Banks warned not to use sharia units only as 'cosmetics'

The Jakarta Post ,  Jakarta   |  Fri, 10/26/2007 4:28 PM  |  Business

The Jakarta Post, Jakarta

Bank Indonesia Deputy Governor Siti C. Fadjrijah has told local banks not to use their sharia banking units just as a ""sweetener"" to attract customers.

""We don't want the sharia units to be mere 'cosmetic lipstick' for the banks, where they say they have such Islamic-based banking businesses but the fact is the units only have an inappropriately small market share,"" Siti was quoted as saying by Antara newswire at a sharia banking event in Jakarta on Thursday.

""This is important because the sharia businesses must eventually be profitable for the lenders themselves, and develop into a healthy industry of its own,"" she said.

Siti said a lack of business focus was among the factors hampering the development of sharia banking in the country.

For this reason the central bank, she said, has required lenders in the country to submit detailed business plans before expanding into sharia banking.

Siti said any commercial bank planning to open Islamic-based sharia units must by next year include comprehensive data on the plans in their annual corporate action plans, including the exact market share targeted for the units.

Any bank setting up sharia unit branch offices will also be subject to the central bank's strict compliance guidelines, Siti said, similar to those for the lenders' conventional branch offices.

These requirements are expected to ensure the lenders actually develop their sharia units, and are not just jumping on the Islamic banking bandwagon.

Sharia banking is based on a scheme of profit-sharing. Using interest in savings and lending is forbidden under sharia principles.

Data from Bank Indonesia show the country's sharia banking units as of August managed Rp 23.4 trillion (US$639 million) in assets -- or 1.3 percent of the Rp 1,820 trillion in assets currently managed by commercial banks.

They had recorded Rp 22.1 trillion in financing -- as compared to Rp 893.5 trillion in lendings for conventional banks.

The central bank expects sharia banking assets to reach at least 5 percent of conventional commercial banks by next year.

Although there are currently only three banks focused solely on sharia banking, banking services using Islamic principles continue growing with more conventional banks entering sharia the sector.

At present at least 24 conventional banks have opened sharia units.

Economist Faisal Basri from the University of Indonesia agreed that a lack of focus and market research for sharia banking products was hampering further development of the industry.

""When conventional banks were on a trend of credit cards, sharia banks simply followed suit, without assessing first whether that was actually what their market needed,"" he said.

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