News / Asia

Focus on the Little Guy Could Boost Islamic Banking in Indonesia

Multimedia

Audio

Indonesia's central bank has recently embraced new regulations for Islamic banking, which it sees as key to building on last year's strong economic growth. In a country that is home to more than 200 million Muslims, the potential for expansion is enormous, although Islamic finance still accounts for a small part of the country's financial market.

Over the past six years Islamic banking has averaged 36 percent annual growth in Indonesia. But its $7 billion in assets makes up only 2.5 percent of the country's total banking sector.

Banking analysts say unclear regulations on banking that conforms to Islamic law and pervasive corruption have kept investors away from Indonesia.

The central bank, Bank Indonesia, wants that to change. It has drafted a blueprint that includes expanding Islamic lending to small and medium-sized enterprises, scrapping a tax law that imposes extra costs on Islamic banking transactions and improving risk management.

Under Islamic, or Sharia, law, charging or paying interest is banned, as are investment in businesses that Islam finds unacceptable, such as liquor companies.

Some financial experts say Islamic banking principles, which limit the use of sophisticated derivatives and require transactions to be backed by real assets, could prevent the excessive leverage that undermined the global financial system two years ago.

Bank Indonesia senior bank researcher Dadang Muljawan says those characteristics helped convince the government to develop its dual-banking system. "The Islamic bank can survive very well the economic crisis. This is maybe what has been seen by the Indonesian government as an opportunity …. If we have two systems that can work together and then if one goes bust - I hope not - the other one can sustain," he says.

That does not negate the need for better supervision. The system still requires proper supervision. "Jokingly we sometimes say that we can't say Islamic banks are too holy to fail … it's not the magic word," he says.

Bank Indonesia expects more banks to enter the Islamic market after April, when the new tax law takes effect. Research head Dhani Gunawan says the central bank also hopes to draw in foreign investors to increase the funds available for infrastructure projects and for small and medium-sized businesses. "Islamic banks are focused on small and micro-financing, more close(ly) with real sector financing, so it will support the economy," he says.

If Indonesia is to meet the central bank's goal of seeing Islamic banking account for 10 percent of the market by 2015, it will have to look for high-profile investors, especially in China and the Middle East.

But Dadang says Islamic banks in the country need to focus on the small customers. "We have to also give sufficient attention to micro-finance. Why? Because well, maybe 40 percent of the Indonesian community will still need financial services - capital, bank financing. Most of them are still unbankable (can not access banks), they have the potential to produce something, but they need capital for them to be more efficient, to start a business," he says.

This is where domestic banks can help. B.S. Kusmuljono is a bank executive and chairman of the national committee for microfinance empowerment. He wants to expand an existing system that extends up to $500 in credit to small entrepreneurs, mostly farmers looking to develop their production. "Our aim now is to eradicate poverty and to train as many people as possible to be entrepreneurs. That means the borrower should have a capacity building process. He has to be educated to be a businessman," he says.

But that requires training and added oversight to monitor lending to more than 40 million business owners. Kusmuljono says that may be part of the reason Indonesia has not seen more growth in Islamic finance. "We see that the development is not what we expected 10 years ago. We thought it would grow rapidly. But we are optimistic that the Sharia banking will take an important role because most of the banks in Indonesia have a Sharia affiliate," he says.

Many conventional banks in Indonesia have opened Islamic banking units, as a way to enter the market.

For now, the focus will remain on building small and medium-sized businesses in the financial sector. But there is hope that improved regulations and new government measures could see Indonesia grab a bigger slice of what the central bank says is a $900 billion global market for Islamic banking.
 

You May Like

EU Court Fines Poland for Hosting CIA 'Black Sites'

Ruling is first time a court has acknowledged suspects were held and tortured at the sites, under US program launched following the 9/11 terrorist attacks More

Migrant Issues Close to Home Spur Groups to Take Action

Groups placing water, food in the desert, or aiding detainees after release, have one common goal: no more deaths of migrants crossing illegally into the US More

Video At AIDS Conference, Prevention Pill Stirs Excitement

Truveda shows promise, spurring debate over access and other approaches More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Treatment for Childhood Epilepsy Heats up Medical Marijuana Debatei
X
Shelley Schlender
July 24, 2014 6:43 PM
In the United States, marijuana is classed as an illegal drug by the federal government. But nearly half the states have legalized it, to some degree. Proponents say some strains of marijuana might have exceptional health benefits, for treating pain or inflammation in chronic conditions such as cancer, multiple sclerosis and epilepsy. Shelley Schlender reports on a strain of medical marijuana developed in Colorado that is reputed to reduce seizures in childhood epilepsy
Video

Video Treatment for Childhood Epilepsy Heats up Medical Marijuana Debate

In the United States, marijuana is classed as an illegal drug by the federal government. But nearly half the states have legalized it, to some degree. Proponents say some strains of marijuana might have exceptional health benefits, for treating pain or inflammation in chronic conditions such as cancer, multiple sclerosis and epilepsy. Shelley Schlender reports on a strain of medical marijuana developed in Colorado that is reputed to reduce seizures in childhood epilepsy
Video

Video Airbus Adds Metal 3D Printed Parts to New Jets

By the end of this year, European aircraft manufacturing consortium Airbus plans to deliver the first of its new, extra-wide-body passenger jets, the A350-XWB. Among other technological innovations, the new plane will also incorporate metal parts made in a 3-D printer. VOA's George Putic has more.
Video

Video Death Toll From Israel-Gaza Conflict Surpasses 700

Gaza officials say a shelling hit a compound housing a United Nations-run school in the Gaza Strip, killing more than a dozen people, during an Israeli offensive in the area. Heavy fighting between the Israeli military and Hamas militants continued on Thursday, pushing up the death toll. So far, more than 730 Palestinians and 35 Israelis have been killed in the conflict. VOA's Scott Bobb has the latest from Jerusalem.
Video

Video AIDS Conference Welcomes Exciting Developments in HIV Treatment, Prevention

Significant strides have been made in recent years toward the treatment and prevention of HIV, the virus that causes AIDS. This year, at the International AIDS Conference, the AIDS community welcomed progress on a new pill that may prevent transmission of the deadly virus. VOA’s Anita Powell reports from Melbourne, Australia.
Video

Video Israel Targets Gaza Supply Tunnels

The Israeli military has launched a ground operation in Gaza to destroy the myriad tunnels that may have been used to smuggle weapons to Hamas. VOA's Zlatica Hoke reports that could mean more hardship for the people of Gaza, who obtain some of their essential supplies through these underground passages
Video

Video Researchers Target Low-Cost Avatar Technology

Scientists at the University of Southern California Institute for Creative Technologies say 3-dimensional representations could revolutionize social media. Elizabeth Lee has more from Los Angeles.
Video

Video IAEA: Iran Turns its Enriched Uranium Into Less Harmful Form

Iran has converted its stockpiles of enriched uranium into a less dangerous form that is more difficult to use for nuclear weapons, according to the United Nations’ Atomic Energy Agency. The move complies with an interim deal reached with Western powers on Iran's nuclear program last year, in exchange for easing of sanctions. Henry Ridgwell reports for VOA from London.
Video

Video In Cambodia, HIV Diagnosis Brings Deadly Shame

Although HIV/AIDS is now a treatable condition, a positive diagnosis is still a life altering experience. In Cambodia, people living with HIV are often disowned by friends, family and the community. This humiliation can be unbearable. We bring you one Cambodian woman’s struggle to overcome a life tragedy and her own HIV positive diagnosis.

AppleAndroid