Examining Shariah Banking Trend in Indonesia
Adison Wongkar

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The rapid development of Islamic banking (popularly known as Shariah banking in Indonesia) these past few years was nothing short of attention-grabbing. IMF reported that internationally Shariah banking has been growing by 10-15% per annum over the last decade, with Indonesia constitutes probably the second largest market for Shariah banking worldwide behind Malaysia. Yet most people are still in the dark when it comes to understanding how this banking system works in practice. This article attempts to understand the main principles behind Shariah banking and critically assess its substantiated practice in Indonesia.

1. The coming of Shariah banking in Indonesia

1.1. Legal foundation for Shariah banking

Indonesian Government instigated Shariah banking operation in Indonesia through Act No. 7 of 1992. In the same year, Act No. 72 of 1992 allowed Shariah banks to apply its profit sharing principle. Both these acts became the foundation for dual banking system in Indonesia, i.e. conventional and Shariah system. Later, Act No. 7 of 1992 was amended by Act No. 10 of 1998 to lend a stronger support for Shariah banking system. And Act No. 23 of 1999 gave Bank Indonesia authority to conduct its task according to Shariah principles.

1.2. Penetration of Shariah banking

As of now, there are three fully Shariah banks: Bank Muamalat Indonesia (which pioneered Shariah banking in Indonesia since 1991), Bank Syariah Mandiri, and Bank Syariah Mega Indonesia. A growing number of conventional banks now has Shariah division (Unit Usaha Syariah or UUS), including but not limited to: BNI Syariah, Bank IFI Syariah, Bank Danamon Syariah, BRI Syariah, BII Syariah, Bukopin Syariah, HSBC Syariah, Bank DKI Syariah, Bank Jabar Syariah, Bank Permata, BCA, Bank Tugu, Bank CIC, Bank Bumiputera, Bank Niaga, BPD Riau, Bank Sumut, BPD Aceh, BPD Sumbar, BPD Sumsel, BPD Kalbar, BPD Kalsel, and BPD Sulsel. It is worth noting that conventional banks with Shariah division occupy the larger market segment within Shariah banking market. Aside from those numbers, there are also 104 BPRS (Bank Perkreditan Rakyat Syariah or Shariah Rural Banks), and about 2470+ BMT (Bait Maal Wat Tamwil or Islamic Savings and Loan Cooperatives).

How has Shariah banking make its way into national banking market? According to recent statistic survey as of June 2007 [1], Shariah banking market constitutes about 1.7% of the national figure. We could expect the number to swell in the coming years due to the adoption of “office channeling” practice designed to accelerate Shariah banking penetration. Per Bank of Indonesia (BI) regulation No. 8/3/PBI of 2006, conventional banks with Shariah division could now conduct Shariah banking at any of their existing non-Shariah branches. Furthermore, BI as national banking authority has designed a blueprint and 10-year plan (2002-2011) for developing Shariah banking in Indonesia [2]. BI actively sets the target for Shariah banking penetration in Indonesia (i.e. 5% of market share by 2008) and subsidized Shariah banks to accomplish that target [3]. Moreover, to support this penetration target, the government has also drafted three regulations (or RUUs) [4] in the area of Shariah banking, Shariah obligation (Sukuk), and tax amendment.

2. Shariah banking principles

2.1. Fundamental prohibition in Qur’an

Shariah banking operates according to the Fiqh al-Muamalat (Islamic rules on transactions). Four well-known admonishments taken from Qur’an are to be observed against: charging interest (riba), contractual uncertainty (gharar), gambling (maisir), and prohibited industries (haram). We will discuss these principles later.

