DEVELOPMENT OF SHARIA BANKS (ISLAMIC BANKING) IN INDONESIA
February 2009
Total assets up 34.1% per year
The assets of sharia banks have continued to scale up in five years ending in 2008 growing 34.1% annually on the average. The assets were valued at Rp49.5 trillion in 2008 up from Rp15.3 trillion in 2004.
The number of sharia banks (BUS) is expected to continue to increase converted from UUS. In 2009, two UUS became BUS.
Bank Indonesia (BI) predicted an increase in the assets of sharia banks in 2009. Pessimistic target is set at Rp57 trillion or an increase of 25%, moderate target at Rp68 trillion or an increase of. 37% and optimistic target at Rp87 trillion or an increase of 75%. In 2010, the assets are expected to rise further to Rp124 trillion.
Third Party Funds up 32.8%
The amount of third party funds held by sharia banks has also increased from year to year. In the 204-2008 period, the amount grew 32.8% annually from Rp11.8 trillion to Rp 36.8 trillion - higher than the average growth recorded by conventional banks.
The third party funds in 2008 included mudharabah deposit making up Rp20.1 trillion or 54.6%, mudharabah saving making up Rp12.5 trillion (33.8%) and wadiah giro making up Rp 4.2 trillion (11.6%)
The growth rate is higher but the amount was much smaller or only 2% of the third party funds held by conventional banks.
Growing number of investors prefer to invest sharia banks than conventional banks . Many investors have been rejected by sharia banks on limited capacity of the banks to accommodate the investment.
Channeling offices have become the driving motor for the expansion of sharia banking industry especially in collecting third party funds.
Sharia banks have to offer attractive profit share to investors to remain competitive. In October, 2008, the financing to deposit ratio (FDR) of sharia banks reached 112%, with third party fund totaling Rp34 trillion and financing Rp37 trillion. FDR considered ideal is 80% - 90% to maintain liquidity.
All sharia banking products will be given additional logo of IB (Islamic banking). The logo is to develop the identity of sharia banks.
The largest sharia bank at present is Bank Syariah Mandiri (BSM), which in 2008 recorded Rp15 trillion in third party funds or an increase of 34% from the year before. The third party fund included savings amounting to Rp1.4 trillion or an increase of 36.4% from the year before.
The success of BSM in collecting third party funds is attributable to its wide network of outlets . In December 2008, BS had 313 outlets all over the country - including 57 branch offices, 58 auxiliary branch offices, 63 cash offices, 20 channeling offices and 24 payment offices.
The public savings in BSM have continued to increase. By July 2008, savings totaled Rp4.91 trillion or an increase of 56.87 % from Rp3.31 trillion in 2007. Increase has also been recorded in the number of depositors, up 35.42% from 876,042 to 1,186,381.
The cut in BI Rate makes sharia banks more competitive as a decline in BI Rate is normally followed with a cut in the interest in third party funds such as deposit and saving rate and then credit rate.
On the contrary if BI Rate increases, conventional banks would raise their interest rates making sharia banks less competitive. Under revenue sharing of sharia banking system the share of profit is equivalent to interest rate of 7%-8% in conventional banks. With a cut in BI Rate, the ratio in sharia banking will be more competitive. When BI Rate was more than 9% the interest rate on third party funds hovered around 9%-10%.
The ratio for small sharia investors is lower around 60% with 40% for banks . The ratio is higher for larger investors set at 65%, 80% and 90% with banks to have 35%, 20% or 10%. The ratios are used for mudharabah and wadiah.
Corporate customers normally have a deposit of more than Rp500 million and retail have less than Rp500 million, but there are also corporate customers having deposits of less than Rp100 million.
Sharia financing growing though slower
The past five years have seen a strong growth in the sharia financing service , up 35% annually. The highest growth rate was 37% recorded in 2007 when financing reaching Rp28 trillion, up further by 36.4% to Rp38.2 trillion in 2008.
The slower growth in 2008 came with sharper competition facing conventional banks, which offered a cut in credit rate.
In the last quarter of 2008, a number of sharia banks restrained from offering financing service although altogether an increase was recorded in financing to Rp 38.2 trillion as a number of other major sharia banks such as UUS Bank Jabar, Bank Syariah Mandiri (BSM), and UUS Bank BNI continued to provide financing services.
Amid the global financial crisis, the West Java BPD (Bank Jabar) has to be more careful in observing the prudential banking principle in offering financing .The sharia bank offers only short term financing service and the service is provided only for business not directly affected by the crisis and not needing foreign exchange such as small and medium enterprises and the rest for corporations.
In 2008 financing to deposit ratio (FDR) of Bank Jabar Syariah was 250%. By the end of 2008, outstanding financing by Bank Jabar grew 28% to Rp593 billion with third party funds at Rp290 billion.
BMI also decided to be more selective in offering financing service. Increase in financing in 2008 was attributable partly to a number of regulations of Bank Indonesia issued that year such as on double taxation making the cost of financing cheaper.
However, sharia financing remains much smaller than credits provided by conventional banks with outstanding credit reaching Rp 1,353 trillion .in 2008. Sharia banks are still facing limited capital to be able to compete conventional banks.
Bank Muamalat Indonesia (BMI), the country's first bank and one of the largest sharia banks, recorded outstanding financing at Rp10.2 trillion by the end of August 2008 - falling short of its target of Rp12.5 trillion. Its assets were valued at Rp11.7 trillion, as against its target of Rp13 trillion and its FDR was 97%.
BMI started expansion to the real sector in July, 2008 with financing reaching Rp 602 billion. Bank Muamalat still had fund at Rp 200 billion by the end of 2008. Financing expansion did not cause a decline in its CAR of 12% with compensation from various other revenues. Medium and large businesses account for 67% or Rp408 billion of its financing service with small and medium enterprises given only Rp194 billion.
In 2009, sharia banking financing is forecast to decline as the global financing crisis has also begun to have its effects on sharia businesses. Many sharia banks have restrained from offering financing service.
Non Performing Financing