Indonesian Islamic banking roadmap to boost sector development

Link to Fitch Ratings' Report(s): Indonesian Islamic Banks Dashboard: 2020

Fitch Ratings-Jakarta-09 March 2020: Indonesia's new five-year roadmap for the country's Islamic banking sector should provide some impetus to its development, although most benefits are likely to be realised over the medium term rather than the near term, Fitch Ratings says. The wide-ranging roadmap addresses the need to strengthen regulations and corporate governance, boost penetration of sharia-compliant products, encourage R&D, and improve human resources in the sector. However, progress is likely to take time, limiting the short-term upside. The roadmap aims for 20% market share for the Islamic finance industry - including banking, insurance and capital-market sectors - by end-2024 (2018: 8.6%), but no specific targets for the Islamic banking sector were disclosed.

Two regional development banks - Bank Riau Kepri and Bank Nagari - recently announced they will convert into Islamic banks over the next year. A newly passed regional law in the province of Aceh - a Muslim-majority region that operates under sharia law - requires branches of conventional banks to convert into sharia branches by 2021. These two developments should add around 1 percentage point to Islamic banks' financing market share (2019: 6.3%). In addition, Islamic business units of conventional Indonesian banks are required to be converted into standalone Islamic banks by 2023, which should provide further support to Islamic banks' growth prospects in the medium term.