Indonesia’s Islamic finance industry is luring investment from Middle Eastern and European banks as regulator seeks to double Shariah-compliant assets to 10% of the total this decade.
Al Rajhi Bank, Saudi Arabia’s largest, is chasing investment banking business in Indonesia and may open branches “at the right time,” Mudassir Amray, the head of wholesale banking in Kuala Lumpur, said in a February 2 interview.
Standard Chartered Saadiq will add more outlets, said Wasim Saifi, the Singapore-based global head of Islamic and consumer banking.
“We are on the lookout for any good Indonesian acquisition, if the price is right,” Mohamed Azahari Kamil, the Kuala Lumpur-based chief executive of Asian Finance Bank Bhd, the Malaysian unit of Qatar Islamic Bank, said in an interview on Monday. “We have to be quick as the Indonesian market is becoming more competitive.”
While home to the world’s largest Muslim population, Indonesian Islamic financial assets account for less than 4% of total banking holdings in the country, compared with 21% in Malaysia. Bank Indonesia is proposing tax breaks to boost the industry, which has grown an average 38% annually over the past five years.
Record-low benchmark yields are spurring PT Bank Muamalat Indonesia, the nation’s second- largest Islamic lender, and PT Bank Syariah Mandiri to sell Islamic bonds this year.
Globally, Islamic finance assets may rise about 16% to $1.6tn this year, Raj Mohamad, managing director at Singapore-based consulting firm Five Pillars, told Bloomberg TV on January 18. Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg. Offerings totaled a record $36.3bn in 2011, more than the $31bn in 2007.
Southeast Asia’s biggest economy, Indonesia is trying to catch up with Malaysia, a global hub for Shariah-compliant finance where Al Rajhi Bank has offered services for the last five years. Indonesia had 130tn rupiah ($14.5bn) of Islamic assets as of October. 31, around 11% of the 389.3bn ringgit ($129bn) of its neighbour as of July, according to data from the two countries’ central banks. Around 86% of Indonesia’s 246mn population is Muslim, according to US government data.
Malaysia has relaxed foreign-ownership rules for Islamic institutions and provided tax incentives, helping the nation become the world’s biggest market for sukuk.
Qatar Islamic Bank, Kuwait Finance House and Standard Chartered Saadiq all have operations in the country. “We expect a Middle East bank to buy a big Islamic bank in Indonesia,” Riawan Amin, chairman of the Indonesia Shariah Bank Association in Jakarta, said in an interview on Monday. “This will change the face of Shariah-compliant banking in Indonesia.”
Dubai-based Standard Chartered Saadiq, an Islamic bank set up by the London-based lender in 2008, plans to add to the 11 branches offering Islamic services at PT Bank Permata, the Indonesian lender in which it owns a 44.5% stake, Saifi said in an interview on Monday. Jakarta-based automotive retailer PT Astra International owns 44.5% of the bank and 11% is publicly traded.
“We have seen growth momentum in the Indonesia Islamic industry over the last two to three years,” Saifi said. “Along with capital, foreign banks can bring in expertise as Indonesia provides a very good opportunity looking at its population and growth.”
The yield premium on Indonesia’s 8.8% Shariah- compliant global bonds due in April 2014 over Malaysia’s 3.928% dollar sukuk due 2015 was little changed at 41 basis points on Tuesday, prices from Royal Bank of Scotland Group show. The average yield on sovereign rupiah debt dropped four basis points, or 0.04 percentage point, to 5.78% on Monday, according to a JPMorgan Chase & Co index. That’s the lowest level since Bloomberg began collating the data in 2002.
Securities that comply with Islam’s ban on interest rose 0.9% this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 2.6%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.
The difference between the average yield for sukuk and the London interbank offered rate widened one basis point to 289 on Monday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
Moody’s Investor’s Service awarded Indonesia an investment- grade credit rating last month, following Fitch Ratings in December. Standard & Poor’s upgraded the country to BB+ in April, its top junk level. Gross domestic product increased 6.49% in the fourth quarter, bringing 2011 GDP to 6.46%, data released on Monday showed.
“The Indonesian market is certainly on our radar,” Al Rajhi’s Amray said. “The size of the Muslim population, the country’s economic growth and investment-grade rating will help in attracting more diversified investors, particularly from the Middle East.”