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JULY 21, 2000 VOL. 26 NO. 28 | SEARCH ASIAWEEK

Islamic Finance 101
Shariah lenders make headway in Indonesia
By Warren Caragata Jakarta

After three decades of life at sea, it was time for Indonesian captain Ratmoko to go ashore in 1991. He could have spent his retirement playing golf. But Ratmoko chose to pool his savings with his brother and start freight forwarder Multitrans Group. The business flourished. Then came the 1997 Asian Crisis. Indonesian interest rates skyrocketed. Companies folded one after the other. But not Multitrans. "The crisis had little effect on us," says 64-year-old Ratmoko, who keeps a model of a sailing ship in his office and races Harley-Davidson motorcycles. Last year, his privately held company earned $500,000 on revenues of $4.5 million.

Ratmoko chalks up his success to an unusual relationship with an unusual banker. Instead of charging him interest on his loans, Bank Muamalat gets a share of the revenues from the Multitrans projects it funds. "It's more like a partnership," says Ratmoko. Founded in 1992, Bank Muamalat is Indonesia's first Islamic bank. It operates according to the tenets of the Koran and Sharia law, which prohibit charging interest on loans and paying interest on deposits. Controlled by the Jeddah-based Islamic Development Bank, Muamalat (1999 assets: $88.3 million) typically gets between 6% to 8% of its clients' sales, on top of regular repayment of the principal it is owed.

Islamic banking is catching on in Indonesia. Bank Muamalat, with its 41 branches and cash offices across the country, has been followed by state-owned Bank Mandiri Syariah, which has seven offices. Two conventional financial institutions, Bank Negara Indonesia and Bank IFI, have set up Islamic branches. Eleven conventional banks with operations in Aceh province are studying the conversion of their branches in the northern Sumatra territory, says Mulya Siregar, a senior analyst at the central bank's newly established Sharia division. Separatists demand the imposition of Islamic law in Aceh. The central bank recently issued regulations to monitor Sharia institutions and help them manage liquidity.

It wasn't always so. Former presidents Sukarno and Suharto were wary of promoting Islamic law in a multi-religious and multi-ethnic country, even though Muslims make up the majority of Indonesia's 209.4 million citizens. Suharto's successor, B.J. Habibie, was less reticent --he is credited with giving Islamic banking a big boost. The nation's current president, Abdurrahman Wahid, who used to head a major Muslim organization, has also been encouraging. A key reason: Islamic banks do not require collateral. Most small Indonesian companies do not have assets to back loan applications. "Sharia banking will never be a substitute for conventional banks," says Adi Sasono, who was cooperatives minister under Habibie. "But it is one alternative for small businesses."

Islamic banks currently account for less than 1% of the total assets of Indonesia's banking system, even though they have been growing at a fast clip -- they had $140 million in assets in 1999, 90% more than in 1997. Indonesians long used to earning regular interest on their accounts have to adjust to the way Sharia banking works. Account-holders are not depositors but investors who get a share of an Islamic bank's revenues (and thus always get a return even if the bank were to post a loss). Borrowers must be prepared for regular and close scrutiny of their operations. Bank Muamalat, for example, requires borrowers to deposit all revenues in Muamalat accounts.

Having your banker look over your shoulder can take some getting used to, but Ratmoko says it is worth it. Multitrans is not locked into paying a set amount representing interest on its loans regardless of its business results -- the amount it pays depends on its revenues. The company does almost all its banking with Muamalat, although Ratmoko admits he still uses a conventional bank for personal needs. The reason has nothing to do with Sharia and everything to do with the convenience of a bank with a bigger branch network and more ATMs.

Muslims are the natural market for Sharia banks, but anyone can open an account or arrange financing (although pig farms and other unIslamic projects will not be funded). Siti Mila, Ratmoko's account manager at Bank Muamalat, says she has many non-Muslim customers. Muslims are not coerced into doing business with Muamalat either. "If we provide them with good products and services, they will come," says Adiwarman Karim, a vice-president at the bank's research and training institute. "They should do it because they are willing, not because they have to."

Other financial institutions are getting interested. The Jakarta Stock Exchange has just added a Sharia index of 30 companies that follow Islamic teachings. Danareksa Fund Management has launched a mutual fund that invests in such stocks. Danareksa president Iwan Pontjowinoto is also trying to set up an Islamic money-market fund that will help Sharia banks handle excess liquidity. Doing things the Islamic way is hard work, he says, but it "is a matter of faith." Provided Islamic banks remain prudent and vigilant, it can also be good for business. Just ask Ratmoko.

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