By Karnoto Mohamad
THE map of Islamic banking competition has entered a new phase. In 2020, assets of BNI Syariah and BRI Syariah have overtaken Bank Muamalat, the first Islamic bank in Indonesia to have dominated the Islamic banking market until 2007. Bank Syariah Mandiri has overtaken Bank Muamalat in 2008. In 2021, the three Islamic commercial banks that are owned by banks of State-owned enterprises (BUMN) will increasingly leave Bank Muamalat behind. This is because the three Islamic commercial banks were in the middle of a merger to become Bank Syariah Indonesia (BSI) with assets were 4.7 times larger than the assets of Bank Muamalat.
According to Infobank Research Bureau (BirI), the combined three Islamic banks’ assets will be Rp 227.91 trillion in September 2020 and Rp 239.56 trillion in the end of 2020. BSI controls 60,77% share of Islamic commercial banks’ assets and 40,53% of total Islamic commercial banks’ assets plus 20 Islamic business unit. Apart from becoming increasingly dominant in the Islamic banking market, BSI’s position on the banking industry stage should also be taken into account because it is in the seventh position of the largest banks in the country. “We immediately become the seventh largest bank, and we want to move up to the top five,” said Hery Gunardi, the President Director of BSI to Infobank in mid January 2021. Apart from being leading in the Indonesian market, BSI also has the ambition to be among the top 10 Islamic banks in the world in terms of market capitalization by 2025.
However, Bank Muamalat should not be discouraged. Its position in the national sharia banking industry is still quite good. After being in the fourth largest Islamic commercial bank in 2020, Bank Muamalat becomes the second largest Islamic commercial bank; there are 10 other Islamic commercial banks that are smaller in size. Therefore, the position of Bank Muamalat is a market challenger, even though the gap from the biggest Islamic commercial banks seems so far. Having 1.6 million customers, Bank Muamalat still has the opportunity to operate effectively.
In addition, Bank Muamalat still has the top of mind in Hajj and Umrah business services. The bank has strong connections with Islamic organizations and has a very loyal customer base. “Besides, we are the only full branch of a sharia bank from Indonesia that has branch offices in neighboring countries and can serve regional customer transactions,” said Achmad Kusna Permana, the President Director of Bank Muamalat to Infobank in the middle of last month.
Bank Muamalat had ever run fast until 2013, before, finally, it struggled due to being too aggressive, so that the quality of its assets declined and needed capital strengthening. Unfortunately, the shareholders did not provide support for additional capital for this bank so that the Government had offered an option for state-owned banks to assist the bank that is also the first Islamic bank in the country last year. Bank Muamalat, which has been operating for 30 years, continues to try to attract new investors to strengthen its capital and improve its financial performance.
Bank Muamalat is currently hoping for investment from the Hajj Financial Management Agency (BPKH). “The process of corporate action to strengthen Bank Muamalat’s capital has made significant progress, including the deposit of funds that we have received. BPKH is a very suitable institution because its activities are the same as one of the business focuses of Bank Muamalat, namely haj services,“ Permana explained.
Bank Muamalat’s strengthening of capital is urgent because the capital adequacy ratio (CAR) as of September 2020 was at 12.48%, far below the average CAR of Islamic commercial banks which reached 20.41%. Bank Muamalat’s core capital is also significantly less than the core capital of Bank BTPN Syariah, whose assets are three times smaller. With a capital of Rp 5.17 trillion as of September 2020, BTPN Syariah is in the group of BUKU 3. Meanwhile, Bank Muamalat is still in the group of BUKU 2, because its core capital is still Rp 3.42 trillion. Other Islamic commercial banks which are in the group of BUKU 2 are Bank Aceh Syariah, Bank NTB Syariah, Bank Panin Dubai Syariah, Bank Mega Syariah, and Bank BCA Syariah. The majority of them are less than 10 years old.
