Islamic banking refers to a banking system that complies with Islamic law, also known as Shariah law. The basic principles governing Islamic banking are profit and risk sharing between the parties involved, the guarantee of justice for all and transactions based on business or asset-based activities.
These principles are supported by the core values of Islamic banking which encourage activities that foster entrepreneurship, trade and lead to community development or benefit. Activities involving interest (usury), gambling (mailing) and speculative transactions (gharar) are prohibited.
Through the use of various Islamic financial concepts such as ijarah (rent), mudharabah (profit sharing), musyarakah (partnership), banking institutions have the flexibility, creativity and choice in the production of Islamic financial products. In addition, by emphasizing the need for transactions supported by actual trading or business activities, Islamic banking businesses set higher standards for investment and encourage accountability and risk avoidance.
Islamic finance has grown exponentially since its introduction in the 1970s. Current assets and assets under global Islamic banking management have reached USD750 billion and are expected to reach USD1 trillion by 2010.
There are more than 300 Islamic financial institutions worldwide operating in 75 countries. According to the Asian Banker Research Group, the world’s 100 largest Islamic banks registered an annual growth rate of 26.7% 2 and the global Islamic financial industry experienced an average annual growth of 15-20%
Definition of Sharia Bank
The main Islamic financial institution is an Islamic bank or Islamic bank, which is a financial institution whose function is to facilitate economic mechanisms in the real sector through business activities (investment, buying and selling, or other) based on sharia principles, namely the rules of agreement based on Islamic law between banks and other parties. for depositing funds and / or financing for business activities, or other activities that are declared in accordance with sharia values that are both macro and micro in nature.
According to Muhammad (2015), sharia banks are banks whose activities leave usury problems. An Islamic bank or referred to as an Islamic bank is a bank that operates without relying on interest, or in other words an Islamic bank is a financial or banking institution whose principal business is providing credit and services in the payment traffic and circulation of money whose operations are adjusted according to the principles Islamic sharia principles, which were developed based on the Qur’an and the Hadith of the Prophet SAW.
Islamic banks not only pursue material but also immaterial. In addition, the dimensions of Islamic bank success include the success of the world and the hereafter (long term oriented) which is very concerned about the cleanliness of the source, the correctness of the process, and the benefits of the results.
b. Function and Role of Islamic Banks
The functions and roles of Islamic banks are:
- Investment Manager, Islamic banks can manage customers’ investment funds using a profit sharing agreement (mudharabah).
- Investors, Islamic banks can invest the funds they have and the customer’s funds entrusted to them.
- Providing Financial Services and Payment Traffic, Islamic banks can carry out banking service activities as usual banking institutions as long as they do not conflict with Islamic principles.
- Implementation of Social Activities, as a characteristic inherent in Islamic financial entities. As; zakat, shadaqoh, and good loans (qardhul hasan) (Wibowo, 2005).
Principles and Characteristics of Islamic Banking
1) Sharia Bank Principles
Sharia principles are rules of agreement based on Islamic law between banks and other parties for depositing funds and / or financing business activities, or other activities in accordance with sharia. Some principles or laws adopted by the Islamic banking system include:
- Payment of loans is not in the interest system, because in Islamic banks the value is not determined at the beginning.
- Lenders must also share profits and losses as a result of the results of the business of the institution that borrowed the funds.
- Islam does not allow “making money from money”. Money is only a medium of exchange and not a commodity because it has no intrinsic value.
- The element of gharar (uncertainty, speculation) is not permitted. Both parties must know well the results they will get from a transaction.
- Investment is only given to businesses that are not forbidden in Islam. The liquor business, for example, cannot be funded by Islamic banking.
The main principles used in sharia activities are as follows:
- Prohibition of usury in various forms of transaction.
- Conducting trading business activities based on legal gain.
- Giving zakat (Arifin, 2006).
2) Characteristics of Islamic Banks
Islamic banks have different characteristics from conventional banks, which are as follows (Sudarsono, 2007):
- Charges agreed upon at the time the contract is realized in the form of a nominal amount, the amount of which is not rigid and can be done with freedom of bargaining within reasonable limits.
- The use of a percentage in terms of the obligation to make payments is always avoided, because the percentage is attached to the remaining debt even though the deadline for the agreement has ended.
- In the project financing contacts, the Islamic bank does not apply the calculation based on the defined profit determined in advance.
- Submission of public funds in the form of savings deposits by depositors is considered as a deposit (al-wadiah) whereas for banks it is considered as a deposit entrusted as the participation of funds in projects financed by the bank.
The difference in Islamic banks can be seen based on several things, namely: cost burden, the maximum is the burden of costs agreed between the parties for financing transactions, or referred to as administrative costs. In this case, the use of percentages is avoided because of the large potential to automatically multiply the cost and principal of the loan because of something late. In addition, there is no definite advantage in Islamic banks, because it is in the muamalah system of Islamic contracts carried out both in al-mudharabah and al-musyarakah financing which are essentially profit sharing systems. If at the beginning it has been determined what happens is the application of interest, whereas in Islamic banks the prohibition of usury (interest),
d. Sharia Bank Products
Product is everything that is offered to consumers (society) in the form of goods or services in order to get the attention of the community which will later be bought and used by the community. According to Antonio (2001), basic Islamic products or principles include:
- Principle of Deposit or Deposit (Al-Wadi’ah) Al-wadi’ah can be interpreted as being entrusted purely from one party to another, both individuals and legal entities, which must be safeguarded and returned whenever the requester wishes. This principle was developed in the form of deposits, namely wadiah demand deposits and wadiah savings.
- Profit-Sharing Principle This principle explains the procedure of sharing the results between the fund provider and the fund manager. In general, the principle of profit sharing in Islamic banking can be done in four main contracts, namely al-musyarakah, al-mudharabah, al-muzara’ah, and al-musaqah. However, the most widely used principles are al-musyarakah and al-mudharabah.
- Principles of Sale and Purchase This principle is a system that implements the procedure of buying and selling, where the bank will first buy the goods needed or the customer as an agent of the bank makes purchases of goods on behalf of the bank, then the bank sells the goods to the customer at the price according to the purchase price plus with profit (margin). There are three types of buying and selling that are used as the main support in working capital financing and investment in Islamic banking, namely Ba’i Al-Murabahah, Ba’i As-Salam and Ba’i Al-Isthisna ‘.
- Principle of Lease (Al-Ijarah) Al-Ijarah is a contract for the transfer of use rights over goods or services, through payment of rental wages without being followed by a transfer of ownership of the goods themselves.
- Service Principle This principle is all non-financing services provided by banks, including Al-Wakalah, Al-Kafalah, Al-Hawalah, Ar-rahn and AlQardh.