commissioner.org
| Source | Eubulides |
| Date | 04/01/29/06:56 |
| BANKING
Islam's Edicts The growth of Islamic sensibilities in Asia is tempting domestic and international banks to seek opportunities in a very promising market By Tom McCawley/JAKARTA Issue cover-dated February 05, 2004 MELDA HERYANI, a 21-year-old Muslim student, has an easier time these days reconciling her religion with her finances. As a student of Arabic literature she was aware that the Koran, Islam's holy book, prohibits usury, or interest. So a year ago, Melda, a soft-spoken woman clad in a Muslim headscarf, shifted her savings from a conventional bank to an Islamic one. She says that when she graduates, begins a career and starts a family, she'll be entrusting her savings to Bank Muamalat, Indonesia's oldest bank that operates according to the principles of sharia, or Islamic religious law. "It's my duty as a Muslim," she says from the campus of Jakarta's Al Azhar University. Until recent years, Melda complains, the choice of sharia banks in Indonesia was limited. Those choices are expanding quickly. Since 1999, eight new sharia divisions have opened at major national banks, giving a total of 94 Islamic banks overall. In October last year, HSBC, the world's second-largest financial institution by assets, launched a sharia division in Indonesia. Last year alone, total deposits at sharia banks increased by over two-thirds. Although assets with Islamic banks stand at around 1% of the banking system's total, parliament has instructed the central bank to expand that figure to 5% by 2010. The Koran dictates that charging interest, known in Arabic as riba, is unjust and even damaging to the economy. Instead of paying interest on deposits and charging it on loans, Islamic banks enter into profit-and-loss agreements with depositors and borrowers. Under the Mudarabah system, for example, a bank gives money to a borrower under the agreement that it will share in the profits in an agreed proportion. The bank's depositors receive a share of profits based on the agreed formula instead of interest. (Sharia banks are also forbidden to deal with businesses involving alcohol, pork products, gambling or arms dealing.) Modern Islamic banking has come relatively recently to the 1,500-year-old religion, with the first major such banks opening in the mid-1970s. Thus worldwide, Islamic banks are still developing a basic business model that differs fundamentally from conventional banking. In most Islamic countries, at least 70% of banking transactions have not been based on profit-and-loss sharing but rather on financing, something that to many resembles an interest-bearing loan sometimes disguised as a service charge. For example, under Murabaha, the bank buys equipment or other capital assets and the borrower later buys it back at a profit to the bank. Ijarah, another arrangement, is similar to hire purchase or leasing, but in practice is similar to interest-based lending. The security of deposits is another concern. Under risk-sharing arrangements, depositors are not covered by the same guarantees as those at traditional banks. So far, in the Islamic world, only Iran and the Sudan have mandated interest-free banking by law. Indonesia is following a similar path to Malaysia, which has a dual system of Islamic and conventional banks. Nevertheless, since the 1970s, assets under Islamic financial management have grown to more than $200 billion worldwide. That has prompted a host of international banks such as HSBC, Citibank and ABN Amro to start offering Islamic financial services in the past decade. Islamic banking came relatively late to Indonesia, the world's largest Muslim country, home to over 200 million of the faithful. Indonesia's first Islamic bank, Bank Muamalat Indonesia, was founded in 1991. A year later, parliament passed laws establishing the legal guidelines for interest-free banking. After President Suharto was forced out in 1998, Islamic banking received a huge boost when the country's highest law-making body ordered the central bank to develop sharia-banking facilities. The task required changing bank regulations to facilitate Islamic banks. "Islamic banking is still in its infancy," says Yakob S. Bobat, a senior vice-president with HSBC in Jakarta. Establishing an Islamic banking system brings up logistical problems in Indonesia, an archipelago of 17,000 islands. Islamic banks lack the national networks of conventional banks, limiting their ability to transfer funds. There is also the problem of finding staff trained in the specialized accounting and monitoring techniques needed to ensure success. Judging a company's ability to make future profits is harder than assessing its current credit risk. In many Islamic banks, capital has remained idle after companies failed to meet stringent business requirements. But most small depositors such as Melda are simply looking for a place to store their spare cash. Every month her father, who runs a transport and palm-oil business in Bengkulu, Sumatra, sends her cash for her studies and living costs. He still uses a conventional bank and its cash machines because it's easier and more convenient. Despite the drawbacks, she says, many Muslims in her hometown have been waiting for proper sharia banking facilities. "Many people have been confused about what to do with their money," says Ma'ruf Amin, an official with the Majelis Ulama Indonesia, or MUI, an influential council of Islamic scholars. The main challenge for establishing Islamic banks in Indonesia, says Mulya Effendi Siregar, head of research at Bank Indonesia's sharia division, is "raising awareness." Until the 1990s, Siregar says, some Indonesian Muslims, especially in villages, were keeping their savings in cash, concerned that it was improper to use conventional banks. Savings were often given for safekeeping to a local kyai, or Islamic teacher, or stored in drawers, closets or under the bed. Since the late 1990s, however, sharia outlets have expanded. Indonesia's 94 sharia banks (including 84 in rural areas) have a total of 340 branches. Bank Rakyat Indonesia, which has a nationwide network of small banks, is also expanding its sharia facilities. Total deposits in the sharia-banking system amounted to 2.5 trillion rupiah (almost $300 million) by October 2003. Most of the growth in sharia banking's assets has come from small depositors. Indonesia's Islamic banks have yet to be tested as providers of business financing. But HSBC Indonesia's sharia division, launched in October last year, will focus on corporate and business lending. "Indonesia is a vast, untapped market," says Mahmoud Abushama, a senior vice-president with the bank's sharia division. Abushama says the division will focus on the manufacturing sector and capital markets. Some Islamic bankers claim the system is at least equal to, or even superior to, conventional banking. Bobat of HSBC says that Islamic banks typically have much lower default rates due to a higher level of scrutiny, and having no interest rates, they do not add to inflationary pressures. Supporters argue that Islamic banks are more likely to take a long-term view of a business than short-term considerations of creditworthiness. Indeed, restrictions on currency speculation saved Bank Muamalat from huge losses during the Asian financial crisis. Sticking to Islamic principles in Indonesia's often-murky commercial world will bring its own challenges. In December, the MUI issued a fatwa, or religious instruction, that interest is haram or forbidden for Indonesian Muslims. Ma'ruf Amin of the MUI's fatwa commission said it was "morally binding" on Indonesian Muslims. The MUI itself owns a minor stake in an Islamic bank and some senior council members are employed by Islamic banks to help them interpret Koranic doctrine. Faisal Basri, a prominent Muslim economist, warned that the edict was likely to create a conflict of interest. In establishing an Islamic-banking system, Indonesia will face an easier time than Pakistan, where the Supreme Court had ruled in 1999 that all banks must follow Islamic principles. Three years later, after complaints from international banks and donors, the court overturned its own decision. Wahyu Dwi Agung, an official with Indonesia's sharia-banking association, admits that for now, "sharia banks are too weak to replace the existing banking system." But for the devout at least, there are places other than the mosque or the mattress to store spare rupiah. Rin Hindryati in Jakarta contributed to this article. |
Copyright (c) 1998, Joongpil Cho