Indonesian Islamic banks
to expand further in 2010

Islamic banking assets could grow by 81 percent next year, but only if they fully use the supporting regulations, the central bank says.

As of November, Islamic banking had mobilized total assets of Rp 61.4 trillion (US$6.54 billion).

Bank Indonesia (BI) predicted total assets could reach Rp 68 trillion by the end of 2009, a 37 percent increase from the previous year.

Islamic banking grew significantly in the last five years, but growing from a modest starting point, at above 32 percent annually, BI said on Monday.

"The growth of Islamic banking in 2010 is expected to further increase, not only because of an organic growth *from the existing industry* but also due to an increase in the number of banks or new players in the industry," BI acting governor Darmin Nasution said in a speech, read by BI deputy governor Budi Mulya, in a seminar on the prospects for Islamic banking in the country.

The seminar saw international participants, including those from the neighboring country of Malaysia, which has a well-developed Islamic banking industry.

The global economic recovery will support the financial sector, while the elimination of double taxation on collateral used in sharia-based financial transactions will benefit Islamic banks, BI said.

The elimination of double taxation is regulated under the newly-endorsed law on value added tax, to be effective as of April 2010.

However in a press conference, Mulya Siregar, deputy director of BI's sharia banking directorate, said the optimum 81 percent growth in assets could only be achieved if all the supporting regulations were made use of by the Islamic banks.

Otherwise, the projected growth may only reach a moderate 43 percent based on some new players entering the industry, or the more pessimistic 26 percent growth would be supported only by organic growth from existing players, he said.

Two foreign players, the Bahrain-based Al Baraka Islamic Bank and the Malaysia-based Asian Finance Bank, which have representative offices here, have called BI recently to convey their plans to buy local banks and turn them into Islamic banks, said Mulya.

"They want to open Islamic banks here but all this time they have concluded that the laws *on double taxation* have hampered their plans," he said.

Bank BNI, Bank BCA and Bank Victoria, as well as regional development bank Bank Jabar, will also set up their own Islamic banks, he said.

Ventje Rahardjo, president director of Bank BRI Syariah, said tax incentives, like a lower tax rate for sharia banks, might help boost Islamic banking.

"Incentives needed *by Islamic banks* include tax incentives, a lower capital adequacy ratio, or *to put* government budget allocations in sharia banks," he said.

As of September, sharia banks disbursed Rp 44.52 trillion in loans, or only 2.32 percent of the Rp 1,922.6 trillion channeled by all banks nationwide.

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