Indonesia is the most populous Muslim country in the world, but still has an Islamic finance sector seen by many experts as by far underdeveloped. While Malaysia over the past decades has emerged as the largest Islamic finance market in the region and the world's leading sukuk, or Islamic bonds issuer, Indonesia does not even figure with its current 4.9% asset share of Shariah-compliant banking in the domestic industry compared to Malaysia's 21% and Saudi Arabia's 23%. But the sector is moving into gear now. Islamic banking assets in Indonesia grew by 24.2% to around $21.4bn in 2013, data from Indonesia's financial service authority or Otoritas Jasa Keuangan (OJK) showed.
These assets are handled by the country's 11 Islamic banks and the Islamic windows of 23 conventional financial institutions. And there is reason to believe that the sector will further strengthen. The country's government has embarked on a massive infrastructure drive that would cost around $200bn over the coming years, and not many other financing vehicles such as sukuk are so well-suited to raise enough funds for this mammoth task - a path Malaysia has taken for a long time. However, there are still some obstacles on the way to build up a buoyant Islamic finance market in Indonesia which have very much to do with the regulatory environment the banks are acting in. While the central bank has already set up a framework for Shariah-compliant finance, there are still legal changes required for sukuk to become a viable project financing tool.
And although the country's banks are well-capitalised, they are reluctant to enter long-tenor financing such as sukuk because it puts pressure on their balance sheets. The other issue is that there is few public and/or political awareness or knowledge about the advantages of Islamic finance in both wholesale and retail banking and a lack of innovative products and tax incentives that would entice bank clients to use Islamic finance instrument to fund real estate or other investments. Despite there are currently more than 160 rural Islamic finance companies such as microlenders and co-operatives and a number of charitable organisations with a demand for asset structuring, there is a lack of financial services that go beyond simple transactions.
This is astonishing as about 210mn of Indonesia's 240mn population are Muslims, which means a large pool of natural demand for Islamic finance products should be prevalent. "While Islamic finance is only one part of an Islamic economy, it has great potential here," says Imam T Saptono, member of the Indonesian Islamic Banking Association. "This time it could become the driver that creates a more advanced Islamic economy." The Middle East is not only more than willing to tap into an upcoming broader Indonesian sukuk programme, it also finds a large Islamic finance sector to develop in Indonesia through business initiatives, mergers and acquisitions and other ventures, provided the Indonesian government eases certain regulations concerning foreign participation in the banking sector.
It would only be good for the entire fiscal ecosystem in Indonesia, because apart from infrastructure financing, a larger domestic sukuk market would also help Indonesian corporates reduce their dependency on foreign borrowing which - in turn - could benefit the country's ailing currency. And in the retail finance market, including insurance, there are a lot of opportunities for value creation that yet have to be unlocked.
© Gulf Times 2014
http://www.zawya.com/story/Huge_potential_for_Mideast_investors_in_Indonesian_Islamic_finance_market-ZAWYA20140404042659/
These assets are handled by the country's 11 Islamic banks and the Islamic windows of 23 conventional financial institutions. And there is reason to believe that the sector will further strengthen. The country's government has embarked on a massive infrastructure drive that would cost around $200bn over the coming years, and not many other financing vehicles such as sukuk are so well-suited to raise enough funds for this mammoth task - a path Malaysia has taken for a long time. However, there are still some obstacles on the way to build up a buoyant Islamic finance market in Indonesia which have very much to do with the regulatory environment the banks are acting in. While the central bank has already set up a framework for Shariah-compliant finance, there are still legal changes required for sukuk to become a viable project financing tool.
And although the country's banks are well-capitalised, they are reluctant to enter long-tenor financing such as sukuk because it puts pressure on their balance sheets. The other issue is that there is few public and/or political awareness or knowledge about the advantages of Islamic finance in both wholesale and retail banking and a lack of innovative products and tax incentives that would entice bank clients to use Islamic finance instrument to fund real estate or other investments. Despite there are currently more than 160 rural Islamic finance companies such as microlenders and co-operatives and a number of charitable organisations with a demand for asset structuring, there is a lack of financial services that go beyond simple transactions.
This is astonishing as about 210mn of Indonesia's 240mn population are Muslims, which means a large pool of natural demand for Islamic finance products should be prevalent. "While Islamic finance is only one part of an Islamic economy, it has great potential here," says Imam T Saptono, member of the Indonesian Islamic Banking Association. "This time it could become the driver that creates a more advanced Islamic economy." The Middle East is not only more than willing to tap into an upcoming broader Indonesian sukuk programme, it also finds a large Islamic finance sector to develop in Indonesia through business initiatives, mergers and acquisitions and other ventures, provided the Indonesian government eases certain regulations concerning foreign participation in the banking sector.
It would only be good for the entire fiscal ecosystem in Indonesia, because apart from infrastructure financing, a larger domestic sukuk market would also help Indonesian corporates reduce their dependency on foreign borrowing which - in turn - could benefit the country's ailing currency. And in the retail finance market, including insurance, there are a lot of opportunities for value creation that yet have to be unlocked.
http://www.zawya.com/story/Huge_potential_for_Mideast_investors_in_Indonesian_Islamic_finance_market-ZAWYA20140404042659/
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