Indonesia Eyes Consolidation, New Laws in Roadmap for Islamic Finance

Bareksa.com - Authorities in Indonesia want to reshape the country's Islamic finance industry by encouraging consolidation and building a new regulatory system, as the sector plays catch-up to more mature markets in Malaysia and the Middle East.

Regulators are finalising a five-year roadmap to be presented this month to industry players, who have repeatedly called for clearer laws.

"This is quite a deep review and I'm not surprised if the roadmap we have in the end is a full-fledged revision of what we have had," Halim Alamsyah, deputy governor of Bank Indonesia, the country's central bank, told Reuters.

Indonesia has the world's biggest Muslim population but its Islamic finance market lags well behind that of neighbour Malaysia: Indonesia's Islamic banks held 4.9 percent of total banking assets in the country last year compared with more than 20 percent for their Malaysian counterparts.

The central bank and the country's financial services authority, Otoritas Jasa Keuangan (OJK), are looking at ways to give regulatory support for Islamic banks to hold at least 15 percent of the market by 2023. By that year, Islamic windows of conventional banks must be spun off into standalone entities.

The country is also looking at the idea of creating a large, standalone Islamic bank that could spur consolidation in the industry.

Such entities would have an ideal size of around 200 trillion rupiah ($16.5 billion), said Edy Setiadi, executive director for sharia banking at OJK. That is three times as large as the 65 trillion rupiah held by Indonesia's largest Islamic bank at present, PT Bank Syariah Mandiri.

The country's ministry of state-owned enterprises first proposed the idea together with the central bank and OJK. Three options are being considered: the merging of several existing Islamic banks, the conversion of an existing conventional bank into an Islamic one, and creating an altogether new Islamic bank.

A bigger institution would have the scale to reduce operating costs and provide services at more competitive rates, the central bank's Alamsyah said.

There were 11 full-fledged Islamic banks and 23 Islamic windows in Indonesia with combined assets of 242 trillion rupiah last year, central bank data showed.

DUAL ECONOMY, INCENTIVES

The new roadmap seeks to establish separate legal policies and infrastructure for the Islamic banking sector.

"The Islamic economy can go hand in hand with the conventional side until a certain point. As it becomes bigger, this may be the right time to have a separate way forward," said Alamsyah.

Regulators are considering ways to channel more government-related transactions to Islamic banks. "If that can happen, that would increase quite significantly the supply of Islamic funds," Alamsyah added.

New incentives would seek to make it easier for banks to sell their Islamic products. Under existing rules, banks can sell Islamic products throughout their network in a province as long as there is one standalone Islamic branch in that province. There are 34 provinces in Indonesia.

The rule could be changed to match the country's regions, of which there are only five, said OJK's Setiadi.

Regulators are also looking at laws with a view towards giving regulatory approval to more Islamic banking products, allowing for a wider product range to help sharia-compliant banks grab a bigger share of the market, Setiadi added without elaborating.

About 51 percent of Indonesia's population now owns bank accounts, latest statistics show, up from 40 percent in 2008. (Source : Reuters)