Industry Profie: Sharia (Islamic) Banking System in Indonesia- 2009 Continued 4

DEVELOPMENT OF SHARIA BANKS (ISLAMIC BANKING) IN INDONESIA

February 2009

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Sharia banks business flourishing

Bank Negara Indonesia (BNI) another state bank is preparing to spin off its sharia unit into a sharia bank. Currently BNI is in the process of preparing legal draft. After the process of spin off has been completed, the Islamic Corporation for The Private Sector (ICD) from Middle East will invest in the sharia bank. BNI and ICD already signed a memorandum of understanding with share split of 60% for ICD and 40% for BNI. In the first phase, the sharia bank will have a capital of US$ 250 million. After three years, the capital will be doubled to US$ 500 million. Currently BNI's UUS has an equity of Rp400 billion and it's has non fixed assets valued at Rp300 billion that could be changed into equity.

Despite the global financial crisis, a number of new sharia banks are expected to come on line this year. New investors are expected to establish new sharia banks or acquire conventional banks to be converted into sharia banks. A number of investors have investment to establish new sharia banks in the country such as Albaraka Banking Group and Qatar Islamic Bank from Middle East.

In addition, there is an investor from Oman planning to establish a new sharia bank with an investment of Rp1 trillion.

A number of local private banks also plan to establish sharia banks this year. BCA plans to convert Bank UIB it acquired at price of Rp248.3 billion in February, 2009. The process of conversion will take a year. Investors from Malaysia and Middle East are expected to become strategic partners in the sharia bank. Bank UIB has 12 offices including 5 branch offices and 7 cash offices. Bank UIB has assets valued at Rp 665.8 billion by June 2008.

PT CIMB Niaga Tbk (BNGA) plans to have a UUS after the merger with PT Lippo Bank Tbk.

PT Bank Eksekutif Tbk (BE) already had plan to have a sharia unit in 2008 to operate mainly in Aceh, The opening of the unit was part of the bank's expansion plan to have new four branch offices in Aceh, Yogyakarta, Pekanbaru and Banjarmasin and an auxiliary branch office in Medan. The bank would spend an estimated Rp 4 billion to open each of the branch offices.

Panin Bank wants to expand business to sharia banking. The bank will convert Bank Harfa it has acquired into a sharia bank. Panin Bank wholly acquired Bank Harfa, which is based in Surabaya at a price of Rp 50 billion. Bank Victoria also plans to establish a sharia bank.

A number of foreign banks also have shown strong interest in operating sharia units or subsidiaries in the country. Bank ABN Amro Indonesia planned last year to have a UUS. HSBC, which is based in London, has opened a UUS named HSBC Amanah and Standard Chartered Bank planned to have a USS this year.

Main players in sharia banking

Bank Muamalat Indonesia (BMI)

BMI was established in 1991 and started operation in 1992. Bank Muamalat is the first sharia bank in the country. It is partly owned by Islamic development Bank (IDB). It has maintains good rating of triple A from Moody's and Standard&Poors. Its other shareholders are the Indonesian Ulema Council (MUI) and more than 800,000 institutional and individual shareholders.

In 2008, BMI opened 37 new branch offices in Indonesia and Malaysia and expanded its System of Online Payment Point (SOPP) in 3,600 post offices all over Indonesia. From 37 new branch offices, 8 are located in Medan, Surabaya and Kuala Lumpur, and the rest in 29 locations including Mamuju, West Sulawesi, Cilegon and Jakarta (27 offices),

This year, BMI plans to open 70 more branches bringing the total number of its offices to 325 from 224 offices in 2008.

In 2008, BMI overshot its profit target of Rp277 billion to Rp300 billion. Its Return on Equity, therefore, rose from 23% in 2007 to 40% in 2008.

The increase in RoE and RoA was followed by a 20% increase in assets to Rp12.67 trillion in 2008 from Rp10.57 trillion in 2007. The bank also recorded a strong growth 16% in third party fund from Rp8.69 trillion in 2007 to Rp10.07 trillion in 2008. Similarly a 22% increase was recorded in its financing from Rp8.62 trillion in 2007 to Rp10.48 trillion in 2008. Noteworthy was growing support for the real sector with a financing to debt ratio (FDR) of 104% and with none performing financing (NPF) at a manageable level of only 3.8%.

In 2008, BMI's customer base growth was attributable mainly to Shar-E customers. By December 2008, Shar-E customers totaled 1.8 million or an increase of 50% from 1.2 million by the end of 2007.

The increase in the number of customers came with the expansion of its chain of offices. By Mid 2008, Bank Muamalat operated 223 branches.

In 2007, a consortium of BMI and BNI Syariah and International Leasing and Investment Company (ILIC) provided a credit facility of Rp150 billion for PT Trigana Air Service (TGA). BMI provided Rp15 billion, BNI Syariah Rp 50 billion and ILIC Rp85 billion. The loan was arranged by BMI and Al-Ijarah Agent BMI. It was the first credit offered by BMI for air transport companies.

Trigana is a private airline operating in eastern Indonesia. The loan fund was used by the airline, which serves flights between Papua, Kupang in East Nusatenggara, to expand its capacity by buying two aircraft with a seat capacity of 72 passengers. The loan was to be repaid in 5 years carrying an annual interest of 15%.

In 2008, BMI established a subsidiary named First Islamic Investment Bank Ltd (FIIB) to operate as investment bank. Its initial capital was US$10 million to be increase by phases to US$100 million. The initial investment would be used to develop infrastructure including leasing of buildings and installation of IT system, which will cost around US$1 million.

