The year 2015 is so far a year of stagnation faced by the Islamic banking industry. Up to August 2015, the latest available data showed the growth of the Islamic banking industry is only at 0.42% (Table 1). This will be the slowest-ever growth of the industry in the last five years. Indeed, the figure may change by the end of the year, but it is most likely that the growth in 2015 will not exceed the already slow growth in 2014, when the Islamic banking industry only recorded 12.4% growth.
Like 2014, the year 2015 also shows the increasingly important role played by government Sukuk issuance in maintaining the growth of the Islamic finance industry. In fact, 2015 marks the first time that the amount of Islamic securities issued by the government has outpaced Islamic banking assets. Thus, government Islamic securities issuance is now the most dominant player in the Indonesian Islamic finance industry.
Actually, although they are not that significant compared to the government Islamic securities issuance and the Islamic banking assets, there is still growth in other segments of the Islamic finance industry such as corporate Sukuk, insurance, and rural banks. Islamic life insurance assets seem to have made relatively faster growth in the last four years compared to the Islamic banking industry. Corporate Sukuk, although still small, has also recorded better growth compared to 2014.
Apart from the aforementioned industry perspectives, macro factors such as the effect of increase of electricity and gasoline prices initiated toward the end of 2014, the significant depreciation of the rupiah throughout 2015, the drop of the Indonesian stock index, and sociopolitical issues related to the seemingly weakening anti-graft body under the new administration, somehow contributed to the slower economic growth in the country, which in turn, also affects the growth of the Islamic banking industry.
Review of 2015
The growth of the Islamic banking industry in the last two years (2014 and 2015) was actually in stark contrast compared to 2010 and 2011 when the industry recorded growth of 50% and 33.8% respectively. There had been a deceleration of growth of course, but the slowest recorded stood at 23.6% in 2013, still almost double compared to 2014’s growth of 12.4%. The problems facing the Indonesian Islamic banking industry mainly come from two major Islamic banks in the country: Bank Syariah Mandiri and Bank Muamalat Indonesia (BMI). The assets of these two banks account for almost half of the total Islamic banking assets in the country.
Table 1: Selected figures for the Indonesian Islamic finance industry (IDR trillion) |
|||||
|
2011 |
2012 |
2013 |
2014 |
2015 |
Assets of Islamic commercial banks and Islamic windows |
145.47 |
195.02 |
242.28 |
272.34 |
273.49* |
Assets of Islamic rural banks |
3.52 |
4.70 |
5.83 |
6.57 |
7.09* |
Sovereign Sukuk issuance^ (cumulative) |
81.53 |
138.62 |
186.22 |
250.17 |
349.79*** |
Corporate Sukuk issuance (cumulative) |
7.92 |
9.79 |
11.99 |
12.96 |
14.48** |
Islamic mutual funds (net asset value) |
5.56 |
8.05 |
9.43 |
11.16 |
10.11** |
Assets of Islamic life insurance |
7.25 |
9.83 |
N/A |
18.05 |
19.23* |
Assets of Islamic general insurance and re-insurance |
1.91 |
3.23 |
N/A |
4.31 |
4.67* |
Sources: Alwyni (2015), the OJK, Ministry of Finance, and calculated further. Notes: *As of August 2015; **As of September 2015; *** As of the 22nd October 2015; ^includes all government Islamic securities issuance; US$1 = IDR13,640 (22nd October 2015). |
The aforementioned two banks had struggled with the issues of quality assets left by their previous executive managements. Significant write-offs were undertaken affecting the equity of the banks, with BMI’s equity experiencing a 20.95% plunge to IDR3.55 trillion (US$261.7 million) in June 2015 from IDR4.49 trillion (US$331 million) in June 2014. BMI even needed to slash its 2013 profits to IDR165.14 billion (US$12.17 million) in its 2014 audited accounts from IDR475.85 billion (US$35.08 million) in its 2013 audited accounts (restatement), so as to avoid a loss in 2014. Consequently, the asset growth of the banks in 2014 and 2015 has been constrained due to the need of the new management to steer carefully in terms of financing new transactions.
As predicted in the IFN Guide 2015 analysis, the cumulative issuance of government Islamic securities has now exceeded Islamic banking assets. For 2015 (up to the 22nd October 2015), the growth has reached 39.8%. The figure is even higher compared to the 34.3% growth for the whole year in 2014. The government Islamic securities consist of Islamic fixed rate securities, retail Sukuk (SR), US dollar-denominated global Sukuk (SNI), Islamic T-bills, Hajj Fund Sukuk and project-based Sukuk (PBS). PBS followed by SNI are the first and second-largest government Sukuk issuance accounting for almost 65% of total government Islamic securities issuance in 2015. SR was also increasingly important, successfully raising IDR21.96 trillion (US$1.62 billion).
