Indonesia's Conventional Banks to Spin Off Islamic Units by 2024
Indonesia's Financial Services Authority (OJK), the government agency that regulates and supervises the nation's financial services sector, is preparing a new regulation that requires conventional financial institutions in Indonesia to spin off their Islamic financial units before 17 October 2024. Islamic finance or Islamic banking is a type of banking that is in accordance to the principles of sharia (Islamic law). Based on the regulation, those financial institutions that generate at least 50 percent of their capital through Islamic finance have to comply with the new rule.
There are two strategies that can be applied by Indonesian financial institution to spin off their Islamic units. (1) establish a new financial institution set up in accordance with regulations that apply to Islamic financial institutions in Indonesia. (2) transfer all rights and obligations to an existing Islamic financial institution that already has all required permits.
The OJK will give dispensation to those Indonesian financial institutions that spin off their Islamic banking units before 2018. The dispensation involves allowing the new independent unit to have a minimum amount of equity of IDR 50 billion (approx. USD $3.6 million). Afterwards the equity bar will be raised to IDR 100 billion.
Adi Pramana, Chairman of the Indonesian Syariah Insurance Association (AASI), said - in response to Islamic financial institution's equity - that these new entities require time to boost equity gradually. Although nearly 90 percent of the Indonesian population is Muslim, assets controlled by Islamic financial institutions in Indonesia only account for five percent of the nation’s total banking assets, implying that it is a small market (but also has great potential for further growth). Therefore, Pramana agrees with the nine year transition period that is given to conventional financial institutions to spin off their Islamic units.
Read Analysis: Overview of Indonesia's Islamic Banking Industry
It is still being discussed whether - after the spin off - the conventional institutions are allowed to offer the Islamic banking products of the new independent entity.
One of the conventional companies that is ready to spin off its Islamic unit is Asuransi Jiwa Bersama, an Indonesian life insurance company. The spin off is scheduled for mid-2016.