Fitch: Outlook for Islamic banks

Fitch Ratings expects the profitability of Indonesia’s Islamic banks to remain sluggish due to strong competition from conventional peers, weak asset quality, a slow economic recovery and rising credit costs. ROA of the country’s Islamic banks was 0.6 per cent at end-September 2016 (end-2015: 0.5 per cent), compared with 1.9 per cent for conventional peers. The sector depends on supportive government policies and regulatory privileges for its continued development.

Indonesia’s banking sector incorporates a dual-banking system, where services are provided through conventional or Islamic means. Islamic banking activities are conducted through Shari’ah-compliant banks, such as PT Bank BRISyariah (AA+(idn)/Stable), or Shari’ah-compliant business units within conventional banks, known as Unit Usaha Shari’ah. There were 13 Islamic banks and 21 Islamic business units in Indonesia’s banking industry at end-September 2016, accounting for 5.1 per cent of the industry’s total assets and 5.6 per cent of gross loans. Market Penetration Difficult: Islamic bank development targets a 10 per cent market share by 2020 as part of the regulator’s 2015-2019 Islamic banking roadmap and the ‘I Love Shari’ah Finance’ programme, which was introduced in 2015. Indonesia has the world’s largest Muslim population; 207 million people representing 81 per cent of the total.

Despite this, Islamic bank market share has stabilised at around 5 per cent since the rapidgrowth experienced to 2013, which suggests difficulty in achieving higher market share penetration.

Islamic banks’ non-performing loans (NPL, overdue more than 90 days) ratio remained high, at 4.3 per cent at end-September 2016 (end-2015: 4.3 per cent). It was higher than the 3 per cent NPL ratio of conventional peers, suggesting that Islamic banks require further development of underwriting standards and risk controls. Islamic banks’ NPL reserve coverage of 45.6 per cent was significantly lower than that of conventional banks, at 108.7 per cent, indicating higher risk of near-term capital impairment.—Agencies

Published in Pakistan Observer, February 17^th, 2017