“Shariah banks have asked that loans that are still current can be restructured,” Mulya Siregar, director of Islamic banking at the central bank, said in an interview in Jakarta on Tuesday.
“We’re having intensive discussions and will make a decision by the fourth quarter at the latest.”
Current regulations issued in 2008 only permit terms to be altered once debt turns non-performing, Siregar said.
Indonesia introduced a law two years ago to allow financial institutions to offer financial services that comply with Shariah principles, 25 years after Malaysia. Islamic banking assets totaled $93 billion in Malaysia in 2009, or 20 percent of the total, compared with 2.9 percent in Indonesia, according to central bank data.Shariah-compliant assets in Indonesia may increase 30 percent to Rp 97 trillion ($10.8 billion) in 2010, from Rp 75 trillion at the end of last year, Siregar said.
“Even with the late introduction of the laws, growth has been remarkable,” Siregar said. “We only had three Islamic banks in early 2008, now we have 10.”
Non-performing loans at Indonesia’s Islamic banks fell to 3.89 percent of total lending in June, from 4.39 percent in the same month a year earlier, according to the central bank’s Web site. That is more than the 2.24 percent ratio for troubled loans at the nation’s non-Islamic commercial banks, slowing from 2.72 percent a year ago.
“We have to understand that Indonesia is the world’s biggest Muslim country but its population is secular,” Fauzi Ichsan, an economist at Standard Chartered Plc, said in an interview from Jakarta on Tuesday. “Unless it has full government and parliamentary support, growth for Islamic finance in Indonesia may not be as smooth and large as Malaysia or some other Muslim countries.”
Indonesia needs to offer tax incentives to attract investors who do not use religion as a basis for making investments in order to expand Islamic financial services, according to Ichsan, whose bank gets most of its profit from emerging markets.
Banking that complies with the religion’s ban on interest is increasing at a rate of 15 percent annually, according to the Islamic Financial Services Board, making it the fastest-growing segment in the financial industry. Assets held by Islamic financial institutions may climb to $2.8 trillion by 2015, according to the Kuala Lumpur-based standards-setting body.
Global sales of sukuk, which use asset returns instead of interest, fell 27 percent to $7.9 billion in 2010, according to data compiled by Bloomberg. Islamic notes issued from Indonesia totaled $4.64 billion, about 4 percent of the $130 billion outstanding globally.
Indonesia’s 8.8 percent dollar-denominated Islamic bonds due April 2014 returned 8 percent so far this year, according to prices from Royal Bank of Scotland Group Plc. The yield dropped 27 basis points, or 0.27 percentage point, to a record-low 2.68 percent today. Malaysia’s 3.928 percent sukuk maturing June 2015 has gained 6.1 percent since the debt was sold in May. The yield declined two basis points today to 2.73 percent, the lowest level since its issuance, RBS prices show.
The difference between the average yield on Islamic bonds and the London interbank offered rate narrowed six basis points yesterday to 385. The spread has shrunk 82 basis points so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Shariah-compliant debt returned 9.7 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 13 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The Indonesian central bank has issued about 30 regulations on Shariah banking since 2000, ranging from lending to capital requirements, according to Siregar.
Indonesia raised $650 million from its first global sukuk sale last year. It may sell more of the bonds in the first half of 2011, Rahmat Waluyanto, director general at the finance ministry’s debt-management office, said in Jakarta today. HSBC Holdings Plc, Standard Chartered and Citigroup Inc. may manage the issuance, a finance ministry official said on July 13.
To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Khalid Qayum in Singapore kqayum@bloomberg.net.
http://www.bloomberg.c, om/news/2010-08-18/shariah-loan-restructuring-rules-under-indonesia-review-islamic-finance.html Aug 18, 2010
picture Mulya Siregar - courtesy go-sharing.com
Indonesia reviews Shariah loan restructurings - As you can imagine, my attention got drawn to this news item.
ReplyDeleteThe following passage was the most important : “Shariah banks have asked that loans that are still current can be restructured,” Mulya Siregar, director of Islamic banking at the central bank, said in an interview in Jakarta yesterday. “We’re having intensive discussions and will make a decision by the fourth quarter at the latest.” Current regulations issued in 2008 only permit terms to be altered once debt turns non-performing, Siregar said."
The basic idea would be so that Islamic banks could "anticipate" and restructure debt that could become non-performing or even restructure debt for other reasons (economic, financial ...).
This suggests that the banks expect / fear a flooding of non-performing loans and want apparent restrictive regulations to be altered in due time. The official version is however that the review is not caused by present (or near future) problems, since the news continued: "Non-performing loans at Indonesia’s Islamic banks fell to 3.89 percent of total lending in June, from 4.39 percent in the same month a year earlier, according to the central bank’s website. That’s more than the 2.98 percent ratio for troubled loans at the nation’s non-Islamic commercial banks, slowing from 3.94 percent a year ago.
“Allowing banks to restructure early would help them focus on giving loans,” Teguh Hartanto, an analyst at Indonesia’s state-owned PT Bahana Securities, said in an interview from Jakarta today. “Credit quality can deteriorate easily in a bad economic environment, forcing banks to curb lending as they have to maintain or even increase capital to support the higher NPL level.”
The non-performing loan ratio could climb to 4.7 percent if economic conditions deteriorate by 25 percent, the central bank said in a report on Indonesia’s financial stability in March. (bold from author)
Indonesia needs to offer tax incentives to attract investors who don’t use religion as a basis for making investments in order to expand Islamic financial services, Fauzi Ichsan, an economist at Standard Chartered Plc, said in an interview from Jakarta yesterday."
Hartanto of Bahana Securities is talking about restructuring of non-performing debt (suggests problems now), the report of BI is talking about a doomsday scenario of a deterioration of 25 % economic conditions in the (near) future (!?) and Ichsan of Standard Chartered just wants flexible regulations.
Fact is that the restructuring of existing Islamic compliant debt is not that easy. Extension of payment conditions against mark-up / cost for late payment easy amounts to "riba" and renewal could lead to debt-novation, read : a new "money loan" that probably contains "riba".
Malaysia has some experience in this specific area (restructuring non-performing sukuk and non-performing Islamic loans). It could be a good idea to have a look there to regulations and practices. For the moment, I do not know exactly what is happening and why. I will keep my eyes open for you.