ISLAMIC BANKING | Staff Reporter, Indonesia

4 culprits behind Indonesian Islamic banks' muted profitability

Poor asset quality is one.

Indonesian Islamic bank loan growth will remain sluggish in 2017 due to asset-quality issues, as banks focus on reducing non-performing loans (NPL) rather than growth, says Fitch Ratings in a new report. However, asset-quality deterioration should moderate in the near to medium term, as the operating environment gradually recovers and the industry's risk management practices slowly improve.

Here's more from Fitch:

Islamic banks' NPL (overdue more than 90 days) ratio remained elevated, at 4.3% at end-September 2016 (end-2015: 4.3%). It was higher than the 3.1% NPL ratio of conventional peers, suggesting that Islamic banks require further development of underwriting standards and risk controls. Islamic banks' NPL reserve coverage of 45.6% was significantly lower than that of conventional banks, at 108.7%, indicating a higher risk of near-term capital impairment.

Fitch expects the profitability of Indonesia's Islamic banks to remain muted in 2017, due to strong competition from conventional peers, poor asset-quality, a slow economic recovery and rising credit costs. The banks' ROA was 0.6% at end-September 2016 (end-2015: 0.5%), compared with 1.9% for conventional peers.

The regulator targets 10% market share for Islamic finance by 2020 and has provided industry support, including regulatory dispensations and sharia-compliant monetary instruments. Indonesia has the world's largest Muslim population, but Islamic bank market share has stabilised at around 5% since the rapid growth experienced to 2013. This suggests significant difficulties in achieving higher market share penetration.

Do you know more about this story? Contact us anonymously through this link.

Click here to learn about advertising, content sponsorship, events & rountables, custom media solutions, whitepaper writing, sales leads or eDM opportunities with us.

To get a media kit and information on advertising or sponsoring click here.