Meanwhile, four other Islamic commercial bnaks (BUS) that are still in the group of BUKU 1 are Bank BJB Syariah, Bank Syariah Bukopin, Bank Victoria Syariah, and Bank Net Indonesia Syariah. In fact, until the end of 2020, all commercial banks must meet a minimum core capital of Rp 1 trillion according to capital based on the Financial Services Authority’s Regulation (POJK) Number 12/POJK.03/2020 on Commercial Banks’ Consolidation. All commercial banks that do not yet have a minimum core capital of Rp 3 trillion must submit an action plan to reach it by the end of 2022 and BPD will be tolerated by the end of 2024. If OJK is strict with the regulations that it has made, then, Islamic commercial banks that cannot meet the capital requirements are threatened downgraded into becoming people’s credit bank (BPR). The promising market of the sharia economic should make shareholders optimistic about strengthening the capital of Islamic banks. The potential for the Indonesian halal industry is estimated at Rp 6.545 trillion. The magnitude of this value is supported by the large Muslim population in Indonesia. The adult Muslim population, which was estimated 161 million in 2015, is projected to increase to 184 million in 2025. Even more interesting, the majority or 57.5% of them belongs to the upper middle class.
The large Muslim population does not necessarily make the Islamic economy develop rapidly. The level of penetration of the Indonesian Islamic market is still very low or 4.1%, compared to Saudi Arabia (66.4%), Kuwait (42.6%), Malaysia (28.9%), Bahrain (27.1%), or Qatar (20.8%).
The expansion of Indonesian Islamic banking has not been able to break the blockade of conventional banks that have been operating for a long time. The market share of Islamic banking was 5%, which was only achieved in 2013. Then, for the next seven years, it could only increase the market share to 6.29% (per October 2020).
In fact, many socializations have been carried out by the Government and regulator such as Bank Indonesia (BI) and OJK. President Joko Widodo also “intervened” by forming the National Sharia Finance Committee (KNKS) in 2016. Now, it becomes the National Committee for Sharia Economics and Finance (KNEKS).
To mobilize all available resources, stakeholders have long established the Sharia Economic Community (MES), which is led by Erick Thohir, Minister of BUMN. Erick has been in the position since January. He replaced Wimboh Santoso, Chairman of the OJK Board of Commissioners. In fact, the Government of Aceh is even more aggressive by issuing law and regulation (qonun) of Sharia Financial Institutions (LKS) Number 11 of 2018 which force all financial institutions including banks operating in Aceh province to use based on sharia principles no later than three years since the Qanun has been enacted.
When Bank Indonesia (BI) made a macroprudential policy, Islamic banking also received more lenient treatment, for example in the statutory reserve requirement (GWM) and loan to value (LTV). Likewise, OJK previously provided incentives for UUS who wanted to spin-off before 2023, it was enough to spend only Rp 500 billion in capital, or half of the capital requirement of Rp 1 trillion.
According to Law (UU) Number 21 of 2008 concerning Islamic Banking, Islamic business groups (UUS) whose assets reach 50% of the total assets of its parent banks are required to do a spin off. The 50% portion of the parent asset is actually a calculation of the economies of scale that are deemed sufficient for UUS to be able to operate competitively when separated from its parent. However, the incentive for the UUS spin-off provided by OJK did not get a response until the bank consolidation POJK appeared. “With PJOK bank consolidation, UUS must have a capital of Rp 1 trillion to become a bank business group,” said Anung Herlianto, Executive Director of Banking Research and Regulation at OJK to Infobank in the mid of last month.
According to BirI data, among 20 UUS belonging to conventional banks, there are four UUS whose assets are more than Rp 20 trillion. In fact, as of September 2020 UUS Bank CIMB Niaga’s assets have reached Rp 44 trillion, or beat the assets of 79 conventional commercial banks. It approaches Bank Muamalat’s assets as the second largest BUS after BSI. However, the amount of UUS assets is still 16.04% of the assets of Bank CIMB Niaga.
According to Pandji Jajanegara, the Sharia Director of Bank CIMB Niaga, the bank already has a plan to separate its sharia business unit from its parent in 2023. “Even though the COVID-19 pandemic has dampened our plans for spin-off preparations, we are still on track and, earlier this year, we made soft preparations for the spin-off. But if there is a banking omnibus law that allows postponement of the UUS spin-off, then we will temporarily choose as UUS, “Pandji told Infobank last month.
