Flush With Hajj Money Indonesia Islamic Banks See Loans Tripling


MARCH 26, 2015

A worker sits near an advertisement for BNI Syariah, the bank's Islamic-compliant arm. (JG Photo/ Dhana Kencana)

Flush with cash transfers from the state-controlled Hajj fund, Indonesia’s Islamic banks see loan growth tripling in 2015 as interest-rate cuts spur demand.

The government will finish shifting more than 30 trillion rupiah ($2.3 billion) of the savings of Muslims planning a trip to Mecca to Shariah-compliant lenders from non-Islamic banks this year, a process that started in 2013. That will help drive credit growth to 25.8 percent, beating the 8.3 percent in 2014 and a 16.5 percent forecast increase in lending by both types of banks, according to estimates from the Financial Services Authority based on their business plans.

The Hajj money will reduce costs of capital, already the lowest in nine months, as credit demand is supported by a predicted cut in Bank Indonesia’s policy rate. Bank Muamalat Indonesia, the second-largest Shariah lender, said it would boost loans to small-and medium-sized firms, and BNI Syariah plans to simplify consumer-finance approvals.

“Our biggest challenge last year was the lack of money to mobilize,” Imam Teguh Saptono, a director at BNI Syariah, a unit of the nation’s fourth-largest bank, said in a March 24 phone interview from Jakarta. “With Hajj funds fully moved over and prospects for a lower Bank Indonesia rate, we’re optimistic that loan growth will pick up.”

Slowing economy

Islamic lending grew at the slowest pace last year in data going back to 2007 as the economy expanded 5.02 percent, the least since 2009. The central bank cut its key rate by 25 basis points from a five-year high of 7.75 percent on Feb. 17 and will reduce it to 7.25 percent by year-end, the median estimate in a Bloomberg survey shows.

The Shariah unit of Bank OCBC NISP, a local subsidiary of Singapore’s Oversea-Chinese Banking, sees its loans growing 25 percent to 30 percent in 2015, said Koko T. Rachmadi, the head of the Islamic unit.

The focus will be on “penetrating markets outside Java to capture new demand and enhancing brand awareness,” he said in an e-mail interview in Jakarta on Wednesday.

To comply with the religion’s ban on interest, Islamic banks acquire a stake in the companies or ventures they lend to, or agree to receive a proportion of earnings from the borrower, instead of charging a certain rate.

Competitive disadvantage

The average rate that Shariah-compliant lenders paid on 12- month deposits peaked at 17 percent in November, before easing to 14.2 percent in January, according to the latest data from the Financial Services Authority, or OJK. The average rate on loans backed by profit-sharing contracts fell from 15.5 percent to 14.8 percent.

The cost of funds for non-Islamic lenders and the rate they charge on loans are lower. The average rate on one-year deposits was 8.7 percent in January, while borrowing costs on loans for working capital was 12.8 percent, OJK data show.

“Islamic banks will need to compete with conventional banks for a greater slice of the loan pie,” Suhaimi Zainul- Abidin, treasurer of the Gulf Asia Shari’ah Compliant Investments Association in Singapore, said in an e-mail interview on Wednesday. “In the near term, absent increased awareness and acceptance of Islamic finance, Islamic banks may need to price their loans more competitively or relax their lending conditions.”

Not optimism

The Ministry of Religious Affairs manages the savings of pilgrims waiting to travel to Mecca and every able-bodied Muslim is obliged to make the journey at least once. Saudi Arabia limits how many people can go, resulting in a waiting time of more than 20 years for Indonesians from when a deposit is made. The government oversaw more than Rp 70 trillion of Hajj funds as of March, about half of which is placed in sovereign sukuk, according to the ministry’s website.

Quicker growth of Islamic banking assets would support demand for Shariah-compliant debt. Worldwide sales of such bonds have slowed 29 percent to $7.4 billion this year from the same point in 2014, data compiled by Bloomberg show.

Indonesian Islamic loan growth has averaged 34.5 percent over the past five years, OJK data show. The World Bank estimates Southeast Asia’s largest economy will expand 5.2 percent in 2015, a small improvement from 2014 but still less than the previous four years.

“With a track record of growing more than 30 percent each year, a 25 percent growth forecast shouldn’t be called optimism,” Riawan Amin, chairman of the supervisory board at the Islamic Banking Association in Jakarta, said in a March 24 interview. “If the banks choose the right segment, the right target and position themselves well, then they won’t be too affected by the macro picture and can grow faster.”