Industry Profie: Sharia Banking System in Indonesia- 2009

DEVELOPMENT OF SHARIA BANKS (ISLAMIC BANKING) IN INDONESIA

February 2009

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Non Performing Financing

The non performing financing (NPF) ratio of sharia banking in 2007 was still under control at 4%. In 2008, the ratio even declined to 3.95%. The declined in the NPF ratio was recorded mainly in the trading and construction sectors.

The increase in the NPF ratio is still within in the manageable level good and proper management, the NPF will decline to a safer level. The regulation is yet to be determined through standardization by The Islamic Financial Services Board (IFSB) which is the international agency to standardize sharia banking regulations.

The market share target of 5% yet to be achieved.

The market share of sharia banks is relatively small compared with that of conventional banks. In 2008, the assets of sharia banks totaled Rp49.5 trillion, or 2.2% of the total assets of conventional banks in the country. The share, however, represented an increase from 1.85% in the previous year.

Bank Indonesia (BI) has projected that the assets of sharia banks will rise to Rp 57 trillion in 2009 or 5% of the total assets of conventional banks in the country.

Meanwhile, the market of sharia banking is currently dominated by three largest sharia banks - Bank Syariah Mandiri, which has assets at Rp16.5 trillion, or 33.3% of he total assets of sharia banks; Bank Muamalat Indonesia with assets of Rp12.1 trillion (24.4%) and Bank Mega Syariah with assets of Rp3.1 trillion (6.2%). Combined the three banks control 63.7% of the market. Other sharia banks and UUS split the remaining 36.3%.

Meanwhile, the numbers of customers and financing have increased from year to year. In 2007, sharia bank customers totaled only 2.845 million, up to 3.799 million in 2008.

New Investment

BI said sharia banking industry in Indonesia could not rely on organic growth for expansion. The industry needs non organic growth such by acquiring conventional banks to be converted into sharia banks. Based on a new regulation of the central bank, it is easier to establish a sharia bank through spinning off sharia units into independent sharia banks. Under the regulation, establishing a sharia bank through spin off will need a capital of only Rp500 billion. Earlier the minimum capital was set at Rp1 trillion.

Early 2009, two new sharia banks -- Bank Bukopin Syariah and Bank BRI Syariah. Came on line. The two sharia banks were formerly conventional banks acquired and converted into sharia banks by Bank Bukopin and Bank Rakyat Indonesia (BRI) respectively.

Bank Bukopin Syariah

Earlier, Bank Bukopin acquired and made Bank Persyarikatan Indonesia (BPI) a subsidiary. Early this year the subsidiary was converted into a sharia bank after being merged with a sharia unit of Bank Bukopin. The new sharia bank is named PT Bank Bukopin Syariah (BBS). BBS shareholders include Bank Bukopin (65%), PT. Mega Capital Indonesia (9.46%), PT. Jamsostek (9.46%) and PT. Bakrie Capital (2.16%) and others (1.57%).

BBS offers financing service in sales and purchase (murabaha) and ijaroh. BBS focuses more on offering financing service for small and medium businesses, but it also provides financing service in the education, trading, and health and construction sectors. In the agricultural sector it focuses more on food commodities like rice and sugar.

BBS is set to increase its financing service by Rp350 billion this year mainly for the education, telecommunications and health sectors. Currently BBS has five branch offices and 39 channeling offices. This year it plans to open two more branch offices in Solo and Yogyakarta.

Bank BRI Syariah

PT Bank Rakyat Indonesia (BRI) plans to spin off its sharia units (UUS). The entire assets of the UUS will taken over by PT Bank Jasa Arta , which has been acquired by BRI at a price of Rp61 billion. After the process, Bank Jasa Arta will be converted into a sharia bank to be named PT. Bank Syariah BRI has agreed to provide capital participation of Rp500 billion in the sharia bank subsidiary.

Formerly PT Bank Jasa Arta was a foreign exchange bank with assets of Rp261.2 billion by December, 2007. Almost 100% of its shares were owned by BRI.

BRI spun off its UUS to allow it to focus more involvement in financing small and medium businesses. UUS had only small contributed to the bank financing business.

After the process of spin off has been completed, BRI plans to convert 1,000 units of its 5,000 rural branches into sharia banking units.

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