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ccording to data from the monthly bank report, credit growth in the banking industry in the third quarter of this year has reached double digits at 12.98 percent year-on-year. The achievement of credit performance in this period was better than in the same period last year, when it only grew at 7.93 percent.

However, the impressive credit performance of the banking industry was apparently not followed by the Islamic banks. Islamic banks’ credit (financing) only grew by 3.64 percent, the lowest compared to those of other bank groups such as state-owned banks that grew by 15.29 percent, national private banks by 10.20 percent, foreign bank branch offices by 22.13 percent, joint venture banks by 20 percent and regional banks by 8.18 percent.

Besides being low, Islamic bank financing also seems to be falling. The relatively low growth in Islamic bank financing raises a question. Why is the financing growth of the Islamic banks so slow?

As a Muslim country, Indonesia has great potential for Islamic banks, but this potential has not been optimally explored, especially since in the past five years, the market share of Islamic bank financing has remained stagnant in the range of 3 and 4 percent. So what is the problem exactly?

There are several possible factors that have contributed to the slow financing growth of Islamic banks.

First, third party funds or deposit growth in the Islamic banks is quite low. As of September 2018, deposits grew only by 4.59 percent, lower than the 9.97 percent in September 2017.

With the low deposits, Islamic banks have to limit their financing. If not, they would face liquidity risk. Moreover, banks also have to set aside some of the deposits to be placed in statutory reserves in Bank Indonesia and liquid assets as required by the relevant authorities.

Unfortunately, the sources of Islamic bank funds heavily rely on deposits. Non-deposit funding is relatively minimal, such as the issuance of bonds, medium term notes, negotiable certificate deposits and loans from third parties, including foreign debt.

So, in order to balance the desire to disburse financing to other parties with limited funding availability, they would naturally decelerate the financing. On the other hand, Islamic banks face a high level of non-performing financing (NPF), which was 3.82 percent in September.

The NPF was the highest recorded compared to other bank groups. Such a situation makes them more focused on improving or resolving NPF, thus stopping them from disbursing financing for a while until the NPF problem is resolved or reduced. Certain Islamic banks have been more selective in disbursing their credit.

Along with the high NPF, Islamic banks have conducted a clean-up program to reduce the amount of NPF, such as by writing-off or selling NPF to other parties. As of September 2018, the writing off of their NFP reached Rp 15.47 trillion (US$1.1 billion), an increase of 26.06 percent compared to that in September 2017, which was Rp 12.27 trillion.

While the NPF sales were for example carried out by, among others, Bank Muamalat Indonesia, with total amount of Rp 6 trillion. This has resulted in a decline in their financing.

Finally, competition with conventional banking is very tight, especially with large and medium conventional banks. While on the Islamic banks’ side alone, of the 14 Islamic banks, only two banks have assets of more than Rp 50 trillion, namely Bank Syariah Mandiri and Bank Muamalat Indonesia. Low assets make it difficult for Islamic banks to compete because the size of the bank (in terms of total assets) plays an important role in winning a competition.

The efforts to improve the intermediary role of Islamic banks have indeed begun with Islamic banks themselves, but that is not enough. The stagnant market share of Islamic banking loans that has lasted for a long time shows the need for development from the other side, namely the development of an Islamic (sharia) economic ecosystem.

If the sharia economy grows rapidly, then the need or demand for Islamic financing would be high. The reason is that banks in principle follow businesses and not vice versa.

Therefore, as part of BI commitment to participate in developing the economy and Islamic finance, BI has developed the blueprint of a strategy with three pillars. The first pillar is developing and strengthening the sharia economy through the development of halal value chains. This would be achieved, for example, through a program to develop an ecosystem of various levels of sharia business, including pesantren (Islamic boarding schools). This program can be applied to leading sectors such as the halal food industry, halal tourism sector, agricultural sector and renewable energy sector.

The second pillar supports the distribution of Islamic financing for the development of the halal value chain through deepening the market for Islamic finance. It aims to improve the efficiency of Islamic financial market liquidity management. To achieve this, BI issued sharia repo instruments and Islamic hedging and designed BI sukuk instruments to become part of a sharia-based monetary policy instrument to strengthen banking liquidity management.

The last is to strengthen research, assessment and economic and Islamic finance education to improve public literacy regarding Islamic economics and finance. This pillar would improve the quality of human resources and the level of public awareness of the economy and Islamic finance.
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