Indonesian Islamic Megabank Merger Plan Shifts From 2015 to 2017

  • Amanah consultancy says nation needs enforcement of deadlines
  • Involves combining Shariah-compliant units of four banks

The difficulties in forming a megabank in the $2 trillion Islamic finance industry are becoming clear as Indonesia pushes back deadlines for its plan after failures in Malaysia and the Middle East.

Financial Services Authority Director Dhani Gunawan Idat is the latest official to repeat Indonesia’s goal for such an entity after two years of trying, with a plan to merge the Shariah-compliant units of PT Bank Mandiri, PT Bank Negara Indonesia, PT Bank Rakyat Indonesia and PT Bank Tabungan Negara. He put the time frame as 2017 in an interview Friday, while his Chairman Muliaman Hadad said in January it may happen this year. Gatot Trihargo, deputy minister for government-run enterprises, said in June that 2016 was the target.

Indonesia’s falling Islamic banking assets highlight the need to create an institution with the financial clout to contend with bigger conventional rivals and achieve its aim of competing as a Shariah-compliant hub with Malaysia, which has unsuccessfully tried to get a megabank off the ground for at least six years. The Saudi Arabia-based Islamic Development Bank’s plan touted in 2012 never materialized. Indonesian lenders need clear direction and the agency responsible must enforce the deadline, according to Amanah Capital Group Ltd.

“We have observed the seriousness of the Indonesian government in putting
their Islamic banking and finance industry on the right track to be competitive
against global peers,” said Abas A. Jalil, chief executive officer of the Kuala Lumpur-based consultancy. “What’s lacking are definitive actions.”

Three Proposals

The Southeast Asian nation’s banking assets conforming to Muslim principles dropped 0.5 percent to 204 trillion rupiah ($15 billion) in the first nine months and accounted for 3.3 percent of the total market, according to the Financial Services Regulator. Malaysia’s climbed 14 percent in the 12 months through August to 673 billion ringgit ($156 billion).

Indonesia put forward its merger proposal for an Islamic megabank in 2013 along with two other options -- to set up a new state-controlled Shariah-compliant lender or convert an existing conventional bank.

“The merger will strengthen the competitive capability of the bank and improve their quality of service for customers and stake holders,” Idat, director of Islamic banking research, regulation, development and licensing at the FSA in Jakarta, said by e-mail on Friday.

While Indonesia has the world’s biggest Muslim population it is trailing Malaysia, the top Shariah-compliant bond market, in terms of Islamic finance development. More than five years after the central bank asked the authorities to address the unfavorable practice of double taxation on sukuk from capital gains and on the underlying assets, the issue has yet to be resolved.

Infancy Years

Indonesia is a “promising market” for Islamic banking but the sector “could remain stuck in its infancy for years” without a push from regulators, according to a December report from Ernst & Young LLP. The nation does have a five-year blueprint in place to strengthen Shariah lenders’ capital and increase consumer awareness.

“Indonesia, like Malaysia, has all the potential ingredients for creating a Shariah megabank,” said Raj Mohamad, managing director at Singapore-based consultancy Five Pillars Pte. “Indonesia still needs to develop its Islamic finance jurisdiction and framework, which hasn’t gained global acceptance as yet.” 

Malaysia’s central bank first proposed the Islamic megabank idea in 2009, with no progress made until a planned merger between CIMB Group Holdings Bhd., RHB Capital Bhd. and Malaysia Building Society Bhd. which eventually stalled in January. A license that was slated to be awarded in 2011 for a multinational lender to be formed between Asia and the Middle East also never materialized.

“It’s always going to be an uphill task establishing a megabank through mergers and acquisitions, simply because the constituent financial institutions will have shareholders and stakeholders who may not agree on the terms,” said Suhaimi Zainul-Abidin, a founding member of the Gulf Asia Shari’ah Compliant Investments Association in Singapore. “But it is an aspiration worth pursuing.”

Before it's here, it's on the Bloomberg Terminal.