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Sharia finance gains traction amid pandemic: OJK
The assets of the country’s sharia finance industry reached Rp 1.639 quadrillion (US$111.1 billion) as of July this year, an increase of 20.6 percent compared to the same period last year, according to the OJK.
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ndonesia’s Islamic finance has gained traction amid the coronavirus pandemic as the industry’s assets rose significantly and sharia banks recorded a jump in corporate profit, signaling a growing industry previously plagued with low demand.
The assets of the country’s sharia finance industry reached Rp 1.639 quadrillion (US$111.1 billion) as of July this year, an increase of 20.6 percent compared to the same period last year, according to the Financial Services Authority (OJK), with the industry’s market share now at 9.68 percent of the Indonesian financial industry.
“This reflects how sharia finance has a remarkable resilience and a great spirit to support the acceleration of the national economic recovery,” OJK chairman Wimboh Santoso told a virtual discussion on Monday. “We should use this pandemic as an opportunity to revive sharia economy and finance by giving them a bigger role to speed up economic recovery.”
Although Indonesia is the biggest Muslim-majority country in the world, the growth of the country’s Islamic finance industry remained sluggish due to low demand for its financial products, which was driven by low literacy and low inclusion levels.
However, several sharia banks managed to book a jump in their bottom line despite the cooling economic activity caused by the coronavirus outbreak. They attributed the gain to the implementation of the qanun (Islamic bylaw) on sharia financial institution in Aceh, which obliges all financial companies to provide their services in accordance with the sharia principle in the region starting January 2019.
The financial institutions must comply with the regulation within three years of the qanun implementation.
Experts are of the view that sharia banks’ low base also provides ground for higher growth in their financial performance.
Sharia banking subsidiary of state-owned Bank Rakyat Indonesia (BRI), BRI Syariah, for instance, reported a 229.67 percent jump in net profit in the first half of this year to Rp 117.2 billion as its parent company saw a 37.4 percent year-on-year (yoy) drop in net profit to Rp 10.2 trillion.
State-owned Bank Mandiri's sharia banking arm, Bank Syariah Mandiri, booked a 30.53 percent increase in profit to Rp 718.46 billion as of June, while the parent company’s bottom line was down 23.9 percent yoy to Rp 10.2 trillion.
Privately owned BCA Syariah booked a net profit of Rp 28 billion in the first half, up 8.7 percent compared to the same period last year, while its parent company Bank Central Asia (BCA) pocketed Rp 12.24 trillion in net profit, a drop of almost 5 percent yoy.
The OJK would take some measures to strengthen the country’s Islamic finance industry such as encouraging collaboration among stakeholders, pushing for mergers of state-owned Islamic banks and strengthening the industry’s digital technology adoption, Wimboh said in the discussion.
“We are also open to the State-Owned Enterprises Ministry’s plan to merge sharia banks so they can become BUKU IV category banks and the industry can grow,” he added, referring to a category that includes banks with core capital exceeding Rp 30 trillion.
Indonesia’s Islamic finance development was considered the best in the world last year in terms of leadership and potential, beating other Islamic countries, according to the 2019 Global Islamic Finance Report (GIFR) published by the Cambridge Institute of Islamic Finance.
The report said the country was bound to become an “unrivaled global leader” in the industry supported by the government’s commitment to promote Islamic finance, regulatory developments and significant improvement in the Islamic finance ecosystem.
“The argument of the infant industry applies to Islamic finance as it will need more time to grow and reach the breakeven point,” Islamic finance expert Adiwarman Karim of Karim Consulting told The Jakarta Post on Monday, adding that the country’s extensive regulations and research on sharia finance would help support the industry.
There are currently nine initiatives that involve 21 banks to develop sharia-compliant health care and workers social security, among other things, and those initiatives can have a positive impact to further develop the industry, he added.
“The key to develop the Islamic finance industry is to develop the real sector by providing incentives for sharia businesses that borrow money from sharia banks. This would create demand for sharia financial products,” Institute for Development of Economics and Finance (Indef) senior economist Aviliani told the Post in a phone interview on Monday.
