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Indonesia's government roadmap will drive Islamic banking consolidation and growth

Despite growth rates in excess of 30% a year, the Islamic banking sector only captures a 5% share of the Indonesian banking system," says Khalid Howladar, Moody's Global Head of Islamic Finance. "The Indonesian government's Islamic finance roadmap should drive growth in the sector."
Chen says consolidation would also boost the banks' profitability levels and therefore their ability to generate internal capital and raise external capital. The higher profitability levels will in turn improve the attractiveness of the sector to investors; thereby driving growth in the sector.
Moody's report says that since the end of 2005, Islamic banking assets in Indonesia have expanded at a 33% compound annual growth rate; outpacing growth in the conventional banking sector, the latter of which has also shown rapid growth against the backdrop of robust economic growth and the low penetration rate of financial services.
But despite this strong growth, Islamic banking assets comprised only 4.6% of total system assets as of November 2014 — up from 1.4% at the end of 2005 — and the number of Islamic banks increased to 12 from three.
Moody's report points out that Islamic banks operate less extensive branch networks when compared to conventional banks, and their capital bases are smaller. Such banks also mainly focus on riskier customer segments such as retail, micro enterprises and small and medium-sized enterprises, rather than corporates.
The report says that Malaysia's sukuk market is the largest and most liquid globally, with a deep institutional investor base. This market took three decades to establish but has thrived over the last decade with the coordinated government support that Indonesia is now proposing.
Moody's report points out that Indonesia has an advantage in that it can look at policy initiatives globally and learn from the best practice of other jurisdictions, such as Malaysia.
The report also says that because Islamic finance is now commonplace among many Middle Eastern and Asian countries, there is now a much larger pool of stakeholders to support the global Islamic capital market; of which Indonesia is a key part.
According to Moody's report, Indonesia's large domestic population and affinity for Shari'ah-compliant finance makes it highly likely that the country will become a much more significant contributor to the Islamic capital markets in the future.

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