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Jakarta Post

Islamic banks'€™ market share persistently low

  • The Jakarta Post

    The Jakarta Post

Jakarta   /   Wed, March 23, 2016   /  09:12 am

The market share of the country'€™s Islamic banks has remained low at less than 5 percent in the past several years despite efforts to promote sharia financial services to the mostly Muslim Indonesian population, observers said.

Indonesians are still reluctant to open accounts or carry out transactions through sharia-compliant banks as they are mostly still unaware of the advantages of Islamic banking services, Islamic finance expert Irfan Syauqi Beik said.

Another factor that has caused the sharia banks'€™ stagnant low market share is their weak financing capacity, he said in Jakarta on Monday. He said that most of the existing Islamic banks are undercapitalized so that they are unable to expand their business rapidly.

Indonesia, as the country with the world'€™s largest Muslim population, is quite a promising market for sharia banks because the banks offer banking services that are based on Islamic principles.

'€œSharia banking is based on profit-and-loss sharing, so the return is halal,'€ Irfan said, adding that the banks also avoid using '€œinterest'€ in its services, which according to Islamic law is prohibited.

Sharia prohibits acceptance of specific interest or fees for loans of money, which is known as riba (usury).

The market share of the Islamic banks has been below 5 percent in the past several years. According to an Indostrategic Economic Intelligence survey, their market share flat-lined at 4.6 percent at the end of 2015, down from 4.62 percent in 2014.

Meanwhile, Financial Services Authority (OJK) figures show Islamic banks'€™ market share at 4.87 percent in 2015. The OJK is optimistic that it can break the 5 percent target this year with promotional efforts by the agency.

The surveying agency'€™s chairman Guntur Subagja attributed the fall to the decline in the total assets of Indonesia'€™s first Islamic bank, Bank Muamalat, which dropped 7.4 percent to Rp 57.8 trillion (US$4.39 billion) as of December last year from Rp 62.41 trillion in the same period in 2014.

In addition, the decline in the sharia banks'€™ assets was due to their low financing capacity, he said, adding that six of the 12 Islamic banks have capital of less than Rp 1 trillion and five banks have between Rp 1 trillion and Rp 5 trillion. Only Bank Syariah Mandiri is classified in the BUKU III bank category of banks that have capital of between Rp 5 trillion and Rp 30 trillion.

'€œIslamic banks can boost their assets if they get a capital injection. The banks will be left behind if they only rely on organic growth,'€ Guntur said.

Meanwhile, Bank Muamalat consumer and retail banking director Purnomo B. Soetadi acknowledged that the stagnant growth of the Islamic banks'€™ market share occurred because Islamic banking was still relatively new in the country.

He said that the Islamic banks not only needed a capital boost, but also had to offer more innovative banking products in order to be able lure more customers.

Irfan said he predicts Islamic banks would have a market share of up to 5 percent of the total assets in the country'€™s banking industry if the banks'€™ opportunity to distribute civil servants'€™ salaries is utilized to the maximum.

'€œI hope more heads of working units in several city administrations use sharia banks to distribute their servants'€™ salaries,'€ he said, adding that some sharia banks, such as Bank Syariah Mandiri and BNI Syariah, had been able to distribute the civil servants'€™ salaries as stipulated in the Finance Minister'€™s regulation No. 11/2016.

The same thing was also stated by Purnomo who said that the opportunity given by the government to the Islamic banks to channel the salaries of civil servants could trigger the Islamic bank market share to grow bigger, to approximately 5 percent. (vny)

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