Indonesia Studying Tax Incentives for Islamic Finance

Oct. 20, 2010 (Bloomberg) -- Indonesia, the world’s most populous Muslim nation, is studying ways to make tax laws more conducive to developing Islamic finance, Mulya Siregar, director of Shariah banking at the central bank, said in Jakarta.

“Experience in countries which have successfully developed Shariah banking shows that tax incentives are very helpful in expanding the industry,” he told reporters. The study may be completed by the end of this year, said Siregar, declining to provide more details.

Indonesia is stepping up measures to catch up with Malaysia, the biggest market for sukuk, or debt that pays asset returns to comply with the religion’s ban on interest. Shariah-compliant assets held by financial institutions rose 43 percent to 85.9 trillion rupiah ($9.6 billion) at the end of September, from a year earlier, Siregar said. The government estimates the figure will rise to 97 trillion rupiah by year-end, he said.

Islamic banking assets in Indonesia totaled 75 trillion rupiah at the end of last year, about 2.9 percent of the total, Siregar said in August. That compares with Malaysia’s 337.6 billion ringgit ($109 billion), accounting for 20 percent of the country’s total, according to Bank Negara Malaysia’s website.

Infant Industry

Indonesia needs to do more to bolster investment in Islamic banking, said Ventje Rahardjo, president director of Jakarta- based PT Bank Syariah BRI, a unit of Indonesia’s second-largest lender by assets.

“We have been asked by the government to share our views” on this issue, Rahardjo told reporters. “We are discussing what types of things might help Shariah banks to compete with conventional banks because our Islamic finance industry is still in its infancy.”

Malaysia’s Prime Minister Najib Razak said on Oct. 15 the country plans to cut taxes on certain types of Shariah-compliant transactions to promote innovation in the industry that has total assets of $1 trillion. The government also announced plans last week to start selling Islamic bonds to individual investors

In the past year, Malaysia has also issued permits to global investors including Aberdeen Asset Management Plc and Franklin Templeton Investments to start Islamic fund management businesses.

Source: businessweek.com