Indonesia on the move to create megabank

Despite the recent failure to create an Islamic megabank in Malaysia through a three-way bank merger, Indonesia is forging ahead with its own version of the first Islamic mega bank, UAE-based news service CPI Financial reports, citing Bloomberg.

The US$8 billion merger, first proposed in May 2013, would link the shariah-compliant units of the government controlled Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia. Combined, these banks account for up 40 per cent of the Islamic banking industry, according to the Indonesian Finance Ministry.

However, the major hurdle for this deal - like the Malaysian three-way bank merger that was abandoned last month - is convincing interested parties and institutions that the setting up of an Islamic mega bank would make business sense.

Some supporters are relying on a "build it and they will come" argument. For instance, the chairman of Indonesia's Financial Services Authority, Muliaman Hadad, said a large Islamic lender would help improve public awareness of shariah-compliant finance, reduce operating costs and allow financing of big infrastructure projects.

And in previous comments reported by Bloomberg, Islamic Development Bank president Ahmad Mohamed Ali said that a highly capitalised Islamic mega bank would be able to raise further funding for large projects by issuing a series of sukuk (Islamic bonds) with a variety of maturities in diversified sectors and regions.

The potential for growth is apparent, with Indonesia's Finance Ministry data showing that only six per cent of Islamic bank loans fund construction, 2.8 per cent go to agriculture and 2.4 per cent into mining, compared with 33 per cent for business services.