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Finance

Indonesia's state banks seek to spark sharia sector via mergers

Combining BRI, Mandiri and BNI units will make country's 8th-largest lender

Bank Mandiri together with Bank Rakyat Indonesia and Bank Negara Indonesia have signed a "conditional merger agreement" for their sharia banking units.   © Reuters

JAKARTA -- Indonesia's three state-owned banks will merge their sharia banking units to create one of the country's biggest lenders, as the government tries to kick start a sector that has stagnated despite a vast Muslim population.

Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia have signed a conditional merger agreement for their Islamic banking units, according to a filing to the stock exchange on Tuesday, with BRI's sharia unit bearing the name of the entity.

The new bank will have combined assets of 207 trillion rupiah ($14 billion), the Ministry of State-Owned Enterprises said, making it the eighth-largest lender by assets in the country, according to data from FactSet.

The merger is slated to complete next year and is still subject to approval from regulators and shareholders.

Shares in BRISyaria -- the only listed sharia unit among the three state-owned banks -- ended Wednesday's trading some 64% above Friday's close.

The deal marks "the beginning of a historic process for the birth of a global caliber national Islamic commercial bank," said Erick Thohir, minister of state-owned enterprises. "Indonesia's desire to have the largest national Islamic commercial bank in 2021 is part of the government's efforts, and commitment to develop and make the Islamic financial economy a new pillar of national economic strength."

Despite Indonesia having the world's largest Muslim population of more than 200 million, sharia banking and financing -- in which loans are structured as profit-sharing agreements to comply with prohibitions on usury -- has failed to take off in the archipelago. Sharia banking accounted for less than 6% of the banking market in 2019, while neighbor Malaysia had an Islamic financial market six times bigger in 2018, according to research firm DinarStandard's State of Islamic Economy Report.

Bank Muamalat, the country's oldest sharia-compliant bank, nearly collapsed last year under the weight of plunging profits and bad financing.

Indonesia is keen to position the country as the hub of the region's Islamic economy. The country's five-year master plan aims to increase the market share of Islamic financing in the country to 20% by 2024, far higher than the 8.6% in 2018.

Experts differ on the outlook of the industry. Ratings agency Moody's said in a report this year that there is "significant pent-up demand for Shariah-compliant financial services" in Indonesia, particularly among the underbanked rural populations, who have been becoming more religious in recent years.

But a 2018 survey by PwC said most bankers in Indonesia predicted little growth in sharia banking over the next eight years.

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