Fitch Lauds Central Bank’s Shariah Down Payment Plan

Muhamad Al Azhari

Muhamad Al Azhari

International rating agency Fitch Ratings on Tuesday praised Bank Indonesia’s plan to issue rules requiring Shariah banks to toughen up their down payment requirements on housing and automotive loans.

Fitch said in a report that Indonesia’s consumer financing “is likely to see improved underwriting quality and regulatory consistency, if Bank Indonesia harmonizes prudential rules for Shariah-compliant products with those for mainstream consumer loan products.”

The agency was referring to the implementation of loan-to-value regulations applied to conventional financiers for housing and vehicle loans, which were issued on March 15 and took effect on June 15.

Under the new rules, down payments for vehicles and homes were raised to 25 percent to 30 percent of the total loan.

There were no rules before, but sellers often asked for about 15 percent. Loans typically account for 70 percent of car purchases in Indonesia.

“This would level out uneven competition with non-Shariah products, and prevent asset quality diverging within the consumer finance sector in Indonesia,” Fitch said in the report.

Shariah financial products were excluded from the regulation because in Islamic finance, lending does not require down payments.

Fitch noted increasing activity in Shariah financing that, due to the down payment exemption, might be pushed by financiers as an alternative to conventional loans to avoid a possible slowdown in sales.

It warned of the risks of possible asset deterioration as a result.

But Halim Alamsyah, a deputy governor at Bank Indonesia, said on Aug. 12 that the first installment of Islamic loans for the automotive sector would be regulated.

In its report, Fitch added that the impact on loan growth from new down payment regulations “may be short-lived, as wealth rises in line with Indonesia’s favorable economic prospects.”

Indonesia’s central bank has been issuing regulations to reduce the risk of a consumer loan asset bubble. It also recently toughened requirements for Indonesians wanting to acquire credit cards.

Automotive retailers posted record car sales for July despite the introduction of the new rules. July sales were 16 percent higher than those for the same month in 2011.