Bloomberg/Jakarta/Kuala Lumpur
Indonesia’s Islamic banks say new rules acknowledging the lower risk of profit-sharing loans will help revive industry growth from the slowest pace on record.
The Financial Services Authority is introducing reserves ratios that will vary depending on banks’ risk profiles and setting more flexible guidelines for assessing the quality of Shariah-compliant assets, it said in a November 19 statement. While the rules will mean higher ratios for some lenders, the overall impact is positive as loans that use profit-sharing structures will be deemed less risky, said Hendiarto Yogiono, finance director at PT Bank Muamalat Indonesia.
“The rules are more specifically tailored for Islamic banks, taking into account the different structures we use,” he said in a November 25 phone interview in Jakarta. “They will restore confidence in Shariah banks in the minds of our stakeholders and customers, which will have a multiplier effect in the longer term.”
Growth in Indonesian Islamic financial assets cooled to 11% in the year through September, from as high as 49% in 2011, as Shariah lenders struggled to compete with their non-Islamic counterparts in a slowing economy. That is threatening the government’s goal of boosting market share from 4.7% to enable Indonesia to challenge Malaysia, where the proportion is 25%, as an Islamic finance centre.
Bank Muamalat, Indonesia second-biggest Islamic lender, sees industry growth accelerating next year, Yogiono said. PT BNI Syariah, a unit of the nation’s fourth-largest bank, forecasts expansion of 15% in 2015, Director Imam Teguh Saptono said in a November 25 interview in Jakarta.
Lenders have until 2016 to comply with the new capital-adequacy ratios that will range from 8% to 14% depending on risk profiles. Until now, both Islamic and conventional banks had to hold primary reserves of 8% of deposits and secondary reserves of 4%, with no consideration given to whether the banks’ liabilities are Shariah-compliant or not.
The revised regulations are less stringent in judging the quality of outstanding Islamic loans, especially those based on profit-sharing structures, Nelson Tampubolon, executive director for banking supervision at the Financial Services Authority, or OJK, told reporters in Jakarta on November 19.
“We’ve assessed the banks and found them ready to abide by the new requirements.”
Instead of charging interest, Shariah-compliant banks acquire a stake in the companies or ventures they lend to, or agree to receive a proportion of earnings from the borrower.
Higher borrowing costs have damped lending expansion in an economy that grew 5.01% last quarter, the least since 2009. Shariah-compliant financing increased 9.4% in the year through September, compared with 13.3% for non- Islamic credit, central bank data show. Islamic loans expanded as fast as 50.6% in 2011.
“Growth may ease further in the short term as some banks retain capital and refrain from lending,” BNI Syariah’s Saptono said. “But in the next few years, the rules give us a more solid foundation to support faster growth. We’ll be more resilient to market risk and volatility.”
A slowdown in the expansion of Islamic banking assets may damp demand for Indonesian sukuk. The government has sold 75.5tn rupiah ($6.2bn) of the debt this year, 17.6% of its total bond sales.
Worldwide sales of bonds that pay returns on assets to comply with the religion’s ban on interest increased 14% to $43.7bn in 2014 from the year-earlier period, data compiled by Bloomberg show.
Although Indonesia is home to the world’s largest Muslim population, Islamic finance in the country is languishing just as the global industry starts to expand beyond its traditional strongholds in the Middle East and Southeast Asia. Malaysia accounted for 65% of sukuk issuance in the first nine months of the year, compared with 5.4% from Indonesia, according to the Malaysia International Islamic Finance Centre.
The OJK should allow more Islamic financial instruments, especially hedging products, to help banks guard against currency and interest-rate swings, Muamalat’s Yogiono said. Shariah-compliant hedging has been available in Malaysia since 2006.
The new rules on reserves and asset quality are part of a policy package that is aimed at consolidating Shariah-compliant banking and capital-market regulations, the OJK’s Tampubolon said. The programme also includes requirements for setting up non- bank Islamic financial institutions and corporate governance rules for microlenders.
“The release of a blueprint for Islamic finance is highly encouraging, and shows a long-term serious commitment by the country to develop Islamic finance in a holistic manner,” Suhaimi Zainul-Abidin, treasurer of the Gulf Asia Shariah Compliant Investments Association, said in a November 25 interview from Singapore. “These recent regulatory changes should hopefully be just the tip of the iceberg, and a prelude to many more things to come.”
