BI to relax ruling to boost Islamic bank development

Fitri Wulandari, The Jakarta Post, Jakarta

Bank Indonesia plans to relax certain rulings that could help expand Islamic banking in this country, according to a central bank official.

"Thus, services from sharia banks will be able to be enjoyed widely," Hatief Hadikoesoemo, the head of the Islamic banking unit at Bank Indonesia, said during a press conference following the opening of a three-day international conference on Islamic banking. The conference was opened by Vice President Hamzah Haz.

Under the planned changes, for instance, conventional banks wishing to open an Islamic banking operation will no longer be required to provide a separate building for the new business.

Thus, the Islamic banking unit (or sharia bank) and the conventional bank could share the same office, Hatief said.

"But they would have separate managements and financial systems," he said.

With this strategy, conventional banks could easily open Islamic bank branches throughout their network. Hatief did not provide further details about the planned changes to the regulations.

The Islamic banking system works in line with the principles of Islamic sharia. While conventional banks receives interest from borrowers, sharia banks take a part of the profits made by borrowers under a profit sharing arrangement.

For the past two years, Islamic banking in the country has strengthened its presence. It is not only aimed at Muslim consumers but also the wider community.

At least one foreign bank -- the Hong Kong-based HSBC -- plans to launch Islamic banking unit later this year.

Data from the central bank shows that as of July 2003, the total assets managed by the country's sharia banks stood at Rp 5.6 trillion, or 0.48 percent of the total assets of the country's banks, which amounted to Rp 1,111.68 trillion.

Loans to deposit ratios are averaging 104.5 percent, double the 51.3 percent average of conventional banks. Meanwhile, the nonperforming loan ratio stands at 3.9 percent, well below the central bank's 5 percent limit.

Currently, there are two dedicated Islamic banks in Indonesia, seven conventional banks that also provide sharia products and 86 small rural Islamic banks.

Bank Indonesia is now in the process of formulating a blueprint for the development of Islamic banking in the country until 2011, and expects the sector to have grown by 5 percent by that year.

Meanwhile, Vice President Hamzah Haz said in a speech that the Islamic banking industry had yet to avail of the full potential of the Indonesian market.

Hamzah said Indonesia represented a huge market for Islamic banks with some 40 million small entrepreneurs, 54,000 medium- scale entrepreneurs and 2,000 large entrepreneurs.

"Unfortunately, Islamic financial institutions have yet to fully expand their services to reach them," Hamzah said.

The conference, titled "Risk management, regulation and supervision to unify international regulation," is a collaboration undertaking between the Ministry of Finance, Bank Indonesia and the Islamic Development Bank (IDB).

Some 25 speakers from various international institutions such as the IDB, International Monetary Fund, World Bank, and the International Islamic Rating Agency participated in the event.