Bloomberg News

Pilgrim Funds Give Indonesia Banks Booster Shot: Islamic Finance

May 01, 2013

Indonesia’s plan to shift 11 trillion rupiah ($1.1 billion) of pilgrim’s savings into Shariah- compliant lenders is a booster-shot that will help narrow the gap with neighboring Malaysia.

Deposits set aside by those planning a Hajj visit to Mecca in Saudi Arabia will be shifted by the Ministry of Religious Affairs from non-Islamic banks within a year of announcing the policy, Anggito Abimanyu, director-general of Hajj and Umrah at the ministry, said in an interview yesterday. The funds are equivalent to 7.3 percent of the 150.8 trillion rupiah in savings at Islamic lenders, less than a sixth of Malaysia’s 310 billion ringgit ($102 billion), central bank data show.

Shariah banking assets in Indonesia jumped 35 percent in the year through February and the government wants to lift its market share from 4.6 percent to 10 percent by 2015. Authorities in Kuala Lumpur have relaxed foreign-ownership rules and used tax breaks to help the industry grow to a point where it accounts for 20 percent of the nation’s financial assets. Of the 211,000 Indonesians that went on last year’s Hajj, 92 percent did so on a state-organized tour.

“We are glad for this move as it shows the government’s commitment in supporting the industry’s growth,” Lukita Tri Prakasa, corporate secretary at PT Bank BRI Syariah in Jakarta, which has created a team to manage the incoming money, said in an April 30 interview. “This is very good for us as it will increase our third-party funds and boost our expansion.”

Trading Volumes

The entire Hajj fund totaled 55 trillion rupiah in March, with about 35 trillion rupiah invested in non-tradable sovereign sukuk and 9 trillion rupiah already placed at Islamic lenders, official data show. The government wants to increase trading volumes by selling less bonds to the fund, Dahlan Siamat, director of Islamic financing at the debt management office, said in November, potentially giving Shariah banks another boost.

Bank Indonesia is in talks with the religious affairs ministry on how the funds will be divided up between the banks Edy Setiadi, executive director for Islamic banking at the monetary authority, said in an April 29 e-mailed response to questions. Indonesia has 11 fully fledged Islamic lenders and 24 so-called Shariah-compliant window operations at non-Islamic banks. The central bank is also seeking to spur industry growth by requiring the windows to become standalone units by 2015.

Since the incoming Hajj money will be recorded as a liability, BRI Syariah plans to ask for additional capital from its parent, PT Bank Rakyat Indonesia, the nation’s second- largest by assets, to maintain a healthy balance sheet, Prakasa said. Bank Indonesia requires that lenders hold reserves of at least 8 percent of their loans and deposits.

‘Nice Bonus’

PT Bank Muamalat Indonesia, the nation’s second-largest Shariah lender, has actually been reducing the amount of Hajj money it manages to focus more on its core business of retail banking, Finance Director Hendiarto Yogiono said. It cut the funds by 36 percent to 1.25 trillion rupiah in 2012, as its assets increased 38 percent to 44.9 trillion rupiah.

“Islamic banks have grown rapidly, so the government sees that they can handle a bigger responsibility now,” Yogiono said in an April 30 interview from Jakarta. “It’s a nice bonus, but we don’t expect the decision to cause a dramatic change as the sum isn’t so big.”

Growth in the Shariah-compliant banking industry may spur demand for Islamic bonds as lenders seek to invest their funds. Global sales of sukuk, which pay returns on assets to comply with the religion’s ban on interest, increased 3.8 percent to $14.8 billion in 2013 from the same period last year, data compiled by Bloomberg show. Issuance totaled a record $46.5 billion in 2012.

Fund’s Mandate

The average yield on Shariah-compliant bonds sold internationally rose 14 basis points, or 0.14 percentage point, last month to 3.05 percent, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. The premium investors demand to hold the notes over the London interbank offered rate, or Libor, widened seven basis points to 184.

Islamic bonds returned 1.4 percent this year, according to the HSBC/Nasdaq index, while debt from emerging markets gained 0.5 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.

The Hajj is one of the five pillars of Islam and every able-bodied Muslim is obliged to make the journey at least once in their lives, performing rituals like circling the cube-shaped Kaaba, one of the religion’s most sacred sites. A record 3.16 million pilgrims traveled to Mecca to do the Hajj in 2012, a Saudi Arabian government statement shows. This year’s event will take place in October.

“It was always part of the mandate that funds used for the pilgrimage should be managed in a Shariah-compliant way,” BRI Syariah’s Prakasa said. “We are studying options and making sure we will be ready to put the funds to work so it doesn’t become an operational cost burden for us.”

To contact the reporter on this story: Yudith Ho in Jakarta at yho35@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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