Taking a share of the booming Islamic finance industry, Indonesia is becoming a magnet of Shari`ah-compliant assets from all around the globe.
“We are on the lookout for any good Indonesian acquisition, if the price is right,” Mohamed Azahari Kamil, the Kuala Lumpur-based chief executive of Asian Finance Bank Bhd, the Malaysian unit of Qatar Islamic Bank, told the Gulf Times on Thursday, February 9.
“We have to be quick as the Indonesian market is becoming more competitive.”
Several banks from the Middle East and Europe are seeking to open branches in Indonesia, the world’s most populous Muslim country.
For instance, Al Rajhi Bank, Saudi Arabia’s largest, is mulling opening new branches in the country.
“The Indonesian market is certainly on our radar,” said Mudassir Amray, the bank’s head of wholesale banking in Kuala Lumpur.
“The size of the Muslim population, the country’s economic growth and investment-grade rating will help in attracting more diversified investors, particularly from the Middle East.”
Several Gulf banks as Qatar Islamic Bank, Kuwait Finance House and Standard Chartered Saadiq also have operations in the country.
Indonesia, the largest economy in South-east Asia, has been trying to develop its Islamic finance industry to catch up with neighboring Malaysia, the world’s biggest sukuk market.
Islamic finance in Indonesia has grown an average 38 percent annually over the past five years.
However, Islamic financial assets still account for less than 4 percent of total banking holdings in the country.
To help lure more Shari`ah-compliant assets, Bank Indonesia has proposed tax breaks to boost the Islamic finance industry in the country.
In 2010, the Indonesian government unveiled plans to issue billions of dollars of Islamic bonds (sukuk).
Sukuk, which conforms to Islam’s prohibition of usury, typically work as profit-sharing vehicles.
Firms that issue Sukuk make payments to investors using profits from the underlying business, instead of paying interest.
The money, however, can’t be invested in alcohol, gambling, tobacco, weapons or pork.
The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.
Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg.
Indonesian officials expect a boom in the Islamic finance industry in the country.
“We expect a Middle East bank to buy a big Islamic bank in Indonesia,” said Riawan Amin, chairman of the Indonesia Shari`ah Bank Association in Jakarta.
“This will change the face of Shari`ah-compliant banking in Indonesia.”
Dubai-based Standard Chartered Saadiq, an Islamic bank set up by the London-based lender in 2008, plans to add to the 11 branches offering Islamic services at PT Bank Permata, the Indonesian lender in which it owns a 44.5% stake.
“We have seen growth momentum in the Indonesia Islamic industry over the last two to three years,” said Wasim Saifi, the Singapore-based global head of Islamic and consumer banking.
“Along with capital, foreign banks can bring in expertise as Indonesia provides a very good opportunity looking at its population and growth.”
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.