Indonesia: Plans unveiled for Islamic banking behemoth
Borobudur temple at sunrise, Java, Indonesia

In June, new Indonesian president Joko Widodo’s government announced plans to merge the Shariah-compliant units of four state-owned banks into one Islamic megabank.  Various lenders in both the Middle East and Malaysia have previously discussed similar megabank initiatives, but have never followed through on the execution. Malaysia’s latest attempt was a three-way bank merger, which fell apart in January 2015. The Islamic Development Bank, based in Saudi Arabia, had put a similar plan in motion in 2012, which also never materialized.

The Indonesian megabank is aiming to manage US$ 5.2bn, which would be used to fund the country’s infrastructure projects. Indonesia’s Islamic banking assets are a fraction of those in neighboring Malaysia, but Shariah compliance is growing at amazing speed with an average 43% annual growth rate over the past five years. Malaysia, Saudi Arabia, Iran, and the United Arab Emirates remain the largest markets for Islamic finance. Ernst and Young predicts that global demand for sukuk will triple between now and 2017, and that US$ 900bn in Islamic assets will be traded in 2017, up from US$ 300bn this year. Until a global standard for Islamic banking is agreed upon, though, effective governance structures and mainstream adoption will remain difficult.

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