Bank Indonesia issues four rules for Islamic banks

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)