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Capital Markets

Indonesia bank aims to upgrade shariah unit through IPO

BRI Syariah wants to take advantage of government support for industry

State-owned Bank Rakyat Indonesia is planning an initial public offering for its shariah-compliant subsidiary, BRI Syariah, to support expansion. (Photo by Erwida Maulia)

JAKARTA -- Indonesia's second-largest lender by assets, Bank Rakyat Indonesia, said on Thursday it wants to expand its shariah-compliant business with an initial public offering of subsidiary BRI Syariah, planned for early May.

BRI is targeting at least 1.3 trillion rupiah ($94.4 million) from the sale of 27% stake in the shariah unit, with 80% of the proceeds to be used to increase shariah financing for customers, and the rest to support digitization and upgrade branch offices. BRI is conducting a domestic roadshow for the IPO until April 20.

The state lender is pressing ahead with the plan despite the lackluster performance of BRI Syariah last year, which booked a 40% drop in net profit to 101 billion rupiah ($7.3 million). Shariah banking in Indonesia is failing to grow as fast as expected. Despite showing higher growth than conventional banks in recent years, shariah banking still accounts for just 5% of the national banking industry.

BRI President Suprajarto, however, believes there is large untapped potential in the country's shariah banking market, given the large Muslim population and the underdeveloped nature of shariah banking, which makes most Muslim customers still prefer conventional banks.

He also dismissed concerns over unfavorable market conditions and investors' generally low appetite for IPOs of Indonesian state-owned enterprises last year. "We believe investors will not see this from a narrow angle, but will talk about prospects. And the prospects are enormous."

The IPO proceeds are expected to help BRI Syariah increase its core capital to at least 5 trillion rupiah -- the minimum amount required for an Indonesian bank to reach the so-called BUKU 3 category and therefore offer more advanced services. The core capital of BRI Syariah, currently a BUKU 2 bank, hovers around 3.5 trillion rupiah, following a capital injection of 1 trillion rupiah from its parent in February.

"The BUKU 3 status will allow us to move more freely with our businesses, so we can broaden our services to the public," BRI Syariah President Moch. Hadi Santoso told reporters, citing plans to open custodian and trustee businesses.

He added the government's support for the shariah finance industry will help it grow -- including with a new policy stipulating that only shariah banks are allowed to manage the funds of Indonesian hajj pilgrims, which reached an estimated 100 trillion rupiah last year.

BRI Syariah is the fourth-largest shariah lender in Indonesia in term of assets. Bank Syariah Mandiri, a subsidiary of state lender Bank Mandiri, is the market leader. With the IPO, however, BRI Syariah will be the first state-owned shariah lender listed on the Indonesia Stock Exchange.

"We as the parent company hope that BRI Syariah will grow to become the largest shariah bank in Indonesia," Suprajarto said. "We will support it fully, including with technology support."

BRI, Indonesia's most profitable bank, prides itself on its advanced technology. With the launch of BRISat in June 2016, it became the world's first bank to run and operate its own satellite.

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