Moody’s: Merger of Sharia Banks will be Credit Positive for Islamic Banking

PT Bank Negara Indonesia Tbk (IDX: BBNI) (Baa2 stable, baa31), PT Bank Rakyat Indonesia Tbk (IDX: BBRI) (Baa2 stable, baa2), and PT Bank Mandiri Tbk (IDX: BMRI), (Baa2 stable, baa3), signed a conditional agreement that will merge their Islamic subsidiaries to create the largest sharia bank in Indonesia - Photo by the Company

JAKARTA (TheInsiderStories) – PT Bank Negara Indonesia Tbk (IDX: BBNI) (Baa2 stable, baa31), PT Bank Rakyat Indonesia Tbk (IDX: BBRI) (Baa2 stable, baa2), and PT Bank Mandiri Tbk (IDX: BMRI), (Baa2 stable, baa3), signed a conditional agreement that will merge their Islamic subsidiaries to create the largest sharia bank in Indonesia.

This will be credit positive for Islamic banking in the country because it will create an Islamic entity with a significantly enlarged franchise that will drive overall efficiency and competitiveness of the sector. BBRI’ publicly listed subsidiary, PT Bank BRISyariah Tbk (IDX: BRIS), will be the surviving entity, with BBNI, BBRI and Mandiri remaining as shareholders.

Moody’s Investor Service said in the latest report, the proposed merger, which the parties expect to complete by February 2021, would create the seventh-largest bank in Indonesia by assets. In addition to greater economies of scale, the enlarged franchise will help raise awareness of Islamic banking and spur further demand for sharia-compliant financial products and services.

Moreover, it will also entice banking talents who have avoided working for smaller banks on pay and career concerns, a perennial problem among existing Islamic banks. The surviving entity will also be able to diversify its financing mix and funding sources for risk management purposes.

Because of its enlarged capital, it can expand more toward larger corporates, which are generally less risky compared to smaller companies. The bank will also have a better chance of accessing the global SUKUK market with its bigger presence. The proposed merger is part of the Indonesian government’s plan to develop its Islamic economy.

Despite having a large, Moslem-majority population, Islamic banking in Indonesia is under penetrated compared to its regional peers such as Bangladesh, Brunei and Malaysia. The sector’ assets accounted for only 6 percent of total banking assets as of July, 31, 2020.

Among other reasons, the penetration of Islamic banking in Indonesia is low because the Islamic banks are individually small and therefore unable to generate strong awareness and demand for sharia-compliant financial products. They also lack the economies of scale that their conventional peers enjoy. Islamic banks are therefore less profitable than conventional banks as they are less cost-efficient and rely more on costlier time deposits for funding.

While, their asset quality has improved in recent years, although the coronavirus pandemic will likely disrupt the improving trend.

Edited by Editorial Staff, Email: theinsiderstories@gmail.com