According to the Infobank Institute, UUS spin-off is a strategic step that must be decided not because of the capital incentives previously provided by OJK. Conventional banks that decide to spin off must be based on careful calculations whether their sharia business unit will be successful after being separated. The level of success of BUS is certainly influenced by economies of scale, capital, and the availability of qualified Islamic bankers in both leadership and operations, as well as technological infrastructure.
Therefore, the success of the spin off is not merely a matter of capital, so it is natural that no conventional bank will separate its UUS because it is to take advantage of OJK’s incentives. In addition to not having competitive economies of scale, UUS is more efficient by staying in one place with its parent company, because it can take advantage of shared services from the existing infrastructure. Hence, the ratio of operating costs to operating income (BOPO) of UUS is lower than that of BUS.
According to BirI, almost all BUS have a ratio of operating costs to operating income (BO/PO) above 80%. Apart from BTPN Syariah, all BUS have BO/PO above 81%. There are eight BUS have BO/PO above 90%. Meanwhile, many BO/PO UUS are below 80% because they can take advantage of shared services from the infrastructure owned by their parent companies. To run faster, Islamic banking must overcome its shortcomings, from the side of efficiency, human resources (HR), capital, and asset quality.
The impact of the COVID-19 pandemic has also spurred Islamic banks to accelerate what should be improved. For example, digital technology infrastructure to support efficient and up-to-date operations, including digitizing products and services. Likewise, from a less competitive funding structure so that Islamic banks have to pay higher returns to get third party funds (DPK). Although the ratio of cheap funds to third party funds in BUS increased from an average of 44.87% as of September 2019 to 52.89% as of September 2020, it is still lower than the ratio of cheap funds to third party funds in national banks which was 54.20%.
Then from the capital side, a bank must have a capital design that is able to withstand banks from crisis fluctuations and absorb various risks, especially due to the decline in asset quality. Although non-performing financing (NPF) BUS decreased from 4.76% in 2017 to 3.26% in 2018 and in October to 3.15%, low-quality financing is getting bigger. This can be seen from the loan at risk BUS which increased by 15.27% in September 2019 to 29.33% in September 2020.
The Islamic banking industry faces short-term challenges in managing its portfolio because the impact of the COVID-19 pandemic will still be felt throughout 2021. According to John Kosasih, the President Director of BCA Syariah, the quality of a bank’s assets is very important to be maintained. “Alhamdulillah, the quality of our bank’s assets is still well maintained. The gross NPF is only 0.50% and the net is 0.01%. Only 18 of our debtors are included in the collectability of three to five or NPF,“ he said.
Meanwhile, competition challenges such as the presence of a larger size BSI actually encourage other Islamic banks to increase their competitiveness. “The competition is positive because it requires all Islamic banks to consistently innovate service products, improve service quality, technology infrastructure, and so on,” added John Kosasih.
Achmad K. Permana said the same thing. The birth of BSI should have a positive impact because it will expand the market share of Islamic banking and increase Islamic financial literacy and inclusion in general. “Increasing Islamic financial literacy and inclusion will also have a good impact on the business growth of Bank Muamalat which already has a very strong brand,” he explained.
The huge potential of the Islamic economic market with low Islamic financial literacy is a challenge for the Islamic banking industry to be more active in educating, socializing and developing products and services in accordance with market demands. The new Islamic banking market share of 6.29% is an indicator that what Islamic banks have achieved is far below the industry. The Islamic banking industry should not be lulled by the huge potential of the halal industry and feel that there is a vast land life but in fact it is difficult to compete against conventional banks. It should be noted, the market is very rational so that Islamic banks must also be part of a rational market like conventional banks do. To be part of a rational market, Islamic banks must have the right marketing strategy, a good portfolio, operations that create competitiveness with a technology system that produces competitive products and services, and the presence of the best people. (*)
