More awareness needed of 'Syariah' banking<\/p>\n
By Taufik, Associate Consultant, MarkPlus Strategic Consulting<\/p>\n
Two and a half years after the crisis hit Asia, a great
\nmajority of Indonesia's banks are still not acting like the
\nmediators of recovery they should be. Economic indicators show
\nthat Indonesia's economy is, at last, on the mend, and the banks
\nare already experiencing overliquidity. The heavy toll left by
\nthe crisis has meant that in order to get back on their feet,
\nthey first need to recapitalize -- and fast. Naturally, this
\nsituation has meant that economic recovery has been sluggish, to
\nsay the least.<\/p>\n
Yet, a new trend has emerged among the country's banking
\nsector: the establishment of a banking system based on Islamic
\nlaw -- Syariah banking. It is hoped that this system can become
\nan alternative method of banking for Indonesia and Indonesians.
\nThe move has been triggered by the ability of one bank, Bank
\nMuamalat Indonesia (BMI), to stave off the debilitating effects
\nof the crisis. Unlike the country's other national banks, BMI
\nenjoyed a relatively smooth ride through the crisis, because it
\nhad a built-in mechanism that enabled it to minimize the adverse
\neffects, especially those related to negative spread.<\/p>\n
Under the Syariah system, depositors' returns are governed not
\nby a predetermined fixed interest rate system but instead on the
\nsize of the bank's return on investments. When disbursing loans,
\nthe bank functions in the same way as an investment bank, whereby
\nboth the investor and the bank reap the benefit of high returns
\non investment, but share the losses, too. If return on investment
\nis high, the bank will take a percentage of the investor's
\nprofits. This is impossible for conventional banks, which merely
\nreceive the interest that they themselves fixed at the time the
\nloan was made.<\/p>\n
BMI was the first Indonesian bank to implement Syariah banking
\npractices. BMI's growth since its establishment in 1992 has been
\nslow. Aside from representing a completely new way of banking for
\nthe country's banking industry, there are some hugely important
\nbusiness considerations at stake. In the early days, BMI found it
\ndifficult to educate the market about its product. Yet without a
\nsmooth market education process, it has been fiendishly difficult
\nto expand the market, especially since the bank has had to fight
\nits battle alone.<\/p>\n
The opportunities are wide open for BMI. People are waking up
\nto the idea that, despite its Islamic roots and development,
\nSyariah banking is not merely a system introduced specially for
\nMuslims, but rather a system that can be used by people of all
\ncreeds and from all walks of life. Indeed, the Syariah banking
\nsystem is, in many respects, no different from that of mutual
\nfunds or investment banking.<\/p>\n
In Malaysia, the investment in Syariah banking made by the
\nethnic Chinese, most of whom are non-Muslim, shows that many
\npeople are investing in Syariah banking, which they consider to
\nbe a fairer system than that offered by conventional banks.<\/p>\n
Despite this, there is a difference between Syariah banking
\nlaw and mutual funds, or investment banking in general. Aside
\nfrom not being based on a system of interest, Syariah banking
\nalso does not allow engagement in business activities that
\nconflict with Islamic ideals. Syariah banking would never fund a
\nbrewery, a casino or a pig farm, for instance.<\/p>\n
If this is the case, why, then, has the response of
\nIndonesians, most of whom are Muslims, been so unenthusiastic?
\nThe answer is simple. Neither the principle, nor the system, is
\nproperly understood by the market. What is more, Syariah banking
\nis not only a new concept for Indonesia, it is also still
\nrelatively new to the Muslim world.<\/p>\n
It must be remembered that the percentage of the population
\nusing the services of banks is still small, and of this number,
\nthe majority uses traditional banking systems and products such
\nas savings and deposit accounts. Furthermore, they still conduct
\ntheir banking business in the conventional way, preferring to put
\nin a physical appearance at their bank. Automatic teller machines
\n(ATMs), which have been in existence since the 1980s, only began
\nto gain widespread favor in the second half of the 1990s. Why?
\nBecause although most ATMs operated 24 hours a day, they remained
\na novelty. Because of the public's hesitation in the face of
\nchange, several banks, including BCA, had to take radical steps
\nto educate the public about the virtues of ATMs.<\/p>\n
If ATMs (which are, after all, a simple innovation) took such
\na long time to become accepted, then it is easy to see why
\nSyariah banking, a far more complex concept, has been so slow to
\ntake off. Aside from being a totally new banking system, even the
\nterms used in Syariah banking are mostly Arabic, that is not
\nwidely understood by Indonesians, despite being the official
\nlanguage of Islam.<\/p>\n
More recently, however, after Syariah banking proved its worth
\nduring the economic crisis, these technical difficulties were
\nquickly forgotten, and rapid development ensued within the
\ncountry's Syariah banking sector. The Indonesian monetary
\nauthority reacted to this sudden demand by opening the door to
\nother banks to develop Syariah banking activities. BMI suddenly
\nfound itself no longer alone in its efforts to familiarize
\nIndonesians with the new system. Competition usually goes hand in
\nhand with efforts by individual companies to grab the largest
\npossible slice of the market for themselves. This situation in
\nturn generally leads to more noise being made in an attempt to
\nattract present and future customers. Ultimately, the general
\npublic will become acquainted with the Syariah banking system.<\/p>\n
The problem facing BMI now is that, despite the many obstacles
\nin its public awareness campaign, as the pioneer of Syariah
\nbanking in Indonesia, the bank is expected to retain its position
\nas the leading player in the market. This is no easy task.
\nAlthough the bank is currently in a healthy condition, it
\nremains, nevertheless, a small bank. The bank cannot emulate the
\nmethods of, say, BCA in attracting the market, nor can it ever
\nhope to establish itself as the \"king of the castle\".<\/p>\n
BMI is aware of this problem. Effectively playing on its
\nconsiderable brand equity within the Syariah banking sector, the
\nbank has founded the Muamalat Institute. In addition to acting as
\na forum for those wanting to find out more about Syariah banking,
\nit is hoped that this institute will serve as a key component of
\nthe BMI's integrated marketing communications strategy.<\/p>",
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