HOUSE ENDORSES ISLAMIC BANK LAW

Aditya Suharmoko , The Jakarta Post , Jakarta
Wed, 06/18/2008 10:44 AM
Headlines

The House of Representatives on Tuesday passed the Islamic banking law aimed at accelerating growth in the industry, while failing to address the issue of double-taxation.
Nine of the 10 factions at the House agreed to pass the law, aiming to provide certainty for investors in an industry that has grown rapidly in the past two years.
Sharia bank lending increased by 30 percent in 2007, higher than the 25.5 percent lending growth of conventional banks.

Melchias Markus Mekeng, a member of the House's Commission XI overseeing financial affairs, said after the session that the commission would try to address double taxation in later discussions with the director general of taxation.
"It (the double taxation issue) is complicated. Investors may retreat from injecting funds into sharia banks if the tax is higher than the amount of return they receive," Markus said.
"Perhaps we will insert it in the value-added tax (VAT) bill."

In an Islamic bank, interest payments are forbidden.
A bank customer can obtain profit in an exchange transaction called murahaba in which a buyer (bank) purchases items from a seller (customer) at a specified profit margin payable to the seller.
However, as the transaction involves the buying and selling of items, it will be subjected to value-added tax twice, both when the items are bought and sold.

The Finance Ministry's head of fiscal policy Anggito Abimanyu said the ministry would try to solve the double taxation matter through existing instruments.
"Actually, there is not a buying and selling of items as they are used only as underlying assets. It is a matter of interpretation," Anggito said.
He agreed with Markus that the government might include the double taxation matter in the value-added tax bill, which would be discussed with Commission XI.

The Islamic banking law also stipulates that conventional banks hosting sharia units must separate the business if its capital reaches 50 percent of the bank's total capital, to further expand the sharia banking industry.
Bank Indonesia (BI) aims to increase the market share of sharia banks to 5 percent by 2010. The sharia banking industry accounted for only 1.98 percent of the total market as of February, a small increase from 1.64 percent a year earlier.

Indonesia has three commercial sharia banks -- Bank Syariah Mandiri, the largest sharia bank by assets, Bank Muamalat Indonesia and Bank Syariah Mega Indonesia.
Numerous conventional banks, meanwhile, have established sharia units to tap into the industry.