Bright prospect of Islamic banking

Currently, most of the giant international banks offer either an Islamic Commercial Bank (ICB) or an Islamic Business Unit (IBU). The question is, therefore, “How can national Islamic banking be developed?”

First of all, let us look at the infrastructure of Islamic banking during the last six years. A report titled “Islamic Banking Statistics April 2011”, which was issued by Bank Indonesia (BI) on June 15, 2011, found that ICB increased from only three banks with 304 offices in 2005 — when Islamic banking was born — to 11 banks with 1,215 offices by December 2010.

ICB continued to grow and became incorporated within 11 banks with 1,242, 1,253, 1,268 and 1,276 offices in January, February, March and April 2011, respectively. The number of IBU grew from 19 units with 154 offices in December 2009 to 23 units with 262 offices in December 2010.

The current total of IBU remains unchanged at 23 units, but the number of offices has increased to 264, 280, 307 and 315 in January, February, March and April 2011, respectively.

What is the financial performance of Islamic banking? Financing instead of credit in conventional banking grew 45.40 percent from Rp 46.89 trillion (US$5.49 billion) as of December 2009 to Rp 68.18 trillion in December 2010.

It increased to Rp 69.72 trillion, Rp 71.45 trillion, Rp 74.25 trillion and Rp 75.73 trillion as of January, February, March and April 2011, respectively.

Actually, the third party fund (depositors’ fund) was more fertile as it grew 45.48 percent from Rp 52.27 trillion in December 2009 to Rp 76.04 trillion as of December 2010.

Then it slightly declined to Rp 75.81 trillion in January 2011 and Rp 75.09 trillion in February 2011. The third party fund, however, bounced back to Rp 79.65 trillion in March 2011 and then went down to Rp 79.57 trillion in April 2011.

The growth of both financing and the third party fund resulted in a percentage drop of deposit ratio (FDR) and loan to deposit ratio (LDR) in conventional banking, from 95.57 percent as of April 2010 to 95.17 percent by April 2011. This FDR is in fact higher than the LDR in conventional banking, which reached 78.40 percent over the same period.

It means the capability of being a financial intermediary is better as the FDR reached between 85 and 110 percent, while non-performing financing (NPF), (NPL in conventional banking), went down from 4.47 percent to 3.79 percent, far lower than the 5 percent threshold. Net profits also increased 20 percent from Rp 425 billion in April 2010 to Rp 510 billion in April 2011.

Unfortunately, return on assets (ROA) dropped from 2.06 percent to 1.90 percent, though that is higher than the 1.5 percent threshold. In the clearest terms, the quality of assets in Islamic banking remained good.

The efficiency level reflected in operating costs to operating income ratio was a little worse, going from 77.15 percent to 78.78 percent. However, this ratio shows that Islamic banking has been in the ideal ratio zone, between 70 and 80 percent. Indeed, it is a blue report for Islamic banking.

According to BI, the market share of Islamic banking will be 5 percent higher than the total market of conventional banking in 2015. At the end of 2011, BI is optimistic that the total market share will reach above 3.6-3.7 percent. It will be realized in line with the implementation of the ASEAN community. Why? Because there will be more markets and Islamic banking products. At the same time, the public will pay more attention to Islamic banking, which is able to offer more interesting products and services.

But actually, Islamic banking remains in need of a tonic in order to realize its dreams. How should Islamic banking proceed in the near future?

First: big capital. The capital adequacy ratio (CAR) reached 16.25 percent in December 2010 and then increased to 19.86 percent in April 2011. In short, the CAR in Islamic banking is higher than the CAR in conventional banking, which achieved 17.76 percent in the same period.

In principle, capital should serve as a shield to be able to mitigate any potential risks in banking products, services and business activities. By having big capital, Islamic banking will be stronger to compete with conventional banking in financing.

Without strong capital, Islamic banking may be crushed by both ICB and IBU supported by foreign banks, such as ICB Maybank Indonesia Syariah, BCA Syariah, IBU CIMB Niaga, HSBC Bank International Ltd. and OCBC NISP. Newcomer Bank Kesawan, which operates under the auspices of the Qatar National Bank, will be a strong competitor in Islamic banking. Another bank from Malaysia, Affin Holdings Bhd, will embrace Bank Ina Perdana to be an Islamic bank.

Second: human capital and information technology (IT). It must be acknowledged that Islamic banking lacks capable human capital. BI said that Islamic banking needs 40,000 people for various positions. In my opinion, it will be more efficient and effective to recruit human capital from conventional banking rather than educate newcomers. The latter option would be more costly and would need much more time, as experience cannot be bought.

One of the necessary strategic steps is to send human capital to Malaysia to learn Islamic banking and IT from Malaysian Islamic banks, which are mature, experienced and among market leaders. Human capital should learn about the finance environment and market analysis, marketing, financing and product development to be able to succeed among fierce Islamic banking competition.

Third: risk management. Human capital should also be enriched with risk management. Please remember that Islamic banking faces various potential risks. Normally, these potential risks in the banking world are more likely to emanate from human capital or “people risks” than from processes and IT risks. In other words, human capital should acquire risk management certificates.

This step will enhance human capital to sense any potential risks, which may lead to banking cases. In short, risk management is an urgent and important instrument to anticipate and mitigate any banking business risks.

Fourth: Islamic banking architecture. It is hoped that BI will complete its Islamic banking architecture. It will be a blueprint and road map for Islamic banking, which should be comprehensive and act as a directive for five to 10 years to come.

Thanks to these various tonics, the dream of Islamic banking to increase market share and to compete with conventional banking will be realized more swiftly. It will push national economic growth higher than the 6.5 percent recorded during the second quarter in 2011.

Finally, it will minimize unemployment, which reached 6.80 percent or 8.12 million people in February 2011, down from 7.14 percent or 8.32 million people in August 2010.

The writer is a former assistant vice president of Bank BNI.

Paul Sutaryono
source : Jakarta Post