Indonesia, one of the four tiger cub economies of Southeast Asia, unassumingly pledged their commitment to growing their Islamic banking and finance sector last year with the revision of value added tax laws. The world waited with bated breath for the nation’s Islamic banking sector to take off, and has been waiting ever since. NAZNEEN HALIM trawls through Jakarta to uncover the reasons behind the lag.
Emotions are high, and mixed. The Indonesian Islamic banking and finance sector is like a child on Ritalin — tied to a chair. In late January this year, Bank Indonesia officials laid out their plans and projections for the coming year, including a four-point program to strengthen the country’s banking sector and promote growth across the economy.
Emotions are high, and mixed. The Indonesian Islamic banking and finance sector is like a child on Ritalin — tied to a chair. In late January this year, Bank Indonesia officials laid out their plans and projections for the coming year, including a four-point program to strengthen the country’s banking sector and promote growth across the economy.
Along with initiatives to enhance banking resilience, reinforce the supervisory regime, build a better platform for bank intermediation through the improvement of regulation, and developing and strengthening rural banks’ roles in microfinance, raising the profile of the country’s Islamic banking sector was also a top priority.
Not to say that Indonesia’s Islamic banking and finance sector is even anywhere close to being shabby — so far, the industry has witnessed IDR7.73 trillion (US$864.16 million) in corporate Sukuk issuances, comprising 45 corporates since 2004. However, this still only represents 3.3% of the nation’s total market share on a macro level.
In July this year, Indonesia’s sovereign Sukuk saw a 70% dip in yield premium, and a narrowing to 26 basis points or 0.26%, signaling a lack of investor confidence in the securities. This and the country’s projected budget deficit had set the stage for the postponement of the republic’s October Sukuk issuance set at US$650 million.
However, industry players do not see this as an ominous sign, and are instead optimistic about the prospects 2011 will bring.
Where do we go?
Already, fate has begun to turn for the better for Indonesia. Its credit rating hit a 12-year high this year at ‘Ba2’, and local and foreign currency sovereign ratings were changed to stable. This, credit analysts say, has been driven by an appropriately managed domestic market and a well-tested economic policy framework. Also, a gradual strengthening of the domestic economy has allowed Indonesia to become less reliant on exports compared to its neighbors.
However, industry players do not see this as an ominous sign, and are instead optimistic about the prospects 2011 will bring.
Where do we go?
Already, fate has begun to turn for the better for Indonesia. Its credit rating hit a 12-year high this year at ‘Ba2’, and local and foreign currency sovereign ratings were changed to stable. This, credit analysts say, has been driven by an appropriately managed domestic market and a well-tested economic policy framework. Also, a gradual strengthening of the domestic economy has allowed Indonesia to become less reliant on exports compared to its neighbors.
“In Asia, after China and India, where can investors go? In the eyes of the international investor, the Indonesian story is a good one,” said a Jakarta based senior economist. Yuslam Fauzi, president director of Bank Syariah Mandiri also echoes this sentiment: “Indonesia is one of the mose resilient countries after India and China, and we are confident of our growth this year and next.”
However, just like life, the case of Islamic finance in Indonesia is still riddled with question marks and uncertainty, and as all things are eventually reduced to empirical value, one has to wonder how much time the republic’s Islamic finance sector has to capitalize on this amazing growth the nation’s economy is beginning to enjoy.
And where investors are concerned, funds are funds. It doesn’t matter whether you are coming to a Muslim country or not. If the country can offer a good product, as in the case of Australia and Japan, backed by sound regulations, investors will flock there. While Indonesia is taking its time to do it right, they also have to be cognizant that there are other jurisdictions that are coming up.”
Fractured market?
Since the removal of value added tax on Murabahah products in September 2009, there has not been much change in the Indonesian Islamic finance regulatory system. This is exacerbating market restlessness, and questions are beginning to arise. In other words, market players are asking: “Is this it?” Regulatory officials, however, believe that the current tax exemptions will suffice in creating a larger Islamic banking and finance market share.
