The Merge Continues for Indonesia as they Allow Syariah Lenders

In Indonesia, it’s serious business to be seen as halal. Starbucks and KFC show their halal certification from the top clerical body of the world, even though booze or bacon are seldom associated with the franchises.

But Indonesian households and companies are less picky when it comes to banking. According to the Indonesian Financial Services Agency (OJK), less than 10 percent of the country ‘s banking assets-corporate loans , mortgages and other loans-are owned by the country’s Syariah banks.

As a result, in the Syariah banking world, the country’s lenders are minnows, owning 2% of an estimated US$ 1.6 trillion in Islamic banking assets, including sukuk-Islamic compliant bonds. According to data from the Islamic Financial Services Board, the multilateral organization overseeing syariah banking, this is well behind Malaysia, which holds more than 11 per cent.

That could change, as the Syariah banks of Indonesia are on a relative tear during the pandemic. So far this year, OJK data shows lending up by more than 20 percent as their traditional cousins, who prefer to provide larger loans for longer periods, step back. Syariah banks get around charging interest on loans through profit sharing deals or serving as an agent on behalf of the customer with a negotiated repayment plan to purchase an asset such as a vehicle.

In view of this,  Indonesia’s government announced that it would combine three state-owned lenders’ syariah units to create the seventh-largest bank in the world. After approval by regulators, by February, the syariah units of Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia will merge together with a lender with an asset of approximately 215 trillion rupiah (S$19.8 billion)-just under half of all Islamic banking assets in Indonesia