Indonesia preps Islamic pension rules as Islamic banking growth slows

Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), said in a report that it is preparing a five-year blueprint aimed at industry issues such as sector consolidation, a lack of scale and foreign ownership limits.

OJK said it was now preparing draft regulations for Islamic pension funds, after Indonesia’s national sharia council issued a ruling approving the overall concept in November last year. It has been under study since 2009.

“There is demand from the public to participate. With this, it is hoped that the number of sharia products increase and the public’s wish for a pension fund on the basis of sharia principles is fulfilled.”

Countries such as Pakistan and Malaysia have made efforts to develop Islamic pension systems of their own, where fund managers screen their portfolios according to religious guidelines such as bans on tobacco, alcohol and gambling.

Under a “moderate” scenario, the OJK projects Islamic banking assets will grow by 14.4 percent in 2014, down from 24.2 percent in 2013 and 34 percent in 2012, although these figures would remain above those for conventional banks.

As of December, Indonesia’s Islamic banking industry – which included full-fledged lenders, Islamic windows and Islamic rural banks – had a combined 248.1 trillion rupiah ($20.6 billion) in assets, or 4.9 percent of the country’s total banking assets.

That means Indonesia, which has the world’s biggest Muslim population, remains well below neighbouring Malaysia, where Islamic banks hold more than 20 percent of all banking assets.

The OJK said challenges faced by Islamic banks were mainly internal, rather than related to external pressures such as falling commodity prices or lower export demand, as the sector’s foreign currency funding stood at about 5.9 percent.

In particular, competition for third-party funds is a factor affecting growth, given the small scale of Islamic banks which makes it difficult for them to compete with large-scale conventional banks in attracting liquidity, the OJK said.

Despite this, the sector welcomed its 12th full-fledged Islamic bank last year, Bank BTPN Syariah, which was spun-off from its parent Bank BTPN (BTPN.JK). The Islamic lender also absorbed conventional peer PT Bank Sahabat Purba Danarta.

The industry has also seen growth in other areas such as Islamic mutual funds: As of December, there were 65 Islamic mutual funds in the country which saw a 12.1 percent increase in assets in 2013.

In addition, there were 10 corporate Islamic bonds issued last year, worth a combined 2.2 trillion rupiah, with total sukuk outstanding representing 9.4 percent of total debt issuance. -Reuters