Indonesia: Embracing the growth of Islamic finance
Indonesia is seeking to further develop its Islamic banking sector, looking to tap into the growing market for sharia-compliant financial instruments, though it still has some way to go before being able to match the major players in the segment. In late January, Bank Indonesia officials laid out their plans and projections for the coming year, including a four-point program to strengthen the country’s banking sector and promote growth across the economy.
Along with initiatives to enhance banking resilience, reinforce the supervisory regime, build a better platform for bank intermediation through the improvement of regulation, develop and strengthen rural banks’ roles in micro-finance, there was also the key objective of raising the profile of Islamic banking in the economy. Currently, Islamic banking assets represent only a fraction of the total within the country’s banking sector, with the central bank estimating the year-end figure to be around US$7.6 billion, equivalent to between 2 and 3 percent of total bank assets. While asset levels in the sharia-compliant banking institutions remain low, there has been greater movement in another segment.
The state, some of its autonomous enterprises and, to a lesser extent, the private sector are all making more use of Islamic finance to bankroll their activities. In late March, state electricity firm PT PLN announced it was planning to fund an upgrade of its infrastructure through bond issues valued at $330 million, using both conventional instruments and a rupiah-denominated sukuk issue, with the auction set for May or June. Early in the same month, the government successfully auctioned $109 million worth of sukuk, with the Finance Ministry saying the Islamic-compliant bonds, with terms ranging between five to 15 years, would be used to help fund the state deficit, which is projected to come in at 2.1 percent of GDP this year.
Though the private sector is starting to give sukuk more consideration, some estimates put the number of corporate sukuk issues in the past five years or so at around 20, low when compared to Malaysia, the world’s largest market for Islamic debt instruments last year.
In part, the low figure could be down to a deficiency of proper promotion by lenders and a consequent lack of understanding by potential customers, but also potentially a result of wariness by the corporate sector and the public due to perceived risk stemming from a weak regulatory regime.
Deputy chief executive at the MIDF Amanah Investment Bank of Malaysia, Mohamad Safri Shahul Hamid said that Indonesian authorities will have to do more if they want to see the domestic Islamic finance sector develop. The government have to clear tax and legal issues, and come up with proper guidelines on Islamic securities. The regulators need to play a more active role to open up the market, initiate discussions and encourage the introduction of new products, especially retail and sukuk.
The government has moved to address at least some of these problems, with the parliament passing new legislation last year that would remove double taxation on certain Islamic banking transactions, in particular murabaha, Islamic trade finance.
While some 85 percent of the country’s estimated 240 million people are of the Muslim faith, and with Islamic finance having long since crossed denominational lines to become a mainstream component of the global financial system, there remains massive unfulfilled potential for sharia-compliant finance in Indonesia. It is up to the government, regulatory authorities and the private sector to work together to ensure the required regulatory platform for these products is in place.
Incoming search terms:
- indonesia Sharia Banks/Islamic Banks roles
- mohamad safri shahul hamid
