BI to relax ruling to boost Islamic bank development

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.