2.2. Shariah requirements for conventional banks

As have been noted, the larger players in Shariah banking market segment are the conventional banks as supposed to the wholly Shariah banks. Are there any additional rules for these conventional banks to ensure the above admonishments are observed? According to Sheikh Nizam Yaquby [5], a Shariah scholar with the Institute of Islamic Banking and Insurance, the requirements for conventional banks include: a) complete segregation of Islamic and conventional funds, b) existence of Shariah supervisory board to oversee compliance with Shariah law, c) managerial commitment, d) safeguarding Muslim investors’ funds against fraud, and e) compliance to AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) standards.

3. Examining Shariah banking principles in practice

3.1. Contentions in defining riba

While nobody will argue that riba is prohibited in Islam, contention remains in what exactly that term refers to. Some Muslims consider qard hassan or “benevolent loan”, where payment of any amount beyond principal amount is totally at discretion of the borrower, as the only type of loan that does not violate prohibition of riba. Abdullah Saeed in his book “Islamic Banking and Interest, A Study of Riba and Its Contemporary Interpretation” (1996) [6] elucidated the differing interpretation between the modernists and revivalist (and neo-revivalist) camp of Islam. The former take it to mean exorbitant interest while the latter take it literally to mean any kinds of interest, including bank interest.

MUI (Majelis Ulama Indonesia, or Indonesian Ulama Assembly) issued a fatwa in 2003 to condemn bank interest as riba and therefore haram and prohibited. However, this fatwa was largely opposed by Indonesian Muslims. Nadhlatul Ulama’s Masdar Mas’udi, contested this fatwa on the ground that bank interest is necessary to keep up with inflation rate [7]. Muhammadiyah’s Dien Syamsuddin also contested this fatwa but on the ground of emergency necessity [8] – that Islam allows prohibited practice (haram) be counted as permitted (halal) in emergency situation. If bank interest is prohibited, then a significant number of bank customers in Muslim-majority Indonesia will be rushing to Shariah banks, which at the moment do not yet have adequate infrastructure to serve all people, and therefore would lead to a national emergency.

Many also criticize the purportedly “zero interest” lending. In practice, although they do not charge interest, Shariah banks do compensate for time value of money by marking up the price, often calculated at higher rate compared to that of conventional banks. For example, when a client wants to borrow money to buy a home, Shariah bank will purchase and resell it to the client at a marked-up price. Hence, what would otherwise be covered by interest in conventional banking is charged to the client as price markup or murabahah. Nevertheless, Shariah banks could very well defend such practice because according to Qur’an: “Interest is forbidden by Allah, while trade has been permitted by Him.” [9]

Zero-percent interest for savings and deposit would undoubtedly be a hard sell to attract investing customers. Obviously, people want a return on investment on their savings and deposits. Avoiding the term ‘interest’, Shariah calls this return on investment as mudharabah or profit (and loss) sharing.

3.2. Difficulty delineating gharar and maisir

Bank Muamalat Indonesia described gharar as a risky proposition, ambiguity or buying something that is unknown, which may lead to maisir or gambling [10]. Prohibition on gharar (uncertainty/risk) and maisir (gambling) is often used as the grounds for criticizing conventional financial practices such as short selling, speculation and derivative financial products (ex. stock options). However, whether an activity could be categorized as gharar and maisir is open to anyone’s interpretation.

One case in point is the differing opinion among Muslim scholars as to whether insurance entails to gharar. Saudi Arabia has issued a fatwa that considered all types of commercial insurance as haram [11] because all commercial insurance invariably entails to interest (riba) and uncertainty/risk (gharar), or ambiguity at best – all of which are prohibited in Islamic. Nevertheless, Takaful Insurance, which in Indonesia is represented by a family of company such as PT. Takaful Asuransi Keluarga and PT. Takaful Asuransi Umum, beg to differ. They argued that “Shariah insurance” is legitimate concept. In fact takaful itself is the Arabic term for ‘insurance’.

In order to circumvent the element of uncertainty in insurance contract, the concept of tabarru (to donate, to contribute, to give away) is introduced [12]. In takaful insurance, customers are not buying risk coverage, but rather to contribute their money to a pool that can be used to help fellow customers. Arguably this finer distinction has no perceptible differentiation in practice and therefore unsettled difference regarding legitimacy of “Shariah insurance” remains.

