Indonesia's Islamic banks narrow earnings gap with conventional lenders

Return on assets rose to 1.5% in 2018 from 0.8% in 2017.

The non-performing financing (NPF) ratio of Islamic banks in Indonesia improved to 3.2% in 9M2018 from 3.9% in 2017 to record the narrowest gap to conventional banks (2.6%) in five years, according to Fitch Ratings.

Also read: What's dragging the growth of Islamic banks in ASEAN?

The four largest sharia banks, which account for over half of the sector’s total assets, wrote off legacy problem assets that boosted profitability in 2018. Stabilising asset quality slashed credit costs which helped in pushing up return on assets to 1.5% in 2018 from 0.8% in the previous year.

The Islamic banks' total capital adequacy ratio (CAR) rose to 21.3% from 17.9% in 2017 as a number of lenders raised capital through IPOs. This brought the CAR level closer to the conventional banks' average of 22.8%.

Analyst Dimas Nugroho notes that liquidity appears manageable, with the sector's financing-to-deposits ratio at 87.4% although this still trails behind conventional banks at 93.8%. “[F]urther development of risk management and corporate governance standards is key to improving its competitiveness with conventional banks,” Nugroho added.

Indonesia is home to the largest number of Islamic banks, with a total of 75 banks at end-2018 consisting of 14 Islamic banks, 20 Islamic bank units and 41 Waqf banks.