Sharia Banking Development Policy and Road Map
After achieving relatively-high growth in the previous years, in 2013-2014 sharia banking confronted a challenge from the slow growth. Challenges to face by the sharia banking industry in the coming years are not a trivial and easy matters, given that the global economic environment has not yet shown a significant recovery, it even has to face new challenges from oil price action movement. We certainly are optimistic that the domestic economy will keep recovering consistent with the government policies in improving the fiscal posture and infrastructure development policies and other government priority projects. In addition, several policies implemented by the authorities in enhancing the economy will keep moving, as the Indonesian economy is internationally acknowledged such as Indonesia’s good rankings with the rise of Indonesia’s competitive advantage in the eyes of the world. This indicates that the prospect of the Indonesian economy is relatively good in the future. The sharia banking industry must be able to take advantage of the global and domestic economy dynamics and participate in the national development more actively.
In an effort to improve the growth of the sharia banking business activities and achieve a vision to contribute to the sharia banking for significance to the national economy, it is important to prepare the directions and policies on sharia banking development as a reference for industry and stakeholders in the conduct of activities in years ahead in order to achieve a common vision of the national sharia banking development. The direction of the sharia banking development, called the 2015-2019 Indonesian Sharia Banking Roadmap, presents strategic issues or fundamental problems that remain in the sharia banking industry, and the direction of policies and program activities that support the achievement of policy directions and involve various stakeholders to build the sharia banking industry that can contribute significantly to the national economy based on the sustainable economic growth, equitable development, financial system stability and highly-competitive sharia banking industry.
Preparation for the Sharia Banking Roadmap also contemplates the economic and sharia banking characteristics, such as the preparation for policies that observes the philosophy of the existence of sharia banks encouraged by a desire for the availability of financial services within the sharia principles by creating the banking system that is spared the interest practice (considered identical to usury (riba)), gambling (maysir) and uncertainty (gharar) and other practices that are not consistent with the sharia principles (haram). In addition, the development of sharia banking is also encouraged by the intention to organize the economic and financial activities in accordance with the sharia guidelines, and as response to the crisis phenomenon sparked by bad behavior in economics by ignoring ethics, religion and moral values, which are not only taught by Islam, but also essentially taught by other religions. The sharia principles in economics also care about the public interest and the environment so as not to cause imbalance in the distribution of welfare and the occurrence of the environmental damage.
The Financial Services Authority (OJK) will, in its capacity as regulator and supervisor of the financial services industry, keep observing the changes in the environment and economic situations that may affect the condition of the national financial services industry, including the sharia banking. Conditions and situations that might affect the national financial services, including sharia banking, are (i) Global conditions, the continuously-changing political and world economic trends that make the global financial system very dynamic. The global financial crisis or international political conditions directly or indirectly affect the global financial sector which in the course of time have impacts on the national banking and financial sector. The national banking industry and the sharia banking must therefore have resilience in order to deal with any change and uncertainty; (ii) International standards and commitments, Indonesian membership in a number of forums such as the G20 in cooperation with the Financial Stability Board, Islamic Development Bank (IDB) and several standard setting bodies, such as the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) should enable Indonesia to follow the international standards, with due regard to the national interest. Adaptation to these international standards will make the national sharia banking standards equal to other advanced countries and show Indonesia’s commitment as an active contributor; (iii) The integrated financial sector, the existence of the ASEAN Economic Community (MEA) in 2015 and the ASEAN Economic Community for the banking/financial sector in 2020 will integrate the economy of ASEAN countries, including Indonesia. In addition, in the context of financial integration of various financial services sectors which does not only cover banking development, but also the capital market and non-bank financial industry, it is necessary to make synergy and harmonization of development and supervision more integrated, including for sharia banking and finance; (iv) Sustainable development, to improve more sustainable growth, it requires support from the financial services sector in the real sector and focus on the growth that creates added value. To that end, it requires harmony between the economic, social and environmental interest in carrying out the economic activities, in which the interconnectedness of these matters becomes the characteristic already existing in the context of the sharia banking and finance; (v) Equitable development, the territory of Indonesia which is archipelagic becomes the challenges in terms of the equitable development among regions in Indonesia, whereas the development remains to concentrate in several regions, especially the islands of Java, Sumatera and Bali, until today. Development in regions which is unevenly distributed must be addressed by the allocation of development and financing funds that are in the right place. Sharia financial institutions such as sharia banking should be able to contribute actively in the process of distribution of welfare and even distribution to the public; (vi) Financial stability, with the demand of growth and product variations, this also demands better risk management in order to create the financial system stability. Besides, the implementation of coordination among the authorities also needs to be improved in order that the policy could be realized through the appropriate implementation to finally create the financial system stability; (vii) Demographic Bonuses, the demographic bonus phenomenon that occurs in the period of 2015-2035 has several important implications for the improvement of the sharia banking industry. This implication include the increasing availability of manpower and public savings due to the increasing number of Indonesia’s middle class in the future; (viii) Financing gap, potential and financial deepening, with Indonesia’s credit/GDP ratio below 50%, while neighboring countries such as Singapore, Malaysia and Thailand have a credit/GDP ratio above 100%, this has caused the potential bank financing for financing various economic sectors still wide open, but the increase in the financing requires a more various funding source that allows banks not only to rely on the short-term funds, which in this context, the financial deepening is needed; and (ix) Public literacy about national financial services, according to the 2013 OJK’s National Financial Literacy Survey, only 22% of the Indonesian population understands banking services and 57% of the population has used banking services.
