Growth in Islamic sharia banking to be slow this year

The deepening global economic slowdown, lack of skilled workforce, and limited capital are likely to slow growth in Islamic-sharia banking activities.

Primarily due to these factors, the central bank has forecast that the market share for sharia-based banking, in terms of assets, will only reach 3 percent of the country's whole banking industry assets.

Bank Indonesia (BI) deputy governor Siti Fadjrijah said Wednesday, that the initial forecast of 5 percent market share was too optimistic.

"The five percent market share is a moving target, it's impossible during these hard economic times. Thus, we've lowered it the moderate target (of 3 percent)," she said.

In the optimistic scenario, sharia banking assets would grow to 5 percent of the market share reaching about Rp 127 trillion (US$11.23 billion) this year.

In the moderate scenario, it will grow by 3 percent to between Rp 80 and Rp 90 trillion, while in the pessimistic scenario it will grow by only 1 percent to around Rp 60 trillion.

As of November last year, Islamic banking activities accounted to 2.08 percent of the banking industry, with a total asset base of Rp 47 trillion, up by 36 percent from the same period of last year.

"Islamic banking is still new here, with the first bank only established in 1992 and it started booming in 2000," Siti said.

She said that people were still unaware of Islamic banking as an alternative to conventional banking by seeking earnings from methods other than using interest rates.

Sharia-based banking complies with Islamic Sharia law by using returns on assets to pay investors instead of interest.

Growth in Islamic banking by number of customers and disbursed loans were relatively moderate last year, with BI recording 3.79 million customers as of November last year, up from 2.84 million as of 2007.

The numbers of disbursed loans increased to 589,000 in 2008 rising from 512,000 in 2007, according to Fadjrijah without citing any figures on volume.

"Loan disbursement is like a walking tortoise" she said.

The number of Islamic banking outlets is also rather small, still less than 1,452 compared to 6,500 conventional banking outlets.

"Currently, we're focusing on increasing the number of Islamic banks, and there will be no consolidation between the banks," Siti said.

The central bank is optimistic about its bid to promote Islamic banking, but may face several challenges including low public awareness, lack of human resources, limited capital few product innovations.

"People are still unaware of Islamic banking because it has only just started. We need to catch up with conventional banking that has been here a long time," Siti said.

"We also need more human resources, we're short of 25,000 qualified employees if we want to achieve optimistic targets," Siti added.

Siti also said that Islamic banks needed to strengthen their capital base for expanding businesses and to absorb losses, adding that, it also needed to train creative bankers that could produce innovative products.

Although Indonesia, Southeast Asia's largest economy, houses the world's largest Muslim population it is still lagging far behind neighboring countries like Malaysia and Singapore in developing sharia-based banking and capital markets.

The government will launch its first Islamic retail bonds (sukuk) on Friday, testing for the first time also the appetite of individual local investors over the competitiveness of the products.