Expert Reveals Why Islamic Banks Are More Expensive
JAKARTA — Handi Risza, Vice Rector of Paramadina University and Deputy Head of CSED at the Institute for Development of Economics and Finance (INDEF), has highlighted the dominance of murabahah — a cost-plus sale contract — in Islamic bank financing as a key reason the sector is perceived as more expensive than conventional banking.
Under the murabahah scheme, banks offer a fixed margin rate, meaning instalments at the outset often appear higher than the low introductory interest rates offered by conventional banks. "Islamic banks are frequently fixated on instruments based on the murabahah contract, which offers a fixed profit margin," Handi said. This pattern has shaped a public perception that Islamic financing is costlier, even though conventional interest rates are typically floating and can rise during the course of a loan.
Beyond the contract structure, systemic issues also loom. The majority of Islamic banks still fall within Core Capital Bank Groups (KBMI) 1 and 2, limiting their competitive scope against larger conventional institutions.
Nevertheless, Handi emphasised several advantages of Islamic banking. Islamic banks offer certainty of instalments through to the end of the contract, with no risk of interest rate spikes mid-term. Late payment penalties, where applicable, are not recorded as bank revenue but are instead allocated to social welfare purposes. Each Islamic bank is also overseen by a Sharia Supervisory Board that ensures products comply with Islamic principles. "The advantages of Islamic banks are not measured by figures alone, but also by values and certainty," he said.
In the case of property financing under a murabahah contract, for instance, the Islamic bank is legally required to ensure asset ownership, bear the risk of damage prior to handover, and potentially face double taxation. These administrative and legal costs are inherent to real asset transactions that simply do not exist in conventional banks' money-transfer schemes, making direct comparisons between conventional interest and Islamic margins fundamentally unequal.
Handi recommended that the Islamic banking industry push for diversification of contract types, particularly towards mudharabah and musyarakah — profit-sharing arrangements that offer greater flexibility. Without innovation in business models, Islamic banks will continue to be seen as less competitive. He suggested that the criticism recently levelled by Finance Minister Purbaya Yudhi Sadewa should be read as a timely reminder for the sector to reform.
Under the murabahah scheme, banks offer a fixed margin rate, meaning instalments at the outset often appear higher than the low introductory interest rates offered by conventional banks. "Islamic banks are frequently fixated on instruments based on the murabahah contract, which offers a fixed profit margin," Handi said. This pattern has shaped a public perception that Islamic financing is costlier, even though conventional interest rates are typically floating and can rise during the course of a loan.
Beyond the contract structure, systemic issues also loom. The majority of Islamic banks still fall within Core Capital Bank Groups (KBMI) 1 and 2, limiting their competitive scope against larger conventional institutions.
Nevertheless, Handi emphasised several advantages of Islamic banking. Islamic banks offer certainty of instalments through to the end of the contract, with no risk of interest rate spikes mid-term. Late payment penalties, where applicable, are not recorded as bank revenue but are instead allocated to social welfare purposes. Each Islamic bank is also overseen by a Sharia Supervisory Board that ensures products comply with Islamic principles. "The advantages of Islamic banks are not measured by figures alone, but also by values and certainty," he said.
In the case of property financing under a murabahah contract, for instance, the Islamic bank is legally required to ensure asset ownership, bear the risk of damage prior to handover, and potentially face double taxation. These administrative and legal costs are inherent to real asset transactions that simply do not exist in conventional banks' money-transfer schemes, making direct comparisons between conventional interest and Islamic margins fundamentally unequal.
Handi recommended that the Islamic banking industry push for diversification of contract types, particularly towards mudharabah and musyarakah — profit-sharing arrangements that offer greater flexibility. Without innovation in business models, Islamic banks will continue to be seen as less competitive. He suggested that the criticism recently levelled by Finance Minister Purbaya Yudhi Sadewa should be read as a timely reminder for the sector to reform.