Indonesia: Government Plan Aims To Spur Consolidation Of Islamic Banks

JAKARTA, Indonesia – Indonesia’s efforts to develop its Islamic financial market will encourage smaller Islamic banks in the country to consolidate and create a larger domestic sukuk market, said Moody’s Investors Service.

The government is preparing a five-year plan to develop Islamic finance by encouraging the three large state-owned Islamic banks ‎ to merge. It says doing so will create more efficiency and is expected to spur smaller players to link up in order to compete with the new entity.

The government is also preparing regulations that are more conducive to Islamic or Shariah banking. The details are expected to be finalized later this year.

Among Sharia business tenets is a rule that prohibits banks from earning interest. Indonesia, which has the world’s largest Muslim population, currently has 12 banks that comply with Sharia principles.

But while growth in Islamic banking has been in excess of 30% a year since 2005, when it accounted for 1.4% of the banking system, the Islamic banking sector still only captures a 5% share, said Khalid Howladar, Moody’s Global Head of Islamic Finance.

By contrast, in Malaysia, where only 61% of the population is Muslim, Islamic banks garner a 20% market share.

“The Indonesian government’s Islamic roadmap should drive growth in the sector,” Mr. Howladar said in a press release.

Financial analysts say Islamic banking in Indonesia has found it hard to grow due to a lack of support from the government, an uncertain legal environment, and a lack of skilled manpower needed to develop innovative Islamic financial products.

The government is now encouraging the fully-fledged Shariah subsidiaries of the state-owned Bank Rakyat Indonesia, Bank Negara Indonesia and Bank Mandiri to merge, creating a new unit with total assets of $8 billion. The government says it expects that the new institution will be able to quadruple Islamic banks’ market share to 20% by 2018.

The central bank and the agency that regulates and supervises the financial sector, known as OJK, are also encouraging conventional banks to spin off their 23 Shariah-compl‎iant units into fully-fledged Islamic banks.

(Indonesia Real Times / 27 May 2015)

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