Indonesia rushes to create Islamic megabanks

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Bank MandiriIn a push to boost its Islamic finance industry, Indonesia keeps forging out plans to create larger Islamic banking entities in order to take over the role – as President Joko Widodo put it – of the “new global center for Islamic finance” that would surpass Malaysia.

Widodo spoke at the launch of the “I Love Sharia Finance Programme” initiated by the country’s Financial Services Authority last month in Jakarta. The programme’s strategy is targeted at increasing the share of Shariah-compliant financial assets in the country from a currently meager 5 per cent to 15 per cent by 2023.

Widodo emphasised the efforts Indonesia has made as a sukuk issuer in the recent past, having launched the biggest-ever sovereign issue of Islamic debt in February this year worth $2 billion. But the country still lags far behind its neighbour Malaysia where Islamic banking assets make 20 per cent of total banking assets.

However, Widodo’s ambitions have been spurred by Malaysia’s failure in January to create its own Islamic “megabank” through a merger of CIMB, RHB and Malaysia Building Society, which would have been the nation’s largest-ever mergers–and-acquisitions transaction. An earlier attempt in 2011 to form a multinational Islamic financial institution for infrastructure funding between Asia and the Middle East to be based in Malaysia and Saudi Arabia didn’t materialise either due to licensing issues.

This where Indonesia steps in, realising that one or more Islamic megabanks in the country would not only significantly increase Islamic banking assets in a nation with the world’s largest Muslim population, but also compete with established international conventional banks with Islamic windows such as HSBC and Standard Chartered which frequently wrap up big sukuk deals.

“Larger Islamic banks also have the benefits of the scale to reduce operating costs and provide services at more competitive rates,” says Jessica Gaddes, UK-based associate and Islamic finance expert of international law firm K&L Gates.

“They are also helping improve public awareness of Shariah-compliant finance and have the ability to raise funds for large projects by issuing sukuk with a variety of maturities in diversified sectors and regions,” she added.

One attempt to establish an Islamic megabank in Indonesia is the plan announced earlier this year to merge the Islamic finance units of government-run PT Bank Mandiri, PT Bank Negara Indonesia, PT Bank Rakyat Indonesia and PT Bank Tabungan Negara. The merger would create a bank with a paid-up capital of more than 1.12 billion and assets of up to $8 billion and could happen by this year’s end or early next year, according to Gatot Trihargo, a senior official in the Ministry for State-Owned Enterprises.

Another opportunity to create an Islamic megabank could arise in a partnership between Indonesia, Turkey and the Islamic Development Bank. The latter’s long-lasting plans to create a multinational Islamic infrastructure financing entity that also could serve as a kind of “Islamic central bank” are coming closer to realisation after Indonesia and Turkey have pledged to contribute $300 million each to build up such a bank.

“It will be like an infrastructure bank, but with a Shariah approach, with the Republic of Indonesia, Turkey and the Islamic Development Bank as founding members,” Indonesia’s Finance Minister Bambang Brodjonegoro said.

The new infrastructure megabank is also expected to cooperate with the newly established Asian Infrastructure Investment Bank (AIIB), a China-backed multinational cross-border lending institution for infrastructure which wants to integrate Islamic financing into its lending instruments. Indonesia is expected to receive major funds from the AIIB and thus takes great interest in a close cooperation.

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Reading Time: 2 minutes

In a push to boost its Islamic finance industry, Indonesia keeps forging out plans to create larger Islamic banking entities in order to take over the role – as President Joko Widodo put it – of the “new global center for Islamic finance” that would surpass Malaysia.

Reading Time: 2 minutes

Bank MandiriIn a push to boost its Islamic finance industry, Indonesia keeps forging out plans to create larger Islamic banking entities in order to take over the role – as President Joko Widodo put it – of the “new global center for Islamic finance” that would surpass Malaysia.

Widodo spoke at the launch of the “I Love Sharia Finance Programme” initiated by the country’s Financial Services Authority last month in Jakarta. The programme’s strategy is targeted at increasing the share of Shariah-compliant financial assets in the country from a currently meager 5 per cent to 15 per cent by 2023.

Widodo emphasised the efforts Indonesia has made as a sukuk issuer in the recent past, having launched the biggest-ever sovereign issue of Islamic debt in February this year worth $2 billion. But the country still lags far behind its neighbour Malaysia where Islamic banking assets make 20 per cent of total banking assets.

However, Widodo’s ambitions have been spurred by Malaysia’s failure in January to create its own Islamic “megabank” through a merger of CIMB, RHB and Malaysia Building Society, which would have been the nation’s largest-ever mergers–and-acquisitions transaction. An earlier attempt in 2011 to form a multinational Islamic financial institution for infrastructure funding between Asia and the Middle East to be based in Malaysia and Saudi Arabia didn’t materialise either due to licensing issues.

This where Indonesia steps in, realising that one or more Islamic megabanks in the country would not only significantly increase Islamic banking assets in a nation with the world’s largest Muslim population, but also compete with established international conventional banks with Islamic windows such as HSBC and Standard Chartered which frequently wrap up big sukuk deals.

“Larger Islamic banks also have the benefits of the scale to reduce operating costs and provide services at more competitive rates,” says Jessica Gaddes, UK-based associate and Islamic finance expert of international law firm K&L Gates.

“They are also helping improve public awareness of Shariah-compliant finance and have the ability to raise funds for large projects by issuing sukuk with a variety of maturities in diversified sectors and regions,” she added.

One attempt to establish an Islamic megabank in Indonesia is the plan announced earlier this year to merge the Islamic finance units of government-run PT Bank Mandiri, PT Bank Negara Indonesia, PT Bank Rakyat Indonesia and PT Bank Tabungan Negara. The merger would create a bank with a paid-up capital of more than 1.12 billion and assets of up to $8 billion and could happen by this year’s end or early next year, according to Gatot Trihargo, a senior official in the Ministry for State-Owned Enterprises.

Another opportunity to create an Islamic megabank could arise in a partnership between Indonesia, Turkey and the Islamic Development Bank. The latter’s long-lasting plans to create a multinational Islamic infrastructure financing entity that also could serve as a kind of “Islamic central bank” are coming closer to realisation after Indonesia and Turkey have pledged to contribute $300 million each to build up such a bank.

“It will be like an infrastructure bank, but with a Shariah approach, with the Republic of Indonesia, Turkey and the Islamic Development Bank as founding members,” Indonesia’s Finance Minister Bambang Brodjonegoro said.

The new infrastructure megabank is also expected to cooperate with the newly established Asian Infrastructure Investment Bank (AIIB), a China-backed multinational cross-border lending institution for infrastructure which wants to integrate Islamic financing into its lending instruments. Indonesia is expected to receive major funds from the AIIB and thus takes great interest in a close cooperation.

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