A huge Muslim population and vast untapped banking potential have fuelled expectations that Southeast Asia’s largest economy will be the next big growth market for the US$1 trillion (RM3.39 trillion) industry.
But unwelcoming laws and regulations and a lack of clear industry standards mean that Indonesia will struggle to match those growth expectations, keeping it in neighbouring Malaysia’s shadows for years to come.
“If Indonesia wants Islamic finance to grow faster, they have to clear these tax and legal issues and come up with proper guidelines on Islamic securities,” said Mohamad Safri Shahul Hamid, deputy CEO at Malaysia’s MIDF Amanah Investment Bank, a leading sukuk arranger.
“The regulators need to play a more active role to open up the market, initiate discussions and encourage the introduction of new products, especially retail and sukuk.”
Banks such as CIMB Islamic, the world’s biggest sukuk arranger, and insurers like Prudential plan to expand in Indonesia, drawn by its strong growth prospects.
An upbeat economic outlook, high domestic interest rates and a firming currency have attracted foreign investors to Indonesian assets, but the country has seen few sukuk sales and government issuance has sometimes disappointed.
Data showed foreigners owned a record 117.5 trillion rupiah (RM42.7 billion) worth of federal debt early in February after boosting their holdings by US$2.2 billion or nearly a fifth last year.
But on Tuesday, Jakarta rejected all 1.705 trillion rupiah worth of bids for the 1 trillion rupiah offer of sukuk after investors demanded higher yields due to a lack of trading liquidity in Islamic paper.
Islamic banking assets are expected to total 69 trillion rupiah this year or just 2%-3% of Indonesia’s total banking assets, according to the central bank.
Practitioners said the removal of double taxation on Islamic financial transactions, effective in April, and a law to facilitate government sukuk issuance was crucial, but still insufficient to give the market a boost.
Only 17 sukuk sales took place in Indonesia from 2007-2009, compared with 105 in Malaysia, Thomson Reuters data showed.
A corporate equivalent of government sukuk regulations is also needed to encourage companies to sell sukuk, said MIDF’s Safri, estimating that Indonesia has seen just over 20 rupiah corporate sukuk issues since 2004.
One Islamic banking lawyer in Jakarta said authorities have informally floated plans for a corporate sukuk law but no steps have been taken to enact such legislation.
To boost its syariah insurance industry, Indonesia should require the creation of full-fledged takaful companies, instead of allowing conventional insurers to operate takaful divisions, which have limited capital, said Ismail Mahbob, chief executive of Malaysian Islamic reinsurer MNRB Retakaful.
One particular model employed in Indonesia sees foreign retakaful firms receiving a net margin of fee of 3%-4%, versus at least 10% in other markets, he said.
“The financial aspect of the model they’re working on is not conducive for foreign retakaful operators to come in and give (underwriting) capacity. That will affect the growth of the market. Indirectly, they are approaching a capacity crunch.”
Around 85% of Indonesia’s population are Muslims. But compared to Malaysia, many Indonesians practise a more moderate form of Islam mixed with local beliefs, and may be less inclined to adhere to Islamic principles in finance, analysts said.
“In Indonesia not so many people understand about syariah,” said Anton Gunawan, chief economist at Bank Danamon in Jakarta.
“Middle Eastern investors are looking at sukuk, but it seems to them that the syariah system in Indonesia is not pure Islamic, but a camouflage of normal banking practices.”
And in a country of 230 million people, there are only around 80 million bank accounts, which analysts say reflect a lack of interest in formal banking.
source : bizedge