Islamic Finance Looks to Build

The Islamic financial sector in Indonesia is hoping a mix of state-backed infrastructure projects and regulatory reforms will help the country’s sharia-compliant lenders to continue their rapid expansion, allowing the industry to realize its full potential and to come out of the shadows of other regional banking powers.

Indonesia was a relative late-comer to the Islamic finance sector, only ratifying legislation to clear the way for sharia-compliant services a quarter of a century after Malaysia had opened the door to Islamic banking and associated activities.

Some four years down the road and Indonesia has 11 banks operating solely in compliance with Islamic finance requirements and a further 23 commercial lenders offering sharia-compliant services.

Between them, Indonesia’s Islamic banking institutions held more than $11 billion in assets as of the end of 2010, a steep increase on the $7.7 billion of the previous year. While this rate of growth represented an almost 50 percent increase, the total still only amounted to some 3 percent of the combined assets of the nation’s banking sector. This is a far cry from the 20 percent of Malaysia’s total banking assets held by that country’s Islamic lenders, with Indonesia’s Islamic banking assets equivalent to just 9 percent of Malaysia’s in 2010, according to data released by the Indonesian central bank.

Following its somewhat slow start, an understanding of the sector is developing, with Bank Indonesia forecasting that Islamic lenders can expect to see asset growth of more than 50 percent this year, in part due to an increase in acceptance by clients.

Islamic banking has emerged as one of the most rapidly expanding sectors in the nation’s economy and is expected to play a significant role in the coming years, according to the report, with asset levels topping $17.9 billion by the end of the year.

In a statement issued on Feb. 13, Mulya Siregar, the director of sharia finance at the reserve bank, said that the prospects for the sector were bright.

“If Indonesia’s economy grows at a decent pace, the assets of Islamic banks will increase by 55 percent,” said Mulya. “With total assets exceeding $11.2 billion last year, that should become a solid base for Indonesia’s Islamic banks, which now have more than 6 million customers and employ more than 20,000 workers.”

One of the factors expected to drive forward the economy, and to present significant growth opportunities for the Islamic financial sector in the coming years will be the government’s plans to strengthen the country’s infrastructure with investment of up to $140 billion over the next five years. The main focus will be on the
transport sector, with road and rail projects to the fore, along with utilities such as power stations and distribution grids, all of which are essential for economic development.

Having said it can directly fund only around one-third of the total outlays, the state is looking to the private sector to enter into partnerships on many of the projects. It is also counting on the Islamic banking sector to make a major contribution to the capital investments.

According to Baharudin Abd Majid, the president director of PT Bank Maybank Syariah Indonesia, a subsidiary of Malayan Banking, the government’s investment projects offer big opportunities for Islamic lenders. He suggests, however, that players in the sector may need to join forces to develop the levels of capital needed by the state.

“There are a lot of roads to be built, as well as power, oil and gas plants,” Baharudin told the Bloomberg news agency on March 23. “These are big projects and Islamic banks do not have the capacity to fund them alone, so we need to come together.”

While hoping to tap into the Islamic finance market to fund its own development program, the government is also looking at ways to deepen the sharia-compliant capital pool, mulling a series of measures aimed at attracting more investors and increasing the appeal of launching sukuk offerings.

Among the reforms put forward by Bank Indonesia is to cut taxes payable by banks and clients on income from Islamic finance accounts. Bank Indonesia is also working to smooth the way for more Islamic banking products to be floated on the market, setting up a committee of experts to develop a streamlined approval process for new products.

By making Islamic financial products more appealing and more readily accessible, Indonesia will be able to better utilize the high levels of local liquidity and potentially attract investments from overseas, though it will take some time for all of the proposed reforms to be put in place and have an impact.


From : The Jakarta Post

Strong Growth for Asia in 2011, 2012

Asian economic growth will ease slightly to just under 8 percent for the next two years as the region continues a solid recovery, the Asian Development Bank said Wednesday, although rising food prices threatened to throw more people into poverty.

The Manila-based lender said the region's economic recovery is still firm even though those growth rates are lower than the 9 percent expansion in 2010, when an exceptionally strong rebound from the global financial crisis took place.

The region included in the bank's annual economic report - 45 developing or newly industrializing Asian economies, excluding Japan - are forecast to grow 7.8 percent in 2011 and 7.7 percent in 2012.

"Developing Asia, having shown resilience throughout the global recession, is now consolidating its recovery and rapid expansion in the region's two giants - the People's Republic of China and India - will continue to lift regional and global growth," Chief Economist Changyong Rhee said.

However, the bank warned that inflation remains one of the region's biggest challenges, with prices forecast to rise 5.3 percent this year before tapering off to 4.6 percent in 2012.

Asia's developing countries are home to two-thirds of the world's poor, who tend to spend more of their incomes on food and will be hit harder by rising food prices.

"This widens income inequality and could potentially lead to social tensions," the report said.

