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