Indonesia passes Shariah banking law

The new bill will allow foreigners to establish Islamic banks in partnership with local entities or citizens. (REUTERS)

Indonesia's parliament passed a new banking bill yesterday opening up its Islamic banking sectors for foreign investment in a bid to tap the potential of the Islamic finance sector in the world's most populous Muslim nation.

The new bill allows foreigners to establish Islamic banks in partnership with its citizens or local entities and offers commercial banks the option of converting their business into Shariah-compliant banks.

Around 85 per cent of Indonesia's population of 226 million people are Muslim. But Southeast Asia's largest economy has been slow to tap the fast-growing Islamic finance market.

"We hope this law can increase the turnover of Shariah banking in Indonesia… By 2013, Shariah banking is expected to reach 5-10 per cent of market share, compared to two per cent currently," said legislator Dradjad Wibowo.

Wibowo, also a well-known economist, said the law would help Shariah banks increase loans to sectors with small collateral that are unable to receive loans from conventional banks, such as small and medium enterprises (SMEs). Shariah, or Islamic law, bans payment of interest, allowing money to be earned only from physical assets. It also bars investment in alcohol, tobacco or gambling.

The country's Islamic banking industry is still less than five per cent of the total assets of Indonesia's domestic banks. That compared with a ratio of more than 12 per cent in Malaysia.

Until now, HSBC is the only foreign bank that has Shariah operations in Indonesia, but there are several domestic banks with Shariah-compliant operations, in anticipation of a growing domestic market and to draw investments from oil-rich Middle East countries.

Three local banks – state-owned PT Bank Rakyat Indonesia (BRI), PT Bank Bukopin and PT Bank Negara Indonesia (BNI) – plan to open Shariah-compliant units this year.

Bahrain-based Islamic lender Albaraka Banking Group has also opened an office in Indonesia, as it seeks to stay ahead of rivals in tapping the growing global appeal of Islamic banking.

Global Islamic assets are growing at an annual pace of 20 per cent and are set to hit $2 trillion (Dh7.3trn) in 2010 from the current $900 billion, thanks to a flood of petrodollars, Ernst & Young said in February.