A weak U.S. economy, sovereign debt problems in euro-zone countries and Japan's recovery from a devastating earthquake and tsunami are other possible threats to growth, the ADB said.

Higher oil prices stemming from unrest in the Middle East could also undermine the region's recovery, the bank said, while also noting that Japan's nuclear crisis is raising concerns about nuclear energy as an alternative energy source.

The ADB encouraged Asia's emerging economies to forge so-called "South-South" links with other developing nations in the southern hemisphere to avoid relying on the wealthy industrialized West, whose economies continue to slump after the 2008 global financial crisis.

East Asian economies including China, Hong Kong, Taiwan and South Korea will lead growth, expanding an overall 8.4 percent in 2011 and 8.1 percent in 2012.

The ADB said China's economic expansion will continue to be driven by government investment in infrastructure and other fixed assets, although it will slow as stimulus spending falls and interest rates rise. Export growth will also slow as demand from major Western markets remains sluggish, the ADB said.

India's economy, which grew 8.6 percent in 2010, is forecast to expand 8.2 percent in 2011 before strengthening to 8.8 percent in 2012.

Southeast Asia, including Singapore, Thailand, Malaysia and the Philippines, will grow 5.5 percent in 2011 and 5.7 percent in 2012. Indonesia and Vietnam are expected to expand more than 6 percent for the two-year period.

From : The Jakarta Post

Economy Shrinks for 3rd Straight Year

Ireland's economy shrank in 2010 for the third straight year and the yields on Irish bonds rose to euro-era highs Thursday amid fears that the cost of rescuing the country's failed banks will overwhelm its finances even with the international bailout.

Economists had expected marginally positive figures for 2010, and the government's deficit-fighting plans require at least tepid growth to bring in needed tax revenues.

But Ireland's 2010 gross domestic product instead fell a further 1.0 percent. Gross national product - which provides a better measure of Ireland's domestic economy because it excludes the largely expatriated profits of 950 foreign companies - fell 2.1 percent. In 2009, Irish GDP fell 7.6 percent and GNP 10.9 percent.

Ireland's finances have been ravaged by the 2008 collapse of a property-driven boom and its decision to insure the banks' foreign bondholders against losses. The country's economic turmoil led to an international bailout last year, early elections last month and a new government.

The payout on Irish bonds - which rise as their underlying value falls - has leaped this year despite Ireland's negotiation in November of an emergency credit line from the European Union and International Monetary Fund.

The investor selloff of Irish debt securities reflects growing expectations that Ireland will be forced to make bondholders absorb losses at Irish state-owned banks, a form of default, within the next few years.

The yield on Ireland's 10-year bonds broke through the 10 percent barrier for the first time Wednesday and peaked Thursday at 10.21 percent. More alarmingly, the yields on shorter-term securities surged even higher, reflecting the view that an Irish default could come within the next few years.

The yield on Irish 3-year bonds topped 11 percent for the first time Wednesday and reached 11.13 percent Thursday.

The latest signs of Irish economic weakness came as Prime Minister Enda Kenny attended an EU summit in Brussels focused on solving the wider eurozone debt crisis.

Irish lawmaker Gay Mitchell confirmed that Kenny would seek EU approval for Ireland to shift many billions' worth of its bank debt burdens over to senior bondholders - chiefly British, German and American banks and hedge funds.

Ireland over the past three years has guaranteed total repayment to senior bondholders in a futile effort to keep the flow of foreign bank lending alive. But over the past year, Ireland's six largely state-owned banks have been deserted by many investors regardless, leaving them heavily dependent on short-term funds from the European Central Bank and Irish Central Bank exceeding euro180 billion ($250 billion). A fresh wave of bank bonds is due to mature within the next few months.

"We have a problem with recapitalization of our banks. We're not threatening anybody. We're saying please help us out on this ... Ireland is not capable on its own of doing this," Mitchell from the governing Fine Gael party said in a phone interview from Brussels.

The rising bond yields do not directly hit Ireland's debt financing costs, because the EU-IMF's euro67.5 billion ($95 billion) loan package means Ireland has no immediate need to seek money from bond markets. Ireland would have to pay these higher yields only if it auctioned new bonds now.

Ireland this year has drawn more than euro11 billion ($15.5 billion) from the EU-IMF loan pool, which charges an average interest rate of 5.8 percent. If Ireland had to turn to the bond markets now for funds, it would have to pay nearly double that.

That bank insurance scheme, designed to prevent six Irish banks from falling like dominoes, failed to prevent Ireland from being forced to nationalize four of the banks and take a major stake in a fifth. Those moves transformed the banks' private bond obligations into a state debt burden currently estimated to exceed euro50 billion ($70 billion).

More than half of the EU-IMF's credit line has been earmarked for bolstering the banks. But Ireland says it will publish new stress-test results on four banks March 31 that could raise recapitalization needs by up to euro35 billion ($50 billion) more - unless the EU backs a new deal shifting some of those losses to bondholders.

From : The Jakarta Post