Indonesia Pushes Ahead With $8 Billion Shariah Megabank


FEBRUARY 03, 2015

Indonesian authorities are pushing ahead with a plan to create an $8 billion Islamic megabank, even after a similar proposal fell through in Malaysia.

A potential merger of the shariah-compliant units of government-controlled Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia could happen as soon as this year, Financial Services Authority (OJK) chairman Muliaman Hadad said. Talks are ongoing with the State-Owned Enterprises Ministry, which first proposed the merger in May 2013.

The megabank could help drive a quadrupling in Islamic banks' market share to 20 percent by 2018, compared with 10 percent without it, the Indonesia Islamic Banking Association predicts. That would approach the 21 percent level in Malaysia, where a planned combination of CIMB, RHB Capital and Malaysia Building Society was called off last month as oil prices damped the economic outlook.

"If the shariah banking sector is left to evolve and progress on a purely organic basis, it may experience a long-drawn process with a marginal growth rate," Alhami Abdan, head of international finance and capital markets at OCBC Al-Amin Bank, said last Thursday in Kuala Lumpur.

"The creation of such a megabank may provide an anchoring catalyst for the Shariah banking sector."

A large Islamic lender would help improve public awareness of Shariah-compliant finance, reduce operating costs and allow financing of big infrastructure projects, said the OJK's Muliaman .

Only 6 percent of Islamic bank loans fund construction, 2.8 percent go to agriculture and 2.4 percent for mining, compared with 33 percent for business services, Finance Ministry data show.

Bank Syariah Mandiri, the largest Islamic lender, had Rp 65.4 trillion ($5.2 billion) of assets as of September, according to figures on its website. Bank BRI Syariah, a unit of BRI that has the nation's biggest branch network, had Rp 18.6 trillion rupiah, and Bank BNI Syariah had Rp 18.5 trillion.

Together, the three make up 40 percent of the Rp 261 trillion Islamic banking industry, Finance Ministry figures show. The parent banks of the three units are all listed on Indonesia's stock exchange, although the government has retained majority stakes.

"How possible it is would depend on the shareholders," said Imam Teguh Saptono, business director at BNI Syariah in Jakarta. "I would prefer policies that reduce tax inequality, improve socialization and education, increase regulatory leniency and create new markets such as Shariah state health coverage, for example."

The State-Owned Enterprises Ministry also looked at setting up a new government-controlled Islamic lender or converting an existing non-Islamic bank into a shariah-compliant operation when it started publicly talking about the plan in May 2013.

"It would be good if the proposed plan for an Indonesian Islamic megabank succeeds, even though this seems to be a somewhat ambitious plan," said Megat Hizaini Hassan, who heads Islamic finance practice at law firm Lee Hishammuddin Allen & Gledhill in Kuala Lumpur.

"One of the challenges would be getting the interested parties and institutions to agree that the setting up of such an Islamic megabank would make business sense."

A bigger Islamic banking industry would increase demand for shariah-compliant assets such as sukuk. Worldwide sales of bonds that comply with the religion's ban on interest are off to the slowest start since 2010 this year, amounting to $1.5 billion. Issuance totaled $46.3 billion in 2014, near 2012's record $46.8 billion.

Indonesia's Muslim population is more than 12 times the size of Malaysia's, but its total deposits at shariah banks are less than a sixth of Malaysia's, official data show.

"Having a large bank won't automatically translate to a bigger market share, but it would create a bank with enough scale to compete," said Riawan Amin, chairman of the supervisory board at the Islamic banking association in Jakarta.