Anaylsis World

Reinventing Optimism For Indonesian Islamic Banking Industry

During the period from 2007-2012, the Islamic banking industry in Indonesia was consistently growing at a rate above 30 percent per year, which was twice as fast, the country’s overall banking industry. ’The fastest growth ever recorded was in 2010 and 2011, where the industry grew at 47.6 percent and 492 percent respectively.

It was in 2011 that the growth of Indonesian Islamic banking industry reached its peak; since then, it has been declining—to 344 percent in 2012, and further down to24 percent in 2013. In pursuit of making the Islamic banking sector more significant in Indonesia and increase its share beyond 5 percent of total banking industry (it was still around 45 percent in September 2014), consistent initiatives are still needed from the stakeholders of the industry. However, growth is basically only an indication, there are various factors that need consideration to evaluate performance and to drive growth and sustainability of this sector.

The growth driver for Indonesian Islamic banking industry

The core of the Indonesian Islamic Banking industry consists of 11 full- fledged Islamic commercial banks and 23 Islamic windows of conventional banks. In addition to these, there are 163 rural banks whose assets account for less than 25 percent of the total Islamic banking industry. Considering the many small sized Islamic rural banks when discussing about the Islamic banking industry, the discussions tend to refer only to full-fledged Islamic commercial banks and Islamic windows of conventional banks. Two major Indonesian Islamic Banks, Bank Syariah Mandiri (BSM) and Bank Muamalat Indonesia (BMI), which accounted for around 50 percent of total Indonesian Islamic banking assets in 2013, seems to have played a significant role in affecting the rise and decline of the Indonesian Islamic banking industry. At a time when the Indonesian Islamic banking industry was experiencing its fastest growth in 2011, both banks also recorded their individual fastest growth; BSM and BMI grew at 4984 percent and 5147 percent respectively in 2011. Similarly, when both the banks experienced a slowdown in their growth afterwards, the overall growth of the industry also declined. The year of 2014 was the ‘test’ year for these two banks as  shown in figure J,BSM faced a stagnation in its asset growth which increased only less than 3 percent, and accounting to more than 50 percent decline in its profits, up to September 2014 A1though BMI has performed better in terms of its asset growth, it was able to grow by more than 9 percent, however, with a serious drop in its profitability. Its earnings before tax (EBT) up to September 2014 ofIDR419 billion (US$ 334 million) was only a small portion of its profits of IDR 5851 billion (US$473 million) in September 2013 (figure 2)

The changes at the top executive management level at both banks in 2014 led to the discovery of issues such as quality of assets, thereby significantly eroding the profitability, especially for BMI to some extent, and with different magnitudes, the growth slowdown in 2014 has also been experienced by the second tier Indonesian Islamic banks and/or windows (in terms of assets) such as BRI Syariah, Fermata Syariah (an Islamic window of Fermata Bank owned almost half by the Standard Chartered Bank), and CIMB Niaga Syariah (Islamic window of Malaysia’s banking conglomerate CIMB). For Fermata Syariah, it was the first decline in assets after a remarkable high growth in the list four years, reaching over 100 percent growth in 2011 and 2012, and above 50 percent in 2013. However, it is important to note here that the two dominant players faced performance issues more than others. As a result, in terms of asset growth, BSM was the slowest growing Islamic bank compared to other Islamic banks, during the last five-year-period; whereas in terms of profitability, in the year 2014 there was first most serious profitability plunge for BMI.

Creating sustainable growth: Taking the industry to the next level

The issues of growth and profitability facing the Indonesian Islamic banking industry should be seen as a challenge to improve the performance of Islamic banks in particular and the industry in general.

The fact that Indonesia is home to the world’s largest Muslim population of approximately 210 million people (about 85 percent of the total population) with a growing middle class, the country holds great potential for further development of Islamic banking and finance market.

Furthermore, the OJK itself would like to see the Islamic banking assets hold at least 15 percent of market share by 2023. The authority, has also signed an agreement with the country’s national Shari’a board (DSN-MUI) to strengthen the oversight of the Islamic finance industry, supporting a centralised approach towards managing the industry.

APART FROM the macro-economic issues affecting the Islamic banks, internal operational and business issues of the banks may also be affecting the overall growth and the profitability. It is therefore, vital for the banks management to have a steady and sustainable strategy to foster its growth. One of the critical issues is to strengthen the risk management and to pay more attention to embed ethics into Good Corporate Government (GCG) policies. Rapid asset growth devoid of proper risk management practices and ethical GCG in place, could create financing risk in the medium and long term, especially for bigger banks. In an ongoing endeavour to achieve financial objectives, there is also a need to strengthen the foundation for the growth itself; through non-financial initiatives—including developing Shari’a compliant innovative products and services, upgrading information technology etc.  Additionally, one of the other key success areas is to develop human capital, crafted by strong values and vision. At the end, the Islamic banking industry is not just about banking, it is about contributing to a more fair, ethical, and sustainable financial system. The experience somehow has taught us that to have fast and sustainable growth, one should not just get trapped with the numbers only. Going beyond numbers and to have bigger and wholesome objective, will ultimately create a viable financial system based on ethical grounds, that Islamic banking and finance ultimately aims to achieve in the long run.


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