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Monday, 28 September 2015

Indonesia prays for Islamic banking boom

JAKARTA – Indonesian teacher Nina Ramadhaniah hopes for "blessings from Allah" by opening a Sharia bank account — the sort of pious customer the world's most-populous Muslim-majority country is praying for as it launches an Islamic finance drive.

Indonesia, Southeast Asia's biggest economy, has a Muslim population of around 225 million, but this huge number of faithful has not translated into success for Sharia banks, institutions required to do business in line with Islamic principles.

Now regulators have launched a plan aimed at growing the sector, which currently accounts for less than five per cent of banking assets, compared to a quarter in neighbouring, more developed Muslim-majority Malaysia and around half in Saudi Arabia. 

Authorities believe it is a good moment, with many Indonesians getting wealthier after years of strong economic growth and an increasing trend towards piety across broad sections of society.

Many of those without bank accounts, estimated at about 40 per cent of the population, are soon expected to open one.

"The situation is an opportunity for the Islamic banking business to get bigger," said Nasirwan Ilyas, a senior official from the Islamic banking division of the Financial Services Authority (OJK). 
The OJK is spearheading the drive, and unveiled a five-year roadmap earlier this year that included plans to educate the public about Sharia lenders and the establishment of an Islamic finance committee to better manage the sector.

'Interest is haram' 

Key features of Sharia banking include the prohibition of interest on loans or customer deposits, and a ban on investing in "non-Islamic" businesses, such as those involving pork or alcohol.

For teacher Ramadhaniah, who has an account with Indonesia's biggest Islamic lender, Bank Syariah Mandiri, the ban on interest is a key attraction. 

"Charging interest is haram [against Islam], ill-gotten gains that will not bring me any blessings from Allah," the 44-year-old told AFP. "I don't want to live in sin."

Sharia accounts often work on a "profit-and-loss sharing" model, meaning customers get a windfall when the bank does well but can lose out when it does badly.

There are obvious disadvantages. Sharia lenders generally offer lower returns on investments and their modest size often means they provide fewer services than larger, conventional peers — many shops are not equipped to accept their debit cards.

Nevertheless, Islamic banks have proven popular in recent years, with the sector expanding on average more than 40 per cent a year between 2008 and 2012, according to the OJK.

The growth came after laws were changed to make it easier to establish an Islamic bank, and there are now a plethora of standalone Sharia lenders, Islamic banking units attached to conventional banks, and smaller Islamic financial institutions in the countryside.

Growth in the sector has lost steam due to a broader slowdown in the economy, which is expanding at six-year lows — giving authorities another reason to launch their drive.

Islamic mega-bank 

Central to the overhaul is a plan to set up a National Islamic Finance Committee this year, to oversee the sector by bringing together representatives from different government agencies and act as a contact point for potential foreign investors.

Currently responsibility for the sector is spread around different bodies, such as the OJK, the central bank and the finance ministry, according to the OJK's Ilyas.

It is modelled after similar bodies in other countries, such as the International Islamic Financial Centre in Malaysia, where the sector is already far more developed as the government started supporting it some years ago. 

In addition to the OJK roadmap, the government has announced plans to merge the Islamic banking subsidiaries of four state-owned banks to create an Islamic mega-bank, which should be able to provide better services than the current Islamic lenders.

While observers have broadly welcomed the plans, they concede that many difficulties remain.
Khalid Howladar, Moody's global head of Islamic finance, said it would be "quite a challenge" to grow the sector to a substantial level.

"The market is growing faster than conventional but from a very low base," he said, adding Islamic banks in Indonesia did not offer "substantive competition" to their non-Sharia peers.
But for Ramadhaniah and a growing army of devout Indonesians with new-found spending power, Islamic banks remain the only choice.

(The Jordan Times / 27 September 2015)

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Lahore—Pak-China Joint Chamber of Commerce and Industry (PCJCCI) Saturday called for making the businesses and commercial activities in accordance with Islamic financial laws. 

The PCJCCI President Shah Faisal Afridi told APP here that Islamic banking has proved over time that it is based on firm and sound economic principles and has a good potential to become an alternative system of banking especially in view of the global financial crises. However, efforts should be made to modify the existing structure to provide better products andquality service within the ambit of Islamic laws, he said. He said all stakeholders should understand the limitations at this stage and work towards its advancement to develop an economic system truly reflective of the sacred principles of Islam. 

According to Global Islamic Finance Report, Pakistan ranked at number nine in the world in terms of development of Islamic financial services industry in the country, and second largest Islamic market (population-wise) after Indonesia, and could become the most important player in Islamic banking and finance, if it attained 20 percent market share. Faisal Afridi said, “Time has come where we should look ahead and concentrate to develop innovative products with more perfection and purity.” 

He mentioned that growth of Islamic banking in the country has been over 30 percent in last few years, which is certainly above the average global growth rate of Islamic banking and finance. “If this trend continues, then one should expect that in the next three years Islamic banking assets will at least double from its current size of Rs 926 billion.” 

“If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20 and 30 percent of the market share,” he added. He said, at present there are more than 600 Islamic banking branches throughout Pakistan and 19 Islamic banking institutions are offering commercial banking services as he appreciated the new Islamic banking strategy by the State Bank of Pakistan to double the number of Islamic banking branches in next four years. 

“To achieve the desired goal, we need highly competent, motivated and involved persons with required knowledge of conventional banking and finance as well as knowledge of Islamic Shariah,” he asserted. Faisal Afridi mentioned to product innovation, development and research, flexible and practical application and enforcement of shariah principles, creation of global financial hubs and regulators as key drivers for growth and competitiveness of Islamic finance industry.

(Pakistan Abserver / 28 September 2015)
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