More awareness needed of 'Syariah' banking

More awareness needed of 'Syariah' banking

By Taufik, Associate Consultant, MarkPlus Strategic Consulting

Two and a half years after the crisis hit Asia, a great majority of Indonesia's banks are still not acting like the mediators of recovery they should be. Economic indicators show that Indonesia's economy is, at last, on the mend, and the banks are already experiencing overliquidity. The heavy toll left by the crisis has meant that in order to get back on their feet, they first need to recapitalize -- and fast. Naturally, this situation has meant that economic recovery has been sluggish, to say the least.

Yet, a new trend has emerged among the country's banking sector: the establishment of a banking system based on Islamic law -- Syariah banking. It is hoped that this system can become an alternative method of banking for Indonesia and Indonesians. The move has been triggered by the ability of one bank, Bank Muamalat Indonesia (BMI), to stave off the debilitating effects of the crisis. Unlike the country's other national banks, BMI enjoyed a relatively smooth ride through the crisis, because it had a built-in mechanism that enabled it to minimize the adverse effects, especially those related to negative spread.

Under the Syariah system, depositors' returns are governed not by a predetermined fixed interest rate system but instead on the size of the bank's return on investments. When disbursing loans, the bank functions in the same way as an investment bank, whereby both the investor and the bank reap the benefit of high returns on investment, but share the losses, too. If return on investment is high, the bank will take a percentage of the investor's profits. This is impossible for conventional banks, which merely receive the interest that they themselves fixed at the time the loan was made.

BMI was the first Indonesian bank to implement Syariah banking practices. BMI's growth since its establishment in 1992 has been slow. Aside from representing a completely new way of banking for the country's banking industry, there are some hugely important business considerations at stake. In the early days, BMI found it difficult to educate the market about its product. Yet without a smooth market education process, it has been fiendishly difficult to expand the market, especially since the bank has had to fight its battle alone.

The opportunities are wide open for BMI. People are waking up to the idea that, despite its Islamic roots and development, Syariah banking is not merely a system introduced specially for Muslims, but rather a system that can be used by people of all creeds and from all walks of life. Indeed, the Syariah banking system is, in many respects, no different from that of mutual funds or investment banking.

In Malaysia, the investment in Syariah banking made by the ethnic Chinese, most of whom are non-Muslim, shows that many people are investing in Syariah banking, which they consider to be a fairer system than that offered by conventional banks.

Despite this, there is a difference between Syariah banking law and mutual funds, or investment banking in general. Aside from not being based on a system of interest, Syariah banking also does not allow engagement in business activities that conflict with Islamic ideals. Syariah banking would never fund a brewery, a casino or a pig farm, for instance.

If this is the case, why, then, has the response of Indonesians, most of whom are Muslims, been so unenthusiastic? The answer is simple. Neither the principle, nor the system, is properly understood by the market. What is more, Syariah banking is not only a new concept for Indonesia, it is also still relatively new to the Muslim world.

It must be remembered that the percentage of the population using the services of banks is still small, and of this number, the majority uses traditional banking systems and products such as savings and deposit accounts. Furthermore, they still conduct their banking business in the conventional way, preferring to put in a physical appearance at their bank. Automatic teller machines (ATMs), which have been in existence since the 1980s, only began to gain widespread favor in the second half of the 1990s. Why? Because although most ATMs operated 24 hours a day, they remained a novelty. Because of the public's hesitation in the face of change, several banks, including BCA, had to take radical steps to educate the public about the virtues of ATMs.

If ATMs (which are, after all, a simple innovation) took such a long time to become accepted, then it is easy to see why Syariah banking, a far more complex concept, has been so slow to take off. Aside from being a totally new banking system, even the terms used in Syariah banking are mostly Arabic, that is not widely understood by Indonesians, despite being the official language of Islam.

More recently, however, after Syariah banking proved its worth during the economic crisis, these technical difficulties were quickly forgotten, and rapid development ensued within the country's Syariah banking sector. The Indonesian monetary authority reacted to this sudden demand by opening the door to other banks to develop Syariah banking activities. BMI suddenly found itself no longer alone in its efforts to familiarize Indonesians with the new system. Competition usually goes hand in hand with efforts by individual companies to grab the largest possible slice of the market for themselves. This situation in turn generally leads to more noise being made in an attempt to attract present and future customers. Ultimately, the general public will become acquainted with the Syariah banking system.

The problem facing BMI now is that, despite the many obstacles in its public awareness campaign, as the pioneer of Syariah banking in Indonesia, the bank is expected to retain its position as the leading player in the market. This is no easy task. Although the bank is currently in a healthy condition, it remains, nevertheless, a small bank. The bank cannot emulate the methods of, say, BCA in attracting the market, nor can it ever hope to establish itself as the "king of the castle".

BMI is aware of this problem. Effectively playing on its considerable brand equity within the Syariah banking sector, the bank has founded the Muamalat Institute. In addition to acting as a forum for those wanting to find out more about Syariah banking, it is hoped that this institute will serve as a key component of the BMI's integrated marketing communications strategy.