Indonesia’s Islamic market is set to overtake Malaysia’s, thanks to the growth in sharia-compliant lending, one of Indonesia’s top Muslim clerics said. Indonesia, the world’s most-populous Muslim country, currently lags neighboring Malaysia, the Islamic financial hub for the region, in terms of the market for sharia financial products, but that should change given stronger government support and demand in the domestic market, he said.

Ma’ruf Amin, head of the Indonesian Ulema Council’s (MUI) commission in charge of issuing edicts including on Islamic markets, also said he expected more conventional banks to be turned into Islamic lenders in the near term.

Indonesia’s sharia banking assets accounted for just about $5 billion, or 2 percent of the country’s total banking assets in 2008,  lower than in Malaysia where Islamic banking accounted for some $68 billion, or 17 percent, of total banking assets in late 2008.

“We will be much bigger because the potential is much bigger,” Amin told Reuters in an interview.

“The political will from the government is there; from the president, the ministers. The government has also issued sukuk.”

The government raised 5.56 trillion rupiah ($559 million) from its retail, Islamic-compliant bonds in February and made a debut sale of $650 million worth of global Islamic bonds in April. Both issues attracted strong demand from investors.

Capitalising on the strong potential, several banks including Bank Central Asia, the country’s No. 3 lender by assets, and mid-sized bank Bank Panin, have bought smaller lenders and turned them into sharia banking units.

As in other Islamic financial markets, there has also been a debate recently in Indonesia about the use of conventional hedging tools, such as currency forwards to hedge risks amid concerns that such tools could be prone to speculation.

Currency “forward is not allowed except for hedging. Swaps are not allowed at all,” Amin told Reuters, adding “there is an element of manipulation” in currency swaps. He declined to elaborate.

Sharia, or Islamic law, bans payment of interest, so income must be derived from a fundamental economic transaction such as trade in goods and services, direct investment in business, or renting out property.

Source: Reuters

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