As time passes, even though the market share of the national sharia banking and finance industry has not yet reached the expected level, in terms the magnitude of sharia financial assets, Indonesia has reached the ninth largest position in the world with assets of approximately USD35.6 billion (2013). In addition, Indonesia has received recognition and appreciation from the international world along with UAE, Saudi Arabia, Malaysia and Bahrain which are now considered to be in the position to offer lessons to other countries in the world for the sharia financial development and the Financial Services Authority (OJK) has received an award as The best regulator in promoting Islamic finance.
Various kinds of strategic issues dealt with and have an impact on the development of the national sharia banking must be of concern among the stakeholders. The strategic issues above are as follows: (i) There is no uniform vision and lack of coordination between the government and authorities in the development of sharia banking. The government and authorities and key stakeholders have taken multiple steps, commitments and efforts to support the growth of sharia banking and finance but the objectives and strategies adopted are limited/sectoral in nature and there is no national vision or national objectives to which a joint reference may be used; (ii) Inadequate capital, banking industry and individual banks with a small scale and low efficiency. The limited capital becomes a crucial factor that causes low expansion of the sharia banking assets. Today, of the 12 sharia commercial banks, ten sharia commercial banks have core capital of less than Rp2 trillion, and no sharia commercial bank has core capital above Rp5 trillion. This causes sharia banks to be less flexible to open branch offices, develop infrastructure, and develop service segments; (iii) High cost funding that have an impact on the limited financing segment. The limited capital and funding structure of sharia banking, which is generally not so efficient as the conventional commercial banks, are reflected in the composition of lower cash and savings accounts (CASA), as a result, in general, the sharia banking business model focuses on the retail segment, including micro, small and medium business and consumers, and lacks a variety of financing segments such as corporations and investment; (iv) Products with no variation and services that miss public expectation. Although the various sharia banking products and services are quite developing, especially in the retail segment, sharia banking products receive less welcome from the public as compared to the conventional commercial banking products, due to factors such as features not so complete as the similar products by conventional commercial banks’, the price and quality of services do not match those of the conventional commercial banks, and customers’ limited access and knowledge; (v) Inadequate quantity and quality of Human Resources (HR) and information technology (IT) not supporting the product and service development. HR and IT are the two main factors that bring the success in developing banking products and services, and banking operation in general. It is anticipated that the quality of HR and IT in sharia banks in general is below the quality and capacity of HR and IT of the conventional banking. Moreover, sharia banking faces its own challenges to meet the quality and capacity of HR and IT that can understand and implement the sharia principles; (vi) Poor public understanding and awareness. Poor public understanding and awareness of the services offered by sharia banking is one of the fundamental issues, and sharia banking also often faces public misperception, such as those in connection with the complexity of contracts and terms and expensiveness; and (vii) Suboptimal regulation and supervision. A relevant framework and regulatory and supervisory system are needed to be made current with the global economic development, and harmony among the financial services sub-sectors, including cross-sectoral regulation (cross sectoral issues). Todays’ regulation and supervisory implementation are still suboptimal to respond to the challenges from the more dynamic economic conditions and financial industries.
Given the strategic conditions and issues faced by the national sharia banking industry, there has been prepared the vision for the national sharia banking development: “Creating sharia banking that contributes significantly to the sustainable economic growth, equitable development and financial system stability and high competitiveness.” The development vision is elaborated in the form of directions and the working programs and planned timing of the implementation, which consists of seven directions, i.e.:
The preparation for this Indonesian sharia banking Roadmap along with the working programs with the implementation of the activities in it, which will be a reference for stakeholders for the next five years, is expected to gain momentum for the revival of new growth in the national sharia banking amid the slow growth during 2013-2014. The Financial Services Authority remains optimistic about the future economic situation and the prospects for the development of national financial services including sharia banking, and hopes that the Indonesian sharia banking Roadmap has benefits for the development of financial services and contributes more significantly to the national economic development, and it is expected that this Indonesian sharia banking Roadmap gives the national banking and sharia finance a reference for the development of the world sharia finance.
