Islamic banking still needs a boost in Indonesia

By Kazi Mahmood, IOL Southeast Asia Correspondent

KUALA LUMPUR, October 10 (IslamOnline.net) – The Islamic banking system, a booming business in Malaysia, is not having the same success rate in Indonesia, despite efforts to promote the alternative financial system to the public, experts told Islamonline.net Friday, October 10.

“In Malaysia, Islamic banking is expected to grow significantly and capture a larger share of the local banking market, but it still has to make inroads in Indonesia,” Ghozali Amin, an expert and analyst in Banking living in Jakarta said, in an interview with IOL.

The Deputy Senior Governor Bank Indonesia, Anwar Nasution said in Jakarta last week that Islamic banking only represented 1 percent of the Banking shares in Indonesia, setting the alarm bell that the efforts to promote Islamic banking in this country may be failing to reach it targets.

Indonesia, the most populous Muslim country on earth, is trying its utmost to gain recognition as an Islamic country to reduce "Islamic militancy" against the utterly secular regime of President Megawati Sukarnoputri.

“It is promoting Islamic banking and Shariah laws in several areas in order to give the government a pro-Islam image,” Amin said.

Nasution said the reason why Islamic banks are disregarded by the people is due to the lack of trust rather than to the slow process of giving away licenses to establish new Islamic banks.

Indonesia has one major Islamic Bank, the Bank Muamalat which opened its doors in the late 1990’s and has several branches around the country.

The Bank has progressed steadily but officials of the Indonesian Central Bank, the BI, said on the sideline that conditions to grant licenses to open an Islamic bank in Indonesia were too strict, unlike Malaysia.

In Kuala Lumpur, the Bank Islam, one of the oldest Islamic banking institutions in the world, revealed that Islamic banking market share in the largely Muslim nation will reach 20 percent by the year 2010.

“As at June this year, Islamic banking share has risen to 9.4 percent or RM75.5 billion,“ the Bank Islam Managing Director (MD) Ahmad Tajudin Abdul Rahman said in a press statement, a copy of which was sent to IOL, early this week.

One U.S. dollar is equal to Malaysian Ringgit (RM) 3.80, according to the dollar peg in force in Malaysia.

He said many factors had contributed to the success including the government's support, Shariah experts and academians, shareholders and depositors as well as the positive economic environment in the country.

"This development would surely go on to contribute to the successful transformation of Malaysia as a regional Islamic financial centre and a centre of Islamic excellence in banking and finance,” said the MD.

"It is no longer a doubt that Islamic banking has contributed significantly to strengthening the country's economy," he added.

Ahmad Tajudin said Malaysia was one of the pioneering countries to have introduced Islamic banking with the setting up of Bank Islam in 1983.

"What is most admirable is that Malaysia is the first country in the world to have introduced comprehensive laws and regulations with regards to Islamic banking and Takaful, Islamic capital market, Islamic financial market as well as a National Shariah Advisory Council.

"It is therefore not surprising if the Islamic banking system in the country has continued to see development and a healthy expansion," he said.

This is unlike Indonesia, where the situation is still not fluid on the reasons why the people is not supportive of the Islamic banking system, it is clear major efforts has to be made to reach a level of success for these institutions in the country of 200 million Muslims.

“I believe the economic slump in Indonesia, the level of poverty and the mistrust in the banks, there is a mistrust in banks in this country, are not contributing to the good image of Islamic banking in Indonesia,” said Amin to IOL.

However, the BI argued to the press in Jakarta that Shariah baking, as they call it in Indonesia, is slow to progress because the people of the country was not supportive and did not like it either.

The local Bank Muamalat is the brain child of the defunct Suharto regime and most of the investment into the bank is from supporters of the deposed president.

In Jakarta, there are fears that money invested in the Shariah banks will be dilapidated since corruption is high on the list ills that plagued local banks in this country.

In Indonesia, there are only two major Islamic banks while seven other banks offer Shariah counters to their customers, which represents less than 0.5 percent of the banking market share, said Amin.

He added that if efforts are concentrated with the opening of new banks, there may be an increase in the market share to 3 to 5 percent in 10 to 15 years, which is very slow progress compared to Malaysia he said.

“Malaysia has less than 15 million Muslims yet the Islamic bank is successful there. This is also due to the good economic performance of the country overall, which is not the case of Indonesia,” he added.