Indonesia Pushing Ahead With Islamic Mega Bank Plan

February 18, 2015 – Indonesia is pushing ahead with plans to create an US$8 billion Islamic bank, even as Malaysia’s ambitions of creating the first such mega-bank fade.

Indonesia’s Financial Services Authority declared 2015 as the year of the sharia capital market, with its first act to merge three state-owned Islamic banks: Bank Mandiri Syariah, Bank Rakyat Indonesia and Bank Negara Indonesia. A small unit of Bank Tabungan Negara is also likely to be looped in.

“The team will assess the feasibility of the merger, including its profit opportunity, possible financial loss and impact towards the industry, said Teddy Poernama, a spokesman for Ministry of State Owned Enterprises. “If we really need something we will surely put our efforts to make it happen. We will surely try to reduce the likelihood of our plans failing.”

Indonesia has the world’s biggest Muslim population, but its Islamic finance market lags behind Malaysia. Indonesia’s Islamic banks hold just 5.5 per cent of the country’s banking assets, compared to Malaysia’s 20.7 per cent, according to the latest World Islamic Banking Competitiveness Report.

However, the three-way mega merger could present an oppportunity for the Islamic banking sector to offer services at more competitive rates, due to scale, and win business away from leading names in banking, such as Standard Chartered and HSBC.

Indonesia’s Islamic Banking Association said in just three years, its market share will double to 10 per cent. But with the merger, it said, sharia banking could quadruple to take 20 per cent of the market in that same time. More importantly, it could force to lenders to move away from microfinancing and into funding large infrastructure projects.

“A merger is a good thing. We need to also pay attention to the required adjustments during the merger. It’s not as easy as turning on a switch when you expect a sharia bank that has a core clientele among small and medium enterprises to now focus on the corporate sector,” said Jadi Suriadi, Head of Economics and Syariah Banking at Azzahra University Graduate School.

“There’s going to be a significant cost involved. If the government is serious in merging the banks, then cost won’t matter,” he added.

The Financial Services Authority also unveiled a five-year roadmap for Islamic banking development, with plans to issue six new regulations this year, which will include incentives to attract first-time investors to the sharia capital market.

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