Fig: Issues on Strategies for Sharia Banking Development
- Strengthening the synergistic policy between the authorities and the government and other stakeholders through the working programs such as encouraging the creation of a National Committee on the Sharia Finance Development and the creation of a sharia banking and finance research and development center.
- Strengthening the capital and business scale and improving the efficiency through the working programs, such as: (i) revision of the minimum core capital policies and Business Classification-Based Commercial Banks (BUKU) - Sharia Commercial Banks and (ii) encouraging the formation of sharia BUMN/BUMD banks and (iii) optimized role and increase in the commitment of the conventional commercial banks to develop the sharia banking services to achieve shares of at least 10% of the assets of the parent conventional commercial bank.
- Improving the fund structure to support the expansion of the financing segment, through the working programs, such as the optimized management of hajj funds, waqf/zakat/infaq shodaqoh through the sharia banking, encouraging the involvement of sharia banks in the management of the central/regional government funds and BUMN/BUMD funds, and encouraging the placement of funds as the proceeds of the emission of Islamic bonds with sharia banks.
- Improving the quality of services and diversity of products through the working programs, such as: (i) the increase in the role of the Sharia Banking Working Groups in the development of sharia banking products; (ii) improving the regulation of new products and activities; and (iii) improving the service excellence and customizing products following the development of consumer preference.
- Improving the quantity and quality of HR & IT and other infrastructure through the working programs, such as: (i) the development of sharia banking curriculum standards in higher education institutions; (ii) the mapping of competency and review of sharia bankers’ competency standard study and review of the bank’s HR development budget allocation policy; (iii) Evaluation of policy/regulation concerning the use of IT sharing facility between the parent and subsidiaries; and (iv) the policy in the scope of inter-operability development, especially between the parent and sharia subsidiaries and/or within one group.
- Improving the public literacy and preference through the working programs, such as the establishment of Sharia Public Markets and strengthening the collaboration with Consumer Education and Protection compartments (EPK) and key stakeholders in the improvement of sharia financial literacy or the sharia banking socialization program for key opinion leaders.
- Strengthening and harmonizing regulation and supervision through the working program, such as: (i) revision of the policy concerning financing to value (FTV); (ii) development and revision of the product standards (including documentation) of sharia banks according to business characteristics; (iii) development of application of Early Warning System (EWS) of sharia commercial banks (BUS) and sharia business units (UUS); and (iv) revision of regulations concerning the institutions of sharia commercial banks (BUS) and sharia business units (UUS) along with the supervision and licensing guidelines.
Sharia Finance Education Mapping
Indonesia needs at least 200 thousand bankers for sharia banking for the next five years (Republika Online, October 17, 2011). Seventy (70) percent of the professionals in sharia banking have to this day been recruited from conventional banks. Their backgrounds, however, against the quality of the sharia finance industry.
Sayyid Tahir in his article “Islamic Finance - Undergraduate Education,” in journals published by the Islamic Development Bank (IDB), Islamic Economic Studies, Vol. 16 No. 1 and 2, August 2008 and January 2009, bare the facts that those who facilitate the needs for the sharia finance teaching are the sharia economists when they are not experts in the sharia finance professionally. It is the practitioners who should apply their knowledge to the sharia finance industry. They should also bring, introduce and practice the sharia banking knowledge directly to the public in order to give an impact on the public perception.
According to Sayyid Tahir, a number of countries have developed sharia economic and financial education in an effort to meet the quality of human resources required. Pakistan has started this program by forming the International Islamic University, Islamabad, on November 11, 1980. The university focuses on two economic specializations, namely speaking Arabic fluent and having expertise in Islamic jurisprudence (fiqh) and fiqh proposals, and excelling at modern economics and sharia economic foundation. In 1985, Pakistan began to open master’s and doctor’s degree programs. The International Institute of Islamic Economics (IIIE) provides training for lecturers and senior officials in the government and banking sector. As a result, in 1991, the Sharia Court of Pakistan declared that all forms of interest, including that practiced in banking, were usury (riba). In the wake of the declaration, the sharia finance industry began to grow.
Meanwhile, at the undergraduate level, banking and sharia finance courses were required in the 1997-1998 academic year. Further, in 2002, the first commercial sharia bank license was issued in Pakistan. In 2007, the B.Sc (Hons) Islamic Banking and Finance program counted for 136 credit hours and the Arabic skills development was provided as a separate program.
