Indonesia Reviews Shariah Loan Restructurings: Islamic Finance
Indonesia, the world’s most-populous Muslim nation, may reduce restrictions on Islamic banks by allowing them to change terms on loans and boost lending.
“Shariah banks have asked that loans that are still current can be restructured,” Mulya Siregar, director of Islamic banking at the central bank, said in an interview in Jakarta yesterday. “We’re having intensive discussions and will make a decision by the fourth quarter at the latest.” Current regulations issued in 2008 only permit terms to be altered once debt turns non-performing, Siregar said.
Indonesia, which is home to more than 192 million Muslims, introduced a law two years ago to allow financial institutions to offer services that comply with Shariah principles, 25 years after Malaysia. Islamic banking assets totaled $93 billion in Malaysia in 2009, or 20 percent of the total, compared with 2.9 percent in Indonesia, according to central bank data.
Shariah-compliant assets in Indonesia may increase 30 percent to 97 trillion rupiah in 2010 ($10.8 billion), from 75 trillion rupiah at the end of last year, Siregar said.
“Even with the late introduction of the laws, growth has been remarkable,” Siregar said. “We only had three Islamic banks in early 2008, now we have 10.” The 2008 law requires all lenders to turn their Shariah divisions into separate units by 2023, he said.
Non-performing loans at Indonesia’s Islamic banks fell to 3.89 percent of total lending in June, from 4.39 percent in the same month a year earlier, according to the central bank’s website. That’s more than the 2.98 percent ratio for troubled loans at the nation’s non-Islamic commercial banks, slowing from 3.94 percent a year ago.
“Allowing banks to restructure early would help them focus on giving loans,” Teguh Hartanto, an analyst at Indonesia’s state-owned PT Bahana Securities, said in an interview from Jakarta today. “Credit quality can deteriorate easily in a bad economic environment, forcing banks to curb lending as they have to maintain or even increase capital to support the higher NPL level.”
The non-performing loan ratio could climb to 4.7 percent if economic conditions deteriorate by 25 percent, the central bank said in a report on Indonesia’s financial stability in March.
Indonesia needs to offer tax incentives to attract investors who don’t use religion as a basis for making investments in order to expand Islamic financial services, Fauzi Ichsan, an economist at Standard Chartered Plc, said in an interview from Jakarta yesterday.
“We have to understand that Indonesia is the world’s biggest Muslim country but its population is secular,” said Ichsan, whose bank gets most of its profit from emerging markets. “Unless it has full government and parliamentary support, growth for Islamic finance in Indonesia may not be as smooth and large as Malaysia or some other Muslim countries.”
Banking that complies with the religion’s ban on interest is increasing at a rate of 15 percent annually, according to the Islamic Financial Services Board, making it the fastest-growing segment in the financial industry. Assets held by Islamic financial institutions may climb to $1.6 trillion by 2012, IFSB and the Islamic Development Bank said in a report in April.
Global sales of sukuk, which use asset returns instead of interest, fell 27 percent to $7.9 billion in 2010, according to data compiled by Bloomberg. Islamic notes issued from Indonesia totaled $4.64 billion, about 4 percent of the $130 billion outstanding globally.
Indonesia’s 8.8 percent dollar-denominated Islamic bonds due April 2014 returned 8 percent so far this year, according to prices from Royal Bank of Scotland Group Plc. The yield dropped 27 basis points, or 0.27 percentage point, to a record-low 2.68 percent today. Malaysia’s 3.928 percent sukuk maturing June 2015 has gained 6 percent since the debt was sold in May. The yield declined two basis points today to 2.72 percent, the lowest level since its issuance, RBS prices show.
The difference between the average yield on Islamic bonds and the London interbank offered rate narrowed six basis points yesterday to 385. The spread has shrunk 82 basis points so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Shariah-compliant debt returned 9.7 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 13 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The Indonesian central bank has issued about 30 regulations on Shariah banking since 2000, ranging from lending to capital requirements, according to Siregar.
Indonesia raised $650 million from its first global sukuk sale last year. It may sell more of the bonds in the first half of 2011, Rahmat Waluyanto, director general at the finance ministry’s debt-management office, said in Jakarta today. HSBC Holdings Plc, Standard Chartered and Citigroup Inc. may manage the issuance, a finance ministry official said on July 13.