•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   

A new tax regulation is attracting prospective investors to the Shariah banking sector, including two Middle Eastern banks looking to buy stakes in local lenders, a banker and an international envoy said on Monday.

However, analysts warned that the government should limit foreign investment to prevent overseas companies from dominating the sector.

Passed in October, the new regulation will remove what was essentially the double taxation of Shariah transactions. It will take effect in April.

Speaking at an Islamic banking seminar on Monday, Mulia Siregar, Bank Indonesia’s chief of Shariah banking research, development and regulation, said the change was already attracting prospective investors.

“Al Baraka and Asian Finance Bank [AFB] came to us two weeks ago saying that they would soon acquire a local bank and convert it into a Shariah unit,” he said.

“Their intention is based on the revision of the tax regulation. Before the revision they were worried about double taxation,” he added.

Al Baraka, an Islamic bank listed in Bahrain, and Malaysia’s AFB, which is majority-owned by Qatar Islamic Bank, opened offices in Indonesia three years ago to expand their Shariah lending.

Also on Monday, Indonesia’s special envoy to the Middle East, Alwi Shihab, said Qatar National Bank was eyeing a local bank and the Kuwait Finance House planned to establish a new Shariah bank in the country next year.

“Middle Eastern investors see Indonesia as a promising place. They might delay their investments elsewhere but are not likely to in Indonesia,” Alwi said, referring to the recent Dubai World debt crisis, which has sparked worldwide concerns about Islamic banking and debt.

However, analysts and industry players warned that the government needed to protect the local market from domination by foreign players.

Beny Witjaksono, president director of PT Bank Mega Syariah, said foreign investment in domestic Shariah banks should be limited.

Currently, foreign investors are allowed to own up to 99 percent of a Shariah bank, he said.

“There should be limitations for foreign owners since they are not bringing new things to the domestic Shariah industry,” he said. “They do not bring new expertise, new innovation or technology.”

Most of the benefits from the sector would flow abroad if foreigners are allowed to continue holding such high stakes in domestic Sharia banks, Beny said.

However, Muhammad Gunawan Yasni, a Shariah banking analyst, said the domestic sector could learn much from Middle Eastern expertise in Shariah lending.

The government and central bank needed to make sure that foreign investment in the sector was beneficial, but regulation was not the only way to do that, he said.

“The government should negotiate with foreign players so the investors and domestic players can create synergies,” he said.

Indonesian players could learn from Middle Eastern expertise by increasing local shareholders’ representation on the Shariah units’ boards of directors, Muhammad said.

Bank Indonesia has offered three growth projections for the shariah finance sector next year. They ranged from a pessimistic scenario of 26 percent growth, a more moderate 43 percent growth and the most optimistic scenario of 81 percent growth.

In the pessimistic scenario the sector grew only organically, while foreign investment and incentives drove growth in the central bank’s more optimistic scenarios.

Currently, Shariah bank assets make up less than 3 percent of total banking assets in the country.