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LOGO
Development of
Islamic Banking
in Indonesia
Rully Prassetya
Graduate School of Public Policy
The University of Tokyo
January 2013
Asian Financial Market 2012
Agenda
Quick introduction to Islamic Banking
Islamic Banking Development in Indonesia
Findings on Mini Research
Conclusion
1. INTRODUCTION TO ISLAMIC
BANKING
1. INTRODUCTION TO ISLAMIC BANKING
The Foundation of Islamic Banking
Submission to God
Qur’an and Hadits
Aqidah (faith)
Syari’ah (law)
Theological Economic
Islamic Banking
Insurance, etc.
Political Marital Criminal Military Hygiene,
etc.
Akhlaq (Ethics)
Depositors fund: Demand Deposit
(Wadia contract)
Savings (Wadia contract)
Savings (Mudharaba
contract)
Time Deposit (Mudharaba
contract)
POOLING
FUND
Bank Portion
Services (100% bank income) :
• Incoming/Outgoing Transfer
• Kafalah (Bank Guarantee)
• Ar Rahn (Pledge)
Customer Portion
Trading (Cost Plus
Financing):
Murabaha Installment
Murabaha Cash
Equity Sharing:
Mudharaba
Musyakara
Leasing:
Ijara operational
lease
Hire Purchase
Islamic Banking Main (Commercial) Activities
Margin
Profit
sharing
* Margin
* Fee
Profit
Distribution
System
Reasons
The material is haram (li dzatihi)
Haram other than its material
Break the principle of An-Taraddin Minkum
(Contentment)
Asymmetric information
Break the principle of La Tazhlimuna wa
la tuzhlamun (No Oppression)
Supply manipulation (ikhtikar)
Demand manipulation (Bay
Najasi)
Incomplete Information;
uncertainty to both party (Gharar)
Interest (Riba)
Some Prohibited Transactions
ISLAMIC BANKING
DEVELOPMENT IN INDONESIA
SINCE 2000
2. ISLAMIC BANKING DEVELOPMENT IN INDONESIA
SINCE 2000
0
20
40
60
80
100
120
140
160
180
0
5
10
15
20
25
302
00
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
No
v-1
2
BP
RS
(un
it)
BU
S an
d U
US
(un
it)
The number of Islamic Banks has steadily grown
Islamic Bank(BUS)
Islamic BusienssUnit (UUS)
Islamic RuralBank (BPRS)
Data Source: Bank Indonesia 2012
0
200
400
600
800
1000
1200
1400
1600
1800
Islamic Bank branches have also grown rapidly, mainly since 2007-2008
Islamic Bank(BUS)
Islamic BusienssUnit (UUS)
Islamic RuralBank (BPRS)
Data Source: Bank Indonesia 2012
0
500
1,000
1,500
2,000
2,500
3,000
0%
20%
40%
60%
80%
100%
120%
140%2
00
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
No
v-1
2
Pro
fit
in B
illio
n ID
R
FDR
The Islamic Banks' profit has grown at 47% annually since
2000 and the FDR has been consistently high
Financing toDeposit ratio(FDR)
Profit or loss
Data Source: Bank Indonesia 2012
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%2
00
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
No
v-1
2
The share of Islamic Banks’ asset, depositors fund, and credit in national banking industry have also grown, yet still small
Asset share in bankingindustry
Credit share in bankingindustry
Depositors fund share inbanking industry
Data Source: Bank Indonesia 2012
Question #1
• Why Islamic Banking share is very small in Indonesia, given Indonesia is the biggest Muslim-majority country in the world?
– How to further increase its share?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
The depositor’s fund has been mainly in Mudharaba contract (equity-sharing contract or time deposit)
Time DepositsMudharaba
SavingDepositsMudharaba
SavingDeposits Wadia
DemandDeposit Wadia
Data Source: Bank Indonesia 2012
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010 2011 Nov-12
The Financing in Islamic Banking has been dominated by Murabaha contract (trading contract) and less Mudharaba contract (equity sharing contract)
Ijarah
Qardh
Istishna
Salam
Murabaha
Musyaraka
Mudharaba
Data Source: Bank Indonesia 2012
Question #2
• Why has the financing contract been dominated in Murabaha (trading contract) and depositors fund has been in Mudharaba (equity-sharing contract)?
