU) in 2005, which ended a prolonged conflict
between the Indonesian government and the Free Aceh Movement (GAM). This
agreement led to the enactment of the Aceh Governance Law No. 11 of 2006, granting
Aceh greater autonomy in religious, educational, and economic affairs, including the
implementation of Sharia-based financial regulations (Bakry et al., 2021).
A critical aspect of Aceh’s Sharia governance is its economic framework,
particularly in the financial sector. The enactment of Aceh Qanun No. 11 of 2018
concerning Sharia Financial Institutions mandated the full transition of financial
institutions from conventional banking to Sharia-compliant operations (Zada, 2023).
This regulation required all financial entities in Aceh to convert their systems within
three years, aiming to establish a fully Sharia-based financial ecosystem by January
2022. This transformation represents a significant shift in the province’s economic
structure, aligning local financial practices with Islamic legal principles (Zouari &
Abdelhedi, 2019).
However, despite the legal mandate, the transition process has encountered
several challenges, including the limited availability of Sharia-compliant banking
products, infrastructural deficiencies, low financial literacy, and restricted access to
capital for businesses and financial institutions (Hidayatullah & Yusuf, 2024).
Additionally, conventional banks operating in Aceh were required to restructure their
operational models, which posed both regulatory and economic difficulties. The
success of this transition depends on the effectiveness of government policies, the
readiness of financial institutions, and public acceptance of the new financial system
(Kantika et al., 2022).
This study aims to analyse the implementation of Aceh Qanun No. 11 of 2018,
focusing on the challenges faced by financial institutions, businesses, and the general
public. It seeks to answer key research questions: To what extent has the transition to
Sharia banking been successful? What are the primary obstacles in the implementation
process? How effective is government intervention in facilitating this transition? By
employing a normative legal research approach, this study examines statutory
provisions, regulatory frameworks, and the broader socio-economic impact of Sharia
banking in Aceh. Through this analysis, the research aims to provide insights into the

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effectiveness of policy implementation and propose strategic recommendations to
enhance the sustainability of Sharia financial institutions in Aceh.
METHOD
This study uses normative legal research methodology with comparative,
historical, and juridical-normative approaches (Al-Fatih, 2023). The comparative
approach analyses the transformation of conventional financial institutions into
Islamic financial institutions in Aceh by identifying best practices from other regions.
The historical approach examines the evolution of legal norms underlying Aceh Qanun
No. 11 of 2018 concerning Islamic Financial Institutions. The juridical-normative
approach assesses legal norms in Indonesian financial regulations and Islamic legal
principles. Primary data sources include Aceh Qanun No. 11 of 2018, national financial
regulations, and DSN-MUI fatwas, while secondary sources include academic
literature, previous studies, and government reports. Data was collected through
document analysis, literature review, and expert interviews. Data analysis was
conducted qualitatively with content analysis to examine legal texts, comparative legal
analysis to see similarities and differences in regulations, and thematic analysis to
identify key issues such as policy gaps and best practices. The research findings aim to
provide strategic recommendations for optimising Islamic financial integration in Aceh
and overcoming existing regulatory challenges.
RESULTS AND DISCUSSION
The Application of the Dual Banking System within the National Financial
Framework

Revising Law No. 7 of 1992 through Law No. 10 of 1998 marked a pivotal
moment for Islamic banking in Indonesia. This amendment provided a comprehensive
legal framework, facilitating the coexistence of conventional and Islamic banks within
a dual banking system. By explicitly recognising Sharia-compliant financial institutions,
the law encouraged their growth and integration into the national financial
infrastructure (Andika et al., 2021). Under this framework, conventional commercial
banks were allowed to offer Sharia-based financial services by establishing dedicated
branches, converting existing ones, or creating separate Islamic business units.
However, Islamic banking remained closely linked to conventional institutions due to
the dual banking system. Law No. 21 of 2008 was enacted to address this limitation,
strengthening the legal foundation for independent Islamic banking operations
(Koyyimah et al., 2023).
This legislation is intended to enhance the institutional and operational
landscape of Islamic banking by embedding Sharia principles into financial
transactions (Hidayat et al., 2022). It introduces a profit-and-loss sharing mechanism
that aligns with Islamic values, emphasising ethical investment, discouraging
speculative activities, and promoting fairness. By prioritising equity, Islamic banking

