Indonesia prays for Islamic banking boom


Sam Reeves


INDONESIAN teacher Nina Ramadhaniah hopes for “blessings from Allah” by opening a sharia bank account — the sort of pious customer the world’s most-populous Muslim-majority country is praying for as it launches an Islamic finance drive.

Indonesia, Southeast Asia’s biggest economy, has a Muslim population of around 225 million but this huge number of faithful has not translated into success for sharia banks, institutions required to do business in line with Islamic principles.

Now regulators have launched a plan aimed at growing the sector, which currently accounts for less than five percent of banking assets, compared to a quarter in neighbouring, more developed Muslim-majority Malaysia and around half in Saudi Arabia.

Authorities believe it is a good moment, with many Indonesians getting wealthier after years of strong economic growth and an increasing trend towards piety across broad sections of society.

Many of those without bank accounts, estimated at about 40 percent of the population, are soon expected to open one.

“The situation is an opportunity for the Islamic banking business to get bigger,” said Nasirwan Ilyas, a senior official from the Islamic banking division of the Financial Services Authority (OJK).

The OJK is spearheading the drive, and unveiled a five-year roadmap earlier this year that included plans to educate the public about sharia lenders and the establishment of an Islamic finance committee to better manage the sector.

‘Interest is haram’

Key features of sharia banking include the prohibition of interest on loans or customer deposits, and a ban on investing in “non-Islamic” businesses, such as those involving pork or alcohol.

For teacher Ramadhaniah, who has an account with Indonesia’s biggest Islamic lender, Bank Syariah Mandiri, the ban on interest is a key attraction.

“Charging interest is haram (against Islam), ill-gotten gains that will not bring me any blessings from Allah,” the 44-year-old told AFP. “I don’t want to live in sin.”

Sharia accounts often work on a “profit-and-loss sharing” model, meaning customers get a windfall when the bank does well but can lose out when it does badly.

There are obvious disadvantages. Sharia lenders generally offer lower returns on investments and their modest size often means they provide fewer services than larger, conventional peers — many shops are not equipped to accept their debit cards.

Nevertheless, Islamic banks have proven popular in recent years, with the sector expanding on average more than 40 percent a year between 2008 and 2012, according to the OJK.

The growth came after laws were changed to make it easier to establish an Islamic bank, and there are now a plethora of standalone sharia lenders, Islamic banking units attached to conventional banks, and smaller Islamic financial institutions in the countryside.

Growth in the sector has lost steam due to a broader slowdown in the economy, which is expanding at six-year lows — giving authorities another reason to launch their drive.

Islamic mega-bank

Central to the overhaul is a plan to set up a National Islamic Finance Committee this year, to oversee the sector by bringing together representatives from different government agencies and act as a contact point for potential foreign investors.

Currently responsibility for the sector is spread around different bodies, such as the OJK, the central bank and the finance ministry, according to the OJK’s Ilyas.

It is modelled after similar bodies in other countries, such as the International Islamic Financial Centre in Malaysia, where the sector is already far more developed as the government started supporting it some years ago.

In addition to the OJK roadmap, the government has announced plans to merge the Islamic banking subsidiaries of four state-owned banks to create an Islamic mega-bank, which should be able to provide better services than the current Islamic lenders.

While observers have broadly welcomed the plans, they concede that many difficulties remain.

Khalid Howladar, Moody’s global head of Islamic finance, said it would be “quite a challenge” to grow the sector to a substantial level.

“The market is growing faster than conventional but from a very low base,” he said, adding Islamic banks in Indonesia did not offer “substantive competition” to their non-sharia peers.

But for Ramadhaniah and a growing army of devout Indonesians with new-found spending power, Islamic banks remain the only choice.

“I really don’t care that I’m not earning anything or getting lower returns on my investments,” she said. “I can live in peace.”