Another interesting case to examine is the rising popularity of sukuk or financial certificate that is Islamic equivalent for bonds. We all know that bonds yields interest, so how could sukuk be Shariah-compliant since Shariah prohibits deriving money from money? Well, sukuk requires that the investment money is backed by any income-producing tangible asset. As a result, riba is avoided because money is derived not from money but from that tangible asset. Sukuk also has to face the problem of gharar since most investments, whether backed by tangible asset or not, are anything but certain. To work around this problem, the notion of maslahah or public benefit is introduced. Hedging or mitigating risk become permissible as long as it is deemed beneficial for public. Again, not all schools of interpretation would agree on this point.

3.3. On segregation of funds and bank performance

In Indonesia, it is no secret that many UUS or conventional banks with Shariah division utilized their Shariah division merely as a way to attract savings from a niche customer base, which would then be reinvested in their conventional instruments. Doing so would actually make a lot economic sense. How else could the funds be invested to gain profit? Policing the segregation of funds proved to be a difficult because these banks typically still operate on the same accounting system.

This critique of “the same old conventional banking in Shariah clothing” is also echoed by Faisal H. Basri, a professor at FEUI (University of Indonesia’s School of Economics) and commissioner of KPPU (The Commission for the Supervision of Business Competition). Although he is fond of Shariah banking, Faisal pointed out that Shariah banks in Indonesia could hardly be differentiated from conventional banks because lack of innovation [13]. On the same token, he also criticized some of the unprofessional and non-competitive nature of the Shariah banks. Bank Muamalat Indonesia, for example, has long been protected from its competition by the government. Moreover, it has been heavily subsidized by Bank Indonesia.

Faisal’s observation is revealing. He utterly believes in the supremacy of Shariah banking against conventional banking, yet his honest assessment exposed the inherent shortfalls of Indonesian banking practices, particularly in the area of good governance (i.e. KKN or corruption, collusion, and nepotism), innovative business thinking (vs. flock mentality), trustworthiness, and social responsibility.

3.4. On legal dispute settlement

From 2005 to mid-2006, there were at least 150 cases of legal dispute in Indonesia, the number of which is forecasted to only increase in the coming years [14]. Where would customers go to settle disputes? Some, such as Karim Business Consulting’s Adiwarman Azwar Karim, believed it must be settled in religious court based on amendment No. 3 of 2006 for regulation No. 7 of 1989 regarding religious judicial court. This regulation clearly stated that all dispute within Shariah economy must be settled in Islamic religious court.

However, recent dispute involving Pertamina (National Oil and Gas Company) with two Shariah banks proved that settling such dispute justly and satisfactorily is not easy. This case was brought to DSN-MUI and DPS (Dewan Pengawas Syariah or Shariah Overseer Board) without any resolution. Religious court was still ill equipped to handle legal dispute satisfactorily. According to IAEI (Ikatan Ahli Ekonomi Islam or Association of Islamic Economic Experts), only about 500 out of 2,000 religious judge are up to standard in handling Shariah banking dispute cases. To make matters worse, Bank Indonesia has also found many malicious Shariah banks with scheming products.

Outside of religious court, DSN-MUI has also issued fatwa that allows Shariah related legal dispute to be settled with a Basyarnas (Badan Arbitrase Syariah or Shariah Arbitrage Body). While Basyarnas claims to have more legal and Shariah expertise to handle disputes, there are only a small number of them available to handle all the cases. Perhaps a more critical deficiency is that it doesn’t possess a bona fide legal authority to impose sanctions. As a result, settling legal dispute in Shariah transactions remains a cumbersome undertaking [15].

