Car Loan Rules Spur Indonesian Shariah Lending
Indonesian consumer-finance companies are turning to Shariah-compliant lending after regulators tightened rules on non-Islamic loans for buying cars and motorcycles.
PT Adira Dinamika Multi Finance, the nation’s largest, started a business complying with the Muslim faith in July and expects it to eventually account for as much as 20 percent of operations, Sylvanus Gani Mendrofa, head of the corporate secretary division, said in an Aug. 28 interview in Jakarta.
Shariah lenders PT Amanah Finance and PT Al Ijarah Indonesia Finance said loans will grow at least 30 percent per annum in the next few years, faster than the 23 percent growth for the whole industry over the past five years.
Lenders must receive deposits of at least 25 percent of the value of cars and 20 percent for motorcycles, the finance ministry said in March. Buoyed by one of the fastest economic growth rates in Asia, Indonesian car and motorcycle sales surged by an annual average of 41 percent and 55 percent, respectively, since 2007, data from the Association of Indonesian Automotive Industries show.
“We have considered introducing Shariah-compliant financing for some time, but now is the right moment,” Mendrofa said prior to the start of an advertising campaign for the loans this week. “We don’t see this as a loophole to escape from the regulations but as an addition to our product variety.”
Corporate Sukuk Sales
Sukuk sales, predicted by the government to reach a record this year, may rise as finance companies seek funds that comply with Islamic tenets. Al Ijarah Indonesia said it will sell Shariah-compliant bonds next year once the value of loans it manages reaches 2 trillion rupiah ($209 million), from about 1.5 trillion rupiah currently, President Director Herbudhi S. Tomo said in an Aug. 29 interview in Jakarta.
Yields at all-time lows have spurred worldwide sukuk issuance to $34.6 billion so far this year, compared with $17.5 billion in the same period in 2012, data compiled by Bloomberg show. Offerings reached a record $36.7 billion in 2011.
Indonesian vehicle sales may be 20 percent to 30 percent less than the 1 million units the automotive association forecast in December, Chairman Sudirman MR, said in April. Prior to the new rules most lenders required deposits for cars and motorcycles of 10 percent to 15 percent, he said.
Adira Dinamika, which only lends for vehicles, expects to disburse 28 trillion rupiah this year, down from an earlier target of 35 trillion rupiah, due to the rules, Mendrofa said. The company used to require deposits of 18 percent on average for commercial cars and 15 percent for consumer vehicles, he said.
“Now that the down-payment rules are in place, the only options for consumer-financing companies are to see their sales fall or to offer Islamic products,” Adiwarman Azwar Karim, a member of Indonesia’s National Shariah Board, said in an Aug. 27 interview in Jakarta.
Non-performing loans represented 2.33 percent of all funds disbursed by banks in Indonesia in February, compared with 2.08 percent for loans from consumer-finance companies, according to data from the central bank and finance ministry. Islamic banks had 2.82 percent of non-performing credit, Bank Indonesia figures show.
“Our concern is that consumer lenders will offer Islamic loans with down-payments as low as 5 percent, which they used to do for non-Shariah-compliant financing, and increase non- performing loans,” the board’s Karim said.
Indonesia’s monetary authority, which regulates bank lending, issued similar regulations on non-Islamic loans in March requiring deposits of 25 percent for motorcycles, 30 percent for personal cars and 20 percent for commercial vehicles. It is currently studying down-payment rules for Shariah- compliant lenders to reduce the risk of defaults increasing, Edy Setiadi, Jakarta-based executive director of Islamic Banking at the central bank, said last month.
The finance ministry, which oversees consumer lenders, declined to comment on whether it has plans to introduce minimum-deposit levels for Shariah-compliant financing.
“We would welcome down-payment regulations for Islamic loans to lower our risk as long as the limits are less than for non-Islamic lending to give us room to grow,” Al Ijarah’s Tomo said. “Shariah-compliant loans have many fundamental differences compared with non-Islamic lending, but the credit analysis is exactly the same.”
Islamic bonds sold internationally returned 7.2 percent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets advanced 13.4 percent, according to JPMorgan Chase & Co.’s EMBI Global index.
Average yields on global Shariah-compliant securities declined one basis point, or 0.01 percentage point, to a record low of 3.05 percent on Sept. 4, according to the HSBC/Nasdaq index. The difference between the average and the London interbank offered rate, or Libor, narrowed one basis point to 208 basis points.
The yield premium investors demand to hold Indonesia’s dollar-denominated 8.8 percent Islamic notes maturing in April 2014 over Malaysia’s 3.928 percent bonds due June 2015 narrowed six basis points yesterday to 31 basis points, the smallest gap since April 11, data compiled by Bloomberg show.
Amanah Finance raised its lending target to 2.5 trillion rupiah this year from 2 trillion rupiah after the deposit rules were introduced, Director Adnan Bintang said in an emailed response to questions on Aug. 28. The company booked 1.4 trillion rupiah of financing in 2011, he said. The average Indonesian worker earned 1.28 million rupiah a month in 2011, according to statistics bureau data, compared with the 13.75 million rupiah price tag for a Scoopy motor scooter listed on PT Astra Honda Motor’s website
“The down-payment rules will definitely have an impact on Amanah’s growth as many Indonesian consumers have minimal ability to pay large deposits,” Bintang said in an Aug. 30 telephone interview from Makassar, the capital of Indonesia’s South Sulawesi province.