Indonesia’s Islamic banking to spur growth

JAKARTA: Islamic banking in Indonesia is poised to be the next catalyst of growth for the banking industry and holds great opportunities for foreign investors as the country has the world’s largest Muslim population.

“At the moment, Islamic banking has only a 2% share of the banking sector in the country,” said Ch’ng Ching Hon, CEO of Succsani Corporate Advisory.

Recognising the country’s Islamic banking potential, Malayan Banking Bhd (Maybank) announced on Wednesday it would convert its Indonesian unit, PT Bank Maybank Indocorp, into an Islamic bank. Maybank did not give a timeline for the conversion.

Reuters quoted Indonesia’s central bank deputy governor Muliaman Hadad as saying that the Malaysian bank would set up a syariah bank by August.

While Malaysia and Singapore vie to be the regional hub for Islamic banking, Succsani does not foresee Indonesia becoming a future contender as it has a huge domestic market.

“Indonesia is still in its infancy in terms of Islamic banking. It will probably not compete with Malaysia per se to be a regional player as it has its own market to grow and focus on,” said Ch’ng.

“The potential size of the market does not require Indonesia to be a regional player as the domestic market is already large.”

He said Malaysian banks were well-poised to enter the Indonesian market and several of them were in the process of embarking into the Islamic banking sector.

“If Malaysian banks choose to ignore this (Indonesia) as their next logical expansion destination, other competitors will simply dominate and opportunities will be lost,” said Ch’ng, adding that “the government is placing emphasis on the Islamic financial services sector.”

Apart from CIMB Bank, most of the Malaysian banks can be viewed as being somewhat “late” in entering the Indonesian market compared with their regional counterparts.

Currently there are around 120 banks in Indonesia, South-East Asia’s largest economy, and now a major foreign investment destination.

On Monday, Moody’s Investors Service upgraded Indonesia’s credit rating outlook to positive.

Indonesia’s Ba2 local and foreign currency sovereign rating was raised to positive from stable on expectations of more stable financial policy and improvement in the government’s finances.

Moody’s said the core of Indonesia’s growth story was driven by a large domestic market that was appropriately managed by a well-tested economic policy framework.

Last week, the government further opened up the country’s economy by raising foreign ownership limits in several economic sectors.

Foreign investors can now own 67% of construction businesses, up from 55% previously. In power plant businesses, foreigners can now own up to 95%.

“There are many Malaysian companies looking at the power plant sector and at least a couple are already in this sector,” said Ch’ng.

Hospital ownership by foreign investors has been raised to 67% from 65%.

“Many Indonesians seek medical care overseas in the region. As a result, the government has eased the restrictions on foreign ownerships of hospitals and talks are now underway on the use of foreign doctors,” said Ch’ng.

In line with the Asean Economic Community commitment, Asean investors are allowed to increase their stakes in some sectors of the economy.

Asean investors may own up to 60% of cargo handling services versus the 49% limit for other foreign investors, and up to 60%of foreign sea vessels and 100% of recreation business.

“Opening up these sectors will spur the economy and advance their growth,” said Ch’ng.

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