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contributes to sustainable economic growth while upholding moral and social values
(Hirsanudin & Martini, 2023).
As part of Indonesia’s dual banking model, Islamic banking offers diverse
products and services, expanding financial accessibility. The Indonesian Banking
Architecture incorporates this system to provide inclusive financial services,
supporting national economic development by mobilising funds across various sectors.
Bank Indonesia envisions a modern, inclusive, and accessible Islamic banking system
for all Indonesians (Maf’ula & Mi’raj, 2022). Despite their distinct operational
principles, Islamic and conventional banks compete for financial resources, particularly
in deposit attraction. Customers often transfer funds between systems based on market
conditions (Aulia Fitria Yustiardhi et al., 2020).
For instance, when interest rates fluctuate, some prefer the profit-sharing
mechanisms of Islamic banking, while others seek higher returns in conventional
banking. This competitive dynamic showcases the adaptability of customers and the
growing appeal of Islamic financial products (Amaliyah & Hartono, 2022). However,
Islamic banking remains constrained by financial literacy gaps and limited inclusion.
Many Indonesians are unfamiliar with Sharia financial principles, reducing
participation (Che Arshad & Nurfadilah, 2017). The government and financial
institutions have launched initiatives such as literacy campaigns, educational programs,
and digital banking services tailored to Sharia compliance to address this. For example,
Bank Indonesia and the Financial Services Authority (OJK) promote Islamic banking
through public seminars, digital finance innovations, and microfinance programs for
underserved communities (Affandi et al., 2024).
Islamic banking prohibits riba (usury practices) and speculative transactions,
operating instead on profit-sharing models to finance trade, sales, and services. Unlike
conventional banks, Islamic banks treat financial distributions as partnerships rather
than loans. The dual banking system mitigates systemic risks by diversifying financial
activities and enhancing economic stability (Karbhari et al., 2020). Indonesia’s Islamic
Banking Law facilitates this system through conversions of conventional banks,
establishment of Sharia business units, and integration of Sharia-compliant financial
windows within existing institutions (Sutikno et al., 2022). With continuous regulatory
support and financial literacy efforts, Islamic banking in Indonesia has the potential to
expand further, providing ethical and inclusive financial solutions while
complementing the broader national banking system (Aliyu et al., 2017).
Legal Framework for Sharia Financial Institutional in Aceh

The implementation of Qanun No. 11 of 2018 by the Aceh Government
represents a significant legal shift towards establishing Sharia-compliant financial
systems. This framework provides the foundation for Sharia Financial Institutions
(Lembaga Keuangan Syariah/LKS), but its effectiveness in achieving its objectives—
particularly financial inclusion, investor attraction, and societal acceptance—requires

