As Malaysia continues to pursue its ambition of becoming the leading global hub for Islamic finance, Indonesia is working towards its own goal of international recognition in the industry. RAPHAEL WONG looks at the Indonesian Islamic banking sector through the eyes of two Malaysian banks that have assimilated into the market.
The introduction of the Islamic Banking Act No 21 in 2008 to provide a comprehensive regulatory framework for Shariah banking in Indonesia was welcomed by the banking industry, attracting interest from foreign Islamic windows and banks eager to capture a slice of a potentially lucrative pie. Indonesia is home to about 1.7 billion Muslims, and its banking industry has developed rapidly in recent years.
Indonesia`s capital market efforts have been successful, with numerous government Sukuk oversubscribed not only by domestic investors but also on the international front. The latest issuance saw the finance ministry selling IDR1.15 trillion (US$130.36 million) of 25-year Sukuk in an auction on the 24th February with a weighted average yield of 10.2%. It received offers for more than four times its targeted IDR1 trillion (US$114 million).
CIMB Group`s first foray into Indonesia`s Islamic financial market came about in 2002 when it acquired a controlling stake in PT Bank Niaga, a bank that was formed in 1955. In 2002 Bank Niaga was already an established player in the Islamic banking industry relative to the size of the country`s Islamic finance market then. A rebranding and a merger with Lippo Bank in 2008 saw the birth of PT Bank CIMB Niaga with the Islamic unit renamed to CIMB Niaga Syariah and consolidated as part of CIMB Group`s global Islamic banking and finance franchise, CIMB Islamic. CIMB Niaga Syariah is now the seventh largest Islamic financial institution in Indonesia in terms of assets and deposits.
Maybank Syariah Indonesia, on the other hand, began as a conventional bank. Bank Maybank Indocorp in January 1995 was the first Malaysian-Indonesian joint venture to be allowed by domestic regulators to operate a bank in the country. It converted to a full fledged Islamic bank in 2010.
On the level of development of Islamic banking in Indonesia, CIMB Islamic CEO Badlisyah Abdul Ghani explains that Malaysia has had a head start, and therefore already has all the regulation, legislation and Shariah framework in place, while Indonesia is still in the midst of setting the stage. However, he highlights the fact that Indonesia is the only other country in the world that has a separate Islamic Banking Act and operates on a dual banking model.
"As such, the types of product in the market differ somewhat. Malaysia has gone through the process of getting all the relevant products approved by the regulators while in Indonesia product approval has to go in tandem with regulatory development. Once the framework is fully in place, it will be in sync with the products available... and [will] eventually be at par with what Malaysia has," he explains.
On the comparison of products in the two countries, Mr Ghani feels that particularly in the matter of Shariah it is better to cross each bridge as and when they reach it. "Indonesia is still going through the necessary approval process for these products so there is no point in discussing the differences of the Shariah because you don`t know until these products are submitted for approval," he says.
Maybank Syariah Indonesia president and director Baharudin Abd Majid believes that a proactive approach is the solution to propel Islamic finance forward in the country. Though not the first to moot such an idea, Mr Majid advocates for a participatory involvement between Islamic banks and conventional banks, with Islamic windows as strategic partners to foster the growth of Islamic banking assets.
"This is what we have been trying to champion by approaching presidents and directors of Islamic banks and asking them to participate in this strategy. By pulling the resources and expertise of all Islamic banks and windows, we can realize the goal of increasing our business. Islamic windows can persuade the parent bank to acquire the Shariah compliant products or assets to be placed in their portfolio. We should therefore look at that business angle and work towards the quantum growth of the industry instead of relying on individual growth," he suggests.
On the response from the corporate sector, Mr Majid says that through education, the bank has managed to convince one of the clients to take up take up a Shariah compliant portion in the second tranche of the syndication. He feels that the driving factor will be pricing and service that is equal to or better than in the conventional space. "We have a great opportunity to build up our assets," he adds.
