Faysal Islamic Bank of Bahrain (FIBB) has set up an Islamic finance company in Indonesia in partnership with the local Bank Negara Indonesia, and says it is planning to set up fund management companies in Indonesia and Malaysia.

The new company is being launched amid economic problems in Indonesia after a devaluation of the local currency, the rupiah, which began in July. However, the Bahrain bank believes that the venture - the first of its kind in Indonesia - should be rewarding in the long term as the country's economy is still expected to grow by around 6 per cent a year.

The new company, BNI-Faysal Finance, will have capital of 25,000 million rupiah: this was worth about $14 million when FIBB decided on the joint venture a year ago, but after this summer's devaluation is now worth about $10 million. The company is awaiting final registration with the Indonesian authorities. FIBB will own 49 per cent, but controls the management. BNI- Faysal Finance is likely to increase its capital during its first year of operations and two international institutions, one Islamic, have said they are interested in getting involved.

'We are aiming to go into more secure transactions than we had planned before [because of the economic situation]. Our first priority will be leasing transactions,' says Mohammed Tariq, senior vice-president at FIBB. The company will also look at factoring and Islamic consumer finance, marketed either through BNI's branch network or by selling products to the staff of local corporations.

Plans to underwrite securities issues have been dropped because of a change in the local laws governing finance companies. The fall in the rupiah means that the company's capital is worth less in dollar terms. Its cost of funds will also be higher than planned because the Indonesian central bank is keeping local liquidity tight, but it should be able to earn higher margins on transactions. Indonesia's economic growth is likely to fall by at least one percentage point from last year's 7 per cent, but this is still among the world's highest.

FIBB is also talking to several local institutions in Indonesia and two in Malaysia about setting up Islamic fund management companies there. 'Our style in both places will be to go with major institutions who know the local markets but may not have the Islamic expertise,' says Tariq. These projects are not likely to come to fruition this year, given the general uncertainty about the economic situation and the ambivalent attitude of the authorities towards foreign fund managers, who have been blamed by Malaysia for a devaluation of its currency.