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careful evaluation. While the law is designed to enhance the Islamic economic system
in Aceh, its practical impact is influenced by how well it integrates Islamic banking
principles with the region’s financial needs and business practices (Alidar et al., 2024).
The transition from a dual banking system to a fully Sharia-compliant model raises
critical questions about the legal and economic outcomes, including whether it can
meet the expectations of the broader population and attract both local and
international investors.
With its strong Islamic identity, the Acehnese community generally supports the
transition. However, the law has sparked concerns, especially among businesses,
financial consumers, and non-Muslim residents. Public perception plays a pivotal role,
with some seeing the policy as an important step for the region’s economic
development. In contrast, others worry about the accessibility of financial services, the
efficiency of service delivery, and the availability of diverse financial products. This
raises concerns about the compatibility of the law with the region’s broader economic
goals and whether it can expand financial inclusion, particularly for non-Muslim
residents and marginalised groups (Zamharira et al., 2024).
Financial literacy is a serious challenge. Sharia banking principles, such as profitsharing (mudarabah) and joint ventures (musharakah), remain unfamiliar to many
individuals and businesses, which can hinder participation in Sharia-compliant
financial systems (Alqarni et al., 2024). Without adequate financial education,
misconceptions may limit engagement, reducing the overall effectiveness of the law in
fostering a more inclusive economy (Ibrahim & Ismail, 2020). Moreover, the
mandatory nature of the law, which requires non-Muslims to engage with Sharia
banking, raises legal concerns regarding religious freedom and whether such
requirements are compatible with the constitutional and human rights principles that
guarantee individual freedoms and equal treatment (Asyiqin & Alfurqon, 2024).
To evaluate the legal framework's effectiveness, assessing its compatibility with
national laws, including Indonesia's Constitution and human rights standards, is
essential. This includes considering whether the Qanun's provisions respect the rights
of non-Muslims and whether its mandatory nature could face legal challenges related
to religious freedom. Furthermore, the law's ability to attract investment and support
economic development in Aceh requires a closer examination of its economic impact,
including its role in fostering investor confidence and creating a competitive financial
environment (Karbhari et al., 2020).
Several strategies are required to address societal concerns and ensure the
success of the policy. Strengthening public awareness through comprehensive financial
literacy campaigns can help build trust in Sharia-compliant financial products and
services. Additionally, expanding the variety of Sharia-compliant financial products to
cater to different sectors and community needs can make the transition smoother for
businesses and individuals (Indrawati, 2021). Fostering inclusive dialogue between

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policymakers, financial institutions, and non-Muslim communities is also crucial for
ensuring the law accommodates the needs of all residents. Lastly, technological
innovations such as digital banking can increase accessibility, especially for rural areas
with limited infrastructure.
By addressing these legal, cultural, and economic considerations, the
implementation of Qanun No. 11 of 2018 can move beyond legal compliance to create
a reinforcing and inclusive Sharia financial ecosystem in Aceh. However, for this to
succeed, the law must be evaluated within the broader context of Indonesia’s legal
framework and its alignment with Islamic economic principles, ensuring it is effective
and fair in achieving its financial inclusion and economic development goals.
Aceh Government Authority in Changing Financial Institutions Conventional to
Sharia Financial Institutions

In this context, transformation refers to restructuring an existing financial
system that adheres to a more advanced or entirely new framework, such as converting
conventional financial institutions into Islamic financial institutions. This process
entails a fundamental legal and operational shift, aligning with Sharia principles to meet
regulatory and societal expectations (Jan et al., 2023). As pivotal components of
Indonesia's economic infrastructure, financial institutions significantly influence the
nation's economic development. Aceh mirrors these economic dynamics as an integral
part of Indonesia while incorporating its unique legal and cultural context. The
enactment of Aceh Qanun No. 11 of 2018 concerning Islamic Financial Institutions
exemplifies this transformation by mandating that all conventional financial entities
operating within Aceh conform to Islamic law principles. This legal directive
underscores the region's commitment to fostering a Sharia-compliant financial
ecosystem, ensuring its economic development is rooted in ethical and equitable
practices prescribed by Islamic jurisprudence (Kurniawan et al., 2023). The authority
of the Aceh Government to transform conventional financial institutions into Islamic
financial institutions is granted by Law No. 11 of 2006 concerning the Government of
Aceh, as outlined in Article 155, paragraph (1) said "The economy in Aceh is focused on
enhancing productivity and competitiveness to achieve prosperity and the well-being of the populace.
This is achieved by maintaining Islamic values, justice, equality, the participation of the public, and
efficiency within a sustainable development framework.”
By the authority provided by Law No. 11 of 2006 concerning the Aceh
Government, the Aceh Government established Qanun No. 8 of 2014 concerning the
Principles of Islamic Sharia. Specifically, Article 21, paragraph (1), addresses the
regulation of Sharia financial institutions, stipulating “Sharia principles must be the
foundation of financial institutions operating in Aceh."
The enactment of Qanun No. 11 of 2018 provides a robust legal foundation for
the Aceh Government's authority to mandate the transformation of conventional
financial institutions into Islamic ones. This regulatory framework plays a pivotal role