– What is its implications?
FINDINGS ON MINI RESEARCH
FINDINGS ON MINI RESEARCH
Q1: Why the Islamic Banking share is relatively
very small in Indonesia?
• Islamic Banking growth is significantly determined by the dynamics of real rate of return and real interest rate (Kasri 2007)
• Other plausible reasons:
– Regulatory aspect
– Consumer behavior
– Conservatism of Indonesia’s Islamic scholars
1.1 Regulatory Aspect
• Islamic Banking share is still small due to minimal support in Soeharto era (1966-1998): – Islamic movement was seen as threat (Venardos 2006).
– Only minimal supports to Islamic Banking, predominantly to co-opt Muslim groups (Lindsey 2012)
– There was no specific law on Islamic banking until 2008
– Malaysia has it since 1983 and Middle Eastern countries since 1980s.
• Political reform in 1998 brought freedom and democracy – Trend towards “Islamization”
• The lack of support is still apparent as of 2013. – The deposit of government’s fund (ex. pilgrimage fund)
1.2 The influence of consumer behavior
• Two determining factors: value-oriented behavior and product functionality (Karim and Arif 2005)
• Thus, Two types of Islamic Banking customers: – Loyalist-religious
• Individual; Price insensitive; but sensitive to physical Islamic appearance
– Rational opportunist-swinger • Corporations and pension funds; price sensitive
• Things to note: – Lack of understanding on Islamic Banking (only for Muslim; not profitable;
etc.)
– The number of loyalist-religious is still small, (due to historical “secularism” and/or “lack of knowledge”) yet growing (with the rising Islamic trend in Indonesia, particularly among the educated youth).
– The tighter competition between Islamic Banks will lower the bank charges thus would attract more rational opportunist customer.
1.3 Conservatism of Indonesia’s Islamic Scholar
• National Sharia Board, which has the authority to certify sharia-complied products, is another regulator in Islamic Banking industry, other than central bank.
• Conservatism leads to lack of product development
• Example: – As of January 2013, Indonesia (still) plan to allow Islamic
Banks to use currency hedging, while Malaysia has been doing it since 2006.
– Islamic banks in Indonesia are not doing ‘investment-bank activities’, such as seeking profit from trading Islamic securities in Islamic money market, Islamic capital market, and Islamic stock market.
Q2: Why the share of financing and deposit
contract is as it is?
• Indonesian Islamic Banks are quite risk-averse, thus less Mudharaba (equity sharing) contract; while in Murabaha (trading/cost-plus) contract, there is predetermined short-term cash inflow.
• Higher deposits fund share in Mudharaba contract shows investment-manager nature of Islamic bank.
• Implication:
– Islamic Bank will have a better liquidity condition, as the deposit is long term, while financing is short term.
Conclusion
• Small share in Indonesia’s Islamic Banking is caused by: (1) Late-comers and lack of support from government; (2) Lack of understanding on IB and also small, yet growing, number of loyalist-religious customer; (3) Conservatism of Indonesia’s National Sharia Board.
• The current composition of depositors and financing fund is caused by the risk averse nature of Islamic Bank in Indonesia.
Concluding remarks (1/2): the prospect of
Islamic Banking in Indonesia
• Lack of financial inclusiveness in Indonesia – Only 60% of population has bank account
– Indonesia’s domestic credit to GDP ratio in 2011 is (only) 38.5%; while Thailand 159%; Malaysia 128%; and Singapore 93%).
• The growth of Indonesia’s economy – As of 2012: $900 Billion economy (Nominal, 16th
place) and $1.2 Trillion (PPP, 15th place)
– Demographic bonus until 2020
– Stable political system
– Huge natural resources endowment.
Concluding Remarks (2/2): is (current system of)
Islamic Banking the solution for financial stability?
• Yes
– The practice of no-interest will promote real economy growth
– The ban on speculative activity is good for financial stability.
• But it is not enough
– Fractional Reserve Banking (FRB) and fiat money system are still practiced.
