MICROCAPITAL BRIEF: Microfinance Dominates Shariah Lending in Indonesia, Commercial Banks Take Notice

The market for Shariah loans, those that are in compliance with Islamic law, has reportedly been dominated by microloans, prompting several of Indonesia’s commercial banks to focus on offering the small loans in underserved areas. Andri Vendredi, head of the Jakarta branch of PT Bank Syariah Mandiri (Bank Mandiri), which plans to open new branches in Jakarta and Sumatra to offer microfinance services, reportedly stated that 90 percent of Indonesia’s 50 million microentrepreneurs do not have access to financial services. Indonesia’s Central Bank calculated that microfinance accounts for 70 percent of Islamic lending and predicted that outstanding Shariah microloans may increase from a September 2010 figure of IDR 42 trillion (USD 4.6 billion) to approximately IDR 45 trillion (USD 5 billion) by year-end.

Banks offering Shariah-compliant loans most often practice Murabaha, or “cost plus markup” sale contracts (Shariah-compliant trading), which charge a marked-up price of assets instead of interest. According to CGAP (Consultative Group to Assist the Poor), a policy and research center dedicated to providing financial access for the world’s poor, over 70 percent of Islamic microfinance institutions practice Murabaha.

About PT Bank Syariah Mandiri (Bank Mandiri): Bank Mandiri was formed in 1998 as part of the government of Indonesia’s bank restructuring program. In 1999, four state-owned banks Bank Bumi Daya, Bank Dagang Negara, Bank Exim and Bapindo were amalgamated into Bank Mandiri. Bank Mandiri provides financial services to private and state-owned businesses as well as individuals, including microentrepreneurs. As of 2009 Bank Mandiri reported total assets of IDR 319 trillion (USD 35.1 billion) and 956 domestic branch offices.

By Diana Baide, Research Assistant

[1] Bloomberg Businessweek. “Microfinance Dominates Indonesian Shariah Loans: Islamic Finance” by Soraya Peratasari, 23 November 2010

http://www.businessweek.com/news/2010-11-23/microfinance-dominates-indonesian-shariah-loans-islamic-finance.html

MicroCapital’s Microfinance Universe profile: Bank Mandiri

https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bank+Mandiri

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