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in advancing the strategic development of the Islamic banking sector within the region.
By leveraging this authority, the Aceh Government has positioned Islamic financial
institutions as central facilitators of financial transactions within the provincial
administration and at the district/city levels. The comprehensive implementation of
Qanun No. 11 of 2018, which obliges all financial institutions to operate following
Sharia principles, underscores Aceh's commitment to fostering a dynamic and ethically
grounded Islamic financial ecosystem. This regulatory milestone supports the rapid
expansion and institutionalisation of Islamic banking in Aceh and establishes the
region as a model for the broader implementation of Sharia-compliant banking
systems. Such an approach promotes integrating Islamic values into economic
practices while enhancing financial inclusion and sustainability (Umuri et al., 2023).
Establishing Islamic financial institutions necessitates a comprehensive legal
conversion process, reflecting a fundamental shift in financial entities' operational and
regulatory framework. This transformation policy significantly impacts banks' ability
to comply with banking regulations while providing financial services that adhere to
Islamic principles. Beyond the legal restructuring, the policy encompasses critical
elements such as management frameworks, supervisory mechanisms, financial
performance metrics, operational strategies, and corporate governance standards. The
enactment of Qanun No. 11 of 2018 concerning Islamic Financial Institutions has
further accelerated this transition, mandating the conversion from conventional
financial institutions into Sharia-compliant entities. Article 2, paragraph (1) of Qanun
No. 11 of 2018 stipulates that all financial institutions operating within Aceh are
required to align their operations with Islamic law. This regulation reinforces the legal
obligation for Sharia compliance and signifies a transformative shift in Aceh’s financial
landscape, promoting ethical financial practices and fostering an inclusive Islamic
economic system “Under Sharia principles, all financial institutions are required to execute
transactions that are consistent with their operational base.”
This refers to conventional financial institutions that are in the process of
transforming or converting. They recognise that the scope of their core activities or
business in Aceh is becoming more limited. Therefore, they must take the necessary
steps to adapt to this situation. As a result, several changes have been made, primarily
focusing on altering the transaction mechanisms to ensure they comply with Sharia
principles.
In 2008, a trend emerged of converting conventional banks into Islamic ones
through three methods: 1) the Sharia Business Unit (SBU) of a conventional bank
acquires and converts a smaller bank into an Islamic bank, merging it with the SBU; 2)
a conventional bank without an SBU acquires and converts a smaller bank; 3) a
conventional bank spins off to create a new Islamic bank. This conversion process is
regulated by Bank Indonesia Regulation No. 11/15/PBI/2009, which sets the