Slightly different from Pakistan’s that has started its basic sharia education, Malaysia started the sharia financial industry within a legal framework in 1983. This legal basis acted as an industrial stimulus with the initial formation of the first sharia bank and sharia insurance in 1984.
At the university level, the sharia banking and finance program were then introduced, such as at Universiti Teknologi MARA (UiTM), Universiti Utara Malaysia (UUM), Universiti Kebangsaan Malaysia (UKM), and International Islamic University Malaysia (IIUM). All of those universities offered undergraduate, master’s degree and doctor’s degree programs, specifically for economics, banking, finance, and sharia accounting. UiTM started in 1999 in which one of the obligations of its students was to have an internship. UUM’s Islamic Finance and Banking undergraduate program counted for 115 + credit hours. The Institute of Islamic Banking and Finance offered the Islamic Postgraduate Diploma and PhD program in Islamic Banking and Finance.
There are also universities that offer the sharia undergraduate program with sharia law and economics majors, such as at Universiti Malaya (UM). In its economics undergraduate program, UM offers three credits for Sharia Banking and Finance courses. While Universiti Putra Malaysia (UPM) offers Sharia Finance courses in the undergraduate program in economics and Sharia Finance Management in the undergraduate accounting program. Besides, the training programs are also offered by a number of leading universities and institutions in Malaysia, such as the International Center for Education in Islamic Finance (INCEIF).
Brunei is also active in the sharia finance education. The University of Brunei Darussalam has a minor in Islamic Banking with 15 credit hours at the Faculty of Business, Economics and Policy Studies at the undergraduate level. Meanwhile, a master’s program for Islamic banking and finance is offered by the Center for Islamic Banking, Finance, and Management at the same university.
Middle East Education
The development of sharia finance industry in the Middle East did not come with the development of sharia finance education at the formal education level as in Iran and Sudan. Although the sharia finance industry has begun since 1983 and 1984, there is no clear explanation of how human resources (HR) there have acquired sharia finance education at the local level.
At the undergraduate level, there is only one course, i.e. Sharia Financial Institutions, which is offered in the B.Sc Banking and Finance program at the University of Bahrain. In Saudi Arabia, Imam Muhammad bin Saud Islamic University only offers sharia finance topics which are inserted into the sharia-related course in the Department of Economics. Likewise, the University of Jordan, Amman, only has one elective course, i.e. the Al-Masarif Al-Islamiyyah course, which is offered in the B.Sc Finance program and the Islamic Economics course at B.Sc Business Economics.
Unlike other universities in the Middle East, Yarmouk University in Jordan has an undergraduate program in the Department of Islamic Economics and Banking at the Faculty of Sharia and Islamic Studies. It offers 132 credit hours with the following details: 27 credit hours of university courses, 27 credit hours of faculty courses, 21 credit hours of courses related to accounting, statistics, money and banking, and the remainder are specific department courses related to Islamic economics and banking. There is also a minor program of Islamic Economics and Banking counting for 21 credit hours offered in Accounting, Banking and Finance or General Administration majors.
Several problems are often confronted by students who enter university-level sharia finance education programs, especially in countries other than the Middle East. First, command of Arabic and Fiqh Proposal/Islamic jurisprudence (Fiqh). Both of them are not common and not taught in school. Therefore, having passed Arabic is one of the requirements to enroll on the sharia financial education program.
Then it is the availability of qualified educators. Maybe they are very good at understanding Islamic jurisprudence (fiqh), but they fail to invite students to think critically about issues in the sharia finance industry. Besides, limited literature is also another issue in terms of a source of knowledge.
A further challenge is the absence of a real model of banking, insurance and sharia securities that is practiced in the world today. The growing understanding remains that as long as there is no usury (riba) or no interest, the transaction can proceed. However, in practice, sharia finance still adopts a conventional framework. As a result, the prevailing practice is sharia-compliance and not sharia-based. Therefore, the transfer of Islamic finance at the level of formal education is so emphasized to produce better sharia finance industry. In this context, Sayyid Tahir has offered to create a blueprint for teaching Islamic banking and finance and an applicable sharia curriculum. Wallahu A’lam (Allah is more learned, Allah knows better).
Laily Dwi Arsyianti, Lecturer at IE FEM IPB dan UIKA Bogor
Posted on 11/01/2012 by shariaeconomicforum
The Essence of Islamic Wealth Management
The emergence of outlets along with the products with various sharia financial services has gradually brought about a new form of sharia finance industry, that is, Islamic Wealth Management. Throughout the discussions about wealth management it is also known as Sharia Financial Planning. Various sharia financial portfolios in the form of deposits, mutual funds, insurance, capital markets, etc. are the choice of upper middle class Muslim families to manage their assets. The development of the industry can serve these groups of people towards the economic needs within the sharia principles. The needs arise in line with the steady growth of the Indonesian upper middle class Muslim population which also reflects the Islamic spirits that lift among them.
