Thursday 28 Mar 2024
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INDONESIA is in talks with Islamic Development Bank (IDB) and other Islamic countries to set up what is expected to be the shariah equivalent of Asian Infrastructure Investment Bank (AIIB).

Its Finance Minister Bambang Brodjonegoro says an Islamic infrastructure investment bank (IIIB) is needed to help finance Asia’s massive infrastructure requirements over the next few years.

The plan is for IDB to be a major shareholder of the IIIB, which Bambang hopes will be based in Indonesia.

“The idea is for the bank to finance the infrastructure, first thing, and secondly, to help in the treasury management of Islamic banking in general. So, basically, its role is more than just a bank ... more like an investment bank. That’s why it should be called an Islamic infrastructure investment bank,” Bambang told The Edge in an interview in Hong Kong recently after participating in the Credit Suisse Asian Investment Conference.

“We hope it will be based in Indonesia, but the operation will [involve] all the Islamic countries or OIC (Organisation of Islamic Cooperation) members. We will be working with IDB on that.”

Asked if it would take shape this year, he says, “We are in the process. Of course, it will depend on IDB as a major shareholder, but we are continually working with them.”

Indonesia’s top state-owned banks like Bank Mandiri, Bank Negara Indonesia and Bank Rakyat Indonesia may end up with some shares in the IIIB, he says, but points out that it is still too early in the discussions with IDB to say how the IIIB will be structured in terms of ownership.

Talks to set up the IIIB come at a time when there is strong international support for AIIB. Except for Japan and the US, which is opposed to the China-led venture on concerns that it will rival multilateral lenders like the Washington-based World Bank and Asian Development Bank (ADB), most major countries, including Indonesia, have signed on to be founding members of AIIB.

As at last Thursday, China had approved 57 countries, rejecting only Taiwan’s and North Korea’s applications to join the Beijing-based multilateral lender. It is understood that founding members will have the right to establish the rules for the bank.

Indonesia, while supportive of AIIB and its role of helping finance major infrastructure projects in Asia, argues that AIIB alone is not enough to fill the huge financing gap in the region.

“The need for infrastructure financing in the region is huge and we feel that even with AIIB and other multilateral financial institutions like ADB and the World Bank, there are still huge financing gaps. Having an IIIB will be good for the development of the region,” a government official tells The Edge.

ADB estimates that between 2010 and 2020, Asia will need to spend about US$8 trillion on infrastructure projects to maintain current levels of economic growth. These include power, road, telecommunications, rail, water and sanitation projects.

In Indonesia alone, where the new government is seeking to unlock the country’s economic potential, it has estimated that it needs infrastructure investments of IDR5,000 trillion over the next five years to build new airports, toll roads and power plants, among others.

The government official says, however, it may take some time for the IIIB to come to fruition, pointing to the time taken for AIIB to amass international support. AIIB, which was launched by China last October, is expected to be established only by the end of this year.

Economists have mixed opinions on the setting up of an IIIB. While they agree that there is a need for new sources of financing, they question the timing of it.

“For Indonesia to initiate it now, while China already has this massive thing (AIIB) that’s coming up, only complicates things. It’s not the best timing. You can actually leverage AIIB first, rather than starting something yourself with the Islamic community. I also have some doubt as to whether Indonesia has that international repute to pull it through,” says a Malaysia-based regional economist, who declines to be named.

It will be difficult to set up something like the IIIB without politics getting in the way, he adds. “Even with AIIB, it is understood that there is more to it ... that China’s underlying objective is to grow its influence, thrust itself at the heart of Asia’s development.”

He says it makes sense for Malaysia to join AIIB — it is already a founding member — as there is potential for the bank to finance major projects such as the high-speed rail linking the country to Singapore and the Pan-Borneo Highway linking Sabah and Sarawak.  

 The move to set up an IIIB also comes as Indonesia looks to further develop its Islamic banking industry.

Its Financial Services Authority has, since last year, been working on a five-year road map for Islamic banking development that is expected to address the imbalance between Indonesia’s huge Muslim population — the largest in the world — and their low use of shariah-compliant products and services.

Less than 5% of the country’s total banking assets are Islamic. And although the authorities want Islamic banks to command at least 15% of the market by 2023, the sector’s growth is stalling, according to Indonesian news reports.

In contrast, Malaysia, though smaller in size, has had more success amid strong government encouragement for Islamic finance in recent years. At least a fifth of the banking system’s assets are shariah-compliant.

Bambang says the new Indonesian government is considering ways to spur the industry. This may include having greater flexibility on foreign ownership of Islamic banks in the country.

“We would like to give more attention to the Islamic banking industry. So far, Islamic banks in Indonesia have been struggling to have [even] 5% of total banking assets. The 5% has been a difficult threshold to pass. Last year, the performance of Islamic banks was subdued … not that good,” he says.

“So, I think there is a need to give support to the Islamic banking industry, maybe in terms of how the government can have accounts in Islamic banks, government budget ... distributing money through Islamic banks or setting up state-owned Islamic banks — something that we don’t have now. Or, we should invite greater foreign ownership for the establishment of a big Islamic bank in Indonesia.”

He says what is more important, however, is to find a way to make Islamic banking practices as competitive as conventional banking. “So far, there is a big gap between the services in Islamic banking and conventional banking. People still think that the cost of funds for Islamic banking is higher, and that the service is not up to the level of conventional banking.”

According to the earlier government official, by the end of this month, investors will have “a clearer picture” of Indonesia’s plans for the Islamic banking industry over the next five years.

“It’s interesting because if you look at the Islamic banks in the Middle East, they function more like investment banks, whereas in Malaysia, they’re more like corporate banks. But with Indonesia, we see the potential is more in retail banking,” he says.

Indonesia has 11 full-fledged Islamic banks and 23 Islamic business units with combined assets of IDR244 trillion. Having an IIIB that is based in the country will give its Islamic banking ambition a huge boost.

 

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

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