Indonesia's Financial Services Authority (in Indonesian: Otoritas Jasa Keuangan, or OJK), the government agency that regulates and supervises Indonesia's financial services sector, urges the nation's sharia banks to become more selective in terms of disbursing credit in order to strengthen the quality of loans in Indonesia's Islamic finance industry.
Based on data from the OJK (Sharia Banking Statistics), the gross non-performing loan (NPL) ratio in Indonesia's sharia banking sector had actually gradually improved since the start of 2017 (see table at the bottom of this page). In September 2017 the NPL touched its lowest level at 4.41 percent. However, the NPL ratio then weakened rather rapidly to 4.91 percent in the following month.
Ahmad Soekro Tratmono, Head of Sharia Banking at the OJK, said the OJK does not discourage sharia banks to sell plenty of credit because credit growth is important for the economy. However, sharia banks need to become more careful. For 2018 the OJK has its sharia credit growth target set in the range of 10 - 12 percent year-on-year (y/y).
The most common form of financing in Islamic finance in Indonesia is murabaha, referring to a non-interest-bearing loan (interest payments are forbidden in Islamic law). In this structure the bank buys an item from a client for a predetermined profit over the cost of the item, then sells the item back to the client in installments (charging a flat fee).
Murabaha contributed 54.03 percent (IDR 325,69 trillion - or approx. USD $24.1 billion - per October 2017) to total credit disbursement in Indonesia's Islamic banking sector. Tratmono added that murabaha is also the most simple form of Islamic finance when purchasing, for example, a motorcycle or house.
Currently, there are 13 general sharia banks, 21 sharia units of conventional banks and 167 rural sharia banks (BPRS) active in Indonesia.
Non-Performing Loan Ratio in Indonesia's Sharia Banking in 2017:
Source: Business Indonesia