Islamic Banking in Indonesia

Chapter 9

Islamic Banking in Indonesia

Islamic and Government in Indonesia

Indonesia was one of the earliest parts of South-east Asia to receive Islam, though the actual process was sporadic and piecemeal. The earliest states in the region were Hindu-Buddhist kingdoms, with Hinduism Buddhism having been introduced to South-east Asia by Indian merchant adventures around the first century AD. Their conversion to islam was a gradual one.

But just as the reception of Hinduism and Buddhism in Indonesia had been coloured by local belief system, so too in the case of islam, and from the outset the Muslim faith in Indonesia diverged significantly from the orthodoxies of islam in, say, the Arabian Peninsula.

The highly syncretic nature of islam in Indonesia has meant a more than relaxed attitude towards the Shari’ah, which may be one of the reasons why Islamic banking has been so slow in coming to the region.

Another important factor has been the de-politicing of Indonesians society dunring successive Sukarno and Suharto regimes. Although independent Indonesia was founded along the lines of liberal democracy, with a multi-party parliamentary system, a free press and freedom of organization including the formation of trade unions, the country’s first president, General Sukarno, was very much opposed to a Western style of governance, which he saw as at variance with Indonesian cultural values of harmony and concensus.

The army’s put down of the attemped  communist coup coup of 1965 and the replacement of President Sukarno’s “Old Order” regime by President Suharto’s “New Order” government only served to strengthen the position of Golka in the scheme of things.

Having effectively disposed of the Indonesian Communist Party (PKI) in the bloodletting of 1965, Suharto’s government saw militant Islam as its next-biggest threat – the 1970s and 1980s were of course a time of Islamic revival pertly as a result of the Iranian revolution and partly reflecting a more general resurgence of islam in the Middle East.

The collapse of the Suharto regime in 1998 brought a possibility that things might change, especially with the success of the Party OF National Awakeneing, a modernist Islamic party led by Abdurrahman Wahid, which was runner-up to the Indonesian Democratic Struggle party, led by Megawati Sukarnoputri, daughter of former president Sukarno (Golka finished a poor third).

After years of upheaval following the overthrow of former President Suharto, President Megawati presided over a period of relative stability. However in late 2004, she was replaced by Dr.Susilo Bambang Yudhoyono, the senior minister in charge of political and security affairs then. Corruption is still rife, problems associated with separatise movements in Aceh and Papua persist, and there is the ever-present threat of further terrorist violence.

Traditional Islamic Financial Institutions in Indonesia

After some false starts, Islamic financial institutions are developing rapidly and have the enthusiastic support of many young people and intellectures. There are interest-free financial institutions operating in Indonesia.

Introducing of Measure to Permit Islamic Banking in Indonesia

The present government in Indonesia seems to associated Islamic banking with Islamic fundamentalism to which the regime is not at all sympathetic.

In order to accommodate the public demand for the existence of a new banking system, the Indonesian Government has implicitly allowed the shari’ah banking operations in the Act No.7 of 1992 concerning banking which is elucidated in the Government Decree No. 72 of 1992 concerning Bank Applying Share Base Principle.

In 1998, the Act No. 10 of 1998 on the Act No. 7 of 1992 concerning banking came into force to give stronger legal foundation for the existence of Shari’ah banking system.

Contemporary Indonesian Islamic Financial Institutions

Indonesia has a small market and loyal customers of Islamic banks. Bank Indonesia ideally wants Islamic banks to reach a 5 per cent market share over the next ten years.

Islamic financial institutions in Indonesia include: the Bank Muamallat Indonesia which has been functioning since 1992, several new Islamic branches of regular commercial banks and at least one bank just converted from the interest system, eighty Bank Perkreditan Rakyat Shariyah (BPRS-Smaller banks limited to borrowing and lending in limited areas), and 2470 Bait Maal Wat Tamwil (BMT – Islamic Saving and Loan Cooperatives of wich about 200 are reported to be registered with the Ministry of Cooperatives of which about 200 are reported to be registered with the Ministry of Cooperatives and Small Business).

Bank Indonesia has established an Islamic Banking Development Committee comprising Oversight Committee, Expert Committee and Working Committee.

Other than that, Bank Indonesia has also issued or is currently developing the issuance of decrees by the Board of Managing Directors concerning Islamic commercial and rural banks which have provided legal framework in developing and expanding the network of Islamic banks.

The response of the public ghas been overwhelming and with this, the industry is seeing some significant changes in the fate of the Islamic banking industry.

The Introducing of Standard Accounting Procedures

As of today, there are a number of banks delivering Shari’ah banking in Indonesia, namely bank Mandiri, Bank Danamon, Bank Muamalat Malaysia Berhad ang Bank IFI. The Islamic banking sector continues to provide similar banking and finance facilities which conventional banks have been providing but in accordance with Shari’ah law.

Forms of Lending and Borrowing in Indonesia

The Indonesian Islamic institutions take a variety of funds from depositors on which they pay various sums connected with their profits.

Lending forms

Advance Purchase Forms

·      Cost Plus Financing – Murabaha

Murabaha is a sales contract made between the bank and the customer for the sale of goods at a price which includes a profit margin agreed to by both parties.

·      Purchase with Specification – Istishna

Istisnha is a sales contract made between the bank and the costumer where the customer specifies goods to de made.

·      Purchase with Deferred Delivery – Bai al Salam

Bai al Salam is a sales contract where the price is paid in advance by the bank and the goods delivered later by the customer to a designee.

·      Lease and Hire Purchase – Ijarah Mutahia Bittamlik

Ijarah Mutahia Bittamlik is a contract under which the bank leases equipment to a customer for a rental fee.

                Profit-Sharing Forms

·      Trust Financing/Trustee Profit Sharing – Mudharabah/Mudharabah Muqayyadah

In this intence, the bank provides the capital (shahibul maal) and the customer manages (mudharib) the project. The profit from the project is split according to a pre-agree ratio.

·      Partnership/Participation Financing – Musyarakah

This is a partnership between a bank and its customer in which profits are shared on a pree-agreed basis, but losses are shared on the basis of equity contribution.

·      Benevolent Loan – Qard al Hasan

These are interest-free loans, generally with a charitable motivation.

·      Collateral Agreement – Rahn

In this instance an agreement is made to provide collateral to the bank, either in the bank’s or the customer’s custody as appropriate.

·      Agency/Trust – Wakalah

This is an agreement authorizing another party to be an agent to conduct some business – in this case, an authorization to the bank to conduct some business on the customer’s behalf.

·      Agency - Havalah

This is an agreement made by the bank to undertake some of the liabilities of the customer.

                Borrowing Forms

·      Ummat Saving – Tabungan Ummat

·      Trendi Saving – Tabungan trendi

·      Ukhuwah Saving – Tabungan Ukhuwah

·      Arafah Saving – Tabungan Arafah

·      Fulinves Deposits – Deposito Fulinves

·      Wadi’ah Current Account – Giro Wadi’ah

·      Muamallat Financial Institution Pension Fund – Dana Pensiun Lembaga Keuangan

Summary

Chapter 9

Islamic Banking in Indonesia

Book " Islamic Banking & Finance in South-East Asia" by Angelo M Venardos