Jakarta: A blueprint being drawn up for Indonesia’s Islamic finance industry may include incentives to help revive the domestic market for sukuk (Islamic bonds), the capital market regulator said.
Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), is preparing a five-year plan for the sector to help it expand in southeast Asia’s largest economy.
The document is expected to be ready for public consultation by year-end, and will address issues including a lack of scale in the industry, sector consolidation and the role of foreign ownership, the OJK said in a statement said.
Last week, the OJK established a committee to encourage coordination in Islamic finance among government bodies and the private sector, in order to help Islamic banks navigate a range of local and federal regulations.
“Different regulatory sets and perhaps governance standards between those institutions is one of the key issues in the road map,” the OJK said.
As of May, Indonesia had 11 full-fledged Islamic banks and 23 Islamic windows operated by conventional banks; their combined Islamic banking assets were worth 244 trillion rupiah($21.4bn), giving the sector a 4.8 percent share of total banking assets, OJK data showed.
This represented a 16.5 percent year-on-year growth rate,which the OJK described as “mild”, down from 24.2 percent growth in 2013 and a peak of 49.2 percent in 2011.
Islamic banking initially grew rapidly in Indonesia from a low base, but may now be nearing the limits of expansion in its core customer base: people who value Shariah-compliance above all other factors.
It may now need to compete with conventional banks for a larger, floating mass of consumers who also emphasise service quality and price.
The blueprint will also help the sector implement rules which require Islamic window operations to be spun off from their parent banks and floated on the local exchange by 2022.
The OJK said it expected such listings to spur consolidation among Islamic banks over the next nine years, although it hoped this would not be at the expense of growth.
The OJK did not elaborate on its plans for foreign ownership limits. Foreign institutions must seek regulatory approval to raise their stakes in Indonesian banks above a 40 percent threshold to a maximum 99 percent; some bankers would like to see more clarity in the requirements for rises above 40 percent.
In June, Dubai Islamic Bank completed the acquisition of a 24.9 percent stake in Bank Panin Syariah, saying it would seek to increase its holding to 40 percent.
The regulator is also exploring ways to revive a sukuk market which has seen no corporate issuers so far this year. The market raised a combined 4.18 trillion rupees with 15 sukuk in 2012 and 2013, OJK data showed.
The reasons for the drop-off in activity are not clear, but may be related to higher costs involved in issuing sukuk, a lack of experience among arranging banks, or a lack of regulatory clarity.
The OJK said it was confident that tax neutrality for corporate sukuk had already been created by existing laws, and said it already provided incentives for the sukuk market in the area of fees. But it said additional incentives were possible.
“Taxation should not be an issue, right now the biggest challenge in our sukuk market is the issuers’ and underwriters’ lack of knowledge and understanding on Shariah products.
“We are reviewing the possibilities of incentives we can provide for related parties in Shariah securities issuance, the same as we had done for sukuk in terms of the issuance fee.”
The OJK has in recent months taken a more proactive approach to policing the industry: in February, it revoked the permit of PT Asuransi Tokio Marine Insurance to offer Shariah-compliant products, saying the insurer was handling them in an “unhealthy”way.
The OJK took over supervision of both conventional andIslamic banks, brokerages and insurance firms from the central bank and the capital market watchdog Bapepam-LK in January this year.