Thursday, August 19, 2010

Indonesian Central Bank Reviewing Shariah Lending Rules

Jakarta. The central bank is considering easing restrictions on Islamic banks by allowing them to adjust loan terms and boost lending.

“Shariah banks have asked that loans that are still current be allowed to be restructured,” Mulya Siregar, director of Islamic banking at the central bank, said in an interview in Jakarta on Tuesday.

“We’re having intensive discussions and will make a decision by the fourth quarter at the latest.” Current regulations, issued in 2008, only permit terms to be altered once debt becomes non-performing, Mulya said.

Indonesia, home to 192 million Muslims, introduced a law two years ago allowing financial institutions to offer services that comply with Shariah principles, 25 years after Malaysia.

Islamic banking assets total $93 billion in Malaysia in 2009, or 20 percent of the total, compared with 2.9 percent in Indonesia, according to central bank data.

Islamic finance assets in Indonesia may increase 30 percent to Rp 97 trillion ($10.77 billion) by the end of 2010, up from Rp 75 trillion in 2009, Mulya said.

“Even with the late introduction of the laws, growth has been remarkable,” Mulya said. “We only had three Islamic banks in early 2008, now we have 10.” The 2008 law requires all lenders to spin off their Shariah divisions into separate units by 2023, he said.

Non-performing loans at Indonesia’s Islamic banks fell to 3.89 percent of total lending in June, down from 4.39 percent in the same month a year earlier, according to the central bank’s Web site.

That’s more than the 2.24 percent rate for troubled loans at secular commercial banks, down from 2.72 percent a year ago.

“Allowing banks to restructure early would help them focus on giving loans,” Teguh Hartanto, an analyst at state-owned Bahana Securities, said in an interview on Wednesday.

“Credit quality can deteriorate easily in a bad economic environment, forcing banks to curb lending as they have to maintain or even increase capital to support the higher NPL level.”

The non-performing loan rate could hit 4.7 percent if economic conditions deteriorate by 25 percent, the central bank said in a March report.

Indonesia needs to offer tax incentives to attract investors who don’t use religion as a basis for making investments in order to expand Islamic financial services, said Fauzi Ichsan, an economist at Standard Chartered.

“We have to understand that Indonesia is the world’s biggest Muslim country but its population is secular,” said Fauzi, whose bank gets most of its profit from emerging markets.

“Unless it has full government and parliamentary support, growth for Islamic finance in Indonesia may not be as smooth and large as Malaysia or some other Muslim countries.”

Banking that complies with the religion’s ban on interest is increasing at a rate of 15 percent annually, according to the Islamic Financial Services Board, making it the fastest-growing segment in the financial industry. Assets held by Islamic banks may climb to $1.6 trillion by 2012, IFSB and the Islamic Development Bank said in a report in April.


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