Five Indonesian banks set to launch Islamic units

* BI says sharia units can become sharia banks in one month

* Revised law on VAT encouraging banks to set up sharia units

* Paper reports U.S. insurer looking at buying sharia bank

By Sonya Angraini and Gde Anugrah Arka

JAKARTA, Oct 23 (Reuters) - Five Indonesian banks including Bank Central Asia (BBCA.JK), the No. 3 lender, expect to launch standalone sharia units next year, boosting the sharia market in the world's most populous Muslim nation, officials said.

Industry officials said the revised law on value added tax, which removed double taxation in the Islamic market, would encourage more banks to set up Islamic banking subsidiaries. The double taxation had made Islamic transactions more expensive than comparable conventional deals.

"We hope that it would be easier for us to expand business and seek strategic partners. We also hope to grow faster and attract investors from Middle East," said Barno Sudarwanto, head of planning and development at the sharia unit of Bank Negara Indonesia (BBNI.JK), the No. 4 bank, which will be spun off.

Others due to set up separate sharia banking units include mid-sized lenders Bank Panin (PNBN.JK), Bank Victoria (BVIC.JK) and unlisted Bank Jabar Banten.

Investor Daily newspaper on Friday reported that a U.S. insurance firm had met with central bank officials this week to discuss the possibility of buying an Islamic-compliant lender in Indonesia, without giving details.

Conventional banks typically set up their Islamic subsidiaries by first setting up Islamic banking departments and later on converting them into separate Islamic banks. Others, including BCA, may acquire smaller conventional banks and turn them into Islamic subsidiaries.

"I expect to see more banks spinning off their sharia units as the new VAT law which scraps double taxation from sharia transactions will take effect next year," said Adiwarman Karim, chief of Karim Business Consulting.

The firm offers consultancy services on the Islamic market, including the establishment of Islamic banks.

Indonesia currently has five sharia banks and 24 commercial banks with sharia units as of August 2009, out of around 130 commercial banks operating in Southeast Asia's biggest economy.

ACQUISITIONS BCA vice president director Jahja Setiaatmadja told Reuters the bank was in the final stage of setting up such a unit, adding that operations may start in January. He declined to give further details.

BCA, with a stock market value of $12 billion, acquired Bank UIB in October 2008 and planned to convert the small lender into a sharia bank.

Ramzi A. Zuhdi, director in charge of Islamic banking at the Indonesian central bank, said it took about a month for banks to obtain approvals to convert their Islamic banking units into Islamic banks if all the administrative requirements were met.

In neighbouring Malaysia, seen as the Islamic financial hub in Asia, domestic banks can immediately convert their Islamic units operating under the parent companies into separate entities, said Vaseehar Hassan Abdul Razack, chairman of Unicorn International Islamic Bank Malaysia.

Riawan Amin, the chairman of Indonesia's association of Islamic banks (Asbisindo), said it often took longer than initially expected to launch Islamic banks in the country due partly to administrative reasons such as in recruiting employees. (Additional reporting by Dicky Kristanto in Jakarta and Y-Sing Liau in Kuala Lumpur, Editing by Sara Webb)