The growing importance of Sukuk as a means of international fund mobilization for Indonesia was also signified by the listing of its four global Sukuk amounting to US$6 billion in NASDAQ Dubai on the 31st May 2015; one of the Sukuk amounting to US$2 billion was issued in 2015.
On the corporate side, progress has not been like its sovereign counterpart although there is a sign of progress compared to 2014. Up to the end of September 2015, there were at least nine corporate Sukuk issued amounting to IDR1.52 trillion (US$112.05 million), accounting for an 11.7% increase compared to the total issuance in 2014. This figure is higher compared to the growth in 2014, accounting for 8.1%.
Another major progress in the area of corporate Sukuk in 2015 was the issuance of the US$500 million global un-rated Sukuk by Garuda Indonesia, the state-owned Indonesian airline. The investors of this Sukuk come from the Middle East (56%), Asia (32%), and Europe (12%). This is the first Indonesian non-sovereign US dollar Sukuk — opening the way for other Indonesian state-owned enterprises and corporates to access the market. It is important to note here, however, that it seems this Sukuk issuance has not been recorded in the Indonesia Financial Service Authority (OJK)’s statistical data.
Other area of the Islamic finance industry showing a potential to grow further is Islamic life insurance. Although growth in 2015 is relatively small, in the last three years there was a 100% growth of Islamic life insurance assets in the country. Similar progress is not seen in its general insurance and re-insurance counterparts. For Islamic mutual funds, there was almost a 10% drop in the net asset value up to September 2015, but this drop seems to be something unavoidable due to the general decline in the country’s stock index.
Preview of 2016
Indonesia has a lot to do to catch up with its Malaysian and Gulf counterparts in strengthening the role of Islamic finance in the country’s economy, especially its Islamic banking sector. The Indonesian Islamic banks’ market share of around 5% is still very small compared with 20% and 50% market shares of the same in Malaysia and gulf countries respectively.
The possibility for the Islamic banking industry to resume its pre-2014 growth in 2016 will depend on a number of micro and macro factors affecting the industry as well as the economy. The level of success of the current administration in dealing with the impact of the global financial uncertainty will contribute to the growth recovery of the industry. Apart from these macro factors, policymakers need to do more than just talk about the desire in positioning Islamic finance industry as an important player in the country.
Susilo Bambang Yudhoyono during his presidency once declared the Islamic economic movement as a national agenda and called for all people in the country to promote the Islamic economy. Furthermore, he even envisioned the prospect of making Indonesia a world Islamic financial center integrated with Shariah-based international systems. Now, president Joko Widodo is also backing a national campaign called ‘I love Shariah Finance’ in cities across Indonesia. Previously, at the beginning of 2015, the OJK also declared the year of 2015 as ‘the Islamic Capital Market Year’.
While creating awareness among the population is indeed a promising step, to translate that into real quantitative achievements will require more concrete actions. There has to be more coordinated policies between the Ministry of Finance, the OJK and the central bank in making conducive conditions for the growth of Islamic finance. One of the important aspects is related to fiscal incentives.
While Malaysia has given tax incentives to Islamic banks in its early stages of operations and until now still gives more tax advantages for the issuance of Sukuk compared to conventional bonds, Indonesia has yet to provide similar incentives. Areas that require serious considerations in this respect include firstly, the possibility of reducing the tax on the profit margin received from the deposits in the investment accounts of Islamic banks to 10% from 20% currently applied to Islamic and conventional banks.
Secondly, there has to be a streamlining of the rules related to corporate Sukuk issuance, especially on the issue of SPVs. In addition, corporates issuing Sukuk should be given tax incentives in the form of lower taxes compared to companies issuing conventional bonds. Finally, fiscal incentives for companies sending their employees for Islamic finance education will also boost the level of acceptance of the industry at the corporate level.
Notwithstanding the aforementioned issues, Indonesia as the largest Muslim country and at the same time a member of the G20 (the top 20 largest economies in the world) certainly has a lot of potential to be an alternative hub for the Islamic finance industry. But it needs more concrete actions to be put in place by the government.
Farouk is the chairman of the Center for Islamic Studies in Finance, Economics, and Development (CISFED) and CEO of Alwyni International Capital. He can be contacted at [email protected].