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procedures for aligning operations with Sharia principles, subject to Bank Indonesia
approval.
The bank must seek approval from Bank Indonesia. This process involves
submitting an application that includes a business plan, a feasibility study on market
opportunities and economic potential, a plan for settling customer rights and
obligations, information on prospective controlling shareholders, members of the
board of commissioners, directors, and the Sharia Supervisory Board, as well as a draft
amendment to the articles of association, as specified in Article 14, paragraph (1).
According to Article 16, a conventional bank authorised to transition into an Islamic
bank must incorporate the term "Syariah" in its name, logo, documents, products, and
office networks. Once the conversion permit is granted, the bank must begin operating
under Sharia principles within 60 days. Additionally, Article 18 stipulates that the
conventional bank must settle its rights and obligations from conventional operations
within one year of the conversion approval. In Aceh, three state-owned banks have
undertaken the conversion procedure from conventional banks to Islamic banks (Din
& Abubakar, 2021):
1. In Purwokerto, Central Java, on December 16, 1895, Bank BRI Syariah (Bank
Rakyat Indonesia) was established. BRI is the first government bank in Indonesia,
as outlined in Government Regulation No. 1 of 1946. BRI converted its name to
PT Bank Rakyat Indonesia (Persero) Tbk and was listed on the Indonesia Stock
Exchange (IDX) in 2003. The public possesses 30% of BRI, while the state
currently holds 70%.
2. Bank BNI Syariah (Bank Negara Indonesia), established on July 5, 1946, serves all
levels of society and supports Indonesia's increasingly strategic economy.
Currently, BNI operates over 1,000 branches in Indonesia and eight branches
abroad. BNI also owns subsidiaries such as BNI Syariah and BNI Securities.
3. Bank Mandiri Syariah, a banking institution in Indonesia, operates under the name
Mandiri Syariah. Founded in 1955 as Bank Industri Nasional, the bank underwent
several name changes, finally becoming Bank Syariah Mandiri in 1999, after
previously being known as Bank Susila Bakti, owned by the Welfare Foundation
of the Employees of Bank Dagang Negara and PT Mahkota Prestasi. This year,
Bank Mandiri Syariah has been engaged in Islamic banking operations after
previously being a conventional bank.
Implementing Aceh Qanun No. 11 of 2018: Advancing Sharia Financial Practices in
Aceh

The creation of a Qanun is generally influenced by the social, political, and
economic context of the community and must remain consistent with the boundaries
set by the Qur’an and Hadith in addressing social issues. Nonetheless, any Qanun
enacted must also align with Indonesia’s constitutional framework (Zulkarnaini et al.,
2023). The formulation and implementation of Qanun No. 11 of 2018 concerning

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Islamic Financial Institutions in Aceh comply with national constitutional
requirements, granting it legal legitimacy within Indonesia’s legal hierarchy. However,
its implementation in the financial sector has become a subject of debate due to the
sector’s complexity and the transformative nature of this regulation. Hence, there is a
critical need to deepen the understanding of its application, particularly due to its
strong connection to regional economic challenges (Din & Abubakar, 2021).
One of the primary functions of this Qanun is to govern Aceh’s transition from
conventional to Islamic banking under the framework of special autonomy granted by
the Indonesian government. This autonomy allows Aceh to regulate economic matters
within its territory, prompting the transformation of conventional banks into Islamic
banks. While some argue that this regulation is appropriate—given Aceh’s strong
Islamic values that resonate with the principles of Islamic economics—others highlight
the disruptive nature of such a significant systemic change, especially in a region long
accustomed to conventional financial practices (Alqarni et al., 2024).
Aceh’s approach to implementing Islamic banking through Qanun No. 11 of
2018 primarily involved a conversion mechanism. Indonesia provides two main
models for such conversion: the "spin-off" model—where an Islamic business unit is
separated from its parent conventional bank—and the full conversion of a
conventional bank into an Islamic bank (Budiman, 2021). Article 1, Number 32 of Law
No. 21 of 2008 concerning Islamic Banking defines the “spin-off” and is supported by
Article 68, which mandates such separation when the assets of the Islamic unit reach
50% of the parent bank’s total assets. This process has been observed in major banks
such as PT Bank Negara Indonesia and PT Bank Rakyat Indonesia, which are driven
largely by regulatory pressures (Tiara et al., 2023).
Different models of conversion have also been employed. PT Bank Mandiri
Syariah transitioned into an Islamic bank through acquisition, evolving from PT Bank
Susila Bakti into the second Islamic bank in Indonesia after PT Bank Muamalat.
Meanwhile, PT Bank Aceh undertook a full institutional transformation from a
conventional to an Islamic bank. The Financial Services Authority (OJK) introduced
Regulation No. 28/POJK to support such transformations.03/2019 concerning
Banking Synergy in Single Ownership to expand the scope and service capacity of
Islamic banking. Prior to this, regulations like Bank Indonesia Regulation No.
15/13/PBI/2013 had already governed Islamic Business Units, though with limited
operational flexibility (Yuspin et al., 2023).
The 2013 Synergy Banking regulation permitted conventional bank branches to
offer Islamic banking services under the Islamic bank’s name, provided that
certification from Bank Indonesia was obtained (Article 19). This requirement ensured
operational clarity and brand distinction and reduced risk by mandating that Islamic
services be co-located with the parent bank’s branches. Additionally, it introduced

