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Bank Syariah Indonesia targets nation's Islamic finance ambitions

Merged lender to issue global sukuk and serve micro and small businesses

Indonesia's Deputy State Enterprise Minister Kartika Wirjoatmodjo, center, poses with executives at the head office of new entity Bank Syariah Indonesia. (Photo courtesy of bank)

JAKARTA -- Indonesia is seeking to supercharge its Islamic finance ambition with the launch this week of the country's largest sharia-compliant lender, Bank Syariah Indonesia.

The new entity is the product of a merger between the sharia subsidiaries of the country's three top state-owned lenders -- Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia.

Bank Syariah Indonesia has total assets of 240 trillion rupiah ($17.1 billion), making it the country's seventh-largest lender in terms of assets. It operates 1,200 branch offices across the country, run by 20,000 employees.

The bank was automatically listed on the Indonesia Stock Exchange on Monday, taking over the slot of BRISyariah, Bank Rakyat Indonesia's subsidiary -- previously the only listed entity among the three state Islamic lenders. Its share price on Monday jumped nearly 15% to 2,800 rupiah, before falling back 7% on Tuesday.

The government has grand plans for the bank, including to boost Indonesia's Islamic finance and grow the overall sharia economy -- as well as to turn the bank into a global player.

"Indonesia has long been known as the country with the largest Muslim population in the world," President Joko Widodo said during the launching ceremony at the presidential palace in Jakarta. "It is about time Indonesia became one of the most advanced countries in terms of sharia economy development."

The government has been campaigning for the development of the sharia economy in recent years, seeing large growth opportunities in Indonesia's expanding middle class, at least prior to the coronavirus pandemic, and rising conservatism among its Muslim communities.

The latest annual State of the Global Islamic Economy Report, published by DinarStandard in November, ranks Indonesia fourth among Islamic economies -- after Malaysia, Saudi Arabia and the United Arab Emirates. It is up from fifth place in 2019 and 10th in 2018.

The ranking improvements have been buoyed mainly by Indonesia's flourishing halal food and modest fashion industries. In the Islamic finance segment, however, Indonesia ranks just sixth, reflecting sluggish growth of the sharia banking industry -- which accounts for just 6% of the country's total banking assets.

The establishment of Bank Syariah Indonesia is expected to change that.

"We're aware that our duty is not merely to merge these three banks, but also [to carry out] transformation through improvement of business processes, as well as strengthening risk management, human resources and digital technology," Bank Syariah Indonesia chief executive Hery Gunardi said.

He added the bank would focus on serving micro, small and medium-scale businesses, as well as retail and consumer segments. Despite compliance with Islamic principles -- in which loans are structured as profit-sharing agreements to comply with prohibitions on usury -- the bank will be "inclusive" and serve all customers, not just Muslims, Gunardi asserted.

Furthermore, Bank Syariah Indonesia is planning to tap wholesale banking as well as international business through the issuance of global sukuk, or Islamic bonds. "We're ready to make Bank Syariah Indonesia one of the 10 largest sharia banks in the world in terms of market capitalization over the next five years," Gunardi said.

Moody's is upbeat about the "significantly enlarged franchise," saying it will be credit positive for Islamic banking in Indonesia as it will drive the overall efficiency and competitiveness of the sector. Bank Syariah Indonesia is also expected to entice banking talent who have avoided working for smaller banks due to concerns over lower pay and poorer career prospects, which is "a perennial problem among existing Islamic banks," the credit ratings agency wrote in a note.

"Because of its enlarged capital, it can expand more toward larger corporates, which are generally less risky compared to smaller companies," Moody's said. "The bank will also have a better chance of accessing the global sukuk market with its bigger presence."

Additional reporting by Ismi Damayanti.

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