LOGO
Contact:
rully.prassetya@yahoo.com or rully02.wordpress.com
mailto:rully.prassetya@yahoo.com
Reference
• Abduh, Muhamad and Mohd Azmi Omar. Islamic banking and economic growth: the Indonesian experience. 2012. International Journal of Islamic and Middle eastern Finance and Management, Vol. 5, Issue 1, pp. 35-47
• Abduh, Muhamad, Salina Kassim, and Zainurin Dahari. Customer Satisfaction and Switching Behavior in Islamic Banking: Evidence from Indonesia. 2012. School of Doctoral Studies (European Union) Journal 2012
• Bank Indonesia. “Kajian Model Bisnis Perbankan Syariah”. 2012. • Ismal, Rifki. Depositors’ withdrawal behavior in Islamic banking:
case of Indonesia. 2011. Humanomics, Vol. 27, Issue 1, pp. 61-76. • Ismal, Rifki. Islamic Banking in Indonesia: Lesson Learned. UNCTAD
Coneference 2011. • Karim, Adiwarman A. and Adi Zakaria Afiff. “Islamic Banking
Consumer Behavior in Indonesia: A Qualitative Approach”. 2005
Reference (Cont’d)
• Kasri, Rahmatina A. “The Determinants of Islamic Banking Growth in Indonesia”. 2008. Journal of Islamic Economics, Banking, and Finance, Vol. 6, No. 2.
• Lindsey, Tim. “Between Piety and Prudence: State Syariah and the Regulation of Islamic Banking in Indonesia”. 2012. Sidney Law Review, Vol. 34, pp 107-127.
• Venardos, Angelo M. Islamic banking and finance in South-east Asia: Its development and future (2nd ed.). 2006. Singapore: World Scientific Publishing.
• Islamic Bank Act No. 21 year 2008
APPENDIXES
APPENDIXES
GENERAL TRANSACTION ON ISLAMIC BANKING
TABBARU TIJARAH
NCC NUC
Get Return
Take Risk
Profit and Loss Sharing
Lending money
Lending yourself
Giving something's
Qard
Rahn
Hiwalah
Must be paid
commercial contracts
Certain Return
Hibah Shadaqah Waqf
For Allah
For Masakin
For Everyone
Wakalah
Wadi’ah
Kafalah
Fixed Return
Murabahah
Salam & Istishna’
Ijarah & IMBT
Mudharabah & Musyarakah
Islamic
Deposits Islamic Financing
Non-commercial contracts
Natural Certainty Contract
Natural Uncertainty Contract
Tijarah Contracts in Islamic Banking
Mudharabah Musyarakah Salam Ijarah Ishtishna Murabahah
ISLAMIC
FINANCING
+
ISLAMIC
DEPOSIT
ISLAMIC
FINANCING ISLAMIC FINANCING
$
Al-Bai’
$
Salam
Bai’ muajjal
Istishna’
Ijarah
no transfer of title
IMBT transfer of title
at the end of period
promise to sell or hibah at the beginning of period
$ $ $ $
$ $ $ $
$ $ $ $ $ $ $ $
Tijarah contract - Natural
Certainty Contract (NCC)
Shareholder Annual
Meeting
Board of Commissioners
Audit Committee
Board of Directors
Division A Division B Division C Division D Division E
Sharia Supervisory
Board
A typical Islamic Bank Organization Structure
ISLAMIC LEGAL FRAMEWORK
THE QUR’AN & SUNNAH
Twin Sources
USUL FIQIH Methodology
FIQIH Out Put
QAWAID FIQHIYAH Guidelines & Milestones
Source of Believe, Law & Values
(Aqidah, Syariah, Akhlaq)
Arabic Grammar And Lexicon
Innovation of Products to Suit Modern Demand.
Basic Principle: Contracts & Condition are Permissible
Science of Qur’an Science of Sunnah
History of Islamic Legal Development
Comparative Study Of Fiqh Schools
Classic & Contemporary
Understanding and Reasoning Exercise of Esteemed Jurists
Towards the Twin Sources Al-Quran and As-Sunnah
Recommended