Unique Feature of Islamic Finance Development


Islamic finance is one of the fastest growing in the financial industry, both in size and number. According to Economist (September 2014), Islamic finance grew at an annual rate of 17.6% between 2009 and 2013, faster than conventional banking, and is estimated to be $2 trillion in size. However, one of the puzzles of Islamic finance development is how Indonesia, the biggest Muslim country in the world, has been left behind its development.

One of the reasons why the development of Islamic finance in Indonesia is left behind can be seen from its historical profile. Despite its Muslim population, Indonesia is a relatively latecomer to the Islamic finance industry. United Arab Emirates has a head start for Islamic finance since about 20 years, which established the first modern commercial Islamic bank, Dubai Islamic Bank, in 1979. Malaysia started to involve with the Islamic financial system when it introduced Malaysian Pilgrims Fund Board (Tabung Haji) in 1963. The first Islamic bank in Malaysia, Bank Islam Malaysia Berhad (BIMB), started to operate in 1983.

On the other hand, the first Islamic financial institutions arrived somewhat later in Indonesia than they did in other Muslim-majority countries, for under the New Order Islamic finance, like any other conspicuously Islamic behaviour, was linked to radicalism and extremism (Venardos 2006). The first Indonesian Islamic bank, Bank Muamalat Indonesia, was established in 1992 and Bank Indonesia was only allowed to make use of Islamic instruments as part of its monetary policy in 1999.

The other argument for the late development of Islamic finance in Indonesia also can be seen from new institutional economics perspective, which integrate institutions theory to economics by presenting a pivotal role of institution in defining economic structure of a society (North 1994). Within this perspective, Williamson (2000) suggests two economic change models including top down and marginal adaptation model, in which each model determines the speed of change. Malaysia is one of the best examples for the top down change model. Its government plays an important role to develop the Islamic finance industry with the result the speed of change is relatively high.

Despite the rapid growth of its financial indicator, it also has been critically seen of replicating the practices of its conventional counterpart and more emphasizes to the form instead of the substance (El Gamal 2006). The used instrument of controversial product such as tawarruq based mode of transactions, which is very popular in Malaysia, entails more harm than benefits, therefore, cannot fulfil the maqasid al-shariah, the ultimate objectives of sharia (Siddiqi 2007).

In contrast, the development of Islamic finance in Indonesia can be seen as the marginal adaptation model, which is a bottom up process. According to Ahmed (2012), Islamizing economic structure requires a comprehensive strategy include cultural reorientation in Muslim societies from the existing cultural norms and values toward searching and creating new knowledge based on the Islamic worldview and value system. In a multicultural nation like Indonesia, where Islamic finance coexists with a conventional finance system, the cultural reorientation is a crucial process in the gradual stages (Pepinsky 2009). Given this, the development process is an interactive dynamic model, which involves not only the role of state but also non-government