HISTORY OF SHARIA BANKING by restructuring the financial system as a whole to comply with Islamic Sharia rules, as well as establishing various Islamic financial institutions to compete with conventional financial institutions.
Historically, conceptions and practices of economic transactions that are in line with Islamic sharia principles have been developed since the time of the Prophet Muhammad whose economic activities were centered on Baitul Mal. But the beginning of the history of modern Islamic banking is relatively new, namely since the founding of Mit Ghamir Bank in Egypt by Ahmad Najar in 1963. Furthermore, in 1970, a study was carried out by experts from 18 member countries of the Organization of Islamic Conference (OIC, currently changing to the Organization of Islamic Cooperation) in Karachi, Pakistan, regarding proposals for the establishment of an International Islamic Bank for trade and development (International Islamic Bank For Trade and Development) and proposals for the establishment of the Federation of Islamic Banks. The proposal proposes that the interest financial system should be replaced by a system of cooperation with a risk sharing scheme ,(dividing profit and loss). In March 1973 in Benghazi Libya, the OIC made the decision to form a special field that deals with economic and financial issues. In July of the same year the Islamic economic and banking statutes and articles of association in Jeddah were formulated. Finally in 1975, at a meeting of finance ministers of OIC member states in Jeddah it was agreed that the establishment of an Islamic Development Banking (IDB) with initial capital of 2 billion Islamic Dinars or the equivalent of 2 billion SDR / XDR (special drawing right), and all OIC members become a member of IDB.
Firm and brief financial system restructuring was carried out in Iran, transformation from conventional banks to the Islamic banking system did not experience major problems. The central bank in the country effectively supervises and directs commercial banks in accordance with Islamic financial practices. In contrast to the existing system in Pakistan, where Islamic banking has developed gradually since their independence, the Islamic bank he developed failed due to mismanagement and lack of supervision and guidance from the local banking authority. Despite these failures, both experiments removed the psychological barriers to the implementation of sharia principles in modern financial activities.
The United Arab Emirates established the Dubai Islamic Bank in 1975, Kuwait established the Kuwait Finance House in 1977, Egypt established the Faisal Islamic Bank in 1978, Malaysia established the Islamic Bank of Malaysia Berhard in 1984, Turkey established the Faisal Finance Institution in 1984, Pakistan in in 1979 removed the interest system from its three institutions namely the National Investment, House Building Fianance Corporation and Mutual Funds oh the Investments Corporation of Pakistan, Pakistan converted all conventional banks into Islamic banks in 1985.
Triggered by Law number 10 of 1998, the legal basis of Islamic banks in Indonesia has been quite clear and strong both in terms of institutional and operational basis, thus allowing banks to run a dual banking system, namely the use of conventional and sharia banking that runs in parallel. Seeing the rapid development of Islamic banking so many countries in the world are beginning to glance at the Islamic banking system, not only in Islamic countries, the banking system is implemented, in several European and American countries the Islamic banking system is being developed.
DIFFERENCES OF SHARIA AND CONVENTIONAL BANKING
The difference between sharia and conventional banking is the existence of profit sharing system in sharia banking and the interest system in conventional banking. In the profit sharing system, there is a profit sharing ratio which is applied to income and does not change at all unless mutually agreed upon, whereas in the conventional bank system interest is applied to the principal of the loan and the interest rate can be changed unilaterally at any time by the bank. Sharia bank profits will be distributed to depositing customers, while the profits received by customers in conventional banks only include those promised at the outset. In sharia bank organizations there is also a Sharia Supervisory Board (DPS) which is in charge of guarding sharia values at the bank.
Basically, the thing that distinguishes the Islamic banking system and conventional banking is the principle of determining profits in Islamic banks in the form of PLS (Profit and Loss Sharing) schemes. In Islamic banks interest is nullified. However, depositors are invited directly to build partnership relationships with banks. They will run the business together so that if there is a profit, then the results will be shared and likewise if there is a loss, then each will bear the losses there.
WEAKNESS OF SHARIA BANKING CURRENT
But what is happening right now, Islamic bank financing tends to use murabahah and ijarah financing schemes as its main mode, this is said to be a weakness because murabahah and ijarah schemes are fixed return modes, where the principle that distinguishes between Islamic banks and conventional banks lies in principle risk profit sharing. Then the second weakness is related to investment in the real sector, where Islamic banking circles have not given more serious attention to this problem. However, if we look closely, people and this nation needs investment in the output producing sector, where it will have an extraordinary effect. This stretch of the real sector must be a common concern and concern for the realization of prosperity in the economy.