Adequate income and increasing levels of savings among the Muslim families grow to stimulate the wealth management service industry, and this condition is espoused by conditions in which Muslim individuals have less free time to organize their wealth. The presence of wealth managers will certainly accommodate this segment of community with their needs. Despite this, wealth management is not only the management with profit orientation, but also social orientation and family’s other needs-orientation, such as the allocation of wealth to pay zakat, infaq, alms or waqf. Besides, this also manages the expenses for family needs such as alternatives and allocation of Islamic school fees for children, recreation.
But one thing that needs to be noted is that the Islamic Wealth Management practice or the Islamic Financial Planning practice has not yet reflected the essence of wealth management in Islam. Moral values in faith (aqidah) and characters (akhlaq) have not been wholly illustrated in the new industrial activities. Therefore, Islamic wealth management practices seem, on its face, to be limited to “the management of the wealth of the wealthy owners to maintain or even multiply their wealth in a sharia/halal manner (if not wanting to be defined as wealth accumulation activities in a sharia manner).” This condition will certainly leave the meaning of Islamic wealth management to be limited to only material-oriented activities, without “spirit”, without the “soul” of Islam with stronger nuances of worship in each activity of dealing between the humans (muamalah).
So, before understanding the essence of Islamic wealth management overall and entrenching the spirits of Islam in terms of dealing between the humans (muamalah) in the financial economic matters, it is better to first identify the Islamic moral values that are immediately relevant to assets. Some values of the Prophet’s advice on which the directives are used are:
“Good assets are assets in the hands of the pious people.”
“The best people are people who bring benefits to other people.”
The moral values referred to by the hadith that good assets are assets in the hands of the pious people, meaning that in terms of wealth management, the management of assets will basically reflect the piety of the parties or asset owners. What are the indications? The indications are the property is managed with the intention, methods and objectives for the benefit of Allah SWT alone. The second moral values might have technical definition of piety, that is, the best value of people is people that are most beneficial to other people. In terms of wealth management, wealth should be a tool to distribute or maximize the benefits of their owners. In other words, the piety of someone will be more measurable based on the amount of wealth that can provide benefits to the environment. That means the property is only a tool to achieve a better goal, to make the owner the noblest human being.
Based on these Islamic moral values, the human orientation in managing their property under the Islamic law will be primarily oriented to two things. First, these assets are used for the course of personal life and their family as the compulsory needs that must be based on their characters as human beings. Second, these assets are used by humans not for their family, but used with a motive for endowment as a tool to get the title of veneration from God based on the standards that are also conveyed by God.
A motive for primary needs and good deeds are the two main objectives of the use or utilization of assets. As normally the primary needs are relatively fixed for each individual, the increase in wealth should affect the increase in good deeds or the utilization of that wealth to other people. This paradigm will of course affects someone’s motivation in gaining wealth. It is believed that the spirits to acquire wealth is essentially a reflection of the spirits to maximize good deeds, not the spirits to maximize the enjoyment of it.
Let’s see the examples given by the lives of former noble people, the Prophets and Apostles, Friends and Guardians, although history recognizes them as merchants with abundant commerce, but history does not miss snapping their modest daily lives. They take what is enough for their lives and the rest they are given sincerely to other people, to the community, to their God. Someone among the noble ones once said: “people in the world are like guests, and their property is like a borrowed object. The guest will finally leave and the borrowed object will be returned.”
The purpose of wealth management is not limited to the activity of accumulating wealth according to the Islamic law, but it is more in that the wealth management is to maximize themselves to be the best human being in the eyes of Allah SWT. The orientation of wealth ownership is not enjoyment, but the use for the sake of true happiness.
Besides, without an effort to maintain discipline in compliance with the sharia principles including the Islamic moral values, the tendency of the economic system and applications – sharia finance will be mimicry of what the conventional system has. This is because the industrial parties are only concerned with the provision of products in the scope of managing wealth or liquidity that refers to preferences (more oriented to halal products than Islamic products), of the property owners. Even on a broader scale the behavior of providing products by sharia financial practitioners in the market is unconcerned about the sharia finance relationship or implications for the economic activities and performance in a broad sense. Portfolios as sharia financial products used in wealth management are merely a conventional financial outlet similar to the conventional system’s that further complicates the labyrinth of money in the financial sector which only to empty into the productive activities of the creation of goods and services (as the essence towards which the Islamic economic goals are achieved). That way, the sharia financial economic system, at the end of the day, will lose its characters, with blurred functions and unclear objectives and purposes.