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technical and spatial standards for office usage and branch management (Yusmalinda
et al., 2022).
Despite the comprehensive nature of Aceh's implementation, the discussion
would benefit from comparative analysis with other regions or countries that have
adopted Islamic banking systems. For instance, Malaysia has adopted a dual banking
system, allowing Islamic and conventional banks to coexist while gradually
strengthening Islamic financial institutions through a robust regulatory and
infrastructural framework. Similarly, in Pakistan, the State Bank of Pakistan actively
promotes Islamic banking through phased transitions and dedicated legal instruments.
These comparative cases offer valuable insights: Malaysia demonstrates how Islamic
banking can thrive within a plural financial ecosystem, while Pakistan shows the role
of strong central oversight and public acceptance. By contrast, Aceh’s transition
appears more abrupt and localised, emphasising regulatory mandates over gradual
adoption and market-based incentives. Therefore, this comparison highlights the
uniqueness of Aceh’s Islamic financial transformation and the need for continuous
policy refinement, particularly regarding regulatory mechanisms, institutional
readiness, and public engagement.
According to OJK regulations, the transition from conventional to Islamic banks
must be gradually implemented. The Qanun on Islamic Financial Institutions
mandates that all banks operating in Aceh offer Islamic banking services. Additionally,
institutions within Aceh's jurisdiction are required to adhere to the legal framework set
by the Aceh government (Wahyuni et al., 2021). Consequently, all conventional banks
in Aceh are obligated to operate based on Islamic banking principles, establishing a
standardised governance system across the region (Maf’ula & Mi’raj, 2022).
One of the challenges that the Aceh government has faced to date is the
implementation of the Sharia Financial Institutions (LKS) Qanun, which include (Jihad
et al., 2024) limited financial inclusion in Aceh. The government ensures that financial
services are accessible to all members of society by implementing financial inclusion
programs. The public's capacity to utilise financial services, the alignment of financial
services with the public's requirements, the impact after the community receives
financial services, and limitations in financial service access are all components of the
financial inclusion process. Ensuring financial inclusion necessitates accessibility. By
expanding financial services, it is anticipated that small and medium-sized enterprises
(SMEs) will have an easier time securing capital. The National Vision for Financial
Inclusion is designed to generate economic growth, poverty reduction, income
equality, and the stability of the financial system in Indonesia by establishing a financial
system accessible to all segments of society. Financial inclusion's objectives are as
follows:

