Sharia banking provides universal alternative<\/p>\n
Muhammad Akhyar Adnan, Yogyakarta<\/p>\n
During four decades, the banking industry has been enlivened
\nby the emergence of new types of bank, known as Islamic or sharia
\nbanks. These have been set up, not only in countries where
\nMuslims are in the majority like Indonesia, Malaysia, Egypt,
\nSaudi Arabia, Iran, Pakistan and so forth, but also where Muslims
\nconstitute a minority, as in the United States, Britain, Russia
\nand Switzerland.<\/p>\n
In Indonesia a sharia bank began to operate in the early
\n1990s, much later than its neighbor Malaysia, which started in
\nthe 1980s.<\/p>\n
The most important reason for establishing a sharia bank,
\nparticularly in countries where Muslims account for the bulk of
\ntheir population, is simply that Islamic teachings prohibit the
\npractice of riba (usury), as stated frequently in the Koran.<\/p>\n
But it is interesting to note that, the prohibition of riba
\n(such as bank interest) is not merely the monopoly of Islam, as
\nit is also clearly condemned by Christianity and Judaism. Even
\nthe great philosophers like Plato and Socrates were against usury
\nbecause it led to unfair or unjust transactions.<\/p>\n
There are, in essence, special types of transaction or
\nproducts\/services a sharia bank can enter into. Among these are
\nthe murabaha (trading transaction). For example, a customer who
\nwishes to buy a car (or any other commodity) can go to a sharia
\nbank. The bank will propose to the customer that it will buy the
\ncar at a specified cost, but will sell it again to the customer
\nat an agreed margin or profit. Hence, instead of selling money as
\na commodity, as practiced by conventional banks, the bank sells
\nthe car at an agreed profit and payment procedure within a
\ncertain period of time. This is one of the ways that conform to
\nsharia principles, by which a sharia bank earns its income.<\/p>\n
Another product that might be offered by the sharia bank is a
\npartnership contract. The most common ones are the musharaka and
\nmudharaba.<\/p>\n
The musharaka is broadly similar to what is known by the
\nconventional finance industry or Western practice as venture
\ncapital. In this regard, two parties (a bank and a customer)
\nparticipate in a particular project by putting up capital and,
\nperhaps, skill. The profit and loss resulting from the project
\nwill be shared proportionately by both parties.<\/p>\n
Experience in many developed countries in Europe and the
\nUnited States has shown that many international corporations that
\nhave now become giant companies were launched in collaboration
\nwith venture capitalists. Bill Gates with his Microsoft Corp. is
\nperhaps one of the best examples of how a small firm can be
\nhelped and finally transformed into a giant corporation through
\nthe venture capital system or musharaka.<\/p>\n
Unlike musharaka, in a mudharaba contract, one party will be
\nthe capital supplier, and the other will act as the provider of
\nexpertise and, at the same time, operate or manage the business.
\nThe manager is known as the mudharib and the capital provider
\nsohibul maal. Again, the income generated by the project is
\nshared between the capital provider and project manager, based on
\nan agreed split. However, if normal losses (caused by honest
\nmistakes) are incurred, they will be borne by the capital owner,
\nwhile the manager will bear only nonfinancial losses, such as his
\nlabor or managerial expertise. But any loss inflicted by the
\nmanager's negligence is entirely his responsibility.<\/p>\n
A sharia bank may also provide other fee-based services such
\nas hiwalah (money transfers), kafalah (financial guarantees),
\nwakalah (representation or deputyship), ijarah (leasing) and so
\non.<\/p>\n
These are some illustrations of the way a sharia bank earns
\nits revenue and income. It is also interesting to note that the
\nvariety of products and services a sharia bank can offer is
\nbasically much broader than what conventional banks can provide.
\nA sharia bank will share its income with its depositors on a
\nproportionate basis. Hence, the more profitable a bank, the
\ngreater the income that accrues to depositors.<\/p>\n
Unlike conventional banks, a sharia bank will not provide
\nfixed income or pre-determined interest revenue, meaning that a
\nsharia bank shares its risks with depositors and customers.<\/p>\n
Within the organizational context a sharia bank should also
\nhave a special, independent unit in charge of supervising the
\nbank and seeing to it that the bank always holds to the
\nprinciples of sharia.<\/p>\n
This unit is called the Sharia Supervisory Board (SSB). While
\nthe board of commissioners in a conventional bank is in charge of
\nensuring that the bank fulfills prudential regulations and all
\nother rules imposed by the central bank on the banking industry,
\nthe SSB oversees that a sharia bank's operations are fully in
\ncompliance with sharia principles.<\/p>\n
Given its role and responsibilities, the SSB must comprise
\npeople who have both competence or knowledge about Islamic
\nteachings\/rules on economic activities and skills in business
\nmanagement and auditing.<\/p>\n
Many have acknowledged that sharia banks are much stronger and
\nmore flexible than conventional ones, particularly at times of
\neconomic crisis, such as the one that hit Indonesia in 1997.
\nWhile most major conventional banks collapsed during the crisis,
\nnone of the sharia banks went bankrupt. The reason is obvious --
\nsharia banks do not have the negative spread of their
\nconventional counterparts.<\/p>\n
The growth of sharia banks, both in terms of individuals or
\naggregates, is really remarkable. Sharia banks have so far
\nsuccessfully attracted many depositors, not only from Muslims but
\nalso the non-Muslim community.
\n They have also been very successful in efficiently allocating
\ntheir funds to the market. If the loan-to-deposit ratio (LDR) of
\nconventional banks in Indonesia now averages only about 40
\npercent, the finance-to-deposit ratio (FDR, the sharia bank
\nequivalent of LDR) averages about 80 percent, much closer to the
\nstandard set by the central bank.<\/p>\n
In recent years many conventional banks have expressed
\ninterest or announced plans to open sharia bank branches (as
\npermitted and regulated by the central bank), or even to convert
\nthemselves fully to the sharia bank model.<\/p>\n
Despite some weaknesses, many depositors and customers have
\ntestified they are fully satisfied with the performance of their
\nsharia banks, not only because they generate just and fair
\ntransactions, but also rates of return that are mostly higher
\nthan the interest provided by conventional banks.<\/p>\n
The writer is a senior lecturer in the department of
\naccounting of the school of economics at Universitas Islam
\nIndonesia, Yogyakarta.<\/p>",
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