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

Lesotho Faces New Round of Violence, Political Crisis

Brutal killing of military officer has sent former leaders back into S. Africa where they're watching anxiously as regional officials head in to try to restore peace More

Video US Diplomat Expects Adoption of Bosnian Massacre Anniversary Resolution

Samantha Power says there's broad consensus about killings in Bosnia's war, but Russia calls resolution 'divisive,' backs UN countermeasure More

UN Report Exposes Widespread Boko Haram Atrocities

Damning report graphically details pattern of vicious, widespread atrocities committed by Islamist militants 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.
Olympics Construction Scars Sacred Korean Mountaini
X
July 02, 2015 4:10 AM
Environmentalists in South Korea are protesting a Winter Olympics construction project to build a ski slope through a 500-year-old protected forest. Brian Padden reports that although there is strong national support for hosting the 2018 Pyeongchang Winter Olympics, there are growing public concerns over the costs and possible ecological damage at the revered mountain.
Video

Video Olympics Construction Scars Sacred Korean Mountain

Environmentalists in South Korea are protesting a Winter Olympics construction project to build a ski slope through a 500-year-old protected forest. Brian Padden reports that although there is strong national support for hosting the 2018 Pyeongchang Winter Olympics, there are growing public concerns over the costs and possible ecological damage at the revered mountain.
Video

Video Xenophobia Victims in South Africa Flee Violence, Then Return

Many Malawians fled South Africa early this year after xenophobic attacks on African immigrants. But many quickly found life was no better at home and have returned to South Africa – often illegally and without jobs, and facing the tough task of having to start over. Lameck Masina and Anita Powell file from Johannesburg.
Video

Video Family of American Marine Calls for Release From Iranian Prison

As the crowd of journalists covering the Iran talks swells, so too do the opportunities for media coverage.  Hoping to catch the attention of high-level diplomats, the family of American-Iranian marine Amir Hekmati is in Vienna, pleading for his release from an Iranian prison after nearly 4 years.  VOA’s Heather Murdock reports from Vienna.
Video

Video UK Holds Terror Drill as MPs Mull Tunisia Response

After pledging a tough response to last Friday’s terror attack in Tunisia, which came just days before the 10th anniversary of the bomb attacks on London’s transport network, British security services are shifting their focus to overseas counter-terror operations. VOA's Henry Ridgwell has more.
Video

Video Obama on Cuba: This is What Change Looks Like

President Barack Obama says the United States will soon reopen its embassy in Cuba for the first time since 1961, ending a half-century of isolation. VOA White House correspondent Luis Ramirez reports.
Video

Video Hate Groups Spread Influence Via Internet

Hate groups of various kinds are using the Internet for propaganda and recruitment, and a Jewish human rights organization that monitors these groups, the Simon Wiesenthal Center, says their influence is growing. The messages are different, but the calls to hatred or violence are similar. VOA's Mike O’Sullivan reports.
Video

Video US Silica Sand Mining Surge Worries Illinois Residents, Businesses

Increased domestic U.S. oil and gas production, thanks to advances known as “fracking,” has created a boom for other industries supporting that extraction. Demand for silica sand, used in fracking, could triple over the next five years. In the Midwest state of Illinois, people living near the mines are worried about how increased silica sand mining will affect their businesses and their health. VOA’s Kane Farabaugh has more in this first of a series of reports.
Video

Video Blind Somali Journalist Defies Odds in Mogadishu

Despite improving security in the last few years, Somalia remains one of the most dangerous countries to be a journalist – even more so for someone who cannot see. Abdulaziz Billow has the story of journalist Abdifatah Hassan Kalgacal, who has been reporting from the Somali capital for the last decade despite being blind.
Video

Video Texas Defies Same-Sex Marriage Ruling

Texas state officials have criticized the US Supreme Court decision giving same-sex couples the right to marry nationwide. The attorney general of Texas says last week's decision did not overrule constitutional "rights of religious liberty," and therefore officials performing wedding services can refuse to perform them for same-sex couples if it is against their religious beliefs. Zlatica Hoke reports on the controversy.
Video

Video Rabbi Hits Road to Heal Jewish-Muslim Relations in France

France is on high alert after last week's terrorist attack near the city Lyon, just six months after deadly Paris shootings. The attack have added new tensions to relations between French Jews and Muslims. France’s Jewish and Muslim communities also share a common heritage, though, and as far as one French rabbi is concerned, they are destined to be friends. From the Paris suburb of La Courneuve, Lisa Bryant reports about Rabbi Michel Serfaty and his friendship bus.
Video

Video Saudi Leaks Expose ‘Checkbook Diplomacy’ In Battle With Iran

Saudi Arabia’s willingness to wield its oil money on the global diplomatic stage appears to have been laid bare, after the website WikiLeaks published tens of thousands of leaked cables from Riyadh’s Ministry of Foreign Affairs. VOA's Henry Ridgwell reports.
Video

Video In Kenya, Police Said to Shoot First, Ask Questions Later

An organization that documents torture and extrajudicial killings says Kenyan police were responsible for 1,252 shooting deaths in five cities, including Nairobi, between 2009 and 2014, representing 67 percent of all gun deaths in the areas reviewed. Gabe Joselow has more from Nairobi.

VOA Blogs