For a country like Indonesia that has the largest Muslim population in the world, Islamic banking is moving in slow progress – with only less than 6% contribution on the country’s total national banking asset and only 8% of the total population knowledgeable on the Sharia-compliant financing. Yet, Indonesia still poses a great potential on boosting the Islamic banking sector, the authors argue.
Indonesia, the largest target market for Islamic finance with more than 200 million Muslim citizens, is struggling so hard to be placed at the 10th rank, left behind by the neighbouring country Malaysia which leads the Global Islamic Economy Indicator for the fifth year in a row (Reuters, 2017). As witnessed today, the development of Islamic banking as the core sector of Islamic finance is still far from satisfying the expectation. According to Financial Service Authority (OJK, 2017), the total asset of Islamic banking is only around IDR 400 trillion or equal to 5.18% of national banking asset. In line with that, the market share of Islamic banking is merely 5.78% of the national banking. Whereas on the total fund collected from society, Islamic banking is only able to acquire IDR 341 trillion compared to the total society fund in national banking which is not less than IDR 5,289 trillion. On the side of distributing fund to society, the number is quite the same, IDR 291.18 trillion from Islamic banking compared to IDR 4,782 trillion from total national banking.
The under-performance of Islamic banking might be due to the limited product diversification offered, the low level of differentiation of Islamic banking from its counterpart, and the low literacy level of Islamic banking among society.
According to Head of Commissioner Board of Indonesia Deposit Insurance Corporation (LPS) Halim Alamsyah, one of the factors hindering the acceleration of Islamic banking is that they merely focus on the role as an ordinary intermediary function, rather than maximising their potential role as an investment or social agent. Hence, it made no difference with the conventional one. They, supposedly, can do better if they are more willing to manage the social funds for investment on real-sector activities, which is highly Sharia-compliant and socially-impactful.
Taking a closer look at the contracts of Islamic banking, more than 50% of total transactions are using murabahah agreement, which vulnerably becomes ribawi if continuously run in a long-term. Obviously, fatwa shopping becomes an issue in this case, as it is hard to find an appropriate rule of conduct for this dominant transaction. Most Sharia Advisory Board sitting in multiple banks and other professionalism issues is largely considered as the root cause of this problem. Moreover, until now, Islamic banking is still not allowed by our regulation to have inventory in their business for keeping the commodity to be sold. Hence, it is very hard for Islamic banking to fully manage the risk according to Sharia as well as to comprehensively agree with PSAK 102 as the accounting standard for murabahah transaction.
About the Authors
Vita Arumsari, S.ST., M.Sc. is a lecturer at Politeknik Negeri Semarang. She is a graduate of Islamic Finance in Durham University, UK.
Yunice Karina Tumewang, S.E., M.Sc. is a lecturer at the Accounting Department, Universitas Islam Indonesia