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Saturday, 7 June 2008

Indonesia MPs agree to pass Islamic banking bill


JAKARTA, June 5 (Reuters) - An Indonesian parliamentary working committee agreed to pass a new bill on Sharia or Islamic banking into law, a legislator said on Thursday, which would encourage growth of the country's Islamic finance sector.

Under the existing scheme, the parliament will hold a plenary hearing, which is expected to officially pass the bill agreed by parliamentary working committees.

The bill would allow foreigners to establish sharia banks in partnership with Indonesian citizens or local entities. It would also offer more flexibility to commercial banks, allowing them to convert their business into sharia-compliance banks.

Analysts say the long-awaited law will strengthen the regulatory environment and pave the way for further growth of Indonesia's market for Islamic finance. Around 85 percent of Indonesia's population of 226 million people are Muslim.

Indonesia passed a new law on sharia debt earlier this month, which will enable the government to tap a wider range of investors to help plug a higher state budget deficit due to soaring fuel subsidies.

The government had said it expected to sell a dollar sukuk to raise as much as $1 billion in October, and to raise the equivalent of about $1 billion from the sale of rupiah-denominated Islamic bonds in August.

"With this law, we hope that investors would have no more doubt in doing business in the Islamic banking sector. We expect in 15 years the total assets of Islamic banks to reach 20 percent of the total assets of domestic banks," Andi Rahmat, a lawmaker who is a member of a commission overseeing the banking sector, told Reuters.

Islam bans payment of interest, allowing money to be earned only from physical assets. It also bars investment in alcohol, tobacco or gambling.

Indonesia, the largest economy in Southeast Asia, has been slow to tap the fast-growing Islamic finance market, for example to fund its huge infrastructure needs, and has lagged Malaysia and Singapore in developing sharia-compliant products.

Indonesia's Islamic banking industry is still less than 5 percent of the total assets of Indonesia's domestic banks. That compared to a ratio of more than 12 percent in Malaysia.

But a growing number of Indonesian banks have started to enter the Islamic finance market by opening sharia-compliant units in anticipation of a growing domestic market and to draw investments from oil-rich Middle East countries.

Indonesia's central bank said three local banks -- state-owned PT Bank Rakyat Indonesia (BRI) BBRI.JK, PT Bank Bukopin BBKP.JK and PT Bank Negara Indonesia Tbk (BNI) BBNI.JK -- plan to open sharia-compliant units this year.

Global Islamic assets are growing at an annual pace of 20 percent and are set to hit $2 trillion in 2010 from the current $900 billion, thanks to a flood of petrodollars, Ernst & Young said in February.

($1=9,313 rupiah) (Reporting by Andreas Ismar and Muhamad Al Azhari; editing by Sugita Katyal)


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