Carelessness of the sharia financial practitioners about the substance of the sharia finance principles, especially in the Islamic moral values, and the level of education and preference of the public (as users of sharia financial products for family financial management and planning) are still low, making the applications of sharia economics or finance limited to only the halal applications. The quality of sharia economic or financial applications is very low. Financial applications that focus only on applications that are free from usury (riba) or gambling (speculation), according to me, are the minimum applications of the sharia economic and finance practices, let’s say the level is in the application of halal economics, but if we want the Islamic economic practices to rise to the next higher level (“Islamic economic applications”), the ethics and values of Islamic economic behavior must be introduced. Behavior such as seeking wealth is not for accumulation, but expansion of the benefits for the public, especially the poor people. This behavior is one supplied with the belief in God’s promise that God will increasingly give blessing to those who spend their wealth in God’s way.
It is hoped that, starting from now, in line with the lesson learned and increasing belief or understanding of faith (aqidah) and characters (akhlaq), along with the adequate knowledge and skills of Islamic law, human beings with ability to maintain the spirits of Islam awake to the application and development of the Islamic financial economy. In terms of Islamic Wealth Management or Islamic Financial Planning, it is hoped that this industry becomes a virtuous industry which produces and spreads virtue and increasingly establishes and serves the wealthy people who are pious. In the name of God (Bismillah).
Source : http://abiaqsa.blogspot.com
Sharia Banking: Development and Description
Sharia banking phenomena
Today sharia banks become one of the thriving industrial sectors in Indonesia. Some facts of the rapid growth of sharia banking can be found in tables and graphs below:
Third Party Funds, the amount of public funds placed in bank
Description Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Jun 10 Commercial Bank 1,127,937 1,287,102 1,510,834 1,753,292 1,950,712 2,096,036 Sharia Bank 15,581 19,347 28,011 36,852 52,271 58,078 Sharia Bank Market Share 1.38% 1.50% 1.85% 2.10% 2.68% 2.77%
Financing, the amount of funds channeled by banks to the public
Financing Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Jun 10 Commercial Bank 695,648 792,297 1,002,012 1,307,688 1,437,930 1,586,492 Sharia Bank 12,405 16,113 20,717 26,109 34,452 46,260 Sharia Bank Market Share 1.78% 2.03% 2.07% 2.00% 2.40% 2.92%
Assets, total wealth owned by banking
Asset Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Jun 10 Commercial Bank 1,469,827 1,693,850 1,986,501 2,310,557 2,534,106 2,678,265 Sharia Bank 20,880 26,722 33,016 49,555 66,090 75,205 Sharia Bank Market Share 1.42% 1.58% 1.66% 2.14% 2.61% 2.81%
Third Party Funds, financing and assets of sharia banking grow more rapidly than those of the commercial banks, and therefore, the market share of the sharia banking against the commercial banking always increase.
This is supported by the thriving sharia banking outlets
Number of Outlets Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Jun 10 Conventional 8236 9,110 9,680 10,868 12,837 12,972 Sharia 434 509 568 790 998 1,302 Comparison 5.27% 5.59% 5.87% 7.27% 7.77% 10.04%
In addition to the expansion of sharia banking to increase the number of its outlets, the thriving outlets is attributable to the increasing opening of sharia banks, either Sharia Commercial Banks (BUS) or Sharia Business Units (UUS).
This development makes many parties, ranging from the government, academics, companies, to the public, try to understand sharia banking further, starting from the philosophy, operational system to its products.
Sharia banking philosophy
Sharia banking is part of the sharia economy, and sharia economics is part of muamalat (the relationship between humans and humans). It is therefore sharia banking is an inseparable part of the Qur’an and Sunnah as a source of the Islamic law. Sharia banking is also inseparable from the sharia economic paradigms.
Here are some of the several sharia economic paradigms:
- Tauhid (Oneness of God). In the view of Islam, one of the human missions created is to devote themselves to Allah SWT: “And I did not create the Jinn and Mankind except to worship Me alone” (51:56). This self-devotion is the tawhid realization of a servant to His Creator. All economic activities can consequently hold a worship value if intended to bring closer to Him.
- Allah SWT as the real owner of the wealth. The sharia economic principles views that Allah SWT is the real owner of wealth. “All that is in the heavens and the earth belongs to Allah ...” (2:284). Humans only get a wealth deposit from Him, so how to get and spend the wealth must comply with the rules of the real owner, that is, Allah SWT.
