continued... - Islamic Finance News

www.islamicfi nancenews.com
Islamic Finance news Guide 2008
Accelerating Islamic Banking Growth in Indonesia (continued...)
of Islamic banking grow from 98.9% at the end of 2005 to
99.8%. During the same period, third-party funds increased
to IDR7.3 trillion (US$792 million). This indicated that almost
all funds mobilized by the bank were fully distributed by
Islamic banking; in other words, Islamic banks had optimally
performed their intermediary function.
However, due to the slow recovery of the investment
climate and economic conditions in the fi rst quarter, fund
channeling was slightly affected. This condition infl uenced
investors to be more cautious about placing their funds in
banks; moreover, as an alternative, portfolio placements in
the money market became more attractive as they offered
better fi nancial stability. The shortage of funds on investment
fi nally impeded the expansion of their business. This was
refl ected by the volume of Islamic banking growth that lost
its momentum in the beginning of the year (growth was only
9.3%, or 28.7% year-on-year) and fi nally reached 36.7% at
the end of 2006.
Institutional development
Last year, the total number of banks operating on Shariah
principles increased, as evidenced by the opening of nine
Islamic rural banks (BPRS) and six Islamic business units
(UUS). Therefore, at the end of 2007, the number of Islamic
banking institutions increased to three Islamic commercial
banks (BUS), 26 UUS and 114 BPRS.
In line with the increasing number of Islamic banking
institutions, the offi ce network also signifi cantly increased.
During the reporting period, the number of offi ces (including
cash units, sub-branch offi ces) increased by 75 offi ces from
636 offi ces at the end of 2006 (see Table 1). From area of
distribution, the Islamic banking networks reached people in
more than 70 districts in 31 provinces. The number excludes
the 1,135 conventional offi ces opening Shariah services
(offi ce channeling) which offi cially started in the second
quarter of 2006. This phenomenon indicates that investors
still considered Islamic banks as potential developing
institutions, especially in rural areas.
Table 1: Islamic banking (IB) institutional development
2003 2004 2005 2006 2007
Full-fl edged Islamic banks 2 3 3 3 3
Islamic banking division of
conventional banks
8 15 19 20 26
Islamic rural banks (BPRS) 84 88 92 105 114
Number of Islamic banks 337 443 550 636 711
IB outlet in conventional bank
offi ce (offi ce channeling)
— — — 456 1,135
Development of BUS and UUS
Last year, the business volume of Islamic banking grew by
IDR9.8 trillion (US$1.06 billion). At the end of the period, it
reached IDR36.5 trillion (US$4 billion). Islamic banking assets
by national banking grew from 1.6% at the end of 2006 to
1.8% at the end of 2007, in which the assets were dominated
by fi nancing products. Although BUS still dominated as the
main player in the industry, UUS market share improved from
20.8% in 2006 to 23.5% in 2007.
Table 2: Structure of Third Party Funds
Items Nominal (IDR billion) Growth (%) Share (%)
2006 2007 2006 2007 2006 2007
Number of
accounts
1,992,452 2,845,829 58.6 42.8
Savings
wadiah
3,415,747 3,750,376 67.0 9.8 16.5 13.4
Savings
Mudarabah
6,430,355 9,454,060 47.1 47.0 31.1 33.8
Deposits
Mudarabah
10,826,079 14,807,234 18.1 36.8 52.4 52.9
Third party
funds
20,672,181 28,011,670 32.7 35.5 100 100
Amid stiff competition from various banks on funds
mobilization, third party funds (TPFs) improved from 32.7%
in 2006 to 35.5% in 2007. This was supported by the low
interest rate, which the central bank had reduced eight
times from 10.75% to 8.25% between November 2006 and
November 2007. The structure of TPFs was dominated by
unrestricted investment (see Table 2), and it moved to deposits
(Mudarabah) with long-term maturities. This indicated that the
liquidity preference of Islamic banking customers was likely to
relatively decrease in 2007.
The tendency was strongly evident with the structure of
unrestricted investment term that moved to the shorter term
(one month). Such fund composition potentially increased
the bank liquidity risk mainly from fl uctuated corporate fund
that is usually sensitive to the competitive return offered.
Although the depositors are small in number (2.3%), the
savings amount is dominant so that it is diffi cult to anticipate.
This condition affected the banking investment preference
with short-term orientation in order to mitigate the risk. So
the liquidity transformation function, especially to meet the
purpose of investment, was not optimally achieved.
Meanwhile, fund channeling in the form of various fi nancing
transactions was optimal, reaching the growth rate of 36.7%
y-o-y or higher than that of 2006 or even a year before.
High fi nancing expansion was mainly contributed by UUS
continued...
Page 101