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span class="inline inline-left">Edy Setiadi: Executive Director of bank indonesia’s Department of Islamic BankingBank Indonesia applies several policies to manage the financing to value (FTV) ratio on both housing and automotive financing in Islamic banks to avert the emergence of a credit bubble in the two sectors.

Such polices are outlined in BI circulation letter no. 14/33/DPbS, issued on Nov/ 27, 2012, that will take effect on April 1, 2013. Hence, Islamic banks still have time to adjust their internal FTV policies until March 30, 2013, before implementing the new policies.

“Principally, the Bank Indonesia FTV policies are similar for both the Islamic and the conventional banks. But, there are some exceptions for specific Islamic financing schemes particularly we give Islamic banks an incentive. For example, the minimum down payment in the Islamic housing and authomotive financing is 10 percent lower than the conventional banks,” said Edy Setiadi, the Executive Director of the Department of Islamic Banking, Bank Indonesia.

BI previously issued the FTV policies for both housing and automotive lending in conventional banks in June 2012. Edy said that the same considerations governed the extending of the FTV policies for Islamic banks.

“We are worried with the recent demand for housing and automotive loans that shows an increasing trend. Unless the FTV ratio in the two sectors in Islamic banks are regulated, the previous policies will not work because customers from coventional banks will move to Islamic banks for the sake of seeking the unregulated housing and automotive loans,” he said.

Letting the situation continue could trigger a bubble in the property and automotive sectors.

“Additionally, we also want to boost the growth of the productive sectors. Therefore, under the regulation, vehicles used for productive activities are given a special incentive,” Edy said.

He further explained that the FTV ratio for property targets housing of more than 70 square meters, with the percentage of FTV ratio depending on Islamic banking products.

The FTV ratio for the Murabahah or Ishtina is set at 70 percent, similar to that at conventional banks. Under the Murabahah financing, banks purchase a house at a certain value and then resell it at a higher price to the customers, who pay for it with interest-free installments.

The FTV ratio for other Islamic banking products, namely Musyarakah mutanaqisah (MMQ) and Ijarah Mutahiya Bittamlik (IMBT), are stipulated at maximum 80 percent. “MMQ and IMBT are treated separately because these two products are typical Islamic products,” he said.

MMQ is a form of financing in which an Islamic bank and the customer act together as the owner of a house based on their participation and gradually the bank will transfer part of its ownership to the customer, who also acts as the borrower, he said.

With these new policies, it is expected that incentive-given MMQ and IMBT would be more attractive to the customers compared to the getting popular Murabahah scheme. Hopefully, there will be a shifting from Murabahah to MMQ in terms of customers seeking house financing.

“Murabahah is not wrong and is permissible eventhough the spirit of sharia is a profit sharing contract,” said Edy.

What an Islamic bank pays to its customers should come from its real business, as such it is fair and unprejudiced. Another advantage of MMQ and IMBT financing scheme is that the customers have an opportunity to periodically review the pricing.

Customers can make an adjustment to the market condition and, automatically, this can create a competitive value of Islamic banks compared to conventional banks.

Automotive

Meanwhile, the down payment for two and three-wheeled vehicles is set at the lowest rate, 25 percent, for both non-productive and productive vehicle categories. For the purchase of a non-productive-four-wheeled vehicle, the down payment is similar to conventional banks, at 30 percent. Down payment for four or more wheeled vehicles that are used for productive purposes is set at 20 percent at the lowest.

“The rule of the down payment of 20 percent applies to a vehicle with a driving license for transportation of goods issued by a related authority or proposed by an individual. It also applies to a legal entity that runs a certain business issued by a related authority and used to support the business operation,” Edy said.

Edy is optimistic that Islamic banks will be ready to implement BI’s new policies given that they were involved in discussing the issue prior to the issuance of the regulation.

“Based on our survey, a simultaneous implementation of the policy is much better than a stage by stage implementation as demanded by several banks,” he said. In order to ensure the compliance of the rules, BI will impose sanctions to Islamic banks that fail to follow up the regulations.

“The forms of sanction range from a cash fine, a written reprimand, slashing of the bank soundness level to temporary or permanent closure of the product and suspension of operation of particular business unit,” Edy said.