The Emergence and Development of Islamic Banking in Indonesia

Islamic finance has recently received growing attention in Indonesia. Its resilience during the global financial crisis has positioned the sharia-based financial system as a strong alternative to commonly acceptable conventional banking system.

The differences between the two systems lie on the prohibition of interest (riba) and transform it into profit-loss sharing (PLS) mechanism, as well as the ban to invest in non-halal products such as alcohol, pork and gambling.

The Emergence and Development of Islamic Banking in Indonesia

The Emergence and Development of Islamic Banking in Indonesia

Islamic finance additionally forbids transactions that involve excessive risks due to uncertainty (gharar).

The rise in the adoption of Islamic tenets in financial transactions should not be perceived as means to spread the beliefs of Islam as a religion per se. It is essentially the ‘system’ that Islamic finance attempts to promote – a righteous financial system that will best serve the real economy and provide mutual benefits to all parties involved. In the Western world, such system is similar to an ethical banking system.

Indonesia started to tap into Islamic financial sector in 1992, after acclaiming dual banking system which allows the establishment of Bank Muamalat Indonesia as the first full-fledged Islamic bank in November of that your.

Since then, Islamic banking sector has experienced rapid development, doubling the rate of growth as quickly as their conventional counterparts. As of now, there are eleven full-fledged Islamic banks, 23 Islamic banking units (special unit in conventional banks serving Sharia banking operations) and 153 Islamic rural banks (BPRS).

During the initial inception, the promotion of Islamic banking focused on attracting ‘emotional customer’ and the main selling point was the exclusivity of Islamic banking in offering halal transactions for Muslims. As the market evolves, Islamic banks transformed their approaches and emphasized the notion of functional benefits of their products to address customers’ needs in their marketing campaigns.

For communicating the products to consumers, the common banking terms are used while Arabic terms — for examples, wa’diah, murabahah, musyarakah — are only applied for settling the transactions at back office. Islamic banking products can be identified through additional suffix ‘iB’ (Islamic Banking) after the name of the products, such as ‘Savings Account iB’, ‘Current Account iB’ and ‘USD Deposit iB’.

The Emergence and Development of Islamic Banking in Indonesia

The Emergence and Development of Islamic Banking in Indonesia

The non-interest bearing products offered by Islamic banking do not literally mean that there are no returns for saving or investing in Sharia-compliant products. In the case of ‘Current Account iB’ which is based on wa’diah contracts, hibah (gift) may be given at the bank’s discretion as the return. Meanwhile, ‘Deposit iB’ under mudharabah contract provides a profit sharing return as the Islamic bank channels these funds to finance other forms of economic activities. These Islamic deposit products are able to compete with the conventional ones as they offer competitive returns.

On the other hand, financing products from Islamic banking have gained popularity through their fixed installment scheme and not fluctuated repayment plan like in conventional scheme which follows uncertainties in interest rates. Home financing iB (KPR iB) is a good example of preferred Islamic financing product that eases the transaction for acquiring home ownership.

Another unique point of Islamic financing products is the availability of schemes that endorses the principle of partnership that offers profit-and-loss sharing. In Indonesia, this wide array of products from Islamic banks are catered and are made available to all people, regardless of their religions, ethnicity or backgrounds.

With the big buzzwords surrounding Islamic banking phenomenon, this emerging sector should not be missed. Islamic banking is not only about a form of ethical banking that is in accordance with Islamic principles, but it is also a growing and promising market that offers diverse financial products that may suit your needs – a competitive returns with greater transparency and certainty.

This article originally appeared in Global Indonesian Voices, an independent online media written by Indonesians abroad.

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