Sharia Banking and the Financial Industry

Bank Negara Indonesia (BNI) signed a cooperation Sharia financing to 14 companies a local franchise. Until the end of the year, is expected to have 100 franchises getting financing facilities with a total of up to Rp 50 billion. Card Division General Manager Pembiyaan BNI Syariah, Iwa Kustiwa said that currently there are 54 franchises already funded by BNI Syariah. A number of new franchise such as Mie Champion, Chess Squad, Gudeg Jogya Ibu Sri and Indonesian Children’s Education Foundation have signed memorandum of understanding. Every month BNI continued to add franchises that work with this bank. Funding for this franchise started BNI Syariah in the last two years. This is done because it saw the potential for the growing market for local franchise business such as the sale and purchase a franchise or a franchised motor foods and beverages. The business never stops and the response was very good. Every year the demand increases.

Speculation Indonesia’s credit rating will be raised to investment grade may drive demand for the government’s second sale of global Islamic bonds.  One of chief executive officer at Kuala Lumpur-based OSK-UOB Islamic Fund Management Bhd., said that It would be interested because there’s the possibility of an investment-grade rating. Standard and Poor’s signaled last month it may raise the sovereign debt rating to investment grade after changing the outlook on Indonesia’s debt to positive, citing strength in the economy, which the government expects to grow up to 6.5 percent in 2011, the fastest pace in seven years. An upgrade would open up a larger pool of investors for the securities, according to Union Investment Privatfonds in Frankfurt, OSK-UOB Islamic Fund Management and Al Baraka Banking Group BSC in Manama. Rahmat Waluyanto, director general at the Finance Ministry, said that the nation may sell dollar sukuk early in the second half of the year. Investors say the bonds also may provide extra yield, with the five-year Shariah notes sold in April 2009 offering a premium of 39 basis points, or 0.39 percentage point, more than similar-maturity debt in Malaysia, prices from Royal Bank of Scotland Group show.

The Indonesia Stock Exchange (IDX) officially launched a new equities index on Thursday in a move expected to boost liquidity and widen the investor base amid a growing interest in equities in the world’s biggest Muslim-majority country. The Indonesia Sharia Stock Index (ISSI), which comprises 214 Indonesian stocks, allows investors to buy stocks without violating Islamic investment guidelines which have been screened by the Indonesia Ulema Council (MUI). MUI deputy chairman Ma’ruf Amin told that trading practices that are not compliant with sharia principles can be eliminated, such as those that are engaged in excessive risk-taking, gambling, manipulating, speculation from interest payments. The index excludes stocks of banking, and cigarette and alcohol firms, among others. The sharia index includes blue chip stocks such as top automotive company Astra International, instant noodle giant Indofood CBP Sukses Makmur and number one telephone company Telekomunikasi Indonesia. IDX president director Ito Warsito said that the new index will boost trading interest at least for investors who comply with sharia principles. The market will be more liquid, with both regional and world bases of sharia investors having richer choices of stocks.
The ISSI will complement the existing 30-stock Jakarta Islamic Index (JII) which will tap the more than 200 million Muslims in the country, as well as other sharia markets in the world.
In another attempt to tap the rapid growth of the country’s stock market, the IDX plans to introduce a new and longer schedule for trading in the second half of this year. IDX’s Ito said that after the change, trading on the nation’s bourse would begin at either 9 a.m. or 8:30 a.m. as compared to the current 9:30 a.m.

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Albaraka Banking Group and Qatar Islamic Bank aim to acquire Shariah-compliant lenders in Indonesia as the central bank estimates the nation’s Islamic assets will increase by as much as 55 percent this year. Albaraka, Bahrain’s biggest publicly traded bank, plans to spend $100 million on an acquisition in Indonesia, while Standard Chartered plans to open more branches at its Indonesian joint venture. While Indonesia is home to the world’s largest Muslim population, and its Rp 100 trillion ($11.5 billion) of Islamic banking assets are still only 10 percent of Malaysia’s. Bank Indonesia aims to increase Islamic banking assets by a minimum 45 percent this year to try to close the gap with Malaysia’s 350.8 billion ringgit ($116 billion) sector. Indonesia has 11 full-fledged Islamic lenders and 23 other banks that offer Islamic services. The government plans to start selling short-term treasury bills that comply with Islam’s ban on interest for the first time in the second half of the year. Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, have reached $4.5 billion this year, from $2 billion in the same period of 2010, according to industry data. The $1 trillion global Islamic financial services industry may grow to $1.6 trillion by 2012, according to the Islamic Financial Services Board. The yield on Indonesia’s 8.8 percent dollar-denominated Islamic bond due April 2014 was unchanged at 3.22 percent on Thursday, according to prices from Royal Bank of Scotland Group. The notes returned 0.6 percent this year, compared with an 0.9 percent gain for similar-maturity debt in Malaysia.

The Islamic financial sector in Indonesia is hoping a mix of state-backed infrastructure projects and regulatory reforms. These factors will help the country’s sharia-compliant lenders to continue their rapid expansion and to come out of the shadows of other regional banking powers. Indonesia has 11 banks operating solely in compliance with Islamic finance requirements and a further 23 commercial lenders offering sharia-compliant services. Indonesia’s Islamic banking institutions held more than $11 billion in assets as of the end of 2010, a steep increase on the $7.7 billion of the previous year. While this rate of growth represented an almost 50 percent increase, the total still only amounted to some 3 percent of the combined assets of the nation’s banking sector. Bank Indonesia forecasting that Islamic lenders can expect to see asset growth of more than 50 percent this year, in part due to an increase in acceptance by clients. Islamic banking has emerged as one of the most rapidly expanding sectors in the nation’s economy and is expected to play a significant role in the coming years, according to the report, with asset levels topping $17.9 billion by the end of the year. One of the factors expected to drive forward the economy, and to present significant growth opportunities for the Islamic financial sector in the coming years will be the government’s plans to strengthen the country’s infrastructure with investment of up to $140 billion over the next five years. The main focus will be on the transport sector, with road and rail projects to the fore, along with utilities such as power stations and distribution grids, all of which are essential for economic development. Among the reforms put forward by Bank Indonesia is to cut taxes payable by banks and clients on income from Islamic finance accounts. Bank Indonesia is also working to smooth the way for more Islamic banking products to be floated on the market, setting up a committee of experts to develop a streamlined approval process for new products. By making Islamic financial products more appealing and more readily accessible, Indonesia will be able to better utilize the high levels of local liquidity and potentially attract investments from overseas, though it will take some time for all of the proposed reforms to be put in place and have an impact.

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The Finance Ministry’s debt management office plans to introduce new sharia-compliant debt instruments, including project Islamic bonds (sukuk) designated for infrastructure projects and sharia short-term Treasury bills, according to an official.

Director of sharia financing policy at the Finance Ministry’s debt management office, Dahlan Siamat, said on Monday, 21 Februari 2011 that the ministry was still assessing two possibilities for project sukuk. In the first scheme, proceeds of the sukuk issuance would be used to fund infrastructure projects as planned in the state budget, while the second would finance underlying projects. The first one is the most feasible because it doesn’t need new authorization. Approval to issue T Bill has been given.

The ministry was also studying plans to introduce one-year sharia and regular T-bills to meet demands for short-term sharia notes and to help the liquidity management of sharia banks.

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