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demand for credit amongst individuals and businesses shows no real signs of slackening, even though interest rate margins in Indonesia are the highest in South-East Asia. Attempts by BI to introduce greater transparency into the marketplace seem to have done relatively little to drive down the cost of borrowing as, with few alternatives to bank lending, those wanting credit are forced to pay the price that is asked. However, given the historic volatility of the markets, banks to some extent may be forgiven for building an extra comfort factor into the price of money.
Sharia Take-Off
Indonesia may be the world’s largest Muslim country, but it has not taken the lead when it comes to Islamic finance, ostensibly happy to leave that role to Malaysia, which has imposed sharia banking as the norm. But with that market reaching saturation point and political unrest in a number of Middle East countries, this has given Indonesia the opportunity to catch up at a natural growth point for sharia compliant banking. Consequently, this has already seen some banks spinning off their sharia lending compo- nents to create stand-alone companies that conform to the special requirements regarding interest and excessive risk that the Islamic marketplace demands. With just 5 dedicated Islamic banks and 27 conventional banks with a separate sharia platform to handle Islamic transactions, there is much scope for growth, though this will require mass market education to improve the limited knowl- edge of the largely financially unsophisticated Muslim market as to how the financial community can best meet its needs. Though coming from a low starting point, the last five years have seen sharia banks achieving asset growth of nearly 40% compared to the 15% of conventional banks. Consumer lending to the sector has been strong, with auto financing in particular proving to be quite literally a driving force for growth, given that the vast majority of car purchases in Indonesia are made using loans. This trend is more than likely to continue as demand among the middle classes pushes the market forward. Interest has also grown in Islamic or sukuk bonds, which are now being used to fund both state infra- structure projects as well as private company investment. Howev- er, sharia banking regulations are still relatively complex, making transactions awkward and time-consuming, something that will need to be addressed if the market is to achieve its full potential.
Maturing Markets
Though considered small for a country of its size, the Indone- sian Stock Exchange (IdX) is being considered an increasingly attractive new destination by investors looking to move funds to more buoyant pastures and away from the uncertainties found in their traditional markets. This, along with a growing domestic appetite for shares, has bolstered the Jakarta Composite Index (JCI), helping it to become the best performing market in the Asia- Pacific region, and one that despite its previous reputation for volatility, has remained remarkably tranquil, even during the height of the recent Euro debt crisis. With that said, Indonesia’s capital markets remain relatively thin, with only a limited number of rather non-representative companies listed on the exchange. So while finance, commodities and consumer goods dominate the listings, they actually make up less than one third of GdP. Mindful of the situation, the IdX is looking to reinvent itself, turning to the Asian
development Bank to help it reform and boost capacity. However, along with a lack of corporate variety, there is also one other thing missing from the IdX and that is any real activ- ity from institutional investors. Though Indonesia does, of course, have pension funds, asset managers and insurance companies,
these are less energetic in the market than they are in other parts of the world, focused as they are more on capital preservation than capital gain. This means that once they have bought into large blocks of stock, typically blue-chip companies, they prefer to hold on to them, trading infrequently. The positive impact of this is that they create a ‘sheet anchor’ that stabilises the market, but the flipside is that it leaves capital illiquid, and trapped rather than flowing to where it is needed. The Asian financial crisis did have a significant impact on Indonesia’s capital markets, though this has been largely shaken off as Indonesia’s financial sector has devel- oped further. now banks are moving from their previous status as primarily small rural lenders and turning instead into national and international players with an active role in developing a real credit and capital structure for the country.
For the financial services sector, Indonesia is an increasingly open market, with huge potential for growth in both conventional and Islamic banking. And with the establishment of a new financial service regulator (OJK), there is growing confidence that Indone- sia’s markets are growing in stature and maturity. A strong sector will be essential as the middle class grows in numbers, and more and more Indonesians look to build ongoing relationships with fi- nancial providers. Inevitably, this growth will generate greater com- petition between banks, with the financial services market becom- ing ever more innovative as investment in new IT and systems leads to improved services and differentiated banking products. Similarly, the capital markets are responding, again demonstrating that they have the capacity to grow, and to resist the economic waves coming from elsewhere.
With Indonesia’s growth rate standing at 6.5% in 2012, and forecasts suggesting similar figures for 2013 and beyond, the country is once again presenting to the world an appealing eco- nomic landscape, something that has not gone unnoticed. This has seen the country’s credit rating lift to investment grade, helping ensure Indonesia will become an increasingly attractive proposi- tion for outside funds and all at cheaper rates. What’s more, as planned infrastructure building moves forward apace, this will stimulate further economic activity, with consequent beneficial ripples for the banking sector as more investors are attracted to the country, all helping position Indonesia as the largest and most important developing economy in South-East Asia.
FInAnCE & BAnKInG oVERVIEW
STRATEGY
IndonESIA 2013
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