The efforts by the Indonesian governmen to develop its Islamic financial market will encourage smaller Islamic banks in the country to consolidate and create a larger domestic sukuk market, says Moody’s Investors Service. The government is preparing a five-year plan to develop Islamic finance by encouraging the three large state-owned Islamic banks to merge. Moody’s says doing so will create more efficiency and is expected to spur smaller players to link up in order to compete with the new entity. The government is also preparing regulations that are more conducive to Islamic or Shariah banking. Among Sharia business tenets is a rule that prohibits banks from earning interest. Indonesia, which has the world’s largest Muslim population, currently has 12 banks that comply with Sharia principles. But while growth in Islamic banking has been in excess of 30% a year since 2005, when it accounted for 1.4% of the banking system, the Islamic banking sector still only captures a 5% share, said Khalid Howladar, Moody’s global head of Islamic Finance. By contrast, in Malaysia, where only 61% of the population is Muslim, Islamic banks garner a 20% market share.
