Indonesian Experiences of Islamic Finance
The Sharia-compliant finance industry started in Indonesia with the opening of Bank Muamalat in 1992. Since then, although growth has been impressive (up 45% per year from 2000-2006), assets gathered only made up approximately 1.5% of those of conventional banks. With a Muslim population of more than 200 million, Indonesia offers a great potential for Sharia products. At end of December 2006, the assets of Sharia banks in Indonesia totaled IDR26.72 trillion (US$2.96bn). The central bank of Indonesia, through its acceleration program, targeted the assets of Islamic banks at 5.25% by 2008 or equivalent to IDR91.57 trillion.
Currently, there are many institutions offering Sharia products ranging from banking and investments to insurance. Therefore it is important to understand how Sharia finance will develop in Indonesia and to see why the big players are now starting to offer Sharia products in Indonesia.
Compared to Malaysia, which has a much smaller Muslim population, the Sharia industry in Indonesia has been slow to develop. This has become a major concern for many Islamic scholars in Indonesia, who believe that due to the country’s abundant natural resources, huge (Muslim) population and high growth economy, there is a greater opportunity for the Sharia industry than in other Islamic countries. Foreign institutional players have also seen the opportunity and are now taking part in the development of the industry.
After struggling from the monetary and economic crisis in 1997, many foreign investors believe that the Indonesian economy is showing good progress. The government of Indonesia, learning from Malaysia’s experience, is now also putting a lot of effort into the development of the Sharia industry.
Looking further down to the market potential for Sharia products, particularly Sharia banking, a research report by Karim Business Consulting suggested that there are three categories of Sharia customers. These are the Sharia loyalist, whose primary concern is on strict Sharia compliance; the floater, whose concern is mainly on the return and not too concerned with compliance and finally the conventional loyalist, who only believes in conventional products. Interestingly, the report suggested that only 14.1% of market potential comes from the Sharia loyalist, while about 24.7% comes from conventional loyalists. This means that the biggest market potential comes from the floater, at 61.2%. The research recommended that banks should switch from approaching the Sharia loyalist to approaching the floater, by providing better product variety, competitive returns and services superior to those offered by conventional banks.
I believe that the Sharia fund industry in Indonesia will follow the trend in the Sharia banking industry, as the major distribution channel for local funds is through banks. However, the fund industry in Indonesia is still young. It only started in 1996 and was almost immediately hit by the economic crisis of 1997. The industry started to pick up again in 2001, pushed by falling rates. In 2005, the industry was hit again and experienced a significant decrease (70%) of its AUM due to the increase of interest rates and other issues, but recovered in 2006 with a positive increase of 80%. This year, the AUM of the industry has again increased by more than 30% from 2006 with total AUM now approximately IDR67 trillion (US$7.4bn).
The Sharia fund industry, though still tiny (around 1.5% of the total fund industry – currently at IDR1 trillion/US$111m), is now gaining in popularity. Both Fortis Investments and HSBC, as the first foreign players in this local market, are quite optimistic on the long term potential market, which is not only coming domestically but also regionally, especially from Middle East investors. The potential growth opportunity of Indonesia is now attracting and will continue to attract many offshore investors to invest in Indonesia.
To this extent, Fortis Investments Indonesia and HSBC Amanah Syariah Indonesian have collaborated on an Indonesian equity-based Sharia compliant fund, and both banks have pledged to use their experience of this fund to further develop a variety of investment products that can be offered to investors locally, regionally and even globally in a Sharia compliant way.