Growing market: Sharia-compliant finance shows strong potential

Although Indonesia may be home to more than 200m Muslims, its share of Islamic finance products compared to conventional financial instruments is still fairly small. With these specialised banking and financial services growing by as much as 20% per year, there remains significant potential for the country to capture a larger slice of this market and in the process offset a budget shortfall which has recently climbed to in excess of 2% of GDP. As of late 2011, sharia-compliant financial services showed positive signs of gaining popularity in the country with successful developments in a wide array of financial products including bonds, retail banking and the commodities market.

SUKUK: In November 2011 the government launched a $1bn sukuk (a bond which complies with finance principals guided by the Quran), which attracted $6.5bn in orders from approximately 250 investors the world over. The securities mature in 2018 and hold an interest rate of 4%. This rate is dramatically lower than the 8.8% granted the government’s $650m issuance in 2009 – the country’s first ever Islamic dollar bond. Roughly 32% of the November 2011 issue was purchased by investors residing in the Asia, followed by 30% from the Middle East, 18% from Europe, 12% from within the country and another 8% from investors in the US. Large international banking groups HSBC, Citigroup and Standard Chartered managed the issue of sukuk. Not to be outdone, the Jakarta Futures Exchange (JFX) launched its first sharia-compliant commodity contracts in October 2011. Five of the country's primary agricultural commodities were slated for contracts during the initial phases of the new programme including cocoa, high and low grade coffee, peeled and raw cashew nuts, palm oil and rubber. Later stages of development will see the inclusion of additional products such as diesel fuel, coal and ethanol. The JFX was targeting Rp50bn ($6m) in daily transactions for the commodities through the participation of three Islamic banks - Bank Syariah Mandiri, HSBC Amanah and Bank Muamalat. By offering commodities to supplement sukuk offerings, Islamic banks should now have more domestic options to choose from in determining where to channel their growing liquidity.

SHARIA-COMPLIANCE: Indonesia’s retail banking sector has also been posting strong gains in recent years, although retail sharia-compliant services still make up just a fraction of the total banking business. According to Bank of Indonesia deputy governor Halim Alamsyah, the country's sharia banking sector grew by an average of 36.3% from 2000-10 as it grew in value from Rp100bn ($12m) to Rp1.79trn ($214.8m). This growing interest from the country's large population has spawned interest among international banks looking to expand their sharia services into Indonesia. As of late 2011, numerous foreign financial institutions were reportedly expressing interest in opening up local operations, including Bank Kesawan (which is owned by Qatar National Bank), Affin Bank of Malaysia and Bank Sinarmas. There are currently 11 sharia-compliant banks operating in Indonesia. Even banks who do not have their traditional base in Islamic financial services, such as HSBC, are opening sharia-compliant branches in the country to meet surging demand.

SPREADING THE WEALTH: Changes may also be on the way in the near future for a more customary manner of Islamic financial transaction in the form of the zakat, or tithe. One of the five main obligations of observant Muslims, the zakat is a mandatory donation given by Muslims to be redistributed to those less fortunate including the poor, destitute, uneducated and others. While conventional zakat practice has been limited solely to consumption through the allocation of donated money or goods to the poor, newer, more modern forms of the practice are now being considered. These changes are reflected in a new zakat law being discussed in parliament at the end of 2011. It is hoped that the law will allow new ways of collection, growth and distribution of zakat assets, as well as create a stronger hierarchical structure in order to better coordinate responsibilities and avoid redundancies.