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Thursday, 28 May 2015

Indonesia: Government Plan Aims To Spur Consolidation Of Islamic Banks

JAKARTA, Indonesia – Indonesia’s efforts to develop its Islamic financial market will encourage smaller Islamic banks in the country to consolidate and create a larger domestic sukuk market, said Moody’s Investors Service.
The government is preparing a five-year plan to develop Islamic finance by encouraging the three large state-owned Islamic banks ‎ to merge. It says doing so will create more efficiency and is expected to spur smaller players to link up in order to compete with the new entity.
The government is also preparing regulations that are more conducive to Islamic or Shariah banking. The details are expected to be finalized later this year.
Among Sharia business tenets is a rule that prohibits banks from earning interest. Indonesia, which has the world’s largest Muslim population, currently has 12 banks that comply with Sharia principles.
But while growth in Islamic banking has been in excess of 30% a year since 2005, when it accounted for 1.4% of the banking system, the Islamic banking sector still only captures a 5% share, said Khalid Howladar, Moody’s Global Head of Islamic Finance.
By contrast, in Malaysia, where only 61% of the population is Muslim, Islamic banks garner a 20% market share.
“The Indonesian government’s Islamic roadmap should drive growth in the sector,” Mr. Howladar said in a press release.
Financial analysts say Islamic banking in Indonesia has found it hard to grow due to a lack of support from the government, an uncertain legal environment, and a lack of skilled manpower needed to develop innovative Islamic financial products.
The government is now encouraging the fully-fledged Shariah subsidiaries of the state-owned Bank Rakyat Indonesia, Bank Negara Indonesia and Bank Mandiri to merge, creating a new unit with total assets of $8 billion. The government says it expects that the new institution will be able to quadruple Islamic banks’ market share to 20% by 2018.
The central bank and the agency that regulates and supervises the financial sector, known as OJK, are also encouraging conventional banks to spin off their 23 Shariah-compl‎iant units into fully-fledged Islamic banks.
(Indonesia Real Times / 27 May 2015)
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Islamic financial products risk losing their uniqueness

Islamic finance continues to expand globally but the industry risks losing its differentation from conventional financial products and lacks official data to ensure better supervision, an oversight body said.
Islamic finance weathered the global financial crisis better than conventional banking and is recovering in areas such as profitability and asset quality, the Islamic Financial Services Board (IFSB) said in its third financial stability report.
Islamic finance, which has its core markets in the Middle East and Southeast Asia, follows religious principles that ban interest and shun outright speculation, and as such is seen as an alternative to interest-based banking.
But the industry’s fastest-growing Islamic bonds segment (sukuk) is moving away from profit-sharing structures, which risk weakening the industry’s value proposition.
Less than 7 percent of all new sukuk issued in the first three quarters of 2014 were based on risk-sharing contracts and instead favoured sales-based contracts, the report found.
This could lead sukuk to be valued using similar pricing and risk management approaches used for bonds.
“As a result, any adversity in the global financial system, even if it originates in the conventional sector, has an impact on the financial stability of the sukuk market.”
This was observed in the volatility stemming from the U.S. Federal Reserve’s monetary policy meetings, which had identical effects on both the sukuk and bond markets, the report said.
Another concern is the lack of official data to help monitor and supervise the industry. Some public and private sector entities collect such information but in most cases it is not standardised or comprehensive, the IFSB said.
Last month, the IFSB launched a databank of industry indicators covering 15 countries aiming to help fill this gap.
Islamic finance now holds systemic importance in countries such as Kuwait and Qatar, and has made wider gains buoyed by support from governments such as Pakistan and Turkey.
But with growth come more regulatory requirements, such as consumer protection tools in the form of sharia-compliant lender of last resort facilities, which remain rare.
The IFSB found that out of 24 countries surveyed, only Bahrain, Malaysia, Nigeria and Sudan have implemented such facilities. Fifteen respondents said they would consider lender of last resort provisions, but timeframes ranged from one to five years.
Jordan expects to have a lender of last resort facility fully operational within one to two years, the report said.
(Reuters / 27 May 2015)
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