Sharia Banking and the Financial Industry

State-owned bank PT Bank Negara Indonesia (BNI) has separated its sharia banking unit into an independent entity named PT Bank BNI Syariah, which officially commenced operation on June 17,2010.
BNI president director Gatot said that BNI spins off the sharia banking unit because of the rapid development of the sharia banking industry.
Rizqullah, BNI Syariah president director, said the sharia bank would focus its strength on retail banking services and consumer financing while improving the quality of its some 700 staff members through training. BNI Syariah was targeting an 15 percent growth in total financing disbursed to about Rp 3.7 trillion (US$407 million) from the position after the spin off, Rp 3.2 trillion.
BNI Syariah’s total assets now stood at Rp 5.2 trillion and expected to grow by 15 percent to Rp 6 trillion by the end of this year. The sharia bank has 420,000 customers as of May this year.

Indonesian government may offer tax incentives for Shariah bond issues and bank deposits to better compete with Malaysia, the world’s top Islamic finance market, the central bank official said on Tuesday. One sweetener being considered would help boost bank capital and another could provide a tax holiday for sukuk (Islamic bond) issues. The country has already removed double taxation on Islamic finance transactions to give the industry a level playing field with conventional banking, but new policy was needed.
To support Islamic banking and finance, it’s not enough just to have tax neutrality. We need also tax incentives like in Malaysia as islamic banking director at Bank Indonesia said on the sidelines of an Islamic-banking conference in Singapore. For investment to come into Indonesia, it is possible to give a kind of tax holiday. Islamic bank assets in Indonesia are just a fraction of total banking assets, while in Malaysia they are close to a fifth.

Indonesia’s Islamic bank assets were Rp 66 trillion ($7.2 billion) as of December, compared with Rp 2,534 trillion for the banking industry as a whole, central bank figures show. In Malaysia, Islamic banking assets totaled about $95 billion. Still, with the world’s biggest Muslim population, Islamic bankers say Indonesia is set for explosive growth. But first, authorities need to lay the right legal and regulatory framework. (more…)

Indonesia, is seen as a highly potential and growing market for Islamic banking and finance industry. Enjoying fast growth of an average of 34 percent during the last five years, the country’s Islamic banking and finance, better known as “iB finance”, is now eyeing partnerships with financial institutions with global coverage, to build strong grounds to become the hub of iB finance in Asia. A recent seminar on iB finance jointly organized by Bank Indonesia (BI), UK Trade and Investments, and HSBC Amanah, reveals that Indonesian iB finance continues to show strong performance. The business volume has reached over US$7.4 billion, though it only accounts for a 2.7 percent share of the national banking industry.

In his opening address at the seminar titled “Sharing Experiences of Indonesia-UK in Developing Islamic Finance”, BI deputy governor Muliaman Hadad said the central bank had developed the Islamic banking sector to support a sustainable economy and social prosperity, by promoting a market-based system as well as prudent banking practices. The Islamic banks are encouraged to always improve their performance and service while maintaining compliance to sharia principles. (more…)

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari’ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasise moral and ethical values in all dealings have wide universal appeal. Shari’ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims. (more…)