Indonesian teacher Nina Ramadhaniah hopes for “blessings from Allah” by opening a Shariah bank account — the sort of pious customer the world’s most-populous Muslim-majority country is praying for as it launches an Islamic finance drive.
Indonesia, Southeast Asia’s biggest economy, has a Muslim population of about 225 million, but this huge number of faithful has not translated into success for Shariah banks, institutions required to conduct business in line with Islamic principles.
Now regulators have launched a plan aimed at growing the sector, which currently accounts for less than 5 percent of banking assets, compared with a quarter in Malaysia and about half in Saudi Arabia.
Authorities believe it is a good moment, with many Indonesians getting wealthier after years of strong economic growth and an increasing trend toward piety across broad sections of society.
Many of those without bank accounts, estimated at about 40 percent of the population, are soon expected to open one.
“The situation is an opportunity for the Islamic banking business to get bigger,” said Nasirwan Ilyas, a senior official from the Islamic banking division of Indonesia’s Financial Services Authority (OJK).
The OJK is spearheading the drive, and unveiled a five-year roadmap earlier this year that included plans to educate the public about Shariah lenders and the establishment of an Islamic finance committee to better manage the sector.
Key features of Shariah banking include the prohibition of interest on loans or customer deposits, and a ban on investing in “non-Islamic” businesses, such as those involving pork or alcohol.
For Ramadhaniah, who has an account with Indonesia’s biggest Islamic lender, Bank Syariah Mandiri, the ban on interest is a key attraction.
“Charging interest is haram [against Islam], ill-gotten gains that will not bring me any blessings from Allah,” the 44-year-old said. “I don’t want to live in sin.”
Shariah accounts often work on a “profit-and-loss sharing” model, meaning customers get a windfall when the bank does well, but can lose out when it does badly.
There are obvious disadvantages. Shariah lenders generally offer lower returns on investments and their modest size often means they provide fewer services than larger, conventional peers — many shops are not equipped to accept their debit cards.
Nevertheless, Islamic banks have proven popular in recent years, with the sector expanding on average more than 40 percent a year between 2008 and 2012, according to the OJK.
The growth came after laws were changed to make it easier to establish an Islamic bank, and there are now a plethora of standalone Shariah lenders, Islamic banking units attached to conventional banks and smaller Islamic financial institutions in the countryside.
Growth in the sector has lost steam due to a broader slowdown in the economy, which is expanding at six-year lows — giving authorities another reason to launch their drive.
Central to the overhaul is a plan to set up a National Islamic Finance Committee this year.
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