Devi Asmarani, Jakarta – More Indonesian banks are converting themselves into Syariah banks as people become "more Islamic" and their trust in the conventional banking system erodes. Syariah banks are those which apply the Islamic no-interest principle – borrowers pay no interest while depositors get a share of profits.

These banks have been gaining in popularity over the last three years even as numerous commercial banks restructure or fold up due to poor performance. From only one Syariah bank in 1992, there are now five major Syariah banks in Indonesia as well as three conventional banks with Syariah divisions and 80 small, rural Syariah banks. In addition, there are thousands of cooperatives and financial institutions which apply the Syariah principle.

There were proposals last year to convert several banks under the care of the central bank (Bank Indonesia) and the Indonesian Restructuring Bank Agency, including Bank Tugu and Bank Bukopin.

A revival of religious sentiment may be the reason for the popularity of Syariah banks. A central bank survey of 4,800 people in Java showed that almost all of them believed that Islam forbade the practice of usury. "Eroded public trust in the country's banking system may have also turned many to the Syariah banks," added an economist. Further, Syariah banks are the only ones that still finance small and medium enterprises as conventional banks suffer tight liquidity.

The country's first Syariah bank, Bank Muamalat Indonesia (BMI), saw business grow three-fold in the last 2 1/2 years. Last year, its annual profit rose dramatically from 10 billion rupiah to 63 billion rupiah (S$11.4 million). The amount may seem small by conventional standards, but the bank has grown while many others have collapsed after interest rates were raised sharply to halt the rupiah's nosedive.

BMI president Achmad Riawan Amin told The Straits Times: "Creditors for conventional banks found their loans multiplied as interest rates soared, but not in our banks."

The bank offers two kinds of non-interest financing – "profit-sharing" and "buy and sell" schemes. In the latter, customers who want to buy a motorcycle, for example, get the bank to buy it and sell it to them at a higher price. They then make a fixed payment to the bank.

"Conventional banks revolve their money in the money market making it more risky, we invest our money in manufacturing, trade and commerce so that money goes back to the community."

Economists said prudence may be the main strength of Syariah banks. Mr Umar Juoro of the Habibie Centre said: "The fact that they operate on a small scale and their creditors are carefully selected makes their non-performing loans relatively low while their asset growth is strong."

But Mr Umar Juoro said he could not see Syariah banks replacing the role of conventional banks. But he said they could reach beyond the Muslim community, as Syariah banks do in Malaysia.