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.