AFP/Busines Insider

Sunday, Sep. 27, 2015

bank muamalat


Indonesia regulator may ease foreign ownership rules for Islamic banks

Eveline Danubrata and Bernardo Vizcaino

INDONESIA’s financial regulator said it may ease foreign ownership restrictions for Islamic banks – a move that could attract Middle Eastern lenders such as Bahrain’s Al Baraka Banking Group.

Under a 2012 rule introduced amid calls by nationalist politicians to limit foreign ownership, an overseas bank can only own up to 40 percent of an Indonesian lender.

Nelson Tampubolon, banking supervisor at Indonesia Financial Services Authority, said the regulator is looking at relaxing overseas ownership requirements in cases where a foreign bank plans to convert an Indonesian commercial lender to an Islamic one.

But certain conditions would apply, such as whether Indonesia already has a market access agreement with the foreign country and whether the foreign bank can bring in the expertise that local lenders lack, Tampubolon told Reuters in a text message.

His comments follow remarks earlier this month that China Construction Bank Corp would be permitted to own more than 40 percent of a merged Indonesian bank should it buy stakes in two separate lenders and combine them into a single entity.

Middle Eastern banks have shown “pretty strong” interest to expand in the world’s most populous Muslim country, Tampubolon added.

A relaxation of the rule would help Bahrain-based Al Baraka with its plans to enter Indonesia’s Islamic banking sector by as early as 2016, Chief Executive Adnan Ahmed Yousif told Reuters by email.

Al Baraka opened a representative office in Jakarta in 2008, which it has used to explore potential acquisition targets.

Last year Dubai Islamic Bank said it was seeking to raise its holding in PT Bank Panin Syariah Tbk to 40 percent from 24.9 percent. (Reporting by Eveline Danubrata and Bernardo Vizcaino; Editing by Edwina Gibbs)

Indonesia looks to new roadmap for Islamic finance boost

Nicholas Owen, Fransiska Nangoy and Klara Virencia

INDONESIA’S capital market regulator has published a five-year strategy for the Islamic finance industry, its latest effort to shake the sector out of its niche status in the world’s most populous Muslim country.

The roadmap from Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), charts an extensive agenda ranging from reducing fees on sharia-compliant products to developing education and training programmes.

It aims to encourage an Islamic finance market that lags behind Indonesia’s peers: Islamic banks hold roughly 5 percent of total banking assets in the country, compared with more than 20 percent for neighbour Malaysia and well behind the 50 percent in Saudi Arabia.

Authorities want Indonesia’s Islamic banks to hold at least 15 percent of the market by 2023, an ambitious target considering the sector’s growth is stalling.

“Its difficult to see how they would achieve that target without substantial reforms within the Islamic banking space,” said Khalid Howladar, Moody’s global head of Islamic finance.

“Overall globally, its still a positive growth story. Indonesia in particular has a lot of potential, but it’s had a lot of potential for a long time.”

Part of the problem lies with low financial literacy among the public, with Islamic finance further behind, according to a nationwide survey commissioned by the OJK.

The roadmap would expand on education and promotion activities, while developing rules and industry certification for religious experts that endorse Islamic financial products.

Rules on rights and obligations regarding underlying assets of Islamic bonds (sukuk) would be developed this year, while a law on Islamic securities would be drafted by 2017.

The OJK will also speed up the registration of Islamic securities and relax limits on holdings by Islamic mutual funds.

It will also publish rules on sharia-compliant versions of margin trading, repurchase agreements and hedging.

Coordination among the various government bodies is also set to increase, including the central bank and the ministry for national development planning.

With the exception of Malaysia, a lack of coordination in most majority-Muslim countries has been a persistent drag on the industry’s development, Howladar said.

“If these new developments represent a change in that thinking, then we think that would be positive for the sector.”

