Indonesia's Islamic banking industry is poised to expand more than two-thirds this year, as more consumers and businesses in a country with the world's largest Muslim population seek to follow the religion's financial tenets, the central bank said in a report obtained Wednesday.
Islamic banking assets will probably reach 24 trillion rupiah, or $2.6 billion, in 2005, or 1.8 percent of total assets, Bank Indonesia said. Such assets totaled 14 trillion rupiah at the end of last year, from 7.85 trillion rupiah a year earlier, said the report.
Islamic banking adheres to Shariah law, which bans the payment and receipt of interest. Indonesia, a nation of 238 million people, is attempting to compete with Malaysia and Bahrain to become a global center for the Islamic financial services industry.
"The development of Shariah banking shows high demand for Shariah financial services," said the report.
Assets controlled by Islamic banks worldwide total $200 billion to $500 billion and are growing by 10 percent to 15 percent annually, according to the Financial Services Authority in Britain.
Western lenders including HSBC Holdings are vying with Arab and Asian banks to tap a growing market for Islamic financial services among the world's 1.2 billion Muslims, including in Europe and the United States.
"Islamic banking is the next big thing," said Agus Syabarrudin, head of Islamic products and services at Bank Syariah Mandiri, Indonesia's largest Islamic bank by assets. "Many of our clients, including companies, are shifting from conventional banking. Now the access to Islamic banking is easier and it is better understood in Indonesia and globally."
Other Islamic banks in the nation include Bank Muamalat Indonesia and Bank Syariah Mega Indonesia. Conventional lenders including Bank Negara Indonesia, the nation's No. 3 lender by assets, and Bank Niaga have divisions that provide Islamic banking services, two among 15 such subsidiaries, according to the central bank.
Bank Indonesia, the central bank, issued a "blueprint" for Islamic banking in September 2002, forecasting growth for the sector to reach 5 percent of total banking assets by 2011. To attain the target, Shariah financing has to expand 60 percent to 70 percent annually, according to Mulya Siregar, head of research and regulation at the Directorate of Shariah Banking.
Islamic banking assets accounted for about 1 percent of total Indonesian banking assets in 2004, compared with 0.7 percent in 2003, the central bank said. In Malaysia, Islamic banking accounted for 9.7 percent of total banking assets in 2003, compared with 6.9 percent in 2000.
According to Islamic principles, returns on funds that are lent out must be based on actual profit generated and not on pre-set interest rates, and they require banks to share the risk to make a legitimate gain. They also ban investment in industries like alcohol, gambling, drugs and tobacco.