Indonesia accepts Islamic megabank challenge shelved by Malaysia

[KUALA LUMPUR] Indonesia is taking on the challenge of creating an Islamic megabank that has so far proven too difficult for lenders in Malaysia and the Middle East.

The government plans to merge the Shariah-compliant units of state-owned PT Bank Mandiri, PT Bank Negara Indonesia, PT Bank Rakyat Indonesia and PT Bank Tabungan Negara with paid-up capital of more than 15 trillion rupiah (S$1.51 billion) next year, Gatot Trihargo, deputy minister for government-run enterprises, said in a June 10 interview in Jakarta. Financial Services Authority Chairman Muliaman Hadad said in January that the plan may materialise this year.

Malaysia has been touting the idea of forming an Islamic megabank that can compete with the likes of HSBC Holdings Plc for six years and a three-way merger to create one fell apart in January. The Islamic Development Bank, an institution based in Saudi Arabia with 56 member countries, previously planned to set up such a lender in 2012 with capital of US$1 billion.

"We have seen the challenges that come with wanting to create a mega-Islamic-banking entity," said Raj Mohamad, managing director at Five Pillars Pte, a consulting firm in Singapore. "If it materialises, it will augur well for Islamic banking and finance for not only Asia but also globally."

In the Indonesian plan, the government will ask the four lenders to provide 5 trillion rupiah to 10 trillion rupiah of capital to their Shariah banking units before the planned merger, Trihargo said. The combined entity will help manage about 70 trillion rupiah and this would be used to fund infrastructure projects, he said.

"Because of budget limitations, it's hoped that the parents of the Shariah banks will inject capital," said Mr Trihargo.

The proposed amalgamation is one of three options the authorities first mooted in May 2013 to boost Islamic banking assets, which are just over a 10th of neighbouring Malaysia's. The government also considered setting up a new state-controlled Islamic lender or converting an existing non-Islamic bank into a Shariah-compliant one.

The combined entity is expected to result in a quadrupling of Islamic banks' share of total banking assets to 20 per cent by 2018, compared with 10 per cent without the merger, the Indonesia Islamic Banking Association said in February.

"After each bank has reached a sufficient and healthy economic scale, only then should they be merged," said Imam Teguh Saptono, a Jakarta-based director at PT Bank BNI Syariah, the Islamic unit of Indonesia's fourth-largest lender. "The intention is really to increase the Shariah banking market share and produce an Islamic bank that's large and competitive."

The assets of Shariah-compliant lenders in Indonesia rose 12 per cent to 272 trillion rupiah in 2014, while those in Malaysia recorded a similar pace of growth to 625 billion ringgit (S$224 billion), official data show. Islamic banks in Southeast Asia's biggest economy had a combined 213 trillion rupiah of deposits at the end of March, 18 per cent more than a year earlier, according to the Financial Services Authority.

Indonesia's move marks the latest effort by the US$1.7 trillion Islamic finance industry to form a megabank.

Malaysia's central bank in 2009 proposed the creation of one to cement the nation's position as a sukuk hub. A license slated to be awarded in 2011 for a multinational lender to be formed between Asia and the Middle East didn't materialize. The second attempt was a merger between CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd, announced in October and aborted in January.

In the Middle East, the IDB's 2012 plan to form a mega lender with Riyadh-based Dallah Albaraka Group and the Qatari government also failed to materialize.

Indonesia's proposal aims to "create a catalyst in its Islamic banking sector," said Abas A Jalil, chief executive officer at Amanah Capital Group Ltd, a consultancy in Kuala Lumpur. "Indonesia needs to have bigger Islamic banks to finance infrastructure development programs and manage the growing Shariah-compliant deposits."

BLOOMBERG