4. Concluding remarks

In summary, the evaluation of Shariah and conventional banking alike should not be divorced from its substantiated practice. As we can’t evaluate the merit of conventional banking by its principles alone, so can’t we with Shariah banking. No matter how lofty and inspired it is, an economic concept is only worth as much goodness it could bring to society in practice.

First and foremost, paramount attention must be given for improving accountability rather than pushing for national Shariah banking system. The government and Bank Indonesia has ostensibly exert enormous funds and effort to aggressively promote Shariah banking system in Indonesia. As a nation, it is our basic character (virtues as well as flaws) that shapes our economic and banking practice. The same character flaws and bad governance that plagues conventional banking invariably confront Shariah banking. Reliance on an external system, be it secularly- or religiously-derived one, could scarcely alter our character and practice because we humans are quick to justify our actions. With so much emphasis placed on Shariah banks being a halal (clean) alternative to ubiquitously haram (unclean) ones, we need to heed to Jesus’ admonishment that what comes out of a man is what makes him unclean (or haram, if you would), for greed, deceit, and all vices come from within our heart [16]. Attaching religious attribute to a banking institution would not make better banking system by itself. It could even be argued that such religious attribution might even lower the clienteles’ guard in critically analyzing the banking products. Coupled with sketchy legal options when facing disputes against Shariah banks, the clienteles could easily find themselves at a disadvantaged position.

Second, as conventional and Shariah banks alike have rights to co-exist and will likely continue to do so, society must have the courage to evaluate both types of banks according to the same standard. In evaluating an economic or banking system, Faisal Basri iterated four universal criteria: 1) whether it uphold God-given freewill to humankind; 2) whether it does not exploit anyone; 3) whether it is efficient and un-wasteful; and 4) whether it is just. As he conceded in his interview, ironically he found all these four criteria being fulfilled in United States where banks are subjected to a higher degree of scrutiny and accountability.

Third, in reality, there is no single universally acceptable interpretation of what constitutes Shariah banking. Indonesian interpretation of Shariah banking is caught somewhere in between the Malaysian liberal interpretation (which is also the fastest growing “Shariah” banking market, if it is allowed to be referred as such) and the strict school interpretation of Saudi Arabia and Middle East. DSN-MUI (Dewan Syariah Nasional MUI) presided as the fatwa-giver that supposed to have the authority in determining what Shariah banking is all about in Indonesia. Yet, sometimes even the majority of Muslims disagreed to their fatwas. This lack of clarity of the rules would be hard on customers who come with different expectations as to what Shariah banking entails. At the end, the Shariah banks could very well be no different from any other banks camouflaged in overwhelmingly abstruse jargon for average customers [17].

Finally, instead of being obsessed with the legality issue of clean vs. unclean (haram vs. halal), we all must ask ourselves: What is the true objective of a banking system or economic system in general? Is it not so that love might be showed towards our fellow neighbors through innovative and better allocation of scarce resources to free them from bondage? If malpractice and indifference towards the poor remains while religious terminologies and concepts replace secular ones, what difference does it make? Rather than endlessly debating whether bank interest constitutes a riba and therefore unlawful, why not focus on the heart of the issue: to helping fellow neighbors to stand on their feet? Jesus stood up in defiance against religious authorities of his time by healing people on Sabbath day, which was considered gravely unlawful, to demonstrate God’s heart to set His people free from bondage [18]. On the same token, the high interest charged by Muhammand Yusuf’s Grameen Bank, is considered as riba and therefore unlawful [19] according to Shariah law. Nevertheless, its innovative banking practice has helped 64% [20] of its clients to cross over poverty line. If we so desire to please God in our banking practice, we should ask whether He is pleased by mere observance to the religious law whose interpretation is often clouded by men’s own interpretation. Isn’t He rather more concerned about freeing each and everyone of His creation to break free from the chain of poverty that so confined and reduced his or her space of life?

Adison Wongkar currently works as a software engineer in Austin, TX. His interest includes ICT and economic development issues.