Nonetheless, it was revealed to Islamic Finance Asia that regulatory bodies are working to push for a debt market infrastructure plan to aid in the sector’s development.
Since the removal of value added tax on Murabahah products in September 2009, there has not been much change in the Indonesian Islamic finance regulatory system. This is exacerbating market restlessness, and questions are beginning to arise. In other words, market players are asking: “Is this it?” Regulatory officials, however, believe that the current tax exemptions will suffice in creating a larger Islamic banking and finance market share.
Nonetheless, it was revealed to Islamic Finance Asia that regulatory bodies are working to push for a debt market infrastructure plan to aid in the sector’s development.
Apart from regulatory issues, other fundamental concerns are beginning to surface. Liquidity is far from scarce, but its lack of movement is a major concern; and if the money is not productive, costs are bound to increase. Bankers believe that the Shariah money market is lacking in instruments, and the current flavor of the month, Mudarabah, is not sufficient in projecting expected returns for banks, leaving them to utilize only short term instruments. Other instruments commonly seen in developed Islamic money markets, such as commodity Murabahah, are also elusive in the Indonesian sphere to facilitate interbank money market transactions.
U Saefudin Noer, head of Islamic banking at CIMB Niaga, also believes that there has to be more clarity in the flow of money between Shariah compliant banks and projects funded with this money. “We need to be able to ascertain that funds going to Islamic project financing are 100% Shariah compliant, and money raised from Sukuk issuances also need to go to Islamic banks and not conventional banks. Such consistency will definitely provide more clarity to this market.”
Saefudin also revealed that Islamic banks in Indonesia are subject to the central bank’s reserve requirements policy, which is not applicable to conventional banks. “In Indonesia, the banks’ Shariah financing-to-debt ratio (FDR) is one of Bank Indonesia’s main focuses. They want to see an increase in financing to the real sector and more Islamic funded projects; therefore, if a bank’s FDR is below 80%, reserve requirements for banks will increase to 6%. If FDR hits above 80%, then reserve requirements stand at 5%.
This means Shariah banks must utilize the money they have for financing, and not other instruments such as securities products or investor certificates. Conventional banks are not subject to such requirements because their investment funding avenues are not limited. It is not easy to buy and sell Islamic instruments, even Sukuk; which is why Bank Indonesia has imposed such standards.”
Stuck in the middle
“What is too fast, or too slow? It is clear that Indonesian Islamic banks want to get in and enjoy a significant share of the market, and with so many other countries trying to attract the same funds, can we afford to have all the infrastructure in place before we move on?” Hanim Hamzah questioned.
“What is too fast, or too slow? It is clear that Indonesian Islamic banks want to get in and enjoy a significant share of the market, and with so many other countries trying to attract the same funds, can we afford to have all the infrastructure in place before we move on?” Hanim Hamzah questioned.
Corporate Sukuk issuances are lagging behind due to the current uncertainties in market regulations, especially tax issues. However, Hanim asserts that standardization of agreements is already apparent in the Indonesian market, of which half the battle is won. “Almost all the corporates raising financing in the market are local. We are seeing more interest in raising Shariah compliant financing from local shipping and mining companies, but it seems like these corporates are stuck. They voice their interest, go to the banks and bounce ideas, and then get stuck when it comes to sale and purchase issues — for instance, costs are much higher, and eventually they opt out and go back to the conventional market,” she added.
Saefudin also shares Hanim’s view, stating that despite the government and central bank providing more comprehensive regulatory issues, there has to be a new approach when dealing with taxes. “The entire industry, be it banking, finance or Sukuk, need tax neutrality and fair treatment to be able to compete with the conventional market. VAT is good, but we still have to observe other agreements such as Ijarah Bitamliq, Sukuk Istisnah, Salam and other instruments for trading. VAT is currently only applicable to Murabahah, and instead should be all encompassing. We want it to apply to all Shariah instruments and Akad.”