What about competition between the Islamic banks? Mr Ghani feels that competition does not exist only within the Islamic space but also with the conventional sector, as both sectors target the same markets. "At the moment, it is not a level playing field. If you talk about competition, it is lop-sided towards the conventional. The Islamic banking industry can only compete on a level playing field when the appropriate legislation and regulation is in place," he says.
As a result of its license, CIMB Niaga Syariah is focused on consumer banking, comprised of commercial and retail banking - a division that is already fairly established according to Mr Ghani. Maybank Syariah Indonesia has taken a different route, opting to focus on corporate investment banking. Mr Majid explains that at the micro level retail banking in Indonesia is very competitive, but it is healthy competition. "In Indonesia it is just a numbers game, where the backbone of the banking sector is consumer banking, as this is the bulk of the consumption. There is a great market for that," he says.
However, the same cannot be said about the country`s Islamic corporate banking sector which, in Mr Majid`s opinion, has yet to reach the level achieved by the consumer sector. He believes that this is where an Islamic window has the advantage, as it is able to leverage the expertise and exposure of the parent bank and its subsidiaries.
Despite the setbacks involved with the lack of legislation and regulation, Mr Ghani is optimistic about the future of Islamic finance in the archipelago, as the government is still very committed to continuing the development of Islamic finance and facilitating a level playing field. This, he explains, is evident from the implementation of the Islamic banking law and Sukuk law over the last three years. "The regulators need to follow through with various other frameworks, and naturally it will take time, but we do know it is being worked on and will come out soon enough," he says.
Mr Majid, on the other hand, believes that Islamic banks, through participatory and collective efforts, are able to initiate the much needed growth in the country themselves; particularly in the corporate and investment banking sector. "It is a matter of internal priority set by these individual banks. We do not need to wait for the incentives to come in but rather work together among the Shariah compliant banks. The competition is very healthy and we need to work on this strategy. Entrepreneurs are constantly looking for top quality products which we can offer with competitive pricing. The awareness is there, and the prospect I foresee is a `quantum leap` in the growth of Islamic banking in Indonesia."
By - Islamic Finance Asia
The introduction of the Islamic Banking Act No 21 in 2008 to provide a comprehensive regulatory framework for Shariah banking in Indonesia was welcomed by the banking industry, attracting interest from foreign Islamic windows and banks eager to capture a slice of a potentially lucrative pie. Indonesia is home to about 1.7 billion Muslims, and its banking industry has developed rapidly in recent years.
Indonesia`s capital market efforts have been successful, with numerous government Sukuk oversubscribed not only by domestic investors but also on the international front. The latest issuance saw the finance ministry selling IDR1.15 trillion (US$130.36 million) of 25-year Sukuk in an auction on the 24th February with a weighted average yield of 10.2%. It received offers for more than four times its targeted IDR1 trillion (US$114 million).
CIMB Group`s first foray into Indonesia`s Islamic financial market came about in 2002 when it acquired a controlling stake in PT Bank Niaga, a bank that was formed in 1955. In 2002 Bank Niaga was already an established player in the Islamic banking industry relative to the size of the country`s Islamic finance market then. A rebranding and a merger with Lippo Bank in 2008 saw the birth of PT Bank CIMB Niaga with the Islamic unit renamed to CIMB Niaga Syariah and consolidated as part of CIMB Group`s global Islamic banking and finance franchise, CIMB Islamic. CIMB Niaga Syariah is now the seventh largest Islamic financial institution in Indonesia in terms of assets and deposits.
Maybank Syariah Indonesia, on the other hand, began as a conventional bank. Bank Maybank Indocorp in January 1995 was the first Malaysian-Indonesian joint venture to be allowed by domestic regulators to operate a bank in the country. It converted to a full fledged Islamic bank in 2010.