In November, the OJK signed an agreement with the country’s national sharia board to strengthen oversight of the Islamic finance industry, supporting a centralised approach being favoured elsewhere around the globe. (Reporting by Nicholas Owen, Fransiska Nangoy and Klara Virencia; Writing by Bernardo Vizcaino; Editing by Eric Meijer)

10 June 2015

ojk con

Indonesia revises Islamic banking rules as industry growth slides

ibBernardo Vizcaino and Gayatri Suroyo

INDONESIA’s regulator has issued revised Islamic banking rules covering asset quality and capital adequacy to help clarify market practices, while industry growth has now dropped to single-digits.

Authorities want to encourage a wider product range to help Islamic banks grab a bigger share of the Indonesian market, a sector which remains behind more mature markets in Malaysia and the Middle East.

Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), announced the move on Wednesday as part of a package of 20 new rules, which range from corporate governance to microfinance.

Indonesia has the world’s biggest Muslim population but its Islamic finance market only holds a 4.5 percent of total banking assets in the country as of September, the latest central bank data showed.

Authorities want Islamic banks to hold at least 15 percent of the market by 2023, but the sector’s growth is stalling.

As of September, there were 11 full-fledged Islamic banks and 23 Islamic business units in Indonesia with combined assets of 244 trillion rupiah ($20.1 billion), representing a 7.2 percent growth year-on-year.

This remains above the 3.7 percent growth of conventional banks, although the OJK had projected Islamic banking assets would grow by 14.4 percent in 2014 under a moderate scenario, down from 24.2 percent in 2013 and 34.1 percent in 2012.


ib regUnder the revised rules, Islamic banks must hold increasing levels of capital depending on their risk profile, with regulators outlining four such categories.

The previous capital adequacy requirement for Islamic banks was 8 percent, while the highest risk profile would require such banks to hold as much as 14 percent.

This requirements applies only to full-fledged Islamic banks and not to the Islamic units of conventional banks.

The rules also detail the types of capital-boosting debt that Islamic banks can issue, which must include a loss absorption feature that allows regulators to convert such debt into equity if a lender faces insolvency.

Asset quality requirements address profit-sharing financing such as mudaraba and musharaka, common equity-like contracts used in Islamic finance.

Banks must include the proposed profit sharing ratio in the contract, which must be calculated based on a feasibility analysis of a customer’s business and cash flows.

The rules also address issues such as the separation of Islamic units from conventional parents and guidance for conventional firms that want to become sharia-compliant ones.

Last week, the OJK signed an agreement with the country’s national sharia board to strengthen oversight of the Islamic finance industry, supporting a centralised approach being favoured elsewhere around the globe. (1 US dollar = 12,165.0000 rupiah)

Thu, Nov 20, 2014

bi ojk

Indonesia’s regulator prepares Islamic finance roadmap

ind isl finBernardo Vizcaino

INDONESIA’s capital market regulator is preparing a five-year roadmap for Islamic finance in an effort to expand the industry in southeast Asia’s largest economy.

The plan will help to boost the number of Islamic capital market products and expand the industry’s investor base, Otoritas Jasa Keuangan (OJK), the financial services authority, said in a statement.

The OJK said it was seeking market input for the roadmap and would set up discussion groups with stakeholders including the central bank, the finance ministry, the stock exchange and the country’s national sharia board.

It also said it was refining rules for the issuance of Islamic securities, which it expected to be completed this year. These would include details on the settlement of Islamic financial transactions, disclosure requirements for sukuk (Islamic bonds), and guidelines for sukuk trustees.

Indonesia has 11 full-fledged Islamic banks and 23 Islamic windows operated by conventional banks. Their combined Islamic banking assets grew 24 percent to 242 trillion rupiah ($21.4 billion) last year, giving the sector a 4.9 percent share of total banking assets, OJK data shows.

Last month, the OJK said it would implement risk management guidelines for Islamic insurance companies and that it was now a full member of the Malaysia-based Islamic Financial Services Board, a major standard-setting body for the industry.

The OJK took over supervision of banks, brokerages and insurance firms from the central bank and the capital market watchdog Bapepam-LK in January this year.

