Sharia loans likely to get own LTV limit

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Although sharia banks operating in the country will soon be subject to Bank Indonesia’s (BI) new policy regulating minimum down payments for housing and automotive loans, they may see different limits than those imposed on commercial banks, a deputy governor for the central bank says.

BI announced this month that it would soon include sharia banks in its policy to restrict loans to value (LTV) in automotive and housing lending, which had entered into effect for Indonesian commercial banks in June, in a move to avert economic overheating in the country’s booming consumer credit segment.

For commercial banks, the central bank limited housing and automotive loans to a maximum of 70 percent of their total value, while it set the limit for motorcycle loans at 75 percent. Previously, the LTV for all lending stood at 80 percent.

“We are still studying the limit level for sharia banks, but we cannot impose the same down payment limit [as imposed on commercial banks] on several sharia products,” Bank Indonesia deputy governor Halim Alamsyah said Monday.

He added that among sharia banking products to be treated separately was the musrayakah mutanaqisah (MMQ), a form of housing loan in which sharia banks act as the owner the house and gradually yield ownership to consumers, who act as its renter.

Besides MMQ, the central bank’s policy may affect another form of sharia housing loans commonly known among Indonesian customers as the murabahah, in which banks purchase a house at a certain value then resell it at a higher price to customers, who pay for the house in interest-free installments.

The inclusion of sharia banks in BI’s LTV rule was welcomed by executives of the country’s largest sharia banks, who claimed that the policy could push down non-performing financing (NPF) in their banks and therefore improve the efficiency of the banking industry.

“An increase in down payments means only customers who are able to afford the payment installments will be able to get credit. This is good for us. Actually, we are more conservative, so we are more careful [in disbursing loans],” Bank Muamalat president director Arviyan Arifin said on Monday.

Yuslam Fauzi, the president of Bank Syariah Mandiri, the country’s largest Islamic-based bank, praised the policy, saying that it could improve the internal risk management of sharia banks in Indonesia.

He acknowledged, however, that the inclusion of sharia banks in BI’s LTV policy would have some effect on his bank’s loan growth.

“But we will just comply with BI’s rules, even if that means we are given the same [LTV ratio] as commercial banks,” he said, adding that his bank could turn to channeling credit to commercial and industrial customers if the policy significantly cut into loans in the consumer segment, which accounts for 30 percent of Bank Syariah Mandiri’s total lending.

CIMB Niaga president director Arwin Rasyid said on Monday that lending through his bank’s sharia unit, CIMB Niaga Syariah, could actually grow by more than 100 percent this year, but he claimed that the LTV policy might decelerate the unit’s lending growth to around 70 percent.

Islamic banking is growing rapidly in Indonesia, the world’s largest Muslim nation, as evinced by mushrooming sharia business units established by commercial banks that aim to tap into the market of around 190 million of Muslims in the country.

According to BI data, there are currently 11 sharia banks and 24 sharia units of commercial banks operating in Indonesia. The Islamic banks and business units posted net profits of Rp 1.47 trillion (US$154.5 million) in 2011, growing by 40 percent from a year earlier. (sat)