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a. To incorporate inclusive finance strategies into the broader economic
development, poverty reduction, income equality, and financial system
stability strategies.
b. To provide financial products and services specifically designed to meet the
needs of the public.
c. To enhance the public's understanding of financial services.
d. To enhance the availability of financial services.
e. To enhance the collaboration among non-bank financial institutions, banks,
and microfinance institutions.
f. To optimise the utilisation of information and communication technology
(ICT) to improve the accessibility of financial services.
Three categories of the population still lack access to financial services:
1. The most impoverished of the impoverished
The poorest population who do not have a source of income due to factors like
illness or physical disability.
2. Low-Income Poor
People with limited access to all types of financial services, including those
working in low-wage, seasonal, or informal sectors like agriculture.
3. Working Poor
This group comprises the poor who earn enough to meet their basic needs
through informal sector work.
Additionally, there are three cross-category groups without access to financial
services:
1. Domestic and International Migrant Workers
Indonesia is the third-largest recipient of remittances in the Asia-Pacific region.
Approximately 80% of migrant workers (TKI) are women, and over 85% are
employed in the informal sector. These workers frequently require secure and
cost-effective financial services to ensure they can send money back home often
located in remote regions. (Zulkarnaini et al., 2023.
2. Women
In numerous developing countries, there are substantial gender disparities in the
availability, demand, and selection of financial services. Savings accounts are
accessible to men and women in Indonesia. Nevertheless, males establish
accounts predominantly for credit purposes, while women do so for future
requirements. Women typically favour education insurance, while males tend to
consider life insurance and, to a lesser extent, property insurance.
3. Population in Remote Areas
Approximately 52% of Indonesia's population resides in rural regions, with
approximately 60% lacking access to financial services. Rural areas are home to
64% of the 12.49% of the population that lives below the poverty line. The

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significance of a national inclusive financial strategy prioritising those in remote
areas is underscored by these statistics and Indonesia's geographical conditions as
an archipelago. Information and communication technology, such as mobile
money, can facilitate transfers and payments between rural, urban, and island
areas, thereby partially addressing this category's disparity in financial service
access.
The Aceh government also encourages the public to switch to Islamic finance,
as this system applies justice principles. According to Bank Indonesia's research,
Aceh's financial literacy rate is just 32.7%, meaning only 23 out of 100 people in Aceh
are financially literate. However, financial inclusion in Aceh is 73%, meaning 73 out of
100 people interact with financial services. Meanwhile, the level of Sharia financial
literacy in Aceh is only 21%, with an inclusion rate of 41%. Through various policies,
the government aims to empower and develop businesses, especially SMEs, to
positively impact the national economy and people's livelihoods. The involvement of
SMEs can influence economic growth in Indonesia. SMEs cannot thrive alone and
require government support to keep the economy moving (Kamaly et al., 2022).
Government policies to enhance the financial capacity of small and mediumsized enterprises (SMEs) have been crucial in addressing these businesses' problems,
particularly during crises such as the COVID-19 pandemic. SMEs are vital to Aceh’s
economy, with the Department of Cooperatives and SMEs reporting a population of
74,810 SMEs in the region. However, these businesses have historically struggled with
access to financing, which has been exacerbated in times of crisis. Financial support
mechanisms such as the People's Business Credit (KUR) have provided capital to
SMEs, which helps alleviate these issues. Data from Bank Indonesia’s Aceh
Representative Office indicates that as of December 2021, SME financing in Aceh
reached IDR 8.3 trillion, with KUR disbursements accounting for IDR 2.4 trillion
(61.83% of the IDR 3.9 trillion disbursement limit). While these statistics highlight the
government's efforts to foster SME growth through accessible financial instruments,
it is crucial to critically assess the relationship between this financial support and the
effectiveness of the new Islamic banking system in the region. Implementing Shariacompliant financial systems, as mandated by Qanun No. 11 of 2018, poses
opportunities and challenges for SMEs. While financial products like KUR are
available, the shift to Islamic finance may impact how these financial instruments are
delivered. For instance, SMEs may face challenges adapting to the profit-sharing and
risk-sharing models inherent in Islamic finance, such as mudarabah and musharakah,
which differ fundamentally from conventional loan structures (Umuri et al., 2023).
Therefore, evaluating whether the existing financial support programs, like
KUR, fully comply with Islamic finance principles and whether SMEs are receiving
adequate guidance and support to transition to this system is essential. Although KUR
has provided crucial funding, its effectiveness in addressing the unique needs of SMEs

