Indonesia needs large sharia bank

JAKARTA. The government is working on an ambitious plan to establish a sizeable sharia bank to tap into the Islamic banking potential in the country, as existing sharia banks remain unable to benefit from the significant market potential.

As a country with the largest Muslim population, Indonesia should be a fertile environment for banks operating in accordance with sharia banking principles, which include, for example, the prohibition of fixed or floating payments as well as the taking of set interest or fees (known as riba) on loans.

However, despite the market potential, the growth of Islamic banks has been very slow. Since the first sharia bank — Bank Muamalat — began operations in 1992, little has been achieved in the Islamic banking sector.

 Twenty years on, there are now 11 sharia banks operating as independent business entities, and another 24 sharia business units (UUS) that operate as the Islamic banking divisions of existing commercial banks. By March 2013, the combined assets of sharia banks still accounted for just 4.6 percent or Rp 209.6 trillion (US$21.08 billion) of the total banking assets in Indonesia.

Bank Syariah Mandiri (BSM) and Bank Muamalat were listed as the two largest sharia banks with total assets of Rp 55.48 trillion and Rp 46.47 trillion, respectively.

Gatot Trihargo, the State-Owned Enterprises Ministry’s deputy for business services, said that Indonesia needed to leapfrog its Islamic banking system to ensure that the country’s sharia banks were able to compete with Islamic banks in other ASEAN member states when the ASEAN Economic Community (AEC) was finally established in 2015.

Malaysian sharia banks, which have more experience and have greater capital reserves, could dominate Indonesia’s Islamic banking market if no efforts are taken to strengthen the country’s existing sharia banks. When the single market is formally established, banks within the region will be able operate across the ASEAN region without any major entry barriers.

Gatot, who is in charge of consolidating the country’s sharia banking system, said the State-Owned Enterprises Ministry had four options. The first was to consolidate the existing three sharia subsidiaries of state banks, namely BSM, Bank Negara Indonesia (BNI) Syariah and Bank Rakyat Indonesia (BRI) Syariah with a sharia division of state-owned Bank Tabungan Negara (TBN).

The four entities could be merged into a single sharia bank or a new holding company could be created to run and supervise them. “The merger may be difficult, but we already have experience of a bank merger with Bank Mandiri,” he added.

Bank Mandiri, currently the nation’s largest bank by assets, was the result in 1998 of a merger between Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor Impor Indonesia and Bank Pembangunan Indonesia.

Meanwhile, the second option was to turn only one of the three sharia subsidiaries or BTN shaira unit into a separate state-owned sharia bank, while under the third option, the government would create a new sharia bank from scratch.

Gatot said the ministry had not held any formal talks with the banks’ management and that it was currently assessing the options. “The plan’s implementation will take around two to four years to complete. In the meantime, we have asked the sharia banks’ parent companies to inject additional capital into their subsidiaries so that they can operate more effectively,” he said.

When contacted, BSM president director Yuslam Fauzi said via a text message that the idea of boosting domestic sharia banking was “a noble idea and it showed the government’s political goodwill”. However, the bank had not discussed the plan “as it is not in our domain”, he added.

Separately, BNI Syariah president director Dinno Indiano said that, in general, he supported the government’s agenda. But, according to Dinno, the most important thing for the government was to set a specific target with key performance indicators for the parent companies to strengthen their sharia banking
operations

“In that way, they will be obliged to come up with ways to assist their subsidiaries, and we can also accurately measure the sharia banking industry’s growth,” he said.

Bank Indonesia’s (BI) sharia banking director, Ahmad Buchori, acknowledged that the industry was still giving a lackluster performance despite being established more than 20 years ago. BI data shows that by the end of 2012, depositors possessed 11.09 million sharia deposit accounts, a rise of 32.5 percent from the 8.19 million accounts reported the previous year.

In comparison to existing regular banks, the number of deposit accounts reached 119.92 million in 2012, up 18.1 percent from 101.5 million accounts in 2011.

“Apparently, it does not matter to most Indonesians whether a bank is a commercial or sharia entity, as long as it provides them with the most benefits. So, the full-on religious approach does not work,”
Buchori said.

Echoing Gatot, Buchori went on to say that the country could use a large sharia bank to boost the industry and to compete with foreign banks. He added that its status as a state-owned enterprise (SOE) would be in its best interests, as the government would have a high level of concern for its survival. “The government would be ready to inject additional capital should anything happen,” he said.

The future bank will also be able to better access major government-funded projects, which are carried out by other SOEs, such as state utility firm PT PLN and state telecommunications company PT Telkom.

Of the four options, Buchori said that turning one of the sharia subsidiaries or UUS into a fully state-owned sharia bank was the more feasible option, citing lower risks.

According to Achmad K. Permana, secretary-general of the Indonesian Sharia Banks Association (Asbisindo), the association welcomed the government’s plan as the new bank would be expected to act as the industry’s anchor. He urged the ministry to proceed promptly, however, given the fact that ministry policy would in all likelihood shift with the change of administration after the election next year.

Meanwhile, economists Lana Soelistianingsih and A. Tony Prasetiantono ruled out the two options of creating a new bank from zero and converting a commercial bank into a sharia one. Lana, a University of Indonesia (UI) economist, said such a conversion could damage the bank’s image and existing business.

Tony, a Gadjah Mada University (UGM) economist, said that creating a new bank would require extensive capital outlay. “I am not sure the government has the funds for it,” he said, adding that a merger would be the best move to achieving the goal. (Tassia Sipahutar)