Islamic Banking, the Business Judgement Rule, and OJK's Determination to Provide Legal Protection

The Financial Services Authority (Oversight of Financial Services/OJK) has stated that bankers cannot be summarily criminalised simply because of bad debts. What is truly at stake is not merely the fate of bank officials, but the future courage of the financial industry to provide financing to the real sector.

In the context of Islamic banking, this issue is particularly sensitive because Sharia contracts are fundamentally built on the recognition that businesses can profit or lose, and not every business failure deserves to be interpreted as a crime. Therefore, the OJK’s statement should be read not as a blank cheque for bankers, but as an effort to restore a healthy boundary between business risk, professional negligence, and criminal acts.

Previously, concerns were raised regarding the shrinking operational space for Islamic bankers, as every non-performing financing was almost always suspected of being a gateway to criminal prosecution. Now, after the OJK openly raised the Business Judgement Rule (BJR) as a foundation for banker protection, the discussion has entered a new phase. The OJK’s message is clear: bad loans or financing should not be immediately brought into the criminal realm, as long as business decisions are made in good faith, based on adequate information, following prudent principles, and free from conflicts of interest.

This message is crucial because, in practice, problematic financing has too often been treated simplistically as an indication of crime, whereas the banking sector, including Islamic banking, operates on risk management rather than the assumption that every decision will result in perfection.

Here, the Business Judgement Rule becomes relevant. This doctrine provides protection to directors or business decision-makers so they are not automatically held liable just because their decisions result in losses, provided those decisions were born from a legitimate and professional process. Within the OJK’s framework, the essential elements of BJR include good faith, sufficient information basis, compliance with prudential principles, absence of conflict of interest, and actions taken in the best interest of the institution. In other words, BJR is not a shield to cover mistakes or crimes; rather, it serves as a tool to distinguish between business failure and criminal conduct.

If financing fails due to deteriorating business conditions, market shifts, or missed business assumptions, the failure must first be viewed as an inherent risk of banking intermediation. However, if behind that decision lies data manipulation, fictitious collateral, document forgery, or conflicts of interest, the BJR protection is automatically void.

This issue is even more critical for Islamic banks because their financing characteristics differ from conventional banks. While conventional banks rely more on interest-based credit schemes and collateral strength, Islamic banks operate through contracts (akad) that involve Sharia compliance, risk sharing, and diverse legal relationship structures. In contracts such as Mudharabah or Musyarakah, the potential for loss is an inherent part of the contract design. Therefore, a legal approach that too hastily criminalises bad financing in Islamic banking risks misinterpreting the essence of these contracts.

Something that is a legitimate business consequence in Fiqh Muamalah (Islamic commercial law) could become an object of criminalisation if authorities only look at the end result without examining the decision-making process. At this point, Islamic banking requires much more disciplined governance. To ensure BJR functions as protection, Islamic banks must demonstrate that feasibility analyses were conducted properly, contract structures were appropriately chosen, risk mitigation was reasonably designed, and Sharia supervision was strictly implemented. If the entire process is well-documented, bad financing can more easily be understood as a business failure rather than a deviation.

It must be emphasised repeatedly: not all bad financing can hide behind the BJR. When forgery, collateral manipulation, internal collusion with debtors, or personal gain is discovered, the matter moves from the realm of business judgement into the realm of criminal law. The narrative of legal protection for bankers must be maintained so that it does not shift into a narrative of impunity. What deserves protection is the bank official who works professionally, honestly, and in accordance with procedure.