“The tax office needs to address these issues and look at the bigger picture instead of immediate gains. They shouldn’t feel like they would lose out if they do not impose such taxes. The tax office needs to engage more with industry players and provide us with more clarity. The country is full of budding entrepreneurs looking for financing, and if the sector does not have an avenue to trade and raise money in a more cost effective way, we will lose out. Yes, it is risky, but you can’t wait for everything to be in place,” an Islamic banker revealed.
Power to the people
Perhaps it comes down to the sheer nature of the Indonesian people, but the most charming quality among its bankers and market players is their independent spirit and an understanding of the nation’s socio-cultural situation; and essentially a need to capitalize on this to create organic growth within the Islamic banking industry. “Socio-cultural strength is very important in growing the industry. As long as the government provides us with a level playing ground and equal treatment, and a healthy environment to grow organically, we will flourish. This is not about forcing people to utilize Islamic finance. There is no force in the religion, and people should be given a choice. And when people choose, it depends on the maturity of their religiosity. And this is growing in Indonesia. Based on this, we are confident that Islamic finance in Indonesia will grow,” Yuslam elucidated.
Perhaps it comes down to the sheer nature of the Indonesian people, but the most charming quality among its bankers and market players is their independent spirit and an understanding of the nation’s socio-cultural situation; and essentially a need to capitalize on this to create organic growth within the Islamic banking industry. “Socio-cultural strength is very important in growing the industry. As long as the government provides us with a level playing ground and equal treatment, and a healthy environment to grow organically, we will flourish. This is not about forcing people to utilize Islamic finance. There is no force in the religion, and people should be given a choice. And when people choose, it depends on the maturity of their religiosity. And this is growing in Indonesia. Based on this, we are confident that Islamic finance in Indonesia will grow,” Yuslam elucidated.
Saefudin (caricature) also believes that real growth will come from the retail sector, with increased awareness among the Indonesian people of the accessibility of Islamic banking products. “Islamic banks play an important role as an intermediary institution for funds to be gathered and distributed back to the people through real economic activity, and a country’s economy can only truly take flight when both the real economy and monetary sectors are robust.”
Bank Indonesia Regulation No 10/11/PBI/2008 on Bank Indonesia Shariah Certificates (“Regulation”) has recently been amended by Bank Indonesia Regulation No 12/18/PBI/2010 (“Amendment”)
The Amendment modifies the provision of the Regulation relating to sanctions. Generally, a Bank Indonesia Shariah Certificate is Shariah based commercial paper issued by Bank Indonesia, which is valid for a short period of time and valued in Indonesian Rupiah; based on a Ju’alah contract (an agreement to provide compensation for the delivery of certain performances); issued in paperless form; and cannot be traded in the secondary market.
In addition, all Bank Indonesia Shariah Certificates now have to be traded through an auction process. The parties who can purchase such Shariah based financial instruments include commercial Shariah banks and Shariah business units (a unit in a commercial bank, focusing on providing Shariah banking services). Such parties are also allowed to propose a Shariah Certificates Repurchase Agreement to Bank Indonesia.
According to the Regulation, any parties trading in Bank Indonesia Shariah Certificates who fail to fulfill their obligations as set out in Article 11 of the Regulation will be subject to the cancellation of the transaction, and a fine of 1/1000th of the total value of the transaction up to a maximum fine of IDR1 billion (US$111,667). The Regulation also provides that in the event the parties commit three violations within a six-month period, additional sanctions will be imposed, including the suspensions of the parties from participation in future auctions of the Certificates.
In the Amendment, however, the sanctions have been changed. The parties are now subject to a fine of 1/1000th of the total value of the transaction, or at least IDR10 million (US$1,117), and up to a maximum of IDR100 million (US$11,167). The additional sanctions are also amended, whereby under the Amendment, such sanction only includes the suspension of the parties from taking part in any Shariah monetary operation activities for five consecutive working days.
The Amendment has been in force since the 30th August 2010.
Source : http://www.islamicfinanceasia.com/17_cs.php - Oct 2010
Source : http://www.islamicfinanceasia.com/17_cs.php - Oct 2010
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