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It was a banner year for banks in Indonesia. Year-end data from the country’s central bank, released today, shows that lenders made Rp57.3trn (US$6.4bn) in 2010, nearly 30% higher than the year before and almost double the result five years ago.

Bank loans in Indonesia grew by 23% last year, and yet the system’s overall non-performing loan ratio ended the year at 2.6%, down from 3.3% the year before. Listed Indonesian banks enjoy the highest price-to-book ratio among their peers in Asia, driven by region-topping levels of profitability. Banks in the country are so profitable, in fact, that the central bank urged them not to pass on a recent interest rate hike, given that banks’ lending margins, in the words of the economic minister, are already “too high”.

The chatter about potential bubbles in emerging-market equities is growing louder. Investors in Indonesia, which boasts one of the world’s best-performing markets so far this year, are certainly (irrationally?) exuberant.

The past two days have seen more than US$1bn raised in two IPOs in Jakarta, with today’s listing of noodle maker Indofood CPB worth almost double the previous year’s total for all Indonesian IPOs. Some other recent listings have already doubled in value, such as hotelier Bukit Uluwatu Villa and Bank Jabar Banten, both of which listed in July. Meanwhile, telecoms group Sarana Menara Nusantara has surged by a dizzying 700% since listing in March. Many more issues are in the pipeline, if only for supply to keep up with demand.

Banks in Indonesia enjoy the highest net interest margins of any key economy in Asia, and consistently place near the top of the profitability rankings of global emerging markets. But a new rule from the central bank may dampen these margins; Jakarta-listed lenders have taken a beating in the markets this week as a result.

At first glance, the rule sounds innocuous: by the end of the year, banks will be required to publish their prime lending rates. However, in Indonesia’s relatively opaque banking market, this minor boost to transparency is expected to unleash heated competition as borrowers suddenly find it easier to shop around.

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Fears about the strength of the global economic recovery have sent investors piling into bonds, and Islamic debt is no exception. The yield on a broad-based index tracking sukuk, or bonds that conform to the Islamic prohibition against interest, recently reached lows not seen since late 2005, according to HSBC, a bank, and Nasdaq Dubai, an exchange operator.

Following the high-profile restructuring of sukuk issued by Dubai’s teetering conglomerates, as well as several outright defaults by borrowers elsewhere in the Gulf, does Islamic debt deserve the safe-haven status that current rock-bottom yields imply?

Yes and no. The scarcity of Islamic bonds is as important a factor in explaining the recent rally as is their safe-haven appeal.

Read more at Financial Services Briefing: “Desperately seeking sukuk” (August 23rd)

A new report from the Asian Development Bank takes Indonesian banks to task. Or, it is as critical of banks’ lending practices as the rules of international diplomacy will allow. “The efficiency of Indonesia’s domestic financial intermediation is among the lowest in Southeast Asia,” the ADB says.

Indeed, the ratio of domestic credit to GDP in Indonesia is much lower than most of its neighbours. The spread between lending and deposit rates in the country is also wider and more volatile than elsewhere in the region. Although not a “critical constraint to private investment,” as the ADB puts it, more affordable, available credit could help Indonesia more quickly achieve its considerable economic potential.

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