By Fauziah Rizki Yuniarti,

Three Indonesian Islamic Banks signed a merger deal last October aiming to increase the efficiency, performance, and thus competitiveness of Indonesian Islamic banks at both national and international levels. Indonesia’s Islamic economy is currently ranked 4th in the world (moved up by 1 rank from the previous year) following Malaysia, Saudi Arabia, and the United Arab Emirates. Having the largest (87%) Muslim population in the world, Indonesia’s Islamic finance market remains stagnant at 5-6%, almost three decades since the first Islamic bank developed in Indonesia in 1991.

These uncompelling facts are signalling major inefficiency in the industry. The megamerger should thus be positively welcomed by key stakeholders. Customers would benefit the most from this merger because the new State-owned Islamic Bank (hereinafter referred to as “the new Bank”) would be able to offer significantly cheaper and more competitive products and services (than the conventional ones) due to larger capital resulting to larger opportunities in getting cheaper cost of funding. 

Lack of capital is one of the culprits of the snail’s pace growth of the Indonesian Islamic banking industry. This merger would thus solve this capital issue since the merger would build a stronger capital totalling IDR 20.5 trillion (USD 1.4 billion) in equity contributed by Bank Syariah Mandiri (BSM) (IDR10.3 trillion), BRI Syariah (IDR 5.2 trillion) and BNI Syariah (IDR5.3 trillion) (Note: as of September 2020) making it categorised as BUKU III (banks with core capital between IDR 5 trillion (USD 354 million) to IDR 30 trillion (USD 2 trillion)). The new Bank will be the only Indonesian Islamic Bank categorised on BUKU III (i.e the rest of the Indonesian Islamic banks are in BUKU II or BUKU I). This BUKUs categorisation (BUKU I is the lowest; BUKU IV is the highest rank) significantly affects Banks’ ability in conducting business (e.g., serving customers, investing, and loan channelling). 

The new Bank would also gather IDR 227.9 trillion (USD 16 billion) in assets accounting for almost half of the total Indonesian Islamic banking industry’s assets and making it the 7th largest bank in Indonesia, following BRI, Mandiri Bank, BCA, BNI, BTN, and CIMB Niaga Bank. 

Worries and fears 

Despite the significant potential and positive impacts, this merger plan, aiming to complete by February 2021, entails at least 4 (four) concerns. First, cannibalism. Would the new Bank take over other Islamic banks’ markets? No. The objective of this merger is to increase competitiveness and market share which essentially means that the new Bank would take over the conventional banks’ markets and the untapped (unbanked) markets. Research finds that the existing Indonesian Islamic banks’ religious customers are not swing-customers who would easily be affected by attractive rates offered by other banks.  

Second, SMEs financing. Would the new Bank only focus on financing the conglomerates and abandon the SMEs? No. The larger the capital (and the expectation of a further capital injection that would make the new Bank move up to BUKU IV), the larger the opportunities to get cheaper cost of funding, the larger the new Bank’s ability to channel cheaper loans to SMEs. 

Third, layoffs. Who stays, who goes? The Indonesian Ministry of State-Owned Enterprises, Erick Thohir, assured that there will be no layoffs during this merger process. However, looking back to the previous successful merger of 4 (four) state-owned Indonesian banks into Mandiri Bank in 1999, the latter only absorbed 63% of total employees from the 4 (four) legacies. This number nonetheless was either the Bank’s policy or the employees’ initiatives, or both. 

Success factors 

There are at least two success/failure factors of mergers. First, the right leader. This leader should go nuts and bolts on at least three crucial points (culture of engagement, shared vision, and new identity) on all merger stages (pre, during, and post-mergers). During pre-merger, the culture of engagement is crucial in amalgamating 3 (three) large and strong banks having their own cultures, values, and strategies into one single bank. During the merger, the new Bank must create a shared vision to create a new identity. During post-merger, the new identity created during the merger process needs to be properly implemented. Appointing the right Chief Executive Officer (CEO) is thus crucial because this CEO should deploy all of the aforementioned salient points at the minimum to have a successful merger. To avoid conflict of interest, the new Bank should appoint a CEO that is not coming from the 3 (three) merged banks. 

Second, a sense of crisis. Unlike Bank Mandiri which was formed as a result of a merger process during the 1998 financial crisis, this merger is not due to a financial crisis. No matter how severe the twin crises (financial and health crises) this world is facing now, it is still not (yet) as fatal as the 1998 financial crisis. This new Bank should thus learn from the experience of Bank Mandiri in the least. Research finds that companies who did mergers and acquisitions during financial crises have better performance than those who did not. 

Post-merger strategies 

To achieve the intended aims, the new Bank, as well as other Islamic banks, should follow at least 3 (three) strategies. These strategies would help the new Bank to acquire a wider range of customers: (i) rational, (ii) Non-religious Muslims, (iii) Non-Muslims, (iv) unbanked people, and (v) others (millennials, swing customers, etc). 

First, coming up with new selling points. Islamic banks should start to develop new selling proposition other than religious values. They should sell universal values (social, environmental, ethical, and sustainability values) which are the basic values of Islamic economic. These universal values should be exposed more by Islamic banks, so that these banks could attract rational, non-religious Muslim, and non-Muslim customers. 

Second, literacy, education, and inclusion to reach those unbanked people. Massive education would further increase financial literacy, and subsequently, increase financial inclusion. In 2019, Indonesia’s financial literacy was 38.03% (increased by 8.3% from 2016), while the financial inclusion was 76.19% (increased by 8.3% from 2016). Unfortunately, the same patterns (increase in financial literacy followed by an increase in financial inclusion) failed to manifest in its Islamic finance counterpart. 

In the same year, Indonesia’s Islamic financial literacy was 8.9% (increased by 0.83% from 2016), while the Islamic financial inclusion index recorded a rate of 9.1% (decreased by 2% from 2016). 

The main target of financial literacy are housewives and religious leaders. Research has found that increasing financial literacy in women positively contributes to women’s empowerment. Indonesia has recently been focusing on developing its economy through Islamic schools (pesantren), aiming to increase the financial literacy and inclusion of those religious leaders. Given the economic geography of Islamic finance in Indonesia, Islamic religious leaders are known to play vital roles in various aspects, including to shape the future of Islamic finance. 

Third, massive transformation in business, information technology (IT) infrastructure, and human resources. Islamic banks should do the transformation in business and IT infrastructure to digitalise both products/services and business models. Islamic banks should learn from other banks who have started to digitalise their products and services, offering free, fast, and easy banking transactions (e.g. opening bank saving accounts and fixed deposit and bank transfer). In digitalising business models, Islamic banks could enter the FinTech world, or collaborate with other FinTech players as a start. Make FinTech a friend, instead of a foe. 

Coupling with massive development in the real sectors (e.g. Halal Industry and halal value chain) and supportive integrated Islamic economy ecosystem including transformation in law (Islamic Economics Bill) and policies, Indonesia is seen to be taking serious strides being Asia’s next Islamic Finance hub.

By Fauziah Rizki Yuniarti, Faculty of Economics and Business, University of Indonesia

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