On the level of development of Islamic banking in Indonesia, CIMB Islamic CEO Badlisyah Abdul Ghani explains that Malaysia has had a head start, and therefore already has all the regulation, legislation and Shariah framework in place, while Indonesia is still in the midst of setting the stage. However, he highlights the fact that Indonesia is the only other country in the world that has a separate Islamic Banking Act and operates on a dual banking model.
"As such, the types of product in the market differ somewhat. Malaysia has gone through the process of getting all the relevant products approved by the regulators while in Indonesia product approval has to go in tandem with regulatory development. Once the framework is fully in place, it will be in sync with the products available... and [will] eventually be at par with what Malaysia has," he explains.
On the comparison of products in the two countries, Mr Ghani feels that particularly in the matter of Shariah it is better to cross each bridge as and when they reach it. "Indonesia is still going through the necessary approval process for these products so there is no point in discussing the differences of the Shariah because you don`t know until these products are submitted for approval," he says.
Maybank Syariah Indonesia president and director Baharudin Abd Majid believes that a proactive approach is the solution to propel Islamic finance forward in the country. Though not the first to moot such an idea, Mr Majid advocates for a participatory involvement between Islamic banks and conventional banks, with Islamic windows as strategic partners to foster the growth of Islamic banking assets.
"This is what we have been trying to champion by approaching presidents and directors of Islamic banks and asking them to participate in this strategy. By pulling the resources and expertise of all Islamic banks and windows, we can realize the goal of increasing our business. Islamic windows can persuade the parent bank to acquire the Shariah compliant products or assets to be placed in their portfolio. We should therefore look at that business angle and work towards the quantum growth of the industry instead of relying on individual growth," he suggests.
On the response from the corporate sector, Mr Majid says that through education, the bank has managed to convince one of the clients to take up take up a Shariah compliant portion in the second tranche of the syndication. He feels that the driving factor will be pricing and service that is equal to or better than in the conventional space. "We have a great opportunity to build up our assets," he adds.
What about competition between the Islamic banks? Mr Ghani feels that competition does not exist only within the Islamic space but also with the conventional sector, as both sectors target the same markets. "At the moment, it is not a level playing field. If you talk about competition, it is lop-sided towards the conventional. The Islamic banking industry can only compete on a level playing field when the appropriate legislation and regulation is in place," he says.
As a result of its license, CIMB Niaga Syariah is focused on consumer banking, comprised of commercial and retail banking - a division that is already fairly established according to Mr Ghani. Maybank Syariah Indonesia has taken a different route, opting to focus on corporate investment banking. Mr Majid explains that at the micro level retail banking in Indonesia is very competitive, but it is healthy competition. "In Indonesia it is just a numbers game, where the backbone of the banking sector is consumer banking, as this is the bulk of the consumption. There is a great market for that," he says.
However, the same cannot be said about the country`s Islamic corporate banking sector which, in Mr Majid`s opinion, has yet to reach the level achieved by the consumer sector. He believes that this is where an Islamic window has the advantage, as it is able to leverage the expertise and exposure of the parent bank and its subsidiaries.
Despite the setbacks involved with the lack of legislation and regulation, Mr Ghani is optimistic about the future of Islamic finance in the archipelago, as the government is still very committed to continuing the development of Islamic finance and facilitating a level playing field. This, he explains, is evident from the implementation of the Islamic banking law and Sukuk law over the last three years. "The regulators need to follow through with various other frameworks, and naturally it will take time, but we do know it is being worked on and will come out soon enough," he says.
Mr Majid, on the other hand, believes that Islamic banks, through participatory and collective efforts, are able to initiate the much needed growth in the country themselves; particularly in the corporate and investment banking sector. "It is a matter of internal priority set by these individual banks. We do not need to wait for the incentives to come in but rather work together among the Shariah compliant banks. The competition is very healthy and we need to work on this strategy. Entrepreneurs are constantly looking for top quality products which we can offer with competitive pricing. The awareness is there, and the prospect I foresee is a `quantum leap` in the growth of Islamic banking in Indonesia."
By - Islamic Finance Asia
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