Bank Indonesia issues four rules for Islamic banks

JAKARTA (JP): Bank Indonesia has issued four regulations governing the operation of the mushrooming interest-free Islamic banks, locally known as syariah banks.

The regulations cover rules on minimum reserves at the central bank, clearing, the creation of interbank money market and Bank Indonesia promissory notes designed only for Islamic banks, which adopt profit sharing principles.

Bank Indonesia deputy governor Subarjo Joyosumarto said here on Thursday that based on the 1998 banking law and the 1999 central bank law, Bank Indonesia was responsible in supervising the operation of and nurturing the development of Islamic banks.

"The issuance of these four regulations show our commitment to helping develop sound syariah banks in this country," he told a press conference.

He noted that all the rulings were issued based on Islamic regulations and had been reviewed by the Expert Committee on the Development of Indonesian Syariah Banks.

The committee's chairman Ali Yafie, a noted Muslim scholar, said none of the four regulations issued by the central bank violated syariah principles or Islamic laws.

"The expert committee is of the opinion that the four BI regulations are not against syariah principles. We hope the issuance of those four BI regulations will support the development of syariah banks in the country," Ali Yafie said in a statement.

According to the BI regulation on minimum reserve requirement, dated Feb. 23, Islamic banks must maintain the minimum reserves requirement in the central bank, namely 5 percent of their rupiah-denominated third party funds and 3 percent of foreign exchange third party funds.

Thus, Islamic banks are required to open two accounts with Bank Indonesia, one denominated in rupiah and the other in U.S. dollar. Conventional banks which have syariah units must open two additional accounts.

Islamic banks are also required to report regularly both their rupiah and foreign exchange balance to the central bank. Violators of this reporting requirement will be subject to penalty.

Meanwhile, BI regulation on clearing for Islamic banks, dated Feb. 11, requires all Islamic banks or syariah units of conventional commercial banks to join other commercial banks in the daily clearing program operated by Bank Indonesia.

All clearing regulations for conventional banks, including those on balance and penalties, apply for Islamic banks.

In addition, BI also issued two regulations, dated Feb. 23, on the creation of interbank money market and the creation of BI promissory notes for Islamic banks to help these banks manage their short-term money.

Islamic banks which need short-term funding can issue debt securities and sell them to both Islamic banks and conventional commercial banks.

For Islamic banks with excess liquidity, they could buy those syariah debt securities or place their funds in Bank Indonesia promissory notes created only for Islamic banks. These special notes, called Bank Indonesia Wardiah Certificates, have three series with three maturities: one week, two weeks and one month.

"These special promissory notes have the same function as Bank Indonesia Certificates (SBI), which have been used by the central bank to absorb excess liquidity in the market," Subarjo said.

BI will give a "bonus" for Islamic banks that place their money in BI special notes. The size of the bonus will be adjusted with the rates of Islamic banks' debt securities.

Subarjo said Islamic banks had been able to collect Rp 1.22 trillion (US$164 million) of third party funds as of Dec. 1999, or 0.15 percent of the country's total banking assets of around Rp 1,000 trillion.

The development of Islamic banks began in 1992 when the first Islamic bank, Bank Muamalat Indonesia, started its operation with initial paid-up capital of Rp 73.05 billion.

The bank bases its operation on profit-sharing and loss- sharing contracts and does not pay interest.

In July 1999, private commercial Bank IFI opened its first syariah unit.

Then in Nov. 1999, commercial Bank Susila Bhakti was transformed into Bank Syariah Mandiri.

In addition, most commercial banks' branches in Aceh have been transformed or are in the process of being converted into syariah banks or units.

The central bank, Subarjo said, had also given its approval to state-owned Bank Negara Indonesia to change five of its branches into syariah units. They are in Yogyakarta, Malang, Jepara, Pekalongan and Banjarmasin.

State-owned Bank Rakyat Indonesia and Bank Tabungan Negara have also asked for the central bank's approval to convert a number of their branches into syariah units. (rid)