Three Indonesian banks to open Shariah-compliant units

Three Indonesian banks to open Shariah-compliant units

Three Indonesian banks plan to open sharia-compliant units this year to tap the potential of Islamic finance in the world’s most populous Muslim country, a central bank deputy governor said on Wednesday.

Analysts say Indonesia has the potential to become a major player in global Islamic finance because around 85 percent of its around 226 million people are Muslim.

It lags neighbouring countries like Malaysia and Singapore because of tax and accounting framework issues, but analysts expect sharia financing to take off after parliament passed the long-awaited sharia finance law last months.

Siti Fadjrijah told Reuters state-owned PT Bank Rakyat Indonesia BBRI.JK, the country’s third largest lender, and PT Bank Bukopin BBKP.JK, will convert their conventional units to sharia-compliant banks.

She said another state bank, PT Bank Negara Indonesia Tbk BBNI.JK, will also set up a new Islamic bank together with Islamic Corporation for the Development of the Private Sector (ICD), a unit of Islamic Development Bank.

“This year three new sharia banks will be established in Indonesia,” Fadjrijah said on the sidelines of an Islamic finance conference in Jakarta.

When asked if Bank Indonesia will give more licences for foreign banks, she said:

“It depends. When investors establish a new bank I will ask what are their expectations, how they will increase their business. We must know their target.”

Global Islamic assets are growing at an annual pace of 20 percent and are set to hit $2 trillion in 2010 from the current $900 billion, thanks to a flood of petrodollars, Ernst & Young said in February.

Sharia, or Islamic law, bans payment of interest, allowing money to be earned only from physical assets. It also bars investment in alcohol, tobacco or gambling.

HSBC is the only foreign bank which has sharia operations in Indonesia, but there are several domestic banks with sharia-compliant operations.Indonesia’s central bank said in July it expects total assets of Islamic banks to rise to 91.57 trillion rupiah by the end of 2008.

Fadjrijah said the country’s Islamic banking industry is set to meet its target of a 10-15 percent share of national banking assets by 2015 from less than 5 percent currently.