Wed May 28, 2014

Indonesia’s Islamic finance sector broadens

bank syar fin Islamic-Finance-CoverBernardo Vizcain

Wed Apr 2, 2014

INDONESIA’s Islamic banks maintained double-digit asset growth last year while rural and non-bank segments made further gains, broadening the industry’s consumer base in Southeast Asia’s largest economy.

Indonesia has the world’s largest Muslim population, but that potential has yet to fully translate into the country’s Islamic banking sector which remains underdeveloped, lagging behind neighbour Malaysia.

Islamic banking assets grew by 24.2 percent to 242.3 trillion rupiah ($21.4 billion) last year, giving the sector a 4.9 percent share of total banking assets, data from Indonesia’s financial service authority or Otoritas Jasa Keuangan (OJK) showed.

Indonesia’s 11 full-fledged Islamic banks added 32.7 trillion rupiah worth of assets in 2013, a 22.2 percent increase, while the country’s 23 Islamic windows added 14.5 trillion rupiah in assets, a 30.5 percent increase.

But beyond commercial banks, Islamic finance is making inroads in other areas which could help it tap the country’s large consumer base – with a predominantly Muslim population of 240 million.

There are now 163 Islamic rural banks in Indonesia which posted a 24.1 percent growth in assets in 2013 to reach 5.8 trillion rupiah, lifting their share of total rural banking assets to 7.5 percent.

Such growth came despite the size of their branch network being almost unchanged with 402 branches across the country.

bank syar ojkIn a separate OJK report, Islamic financing companies posted a five-fold increase in assets in 2012 to reach 22.7 trillion rupiah. There were 35 such firms in Indonesia at the end of 2012, after 21 opened their doors that year.

Even Islamic pawn-brokers have made gains, they held a 9.8 percent share of total financing for that segment as of December 2012, the latest available data from OJK showed.

Indonesia’s Muslim charitable organisations have also built large asset pools which could support efforts to reduce poverty, a study released on Tuesday found.

Regulators are also planning to roll out initiatives to develop other areas of Islamic finance, which follows religious principles such as a ban on interest and monetary speculation.

The OJK is now a full-member of the Malaysia-based Islamic Financial Services Board, a major standard-setting body for the industry. It said last week it would implement risk management guidelines for Islamic insurance companies.

Indonesia’s central bank is also developing a market for the short-term sukuk issued by the International Islamic Liquidity Management Corp, to help address a lack of highly-liquid sharia compliant money market instruments.

Other proposed policies include regulating foreign exchange markets, introducing Islamic repurchase agreements as well as education and promotion initiatives.

($1 = 11,312.5 rupiah) (Editing by Jacqueline Wong)

Wed Apr 2, 2014

A World Islamic Banking Competitiveness Report 2013-14 published by Ernst and Young revealed Malaysia’s market share, growth rate, and value of Islamic assets in comparison to five other countries that, along with Malaysia, makes up 78% of international Islamic banking assets. Infographics:

A World Islamic Banking Competitiveness Report 2013-14 published by Ernst and Young revealed Malaysia’s market share, growth rate, and value of Islamic assets in comparison to five other countries that, along with Malaysia, makes up 78% of international Islamic banking assets. Infographics:

Indonesia’s Islamic banking still safe despite the high FDR

bnisyariahIchsan Emrald Alamsyah/Mutia Ramadhani

REPUBLIKA.CO.ID — Ratio of finance to deposit ratio (FDR) of Islamic banking reached 121.46 percent until the end of December 2013. This figure jumped up to seven digits compared to 118 percent in last year.

However, Financial Services Authority (OJK) is still not set a minimum threshold to Islamic banking. OJK commissioner on banking supervision, Nelson Tampubolon said that the figure was still a small portion compared to conventional banks. Therefore, OJK will still give a chance to expand Islamic banks.

Based on data, Islamic banking financing reached 179.2 trillion IDR by the end of December 2013. The third party funds was recorded 138 trillion IDR.