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in Aceh, particularly under the constraints of Islamic banking, requires examination.
Further research and analysis should focus on the outcomes of these financing
programs in the context of the new Sharia-compliant system and how they contribute
to the resilience of SMEs in Aceh. In other words, despite the financial data
demonstrating the government's commitment to SME growth, there is a need for a
deeper analysis of how these funding mechanisms conform to the Islamic banking
system and their broader impact on financial inclusion and economic sustainability in
Aceh. Understanding these dynamics is critical for ensuring that SMEs can thrive
within the new regulatory framework and continue to drive local economic
development.
The government’s support for SMEs extends beyond financial aid to enhancing
business adaptability, notably through the promotion of digitalisation. Many SMEs in
Aceh have joined online platforms like Shopee and Tokopedia. Additionally, the
government introduced Digipay, a platform designed to streamline government
payments and empower SMEs. While Digipay is implemented across Indonesia’s State
Treasury and Payment Service Centres (KKPN), Aceh has not adopted this payment
system since Qanun Aceh No. 11 of 2018 mandates the transition of all provincial
financial institutions to Sharia-compliant systems. Because Digipay’s implementation
in Aceh faces issues, Aceh relies on conventional financial institutions (Yahya et al.,
2023).
Islamic financial products and services align with Sharia principles, facilitating
the flow of funds between those needing financial resources and those with surplus
funds within the Islamic financial framework (Jan et al., 2023). This system integrates
two key influences: Sharia principles, rooted in the Qur'an and Sunnah, and human
reasoning, which addresses economic challenges such as management, finance, and
business. Consequently, the Islamic financial system possesses distinct characteristics,
emphasising efficient utilisation of human and natural resources to promote economic
growth (Afdal et al., 2024). However, Islam's ultimate goal is not merely substantial
economic expansion. Activities prohibited by Sharia, such as producing alcoholic
beverages, gambling, narcotics, and prostitution, are not considered legitimate means
of achieving material welfare. The Islamic economic framework prioritises equitable
prosperity and socio-economic justice, highlighting the concept of universal
brotherhood. Justice principles and solidarity are deeply embedded in Islamic
teachings, making their incorporation into monetary policy a spiritual duty to ensure
the economic well-being of society.
Interest rates serve as the foundation of the conventional financial system. The
demand for money for fundamental necessities and investments is diminished due to
efforts to regulate finances through interest rates. This will hamper the fulfilment of
the country's economic development objectives, causing instability in the monetary
sector and overall economy. It is imperative to comprehend that the health of the

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economy is affected differentially by the Islamic and conventional systems (Renie,
2021). The Islamic financial system endeavours to establish a financial system founded
on justice, benefit, unity, honesty, freedom, balance, transparency, anti-exploitation,
anti-oppression, and anti-injustice, all achieved through Islamic banking and nonbanking institutions (Sulistiawati et al., 2023).
CONCLUSION
The study highlights the significant role of Aceh's legal framework in
transitioning conventional financial institutions to Sharia-compliant ones. Through
laws like Law No. 11 of 2006, Qanun No. 8 of 2014, and Qanun No. 11 of 2018, Aceh
has laid a solid foundation for Sharia finance, focusing on eliminating exploitative
practices and promoting economic justice. These legal instruments help foster a fair
and Islamic economy, ensuring that financial activities align with Sharia principles.
However, the research also identifies ongoing challenges, particularly in financial
inclusion and literacy. To address these, the study suggests enhancing financial literacy
programs incorporating Islamic financial principles, expanding access to digital
banking services, and offering incentives to support the transition of conventional
institutions to Sharia-compliant models. Collaboration between government bodies,
financial institutions, and religious authorities is also essential for effective regulation
and implementation. This study helps understand how legal frameworks can shape the
development of Sharia finance in Aceh and offers practical strategies to overcome
barriers, ensuring the system’s alignment with Islamic principles and promoting
sustainable economic growth. The study’s findings fill gaps in understanding Sharia
finance integration while suggesting future research areas for improving financial
inclusion in Aceh.
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