By Arno Maierbrugger
Gulf Times Correspondent
Bangkok

The Islamic finance sector in Indonesia is forecast to grow by around 15% next year as per projections of the Masyarakat Ekonomi Syariah (MES), or Islamic Economic Society, a Jakarta-based non-profit organisation focused on the enhancing the Islamic banking industry in the country.
MES has set up different scenarios for the sector’s growth that depend on Indonesia’s macroeconomic development in 2016, namely the country’s GDP growth, inflation and currency exchange rate. Under a normal scenario, with Indonesia’s economic growth at around 5%, inflation at 4.7% and a rupiah exchange rate at 13,900 per US dollar, Islamic financing is projected to grow up to 15% in 2016, while Islamic banking assets are expected to grow 14.6%%. Assets held by Islamic financial institutions in Indonesia are expected to remain just below the 5 percentage point mark of the nation’s total banking assets, showing that - despite having the world’s largest Muslim population – Indonesia’s Islamic banking industry lags far behind its conventional counterpart and the growth potential is huge. In comparison, neighbour Malaysia has a market share in Islamic finance of more than 20% and Saudi Arabia around 50%.
However, the country is undertaking steps to strengthen the sector and raise the level of inclusion of its 250mn-population in Islamic finance. A five-year strategy for the Islamic finance industry has recently been released that basically says it wants Indonesia’s Islamic banks to hold at least 15% of the market by 2023. One reason that Islamic finance still remains a niche business in Indonesia has been attributed to the low general financial literacy among the public, with Islamic finance further behind, according to nationwide surveys. Thus, the Islamic finance 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 sukuk are being developed, while a law on Islamic securities would be drafted by 2017.
Due to high potential, Islamic finance in Indonesia is also attractive for foreign investment. In the past, the hindrance has been the rule that foreign investors cannot own more than 40% of Islamic banks in Indonesia. However, the country’s financial authorities are considering raising this ceiling to entice more potential investors, namely Middle Eastern and Malaysian banks. First positive results were that Dubai Islamic Bank widened its operations in Indonesia in October 2015 after it obtained approval from Indonesia’s Financial Services Authority to increase its stake in Bank Panin Syariah to 40% from 24.9%. Bahrain-based Al Baraka Banking Group said it had plans to venture into Indonesia next year, and Abu Dhabi Islamic Bank also mentioned it is “closely eyeing” Indonesia as one country to expand into as part of its overall Southeast Asian expansion strategy.
Domestically, Sumatra-based Bank Aceh will become a full-fledged Shariah-compliant bank in 2016. This bank, which is majority-owned by local Aceh province, controls more than $1.5bn in assets. Islam is the dominant religion in the province of Aceh where about 98% of the local population adhere to Islam.
Presently, the Islamic banking industry in Indonesia comprises 12 Islamic banks, 22 “Islamic windows” of conventional banks and 163 Shariah-compliant cooperative banks in rural areas of the country. There are plans to create a “mega-Islamic bank” as early as next year by merging the Islamic units of state-controlled banks Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia which would reduce operating costs and make it possible to offer more competitive products, while making integration between Indonesia’s Islamic banks and the global financial system easier.
However, the roadmap towards such a huge merger has so far proven to be difficult and the Indonesian government is also considering alternatives such as setting up a new state-controlled Islamic bank or converting an existing non-Islamic bank into a Shariah-compliant financial institution.