Demand for sharia bank financing services in the province has declined lately forcing a number of sharia banks to close their units in various areas for cost efficiency.
Profit margin has also declined following the change in Bank Indonesia benchmark interest rate with 7 days Repo Rate and a cut in the interest of the Deposit Insurance Agency (LPS).
Director of Supervision of the Financial Service Authority (OJK) for Southern Sumatra Sabil said in the 2015-2016 period, there were 28 units of sharia bank branches in the province had stopped operation for efficiency.
"This is what has happened over the past year. Generally the reasons is efficiency for closing branch offices," Sabil said.
Based on data from Karim Consulting Indonesia, Return on Assets (ROA) of sharia banks by July , 2016 was 0.6 percent and that of conventional banks was 2.6 percent.
Meanwhile the ratio of operational cost to operational income (BOPO) of sharia banks has always been higher than that of conventional banks since 2012.
The BOPO of sharia banks is 96 percent and that of conventional banks is 82 percent. The non-performing financing ratio of sharia banks rose to exceed five percent.
Therefore, a number of conventional banks decided to close their sharia units for efficiency especially as the economy has not fully recovered from the impact of the global economic slowdown.
The prices of South Sumatra`s main commodities - rubber, palm oil, coal and minerals have remained low on weak demand.
Banks both conventional and sharia banks have since 2013 been selective in offering credits and financing services to the plantation sector for fear of growing default as the price of rubber has shrunk to below the reference price.
Some sharia banks , however, managed to record good performance and opened new branches in the province.
They are encouraged by the brisk development in South Sumatra. The capital city, Palembang, is busy face lifting ahead of the 2018 Asian Games of which it is to be a co-host .
A number of infrastructure projects such as Light Rail Transit project in the city , bridges, under passes. flyovers , power plants and gas pipes have contributed to the relatively high economic growth of South Sumatra.The province recorded a 5 percent growth in economy in 2015. In the third quarter of 2016, its economic growth was 4.92 percent.
Head of the Palembang branch office of Panin Syariah Kms Afandi said after receiving a capital injection of Rp200 billion from a Dubai investor, Bank Panin opened a sharia branch in Palembang in mid 2016.
Toward the end of the year, Bank Panin Syariah already recorded a growth of 10 percent thanks to demands for financing from a number of infrastructure projects in South Sumatra.
Financing as provided for a number of construction service providers averaging Rp2 billion-Rp10 billion each.
Meanwhile, Bank OCBC NISP also has opened its sharia unit in the city of Palembang in 2016 to increase its financing service and saving growth 15-17 percent.
Head of the sharia unit of Bank OCBC NISP Koko T Rachmadi said the strategic location of Palembang in Sumatra makes the city more potential for sharia banking .
"This city has even become one of the largest cities in sharia banking industry in the country. Sharia banks in Palembang have a 7 percent share of banking market or higher than the country`s average," Rachmadi said.
In addition, the optimism is strengthened by the country`s improved economic condition marked by growing middle class people and increase in purchasing power of the people , and growth phenomenon of "Islamic Trend".
Head of Bank Indonesia`s representative office for South Sumatra Hamid Ponco Wibowo said growth of sharia banking has to be pushed to increase its share of banking market in the country. Sharia banks are still lagging far behind conventional banks with market share of only 5 percent.
Sharia banks , therefore, have to be more active as until now most people are not yet literate in sharia banking. No less important is improvement of infrastructure and skill of human resources.
Sharia banks should at least have a proportional share of infrastructure financing in South Sumatra, Hamid said.
"Many sectors including small and medium enterprises UMKM)are lifted with the brisk infrastructure development in South Sumatra.
If state banks dominate financing of large projects, sharia banks should be able to play in smaller projects, he said.
In general, Bank Indonesia said sharia banks has continued to grow in 2016 , although conventional banks also recorded growth.
Therefore, Hamid said he did not agree that the market share sharia banks remained 5 percent. He said in 2016, sharia banks grew faster than conventional banks in financing term.
Meanwhile slowdown was recorded in raising third party fund both by sharia and conventional banks. Outstanding credits totaled Rp101 trillion and third party fund Rp60 trillion recorded by conventional banks in the province.
Hamid also noted a setback suffered by a number of sharia banks in South Sumatra with the closure of a number of branch offices.
"There are banks decided to close their sharia units for efficiency, but it was not an indication that sharia banking industry did not grow," he said.
In a bid to increase the market share of sharia banks, the Central Bank, Bank Indonesia, has opened South Sumatra Sharia Expo 2016 in Palembang, from Dec. 8 to 10 .
Ten sharia banks took part in the Expo at the Palembang Indah Mal, which has become an annual event since 2013.
Chairman of the South Sumatra Sharia Economy Community Dodi Reza Alex also agreed that sharia banks should be more active in educating the people to be more literate in sharia banking in a bid to increase sharia banking market.
"Many people are still not familiar with sharia banking while conventional banks already expanded service deep int rural areas," Dodi said.
Based on Islamic Financial Service Industry Stability Report 2016, sharia banking and takaful could grow only one digit although in 2008- 2013 the industry grew two digits.
"This means , the global sharia finance industry in 2016 is entering the phase of consolidation," he said.
Similar problem is being faced in Indonesia as reflected in the low growth of 4.8 percent in the assets of sharia banking industry until August, 2016.
The growth rate dropped sharply after leapfrogging growth in 2008-2013 with highest growth reaching 40 percent.
Sharia banking industry is still lagging behind conventional banking industry in general performance as sharia banks, financing portfolio is still limited to certain sector mainly consumptive sector such as motor vehicles and personal loan.
The second challenge is liquid instrument that is intermediacy institutions . Shari banks still are exposed to liquidity as liquidity risk management of sharia banks through financial market is not yet optimum on limited liquid instrument.
Another challenge is economic scale, in which sharia banks are not yet comparable with conventional banks. Sharia banks still minor in financing capacity compared to conventional banks.
No less big challenge is in consumers` preference. Currently few consumers choose sharia banks over conventional banks largely on inadequate knowledge of the procedure in dealing with sharia banks.
Therefore, education is necessary to improve the people`s understanding about sharia banking industry .
Education could be through two ways - by banks themselves and with rolling back from the OJK .
Until now only few people know much about sharia banking. The majority of Muslim people still have not shown interest in sharia banks over conventional banks.
A report said the performance of the Islamic banking industry in Indonesia has yet to satisfy the public expectations.
Islamic banks in Indonesia still face difficulties in luring customers in this predominantly Muslim country .
The country is hugely potential market of more than 200 million, but the market share of sharia banks has not up to 5 percent in the past three years. This is an irony.
According to the Global Advisors Islamic Finance Outlook Report for 2016, no Indonesian Islamic banks were ranked in the top five largest banks based on assets in Southeast Asia.
The public believe that Islamic banks are still unable to tap into its market potential. The basis for such an argument is simple as indicated by the large size of the Muslim population and the size of the Muslim middle-class.
Indeed, if one calculated roughly, around 40 percent of 200 million Muslim are at the productive age of between 20 and 40 years old, not counting the affluent segments aged between 40 and 60 years old. Unfortunately, being a Muslim does not necessarily mean that he or she has good literacy on Islamic finance.
The failure to seize Muslim customers is the latent problem of Islamic banking in Indonesia. There are at least four reasons contributing to this situation.
First, there have not been enough endeavors to adequately explain what Islamic finance is all about. This is because of the scarcity of good talent.
Therefore there is a tendency to explain Islamic financial products and services in conventional language.