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everal important factors bode well for the development of sharia banking in Indonesia, including in eventually becoming a center for the Islamic financing system in Asia and the world.

First and foremost is the majority Muslim population in the world’s fourth largest nation. A second is the growing recognition of the value of sharia banking, along with changing public perceptions about what the finance system entails and how it compares to mainstream banks.

Although its total assets remain relatively small, sharia banking is experiencing strong and promising growth. The nation’s largest state-owned and private banks are taking notice by introducing new sharia products and services in their sharia banking subsidiaries.

Sunarso, the director of commercial and business banking of PT Bank Mandiri, said Rp 300 billion in funds were earmarked for its subsidiary, Bank Syariah Mandiri, this month. The growth of the sharia economy in Indonesia is boosting the development of sharia banking, he said.

“BSM’s assets are currently Rp 51 trillion, which is a result of the developing sharia economy in Indonesia. And from the total assets, Rp 42 trillion is for disbursement in public financing.”

Bank Syariah Mandiri vice president Eka B. Danuwirana noted the differences in the growth of sharia banking in Indonesia compared to other nations. In the Arab world, its development was fueled by over-liquidity, while in Malaysia the government has played an instrumental role in its promotion.

In Indonesia, in contrast, public need and demand are leading to its development.

“Sharia banking assets are Rp 200 trillion, or 5 percent from the total national banking assets of Rp 4,000 trillion,” he said.

PT Bank Jabar Banten Syariah is also increasing its income from the multifinance sector. Through the end of 2012, its target is Rp 3.1 trillion.

The bank’s operational director Didi Muwardi said Rp 560 billion in funding would be channeled to multifinance operations, with the focus on micro-credit, small and medium enterprises, as well as commercial operations.

“As a new sharia bank our customers remain limited, and in general are small and medium enterprises as well as commercial ones,” he said.

PT Bank BRI Syariah is targeting the growth of consumer housing loans in its consumer credit portfolio.

“Our target is double growth of housing loans compared to 2012,” said Consumer Financing Group head Sri Esti Kadaryanti.

“Currently, housing loans account for 35 percent from the total number of customers. We have set our target for double growth considering the great potential of the housing market. We’re optimistic.”

As of October 2012, BRI Syariah’s total assets were Rp 12 trillion. Its market focus for clients is on individuals and entrepreneurs, both small and medium size enterprises.

Greater effort

Bank Indonesia believes there must be a major effort for the development of sharia banking, both in the amount and volume of business, to increase its share of the banking industry.

“Both the business amount and volume need development, because sharia banks currently cannot compete with conventional banks. It will require a push for more amount and share of the market,” said the central bank’s deputy governor Halim Alamsyah.

Sharia banking must expand its scale of operations, he continued, through increasing capital. A greater scale of business will lead to streamlined expenditures and higher efficiency in the sharia banking business, he added.

“Regarding human resources, there can be no distinction between sharia and conventional banks, for the quality and number must be the same. And this requires a large scale of operations to be competitive,” Halim said.

In supporting the development of sharia bank, the central bank is focused on five objectives: sharia bank funding that concentrates on the productive economic sectors and reaching out to the mainstream public; development of products that are better suited to the needs of the public and productive sector; the transition of supervision that continues to uphold the continuity of sharia banking’s development; revitalization in the enhanced synergy of relations with its parent bank; a focus on education and communication in increasing the capacity of sharia banking in the productive sector; and the promotion of premium products.

“We will use as a measure the percentage of the parent bank and its subsidiary of the sharia bank,” said Bank Indonesia’s Syariah Banking executive director Edy Setiadi.

“The growth of sharia banking can be included in the business plan of the parent bank. Currently, there are only two banks [sharia banks] and one sharia financing unit operating above 5 percent from their parent bank.”

Bank Indonesia recorded sharia banking assets at Rp 178 trillion as of October 2012, a 37 percent increase in the year. The development of sharia banking, both in sharia banks and financing units, has been rapid in the past year.

Total assets of sharia banks and sharia finance units combined as of October reached Rp 174.09 trillion; with an additional Rp 4.56 trillion from the Syariah Bank Perkreditan Rakyat the amount soars to Rp 178.65 trillion.

Halim acknowledged that the macroeconomic effects from the prolonged global economic crisis of 2012 also affected slightly the national sharia banking industry.

“This can be seen from the growth of sharia banking assets that while relatively high are not as high as in the same period of the previous year. The significant decrease in growth of national sharia banking assets began in March through September 2012, as a result of a sharp decline in third party funds and slowdown amid domestic non-economic conditions,” he said.

The central bank projects strong growth of sharia banking assets in 2013 to reach from 36 percent-58 percent based on expected improvements in the global economy and its conducive effect on development of the domestic business environment.