JAKARTA/SYDNEY, Dec 17 (Reuters) - Indonesia's central bank estimates growth of Islamic banking assets will slow next year due to rising pressure from trade deficits and a depreciation in the rupiah, a Bank Indonesia report showed.
Authorities in Southeast Asia's largest economy now plan to introduce an array of policies to develop the sector, ranging from regulating foreign exchange markets, introducing Islamic repurchase agreements as well as education and promotion initiatives.
The central bank estimates industry assets will grow between 19 percent and 29 percent next year, moderating from a forecast of 31.8 percent in 2013 and nearly half from 2012 growth of 34.1 percent.
Indonesia has the world's biggest Muslim population but its Islamic finance market still lags behind neighbour Malaysia: Indonesian Islamic lenders held 4.8 percent of total banking assets compared with more than 20 percent for their Malaysian counterparts.
Islamic finance follows religious principles such as a ban on interest and monetary speculation, but despite the country's large consumer market the industry lags due to capital constraints, a lack of product innovation and a shortage of human capital.
There were 11 Islamic banks in Indonesia with combined assets of 229.5 trillion rupiah ($18.96 billion) as of October, compared with 120 conventional lenders with assets of 4,716.8 trillion rupiah, central bank data showed.
The central bank said a tighter policy in finance-to-deposit ratio, similar to the loan-to-deposit (LDR) ratio used for conventional banks, and developing a sharia-compliant lender of last resort (LOLR) would be needed to support the stability of the financial system.
"A strengthening in macro and microprudential coordination is quite important to prevent an increase in regulatory cost, anticipating regulatory arbitrage and increasing the quality of Crisis Management Protocol," said Assistant to Governor of Bank Indonesia, Mulya E. Siregar, in the report.
Strong growth in 2014, Siregar said, would be underpinned by a recovery in export and industry sectors, plans to establish state-owned Islamic banks as well as a significant transfer of pilgrimage saving funds to be managed by Islamic lenders.
Developing an Islamic lender of last resort would help Islamic banks during financial distress, while introducing an Islamic repurchase agreement would give lenders another tool to manage their short-term liquidity needs, a longstanding challenge for the sector.
Bank Indonesia is expected to hand over its banking supervisory and regulatory mandate to the financial service authority or Otoritas Jasa Keuangan on Dec. 31.
Indonesia posted a modest trade surplus of $50 million in October, as a slow recovery in commodity prices eroded revenues amid a sharp fall in the rupiah. The rupiah is Asia's worst performing currency and has fallen more than 20 percent so far this year.
($1 = 12,105 rupiah) (Reporting by Rieka Rahadiana in JAKARTA and Bernardo Vizcaino in SYDNEY; Editing by Jacqueline Wong)