References

[1] Waspada Online. Bank Syariah Minta Subsidi ke BI (31 Agustus 2007).
Source: http://www.waspada.co.id/Mimbar-Jumat/Artikel-Jumat/Bank-Syariah-Minta-Subsidi-Ke-BI.html
[2] Bank Indonesia. The Blueprint of Islamic Banking Development in Indonesia.
Source: http://www.bi.go.id/NR/rdonlyres/9170EE41-7D9A-4376-B520-A6B3A0945153/1331/syariah_bprintengl.pdf
[3] Source: http://www.waspada.co.id/Mimbar-Jumat/Artikel-Jumat/Bank-Syariah-Minta-Subsidi-Ke-BI.html
[4] Djoni Edward. Bisnis Indonesia Online. Target pangsa pasar 5% tergantung 3 RUU.
Source: http://web.bisnis.com/keuangan/perbankan/1id32659.html
[5] Yaquby, S. N. Shariah Requirements for Conventional Banks.
Source: http://www.islamic-banking.com/aom/shariah/sn_yaqubi.php;
Also cited from IMF publication: Sole, Juan. Islamic Banking Makes Headway.
Source: http://www.imf.org/external/pubs/ft/survey/so/2007/RES0919A.htm
[6] This book has been translated into Indonesian and was reviewed by M. Nur A. Birton in his article: “Mengkaji Konsistensi Teori dan Praktik Bank Syariah” published by Kompas newsletter, June 13, 2004.
Source: http://www.kompas.com/kompas-cetak/0406/13/Buku/1078391.htm
[7] NU Online. NU Tolak Rencana Fatwa MUI yang Haramkan Bunga Bank.
Source: http://www.nu.or.id/page.php?lang=id&menu=news_view&news_id=858&bulanku=5&tahunku=2007&bulanku=4&tahunku=2007
[8] Tempo Interaktif. Muhammadiyah Tidak Setuju Fatwa Haram Bunga Bank, November 9, 2003.
Source: http://www.tempointeraktif.com/hg/ekbis/2003/11/09/brk,20031109-03,id.html
[9] The context of this quotation can be found in Surah Baqarah 2:275.
[10] Source: http://www.muamalatbank.com/berita/ekoislam.asp
[11] The fatwa was issued by Sheikh Muhammad Salih Al-Munajid, a prominent cleric in Saudi Arabia. IslamOnline.net has more information about this fatwa and discussions on insurance in Islam.
Source: http://www.islamonline.net/fatwa/english/FatwaDisplay.asp?hFatwaID=58824
[12] Source: http://en.wikipedia.org/wiki/Takaful
[13] HukumOnline.com. Wawancara Faisal Basri: 'Kerja Bank Syariah Itu Memble dan Tidak Profesional.'
Source: http://hukumonline.com/detail.asp?id=9236&cl=Wawancara
[14] HukumOnline.com. Penyelesaian Sengketa Bank Syariah Masih Diperdebatkan.
Source: http://hukumonline.com/detail.asp?id=15248&cl=Berita
[15] Republika Online. Lukita Tri Prakasa, SH. MSi. Repotnya Bersengketa dalam Transaksi Syariah Pilih Arbitrase atau Pengadilan?
Source: http://pasarmuslim.com/e/ekonomi.php?bid=145
[16] Mark 7:9-23.
[17] The practice of banks using Arabic Shariah terminologies is quite prevalent to a point that it became so overwhelmingly abstruse.
Source: http://www.antara.co.id/arc/2007/10/25/perbankan-diminta-cari-padanan-istilah-syariah
[18] Luke 13:10-17.
[19] Republika Online. Grameen Bank dan Bank Syariah Indonesia.
Source: http://www.republika.co.id/koran_detail.asp?id=303192&kat_id=16
[20] Grameen Bank at a Glance. Source: http://www.grameen-info.org/bank/GBGlance.htm

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