Indonesian authorities are pushing ahead with a plan to create an $8 billion Islamic megabank even after a similar proposal fell through in Malaysia. A combination of the Shari’ah-compliant units of government- controlled PT Bank Mandiri, PT Bank Rakyat Indonesia and PT Bank Negara Indonesia could happen as soon as this year, Financial Services Authority Chairman Muliaman Hadad said in Jakarta on 23 January. Talks are ongoing with the Ministry of State-Owned Enterprises on a merger first proposed in May 2013.
The megabank could help drive a quadrupling in Islamic banks’ market share to 20 per cent by 2018, compared with 10 per cent without it, the Indonesia Islamic Banking Association predicts. That would approach the 21 per cent level in Malaysia, where a planned combination of CIMB Group Holdings Bhd., RHB Capital Bhd. and Malaysia Building Society Bhd. was called off last month as falling oil prices damped the economic outlook.
“If the Shari’ah banking sector is left to evolve and progress on a purely organic basis it may experience a long- drawn process with a marginal growth rate,” Alhami Abdan, head of international finance and capital markets at OCBC Al-Amin Bank Bhd., said in a 30 January e-mail interview from Kuala Lumpur. “The creation of such a megabank may provide an anchoring catalyst for the Shari’ah banking sector.”
A large Islamic lender would help improve public awareness of Shariah-compliant finance, reduce operating costs and allow financing of big infrastructure projects, said the authority’s Hadad. Only six per cent of Islamic bank loans fund construction, 2.8 per cent go to agriculture and 2.4 per cent for mining, compared with 33 per cent for business services, Finance Ministry data show.
PT Bank Syariah Mandiri, the largest Islamic lender, had IDR 65.4 trillion ($5.2 billion) of assets as of September, according to figures on its website. PT Bank BRI Syariah, a unit of Bank Rakyat that has the nation’s biggest branch network, had IDR 18.6 trillion and PT Bank BNI Syariah had IDR 18.5 trillion, according to company statements.
Together, the three make up 40 per cent of the IDR 261 trillion Islamic banking industry, Finance Ministry figures show. The parent banks of the three units are all listed on Indonesia’s stock exchange, although the government has retained majority stakes.
“How possible it is would depend on the shareholders,” Imam Teguh Saptono, business director at BNI Syariah in Jakarta, said in a phone interview yesterday. “I would prefer policies that reduce tax inequality, improve socialization and education, increase regulatory leniency and create new markets such as Shariah state health coverage, for example.”
The State-Owned Enterprises Ministry also looked at setting up a new government-controlled Islamic lender or converting an existing non-Islamic bank into a Shariah-compliant operation when it started publicly talking about the plan in May 2013.
“It would be good if the proposed plan for an Indonesian Islamic megabank succeeds, even though this seems to be a somewhat ambitious plan,” Megat Hizaini Hassan, head of the Islamic finance practice at law firm Lee Hishammuddin Allen & Gledhill in Kuala Lumpur, said in a 30 January e-mail interview. “One of the challenges would be getting the interested parties and institutions to agree that the setting up of such an Islamic megabank would make business sense.”
A bigger Islamic banking industry would increase demand for Shari’ah-compliant assets such as Sukuk. Worldwide sales of bonds that comply with the religion’s ban on interest are off to the slowest start since 2010 this year, amounting to $1.5 billion, data compiled by Bloomberg show. Issuance totalled $46.3 billion in 2014, near 2012’s record $46.8 billion.
While Indonesia has a Muslim population more than 12 times the size of Malaysia’s, it has lagged behind its neighbour in developing an Islamic finance industry. Total deposits at Shari’ah banks are less than a sixth of Malaysia’s, official data show.
“Having a large bank won’t automatically translate to a bigger market share, but it would create a bank with enough scale to compete,” Riawan Amin, chairman of the supervisory board at the Islamic banking association in Jakarta, said in an interview yesterday. “With a strong will, we hope this good aspiration can be fulfilled.”
Originally published on www.cpifinancial.net