BI to require sharia banks to up reserve deposits

Tony Hotland Jakarta

Starting Sept. 1, Bank Indonesia (BI) will require sharia banks with assets of more than Rp 1 trillion (US$110.25 million) and financing to deposit ratios (FDR) of less than 80 percent to increase their minimum reserves with the central bank from the current 5 percent level.

BI Governor Burhanuddin Abdullah said on Monday that the decision was aimed at boosting the banks' intermediation roles.

"We hope that sharia banks will increase their financing ratios to help industry here," Burhanuddin said after being honored by Bank Muamalat Indonesia for his contribution to the country's flourishing sharia sector.

He said that the requirement was similar to the one recently imposed on conventional banks.

Last month, the central bank started requiring conventional banks to increase their reserves by up to 3 percentage points from the previous level of 5 percent.

Conventional banks with assets ranging from Rp 1 trillion up to Rp 10 trillion must increase their reserves to 6 percent, those with assets of between Rp 10 trillion and Rp 50 trillion to 7 percent, and those with assets in excess of 50 trillion to 8 percent.

These conventional banks are paid interest at a rate of 3 percent on the additional reserves.

However, no interest will be paid to the sharia banks.

"This way, they will be encouraged to boost their performances, and increase their FDRs so as to avoid this obligation," said Harisman, the director of Islamic banking at BI.

Sharia banks operate in line with the principles of Islamic law. While conventional banks are paid interest by borrowers, sharia banks take a part of the profits made by borrowers under a profit-sharing arrangement.

Such banks are starting to proliferate here -- not surprising given that the majority of the population is Muslim. There are two dedicated Islamic banks in the country (Bank Muamalat Indonesia and Bank Syariah Mandiri), in addition to 10 sharia banking units in conventional banks, such as Bank International Indonesia, Bank Danamon and Bank Negara Indonesia.

According to Harisman, the total funds deposited with the sharia banks or units accounted for 0.7 percent of the total funds in the country's banks.

Burhanuddin added that unlike in the case of conventional banks, the capital adequacy ratio (CAR) of sharia banks would include an additional factor: reputation.

"This factor takes into account the question of whether the bank really abides by sharia regulations. It is a very important thing for sharia banks as it concerns how they work in accordance with Islamic law," he said.

No details about how the "reputation" factor would be quantified were available.