Understanding Prices with Integrity: Islamic Banks and Misconceptions about Being 'Expensive'

By Dr. Dece Kurniadi, SH, MM

Islamic banks are not necessarily more expensive; they operate with a different economic logic than conventional banks, so the way we ‘measure price’ should also be different. When this difference in paradigm is ignored, it is understandable that the public and policymakers hastily conclude that Islamic banks are simply more expensive and resemble conventional banks.

REPUBLIKA.CO.ID, JAKARTA – In a previous article, ‘Sharia, Interpretation, and the Long Road to Justice,’ I stated that law, including Islamic economic law, is an art of interpretation that moves between text, context, and the ideal of justice. Criticism of Islamic banking, both regarding Sharia consistency and the ‘high cost’ of products, should be read as a mirror, not a verdict, and even as an invitation to deepen our understanding of the system, rather than simply a spontaneous reaction to figures in a brochure.

Islamic banking itself was born and grew within a national legal system rooted in conventional financial traditions. Its transformation has been evolutionary, through gradual adaptation and adjustment, rather than a revolutionary leap; the similarity in product form to conventional banks does not automatically mean a mistaken ‘mirroring,’ but often serves as a transitional bridge so that the new system can live within the existing legal framework and infrastructure.

Why ‘Expensive’ Cannot Be Measured Solely by Margin

Observers often point out that the small scale of operations, limited low-cost funding, and relatively higher cost of funds make the pricing of Islamic financing appear less competitive. They are not wrong, but the question of ‘expensive or cheap’ should not stop at short-term financial calculations alone.

From a legal economic perspective, every price figure is the result of a configuration of value, risk, contract structure, and regulatory framework that shapes the relationship between the parties. Buying and selling contracts, profit-sharing, or ujrah (fee-based) contracts have different consequences for the distribution of risk and legal responsibility than interest-bearing loans: when the bank is obliged to ensure that the financing object is halal (permissible) and real, and even shares the risk of the business, then the ‘cost’ that appears in the margin also contains risk protection and legal certainty for customers.

The image of being expensive also often arises from the way costs are presented. Upfront contract and administration fees make the obligation seem large from the start, even though the total cost can still be competitive compared to floating-rate loans where installments can increase along the way. Judging only from initial installments without looking at the overall risk structure clearly oversimplifies the problem.

Behind the Installment Figures: Breathing Room for Families and SMEs

Imagine a young family wanting to buy a house. In the brochure, the initial installment of a conventional floating-rate mortgage appears lower than the financing for a house with a murabahah (cost-plus) contract at an Islamic bank, so the Islamic bank is immediately labeled ‘more expensive.’ However, three or five years later, when the benchmark interest rate rises, the conventional mortgage installment also increases; the murabahah installment remains the same from the beginning to the end of the term.

If we calculate the total payment over 15–20 years, what initially appears ‘cheap’ may not actually be lighter. Here, the ‘cost’ in the Islamic contract becomes certainty: space to plan life without being haunted by the uncertainty of installment figures.

Or look at SMEs looking for working capital. In a fixed-rate loan, they bear the same installment whether turnover increases or decreases. In profit-sharing financing, when their business weakens, the portion of profit shared decreases; when their business improves, the bank receives a larger share fairly. In the eyes of some, this scheme feels ‘expensive’ when the business is very profitable, but at other times it becomes a lifesaver when the business is hit. This is where a more balanced distribution of risk is not always reflected in a single margin figure, but in the customer’s ability to survive and recover.