So far, BMI has been granted letter of content from Bank Indonesia (BI) and Labuan Offshore Financial Services Authority in East Malaysia. According to plan, the investment bank will have its office in Kuala Lumpur. Labuan is a city in Malaysia, well known to foreign investors. Malaysia has been selected to be the operational place for the investment bank as the taxes are lower in the country. The new sharia bank will be oriented to mid and long term equity financing of 5-10 years. Apart from equity financing, FIIB will offer debt financing service and financial advisory service.

FIIB will finance infrastructure projects in Indonesia using funds it will raise in Malaysia.

With total assets of Rp12.1 trillion by September 2008, BMI was the second largest sharia bank in the country after BSM. It has a 24.4% share of sharia bank market in the country.

Bank Syariah Mandiri (BSM)

In 1999, PT. Bank Mandiri acquired PT. Bank Susila Bakti from Yayasan Kesejahteraan Pegawai (YKP) PT. Bank Dagang Negara and PT. Mahkota Prestasi. Later Bank Mandiri converted PT. Bank Susila Bakti into a sharia bank named PT. Bank Syariah Mandiri (BSM).

BSM became the sales agent for Ritel Indonesia's first edition of sharia bond or SR 001. By taking part in sharia bond sales, BMI has taken part in the country's economic development through sharia investment. With BMI becoming the sale agent of SR 001, its customers could access the product. BSM also continues to develop public saving products such as GPRS-based BSM mobile banking saving and payment of premium of Tafakul Insurance. This service facilitates customers in making banking transaction such as checking account balance, latest transactions and real time inter-bank transfer. The service could also be used in the payment of Tafakul insurance premium through hand phone.

Other products offered by BSM include BSM net banking facilitating banking transaction through internet, Transfer of D.U.I.T enabling transfer of money from abroad to Indonesia in cooperation with Merchentrade Asia (MTA) Malaysia.

BSM has also offered its latest product called gold saving. Customers or prospective customers that want to do the saving do not have to bring gold to the office of BSM. They need only to open an account and pay a mount of money equivalent to the gold price. The saving book, therefore, will record the size of gold instead of an amount of money. Any time the customers need money the could make a request for credit with gold saving as collateral. The credit could be as much as 85% of the value of the gold in saving. Credit could be disbursed in a day.

With total assets of Rp16.5 trillion, BSM is the largest sharia bank in the country accounting for 33.3. % of the total assets of sharia banks in the country. Currently BSM has 292 offices in 24 provinces including 57 branch offices , 58 auxiliary branch offices , 67 cash offices, and 46 KLS, and 35 payment points, etc. All BSM services in all of its offices are connected online with ATM network including Bersama ATM, Mandiri ATM, and Prima ATM. No charge in transaction in the ATM Mandiri

Bank Syariah Mega Indonesia (BSMI)

The Para Group is made up of PT. Para Global Investindo and PT. Para Rekan Investama owned by Chairul Tanjung. It acquired PT Bank Umum Tugu in 2001 to be converted into a sharia bank on August 25, 2004 using the name of PT. Bank Syariah Mega Indonesia (BSMI). PT Para Global Investindo injected additional capital of Rp50 billion in 2006 to the new sharia bank.

In 2008, BSMI set fee-based income target at Rp20 billion. By the end of May, its fee-based income totaled Rp9 billion. The bank cooperated with PT Telkom in the payment of telecommunications charges. Its fee-based income through cooperation with Telkom, Indosat, Telkomsel and PLN was projected to reach Rp15 billion to Rp20 billion in 2008. In the first five months of that year it already had Rp9 billion.

BSMI's financing in the telecommunications sector was projected to reach Rp400 billion in 2008. In the first five month it already achieved half or Rp200 billion of the target. BSMI is quite focuses on financing business in the telecommunication sector. Almost 20% of its financing service is for the sector. It also offers financing service in other sectors such as mining, paper industry and infrastructure.

In 2007, BSMI spent Rp150 billion in financing service in the telecommunication sector including Rp75 billion in East Java. And Rp75 billion in eastern Indonesia.

Bank Mega Syariah has been aggressive in expanding its network by opening new branches that totaled 200 units in 2008. Its branches are located in Java, Sumatra and Sulawesi.

BSMI planned to issue sharia subordinate bonds valued Rp300 billion - Rp500 billion in the second half of 2009 to strengthen its capital and financing capacity. This year BSMI is set to increase its outstanding financing to Rp2.4 trillion after the opening of a number of new branches now totaling 230 units.

By the end of 2008, its outstanding financing was Rp2.1 trillion, or up by around Rp300 billion from 2007. Most of financing service is for small and medium enterprises. Until now BSMI already provided financing services for 40,000 customer's mostly small and medium enterprises.

By the end of 2008, its assets totaled Rp3.1 trillion, up 22% from a year earlier. Its third party fund also rose from Rp2.1 trillion in 2007 to Rp2.64 trillion in 2008. With total assets of Rp3.1 trillion in 2008, BSMI accounted for 6.2% of the total assets of sharia banks in the country.

In 2009, BSMI is set to increase its assets to Rp6 trillion. With third party funds rising to Rp5.8 trillion.

BSMI plans to continue to open more branch offices in Jakarta, Bandung, Semarang, Surabaya, Kediri and other major cities. BSMI also cooperates with PT Artajasa Pembayaran Elektronis to operate ATM Bersama (joint ATM) and PT. Rintis Sejahtera as the operator of ATM Prima and Prima Debit to facilitate its transactions.

This year BNMI plans to open 170 new branches all over the country.

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