- Global and long-term vision. The sharia economics teaches people to have a far-sighted vision and think about the nature as a whole. The Islamic teachings encourage the people to pursue the afterlife which is long-term life, without letting go of the world: “Seek instead, by means of what God has granted thee, [the good of] the life to come, without forgetting, withal, thine own [rightful] share in this world; and do good [unto others] as God has done good unto thee; and seek not to spread corruption on earth: for, verily, God does not love the spreaders of corruption!” (28:77). Islamic essays passed down to Muhammad SAW also contain mercy for the universe: “And We have not sent you, [O Muhammad], except as a mercy to the worlds” (23:107). Sharia economics, in the time dimension, observes the long-term effects, even the hereafter (akhirat). Meanwhile in the area and scope dimensions, the benefits of the sharia economics must be enjoyed not only by humans, but also by the worldGlobal and long-term vision. The sharia economics teaches people to have a far-sighted vision and think about the nature as a whole. The Islamic teachings encourage the people to pursue the afterlife which is long-term life, without letting go of the world: “Seek instead, by means of what God has granted thee, [the good of] the life to come, without forgetting, withal, thine own [rightful] share in this world; and do good [unto others] as God has done good unto thee; and seek not to spread corruption on earth: for, verily, God does not love the spreaders of corruption!” (28:77). Islamic essays passed down to Muhammad SAW also contain mercy for the universe: “And We have not sent you, [O Muhammad], except as a mercy to the worlds” (23:107). Sharia economics, in the time dimension, observes the long-term effects, even the hereafter (akhirat). Meanwhile in the area and scope dimensions, the benefits of the sharia economics must be enjoyed not only by humans, but also by the world.
- Justice. Allah SWT has ordered to serve justice: “Indeed, Allah commands you to render trusts to whom they are due and when you judge between people to judge with justice” (4:48). Someone’s hatred of a people cannot even be tolerated as such that would make the person unfair: “O you who have believed, be persistently standing firm for Allah, witnesses in justice, and do not let the hatred of a people prevent you from being just. Be just; that is nearer to righteousness. And fear Allah; indeed, Allah is acquainted with what you do” (5:8).
- Great moral characters (Akhlaq). Islam encourages the practice of great moral characters to every human being, and the Messenger of Allah SAW once even stated that: “Indeed I was sent to improve the great moral characters” (HR Malik). This includes when they have economic activities. The examples of great moral characters are friendly, helpful, humble, trustworthy, honest, and very supportive of the economic activities to remain healthy. Here is the best example of characters shown by Muhammad, so that Allah SWT praised him: “And indeed, you are of a great moral character” (68:4). Prior to appointment as an Apostle, Muhammad was so trusted by his people that He was given the title ‘al Amin’ (the trusted one). The result was He became a successful entrepreneur.
- Brotherhood. Islam holds that every believer is a brother: “The believers are but brothers” (49:10). The brotherhood concept teaches that believers must be egalitarians, care about others and help each other. Islam also teaches that differences among tribes and peoples are not for contradictions, but rather as a means to know and understand each other: “O mankind, indeed We have created you from male and female and made you peoples and tribes that you may know one another” (49:13).
Sharia banking operations
Sharia banking performs the same function as conventional banking as an intermediary institution (channeling) from customers who own funds (shahibul mal) with customers who need funds. However, funding customers in sharia banks are treated as investors and/or fund depositors. The funds are channeled by sharia banks to financing customers for multi-purposes, both productive (investment and working capital) and consumptive. Sharia banks will earn profit sharing/margin from the financing as income for the sharia banks. So, the financing customers will pay the principal + profit sharing/margin to the sharia banks. The principal will be repaid fully to the funding customers while the profit sharing/margin will, in a ratio as agreed upon, be shared between the sharia banks and the funding customers.
This means that in sharia banks, funds from the funding customers must be first grown to generate income. That income will be shared as the benefits of the sharia banks and the funding customers.
Sharia banking product schemes
Sharia banks, in its operations, use several schemes that are consistent with the Islamic law as described below:
Some members of the public still wonder about the difference between sharia banks and conventional banks. There are even some people who consider sharia banks play camouflage tricks to attract business from emotional Muslim segments. There are actually quite a lot of differences between sharia banks and conventional banks, ranging from paradigm, operational, and organizational settings to the products and schemes offered. The paradigms of sharia banks are consistent with sharia economics described above. While the remaining differences are as follows:
Types of Differences Sharia Bank Conventional Bank Legal Basis Al Qur`an & as Sunnah + Positive Law Positive Law Operating Basis Profit-sharing Interest
Under the Islamic law, e.g. profit sharing (mudharabah), safekeeping (wadiah), mark up/cost plus (murabahah), partnership (musyarakah), etc.
