Are Islamic Banks Really More Expensive, Complicated, Just Relabelled, and Not Truly Sharia-Compliant?

Some time ago, Finance Minister Purbaya Yudhi Sadewa made statements suggesting that Islamic banks in Indonesia have not fully implemented Sharia principles and tend merely to replace terminology. He also claimed that “Islamic bank margins are more expensive than conventional bank interest rates” with more difficult financing application requirements. These statements have generated substantial discussion that warrants proper consideration. Below are several key points worthy of attention:

1. Addressing the Finance Minister’s statement: Criticism as an alarm for improvement

The statement that costs at Islamic banks are perceived as not yet fully competitive is actually consistent with the reflections of many industry players, particularly regarding the still relatively small industry scale (market share of approximately 7–8 per cent of national banking, meaning structural efficiency is not yet optimal).

The criticism that Islamic banks “merely replace terminology” cannot be oversimplified, because regulatory frameworks require all Islamic bank products to comply with DSN-MUI fatwas and be supervised by Sharia Supervisory Boards (DPS) that ensure transaction contracts and structures conform to Sharia principles, not merely rename conventional products.

In this framework, KNEKS views Purbaya’s statement as an “alarm” for the industry to accelerate the next phase: strengthening price competitiveness, service quality, market depth, and innovation in Islamic business models, rather than merely defending against criticism.

2. Fundamental differences between Islamic and conventional banks

Conventional banks operate on an interest-based model that fixes the price of money use, whilst Islamic banks employ contracts based on sales, profit-sharing, rental, or service arrangements (murabahah, musyarakah, mudharabah, ijarah, wakalah, etc.) that are substantively different from interest because they are tied to underlying real transactions and risk-sharing schemes.

Islamic banks maintain Sharia compliance obligations (sharia compliance) safeguarded by DPS and authorities, from product design, process, through to fund disbursement; this aspect makes Islamic banking practice tend to be more prudent, since every financing must ensure the underlying object and purpose are halal, free from riba, excessive gharar, and maysir.

Sharia financing products also have distinct characteristics—for example, murabahah (sales with markup), musyarakah/mudharabah (profit-sharing), and ijarah (rental)—which create payment patterns and risk profiles not identical to interest-bearing loans at conventional banks.

3. Are Islamic bank “margins” more expensive? Perspective and data

First, terminologically, it must be clarified: Islamic banks have no “interest”; they have margins (for sales), profit-sharing ratios (for profit-sharing contracts), or service fees. Directly equating Islamic margins with conventional interest often creates perception bias as though both structures were identical.

Second, the perception of being “more expensive” is largely influenced by the dominance of murabahah contracts with fixed margins, so instalments from the outset appear higher when compared with conventional loans with floating rates that are typically low in the early years; however, floating rates can increase over time, whilst murabahah instalments remain fixed until the contract’s end, providing certainty for customers.

Third, structurally, the still-small scale of Islamic banks affects the cost of funds because the composition of cheap funds (current accounts, savings) is not as large as in major conventional banks; consequently, the room to compress financing margins is more limited until industry scale expands.