Islamic Banking: A Matter of Principle or Following Market Logic?
When a customer compares the instalments of a Sharia mortgage with a conventional one and finds the Sharia figure to be higher, a simple yet piercing question arises: if so, where is the ‘Sharia’ in it? This question is not merely a layperson’s complaint. It touches on a debate that has been ongoing for decades among economists and Sharia scholars themselves — whether Islamic banking in Indonesia truly implements its principles, or merely submits to the same market logic as conventional banks, only with different Arabic terminology.
Legally Valid by Contract, but That Is Not Enough
In terms of contract law, the claim that Islamic banks are ‘different’ is not unfounded. Every financing product is audited by a Sharia Supervisory Board and must be based on a fatwa from the National Sharia Council of the Indonesian Ulema Council. In a murabahah contract for a house purchase, for example, the bank is legally obliged to take ownership of the asset first before selling it to the customer, bear the risk of damage before handover, and set a margin that is locked in from the start — there are no surprises of rising instalments as with floating interest rate loans. Late payment penalties, in many products, do not become bank income but are channelled to social funds.
All of this is real and not an empty formality. But herein lies the problem: compliance with a contract form that is valid according to fiqh does not automatically mean the industry has implemented the very spirit of Islamic finance itself.
When Murabahah Becomes Everything
The ideal aspiration of Islamic finance is actually not just to avoid the word ‘interest’, but to build a financial system that shares business risk fairly between the fund owner and the fund manager — this is the spirit behind mudharabah and musyarakah contracts. In this scheme, the bank should share in the profit and loss with the customer, not merely collect back the principal plus a fixed margin.
The reality is far from this. In Indonesia, murabahah-based financing dominates 58 to over 70 per cent of the total financing portfolio of Islamic banks, while the profit-sharing schemes that are the most substantive hallmark of Islamic finance remain on the periphery. Murabahah, in its economic function, is a sale-and-purchase contract with a fixed margin — the bank bears almost no business risk, the customer bears nearly all the risk, just like a debtor in conventional credit. The only difference is the contractual packaging.
What makes this criticism increasingly difficult to refute is the fact that the determination of the murabahah margin often refers to the movement of the Bank Indonesia benchmark interest rate, so that Islamic bank products remain competitive in a market still dominated by the conventional system. When the price of a Sharia product is determined by an interest rate benchmark, it is difficult to argue that the product was born purely from the logic of real goods trading, rather than from the calculation of the time value of money which is the core of the interest concept it seeks to avoid.
Not the Fault of Islamic Banks Alone
However, it would be unfair to place the entire problem on the intentions of industry players. Data from the Financial Services Authority shows that the proportion of low-cost funds — current accounts and low-cost savings — in conventional banks reaches around 58 per cent, while in Islamic banks it is only about 42 per cent. This means the ‘raw material’ for Islamic banks is indeed more expensive from the source. Coupled with legal obligations such as ensuring asset ownership and the potential for double taxation in goods-based transactions, the operational costs of Islamic banks are structurally higher than those of conventional banks, which simply lend money without needing to engage in any physical transactions.
In other words, Islamic banks operate within a financial ecosystem whose rules of the game are still written by conventional logic. As long as the national financial market — from interest rate benchmarks and tax structures to customer preferences that compare instalments nominally — remains based on the interest system, Islamic banks are forced to ‘play’ within a price range competitive with that system, however different the contractual foundations they use may be.
Principle or Market? The Answer: Both, with an Imbalanced Portion
If the question is framed in black and white — do Islamic banks uphold principles or follow market logic — the honest answer is: both, but with a portion that is not yet balanced. On a formal level, Sharia principles are implemented quite strictly through the supervision of the Sharia Supervisory Board and the fatwas of the National Sharia Council. However, on the level of economic substance, the industry is still very much subject to conventional market logic: interest rate benchmarks, the dominance of fixed-margin sale-and-purchase contracts, and a lack of courage to share business risk with customers through profit-sharing schemes.
This is not a reason to conclude that Islamic banking in Indonesia is a failure or merely ‘interest in a new guise’ — an accusation that oversimplifies a complex issue. But it is also not a reason for complacency and to assume that the current condition represents the ideal aspiration of Islamic finance. The industry is at a crossroads that is natural for a sector growing amidst the dominance of a conventional system — the question is whether it will continue to move closer to its original spirit, or become increasingly comfortable as a shadow of the very system it sought to offer an alternative to.
The answer to that question lies not only in the hands of regulators or banks, but also in the hands of customers and society — how willing are we to push for, and pay the price for, a financial system that is truly different, not just one with a different name.