Treatment of Public Funds
Public funds are deposits/investment that only get proceeds when grown/managed in the first place
Public funds are deposits, the interest of which must be paid at maturity
Fund channeling sector Halal is required Halal/haram don’t matter Organization DPS (Sharia Supervisory Board) is required No DPS (Sharia Supervisory Board
Accrual and cash basis (for profit sharing) Accrual basis
There are also differences between profit sharing and bank interest, as follows:
Interest Profit Sharing Interest rate is determined in advance The profit sharing ratio is determined in advance Interest is applied to the principal debt (for credit) The profit sharing ratio is applied to the income earned by the financing customer Interest rate may be changed at any time unilaterally by the bank The profit sharing ratio may be changed as agreed upon by both parties
- Funding/collection of funds: Safekeeping (wadiah) and profit sharing (mudharabah)
Under the safekeeping (wadiah) scheme, customers deposit their funds with sharia banks. Customers allow their funds to be utilized by sharia banks for multi-purposes (under the Islamic law). If, however, customers want to withdraw funds, the sharia banks are required to provide those funds. Generally, the safekeeping (wadiah) scheme is used in giro products and partially savings.
BSM adopts this scheme for BSM Giro, BSM TabunganKu and BSM Tabungan Simpatik.
Under the profit sharing (mudharabah) scheme, customers invest their funds in sharia banks for management. Under this scheme, BSM acts as an investment manager for the funding customers. Customers entrust the management of those funds for profitable business (under the Islamic law). The proceeds from the business will be shared between the funding customers and BSM in a ratio as agreed upon in advance.
BSM adopts this scheme for BSM Deposits, BSM Savings, BSM Tabungan Berencana, BSM Tabungan Mabrur, BSM Tabungan Investa Cendekia and BSM Tabungan Kurban.
- Safekeeping (Wadiah) (deposits)
- Profit sharing (Mudharabah) (investment)
Funding/collection of funds: Mark up/cost plus (Murabahah), leasing (ijarah), trade financing (istishna), profit sharing (mudharabah), partnership (musyarakah), etc.
It is a sale and purchase contract between a customer and a sharia bank. A sharia bank will buy goods needed by a customer, which then sells the goods to the customer at an agreed margin. The selling price (principal financing + margin) will be paid in installments every month for a period agreed upon between the customer and the sharia bank. The selling price has been agreed in advance, the customer’s installments are fixed during the financing period.
Almost all BSM consumptive financing (BSM Griya, BSM Oto) adopts this scheme. This scheme is also widely adopted by BSM in financing working capital or investment in the form of goods. About 70% of the sharia bank financing adopts the mark up/cost plus (murabahah) scheme.
It is a lease agreement between a customer and a sharia bank. The sharia bank finances the needs for services or benefits of goods and then lease them out to the customer. Generally, the customer pays the lease charge to the sharia bank every month in an amount as agreed upon in advance.
BSM applies this scheme to BSM Pembiayaan Eduka (funding for college) and BSM Pembiayaan Umrah. Some investment financing also adopts the leasing (ijarah) scheme, specifically the ijarah muntahiya bit tamlik (IMBT) scheme (the customer is provided for in the lease and the lease arrangement).
It is a sale and purchase contract between a customer and a sharia bank, but the goods to be purchased are in the process of manufacture. A sharia bank finances the manufacturing of the goods and gets payments from the customer as much as the goods financed plus a profit margin. Payment of principal installments and margin to the sharia bank is not at one time at the end of the period, but repaid in installments as agreed upon. Generally, a sharia bank adopts this scheme to finance construction.
It is a profit sharing-based contract under which a sharia bank fully bears the needs for business capital/investment.
It is a profit-based contract under which a sharia bank does not fully bear the needs for business capital/investment (usually around 70% to 80%).
- Mark up/cost plus (Murabahah)
- Leasing (Ijarah)
- Trade financing (Istishna)
- Profit sharing (Mudharabah)
- Partnership (Musyarakah)
Services: Agency (wakalah), pledges (rahn), guarantees (kafalah), currency exchange (sharf), etc.
Agency (wakalah) means a guardianship/representative. This means BSM works to represent customers in doing something. BSM applies this scheme to various services, such as money transfers, L/C, domestic documentary credit, etc.
Rahn means a pledge. It means a sharia bank lends money (qardh) to a customer to the customer with a deposit paid by the customer to the sharia bank. The sharia bank collects a deposit fee to cover the costs and benefits of the sharia bank.
BSM applies this scheme to the BSM iB Gold Pledges.
Under the guarantees (kafalah) scheme, sharia banks guarantee their customers. In case something happens to the customers, the sharia banks will be responsible to the third party as agreed in advance.
BSM applies this scheme.