Indonesia is chasing Malaysia’s status as a global Islamic finance leader but, despite its larger population and economy, it still has some way to go. Bankers say the government needs get more active with incentives and tax breaks to leverage its status as the world’s largest Muslim nation.

The Malaysian government announced in its budget last week that it would cut taxes on Islamic transactions in order to promote more ‘innovation in Islamic securities’. Islamic funds will be tax-exempt until 2016. Malaysia has also issued more permits to international companies looking to enter the industry, like Aberdeen Asset Management Plc and Franklin Templeton Investments.

There are US$1 trillion worth of Islamic/shariah-compliant assets under management worldwide. Malaysia has $109 billion in banking assets, while Indonesia has $8.4 billion. The Indonesian government attempted a sukuk (Islamic bond) sale on 5 October but sold only 38% of its intended Rp1 trillion ($111.8 million), reportedly due to investors expecting higher yields.

Global sukuk sales hit a record peak in 2007 at $31 billion, plummeted to $14.1 billion in 2008 before recovering to $20.2 billion in 2009. 2010 so far has seen figures dropping again. Malaysia alone has sold $85 billion in sukuk since they first became available, 65% of the world’s total.

source & full article: Bloomberg

Update: Indonesia may yet face more competition in the sector, this time from its neighbors to the south