Indonesia: Sharia banks struggling to grow

At the same time as it comes to financial management, religious views no longer seem to matter for most Indonesians, who choose lenders that can accommodate their daily needs and provide the highest investment returns.

Despite its status as the world’s major Muslim-majority country, Indonesians still favor conventional banks over those that adhere to Islamic principles.

The market share of Islamic banks in the country has remained below 5 % over recent years despite the existence of sharia banking in the country since the early 1990s.

Perhaps the major reason lies in human nature, as consumers are attracted to products that offer good benefits and reliable services.

Private employee Hanie Dewita, 27, who is Muslim, recently decided to close her account with the sharia unit of a conventional bank as it did not have a branch near her South Jakarta office.

The sharia unit she before used as well did not have a direct link to its parent bank, causing her frequent difficulties at the same time as making transactions and interbank transfers.

“For transactional purposes, it is additional enjoyable to use banks that have a lot of ATMs and branches located near my office,” she told The Jakarta Post on Thursday.

An extra private employee, Gita Rossiana, 30, closed her time deposit account at a sharia bank next calculating that the nisbah (interest rate) was far lower than the % offered by conventional banks.

“The return was just too small for me,” she said.

For instance, the average return for a three-month time deposit at a sharia bank stood at 7.08 % in April, according to data from the Financial Services Authority (OJK). On the other hand, three-month time deposits at conventional banks offered an average interest rate of 7.27 % in the same month.

Such testimonies reflect a herculean task for domestic sharia banks to offer products and services on par with their conventional counterparts if they want to grow significantly someday.

Data from the OJK showed that Islamic banks’ market share stood at 4.87 % in 2015, slightly higher than 4.62 % a year before.

The banking authority was before optimistic that the market share could hit its 5 % target this year. Sharia banks, however, are presently struggling with rising bad loans and shrinking assets as a result of the world economic slowdown.

In order to grow, Islamic banks must work harder to attract customers with innovations in all types of products and services, according to experts.

“So far, the products and services offered by sharia banks are still very traditional and limited. They’re still unable to respond to business needs, which are always developing,” said Agustianto Mingka, chairman of the Islamic Economic Experts Association’s (IAEI) central advisory board.

To develop additional sophisticated sharia banking services, industry players will need to make hefty investments, an effort that should not be too daunting for large sharia lenders owned by giant parents, such as national-owned Bank Mandiri and Bank Negara Indonesia (BNI).

Top executives of large parent banks have acknowledged such matters and have planned several sets of capital injections for their sharia subsidiaries in the long term. Mandiri, for instance, has allocated Rp 1 trillion (US$76 million) for its sharia subsidiary, Bank Syariah Mandiri (BSM).

However, Mandiri president director Kartika “Tiko” Wirjoatmodjo said recently that the bank was looking for a strategic partner from abroad to develop BSM as it would not be able to provide support each year for an unlimited time.

“We are in the process of seeking investors from the Middle East, because they have knowledge in sharia. Mandiri will remain a majority shareholder,” Tiko said.

Agustianto said such efforts would be ineffective without a strong commitment from the government to help grow domestic sharia banks with supportive policies, as seen in Malaysia.

“The government, for example, should place a major all of its funds in sharia banks and channel the money to infrastructure projects,” he said.

Attractive marketing strategies could as well help the appeal of interest rates part potential customers, inclunding non-Muslims, as sharia prohibits the acceptance of specific interest or fees for loans, which it refers to as riba (usury).

Christine Nababan, 32, a Christian, is a loyal customer of sharia banks and plans to open a new locked savings account with an extra sharia bank.

“I’m interested in opening a new account as the bank offers a lot of prizes, inclunding an iPhone 6,” she said.