Murabahah scheme is a scheme that tends not to be risky and also tends to add fuel to the possibility of inflation, where commodity commodity prices tend to increase, therefore the murabahah scheme should be a supporting scheme to cover mudarabah and musyarakah patterns, meaning everything that cannot be handled by mudarabah or musyarakah schemes can be overcome by murabaha schemes. For this reason, it is time for Islamic banking to pay more attention to financing patterns other than murabaha, namely by increasing the percentage of financing through mudarabah and musyarakah schemes.
The impacts arising from increasing the percentage of financing through mudarabah and musyarakah patterns include:
1 Stimulating the real sector, investment will increase, accompanied by the opening of new jobs.
2 In terms of customers. Customers will have two choices whether to deposit funds in Islamic banks or conventional banks by carefully comparing the expected rate of return offered by Islamic banks with the interest rates offered by conventional banks, so this will be a driving factor in increasing the number of customers.
3 Encouraging the growth of entrepreneurs or investors who dare to take risky business decisions, this has led to the development of various new innovations that can ultimately increase competitiveness.
4 Reducing the chances of an economic recession and financial crisis. This is because Islamic banks are asset-based institutions. This means that Islamic banks are production-based institutions. Islamic banks trade based on real assets and not rely on paper work alone. While on the other hand, conventional banks only transact based on paper work and documents alone, then charge interest by a certain percentage to potential investors.
5 Minimizing the financial crisis because the company’s balance sheet is relatively stable, this is due to the mudarib position, where the company does not bear the losses if the losses are caused by conditions that cannot be predicted beforehand. Thus all losses will be borne by Islamic banks as rabbul mal.
OPPORTUNITIES, CHALLENGES AND SHARIA BANKING STEPS IN INDONESIA
There are several influencing factors that can make Indonesia a core player in the world of finance and Islamic banking, including a large Muslim population being potential customers of the financial industry and Islamic banking, bright economic prospects, reflected in relatively high economic growth (range 6, 0% -6.5%) supported by solid economic fundamentals, increasing Indonesia’s sovereign credit rating to investment grade that will increase investor interest in investing in the domestic financial sector, including the Islamic banking industry and has abundant natural resources that can be used as the underlying transaction of the Islamic financial industry.
In addition, the advantages of other Islamic financial development structures in Indonesia are regulatory regimes that are considered better than other countries. In Indonesia the authority to issue Islamic financial fatwa is centralized by the National Sharia Council (DSN) – Indonesian Ulema Council (MUI) which is an independent institution. While in other countries, fatwas can be issued by individual scholars so that the opportunity for differences is very large. However, from the aspect of excellence, Indonesia needs the development of sharia banking in order to improve or maintain these advantages.
In its development, in 2017 Islamic banking faces a number of challenges that must be faced with a variety of strategic steps including:
1 Growth in Islamic banking assets is estimated to be the same as last year’s around 15%. Thus the growth of third party funds (DPK) and financing is still in the range, although the sharia banking asset securitization program will be carried out in Indonesia for sharia banking, it seems, this program is only running in the current year, except for the issuing institution EBA SP Sharia moves faster
2 In 2017, it was marked by an increasingly fierce level of competition in the financial services business, due to the adoption of the ASEAN economic community (AEC) where for the banking industry this was stated in the ASEAN Banking Integration Framework (ABIF),
3 Strengthening capital and business scale of Islamic banks. Islamic bank capital needs to be strengthened significantly in order to have an adequate business scale to expand. To realize that, as a concrete step to develop Islamic banking, OJK must encourage the commitment of Conventional Parent Banks to optimize their role and increase their commitment to develop Islamic banking services to reach a minimum share of more than 10% of BUK parent assets .
4 Improve Islamic financial system technology. The classic problem that must not be ignored, even should be a priority is the technological aspect. This aspect should be the main concern of Islamic banks. Islamic banks must invest their funds in the provision of information technology (IT). In the midst of the current digital financial era the use of IT in business processes has become increasingly widespread and has become a necessity.
From the various challenges, there are several steps to face these challenges, namely:
1 Islamic banks must have international operating standards, supported by adequate capital, competitiveness and competence in the chosen market type. In this year, Indonesia must enter the MEA, if the Islamic banking financial services industry in Indonesia does not have international operational standards, of course the development of Islamic banking financial services is far behind that of other countries that have adopted international operational standards for Islamic banking in that country.
2 Form a strategic alliance of Islamic banks with other Islamic financial institutions. The need to form an alliance is nothing but to help improve the performance and development of sharia banking, but financial institutions outside of sharia banking will certainly experience progress because one financial and other financial institution synergizes to improve its performance.
3 Creating a risk-based regulation and supervision system that can lead to the formation of a self-regulatory system, with adequate IT and HR support. Current consumer trends have made the internet one of the main needs. This can be seen from the surge of internet users, especially during the current smartphone era. Related to these developments, Islamic banks must not be left behind in upgrading the technology used. Benefits that can be felt by Islamic banks with the latest IT systems are an increase in the number of customers and cost efficiency.
4 The needs of sharia bank supervisors who have a high level of expertise and in proportion to the supervisory needs must be fulfilled.
5 Implement mechanism and harmonization of sharia principles supervision in the sharia banking industry and non-bank sharia financial institutions. Harmonization between Islamic financial institutions is important both in the banking industry and the non-banking industry because the principle of the presence of the two institutions is nothing but to transact according to sharia demands. The need for harmonization is aimed at maintaining financial service products that they implement can be used by customers without being based on the worry that these sharia products are sharia or not. In addition, stronger harmonization of banking regulations is also needed to make sharia banking more differentiated given the contrasting aspects of sharia and conventional banking.
6 The regulator must continue to make policies that support and also several holding companies that have Islamic banking business to remain seriously committed in making development strategies
SHARIA 2017 BANKING OUTLOOK
There are important points in the direction of the BI policy mix in 2017. Bank Indonesia will conduct exchange rate stability by minimizing capital. Among them will be issuing more optimal payment system policies such as NPG and GNNT, Facilitation of Social Assistance payments (Smart Indonesia Cards, Healthy Indonesia Cards, Family Hope etc.). This can be a separate opportunity for Islamic financial institutions, because if Islamic banks are able to become BI partners in the distribution of social assistance to all levels of society, then the public can easily recognize Islamic banks, and Islamic banks easily introduce other products to the public. Banking will also be fully supported by Bank Indonesia,
The 2017 sharia banking outlook is prepared with the following macro assumptions.
1 The global economy is still stagnant. The economic growth of the United States in 2016 is estimated to be below 2 percent, Chinese growth is only 6.5 percent, and Europe is only 1.5 percent.
2 Indonesia’s economic growth in 2016 is estimated at 5.2 percent with 8 percent credit growth.
3 Indonesia’s economic growth in 2017 is projected at 5.4 percent with a loan growth of 10 percent.
This Outlook also takes into account the four things that remain obstacles to the Islamic banking industry.
1 The risk of concentrated credit will still rely on the consumptive sector, especially motor vehicle financing and multipurpose financing for fixed income customers.
2 The economies of scale are small because of the capital and capacity of Islamic banks. It is estimated that in 2017 only one BUS will enter the BOOK bank. This small scale of economy creates two obstacles, namely the limited ability to attract the best human resources in their fields, and the limited ability to invest in technology.
3 The switching rate of customers to Islamic banking is still low. Various surveys conducted show that the high desire of conventional customers to move to Islamic banking is measured by the low resistance rate (rejection rate). However, the desire of customers to move is constrained by the limited products and services.
4 The limited liquid assets which is increasingly felt when regional banks have the character of large amounts of excess liquidity in the second to fourth quarters and lack of large amounts of liquidity in the first quarter.
This Outlook predicts four changes that will occur, two potentially good changes (upsides) and two potentially bad changes (downsides). Two changes that have the potential to accelerate the growth of Islamic banking are the process of conversion, spin off, merger acquisition, and the entry process of fintech into Islamic banking. While the two downsides that have the potential to slow down the growth of Islamic banks are the end of the OJK management period, and changes in the management of several Islamic banks. In short, if the two downsides can be managed well and the two upsides can be optimized, then it will not be difficult for Indonesia to have a new face of a strong and healthy Islamic banking.