Indonesia's sharia banks to maintain returns

JAKARTA (Reuters) - Indonesia's Islamic banks could offer investors twice the returns of conventional lenders in coming years, driven by solid demand for Islamic products in the world's most populous Muslim nation, and despite growing competition, a banker said.

Beny Witjaksono, president director of Bank Mega Syariah Indonesia, the country's fourth-largest Islamic lender, told the Reuters Islamic Banking and Finance Summit he expected his bank to post a return on equity (ROE) of around 40 percent this year.

That would be in line with the trend in the sharia banking industry in Indonesia, and about twice the ROE for conventional banks.

Indonesian banks, both conventional and Islamic-compliant, have attracted strong foreign interest in recent years, with about half of the country's total banking assets in the hands of foreign-controlled lenders.

Islamic banking assets in Indonesia have seen annual growth of about 40 percent in recent years, but still account for just 2.5 percent of Indonesia's total banking assets of $270 billion, providing strong potential for growth.

"Our return on equity was above 40 percent in the past four years, except in 2008 when it was 11 percent because of large expansion," Witjaksono told the summit.

He forecast ROE growth would be sustainable at a similar rate in coming years.

The bank expected an after-tax profit of 66 billion Indonesian rupiah ($7 million) this year, up from 63 billion rupiah last year, he said.

HIGH PROFIT BUT RISING COMPETITION

Witjaksono said profitability was being driven by strong demand for Islamic products, steady economic growth and finance fees now at around 20 percent, almost twice the rates for conventional banks.

Fees are higher due to the structure of the loans requiring Islamic banks to take a more active role in the lending process.

Under Islamic law, sharia banks are banned from charging interest. Borrowers may obtain funds from Islamic banks in the form of profit sharing, partnership or a joint venture, or alternatively a scheme where banks buy products such as motorcycles and sell them to the bank customers at a profit.

Competition was getting tough, however, with the expected entry of at least three more fully-fledged Islamic banks this year, adding to six sharia banks and 25 sharia banking windows, or specialist units, already in operation, he said.

The three Islamic banks due to be launched this year included those controlled by major lenders Bank Central Asia (BBCA.JK) and Bank BNI (BBNI.JK).

"Our big competitors from foreign banks include HSBC (HSBA.L) and Standard Chartered Bank (STAN.L). But the biggest threat comes from Malaysia and Singapore, through CIMB Niaga (BNGA.JK) and Danamon (BDMN.JK) because they target the same markets as ours," he said.

CIMB Niaga is controlled by Malaysia's Bumiputra-Commerce Holdings Berhad (CIMB.KL), while Bank Danamon is controlled by a consortium including Singapore's state investor Temasek Holdings TEM.UL and Deutsche Bank (DBKGn.DE).

Witjaksono said one of the challenges faced by Indonesia's Islamic banking sector -- which is less than two decades old compared to its conventional peers which have been around for 100 years -- was the lack of skilled workers, leading to a high cost of retaining employees.

Bank Mega Syariah Indonesia was also considering issuing a subordinated sukuk, Islamic debt, worth around 300 billion rupiah in the first half of 2010 to strengthen its financial position, he said.

($1=9345 Rupiah)

(Additional reporting by Sonya Angraini; Editing by Ed Davies and Rupert Winchester)