Sharia banking to grow up to 50% in 2006: BI

The Jakarta Post, Jakarta

Sharia banking, which is based on Islamic law, will expand by up to 50 percent next year in the world's largest Moslem country on an improving economy and the implementation of a new system, a senior central bank official says.

Despite the current economic downturn and rising inflation, the growth of sharia banking next year will stand at between 45 percent and 50 percent, slightly higher than this year's estimated growth, Bank Indonesia deputy governor Siti Fadjrijah was quoted by Antara news agency as saying on Monday.

The rapid expansion will become possible after sharia banks start implementing "office channeling", a system that allows sharia customers to open accounts and conduct financial transactions in the branches of conventional banks, said Siti on the sidelines of a seminar on sharia banking.

Most sharia banks in Indonesia do not stand of their own, but are subsidiaries or units of conventional banks. The new system is expected to add thousands of branches to the hundreds of units currently open to sharia customers.

The concept of interest, as well as speculation, is strictly forbidden under sharia banking, which uses a profit-sharing mechanism instead. The sub-sector's market share in the country's banking sector stood at 1.4 percent in 2005, BI sharia banking director Harisman said.

According to earlier figures, as of October, total assets in the sector had reached Rp 18.5 trillion (US$1.88 billion) with total financing of Rp 14.75 trillion and third-party funds of Rp 13.36 trillion.

According to the central bank's report, sharia banking contributed 1.1 percent to national banking assets last year. It grew by 88.6 percent in 2004, with total assets reaching Rp 14 trillion and total financing Rp 10.9 trillion.

Sharia banking has been enjoying rapid growth since the Indonesian Ulema Council (MUI) issued an edict in 2003 stating that bank interest could be considered an illegal profit, or riba.

It seems poised to get another strong boost as the government has decided to assign the management of haj pilgrimage funds, worth some Rp 5 trillion annually, to the sub-sector starting 2006.

Vice President Jusuf Kalla said on Nov. 21 that Minister of Religious Affairs Maftuh Basyuni had been ordered to use the sharia system to control the funds collected from some 200,000 pilgrims going to Mecca in Saudi Arabia each year.

The pilgrims, who are charged about Rp 25 million each for the trip, must transfer the money to assigned bank accounts months or even a year prior to their departures.

BI has also provided several incentives for boosting the development of the sub-sector, including lowering the required capital for setting up a new sharia bank from Rp 3 trillion to Rp 1 trillion.

The central bank has projected that by 2011, the asset share of sharia banks will reach between 5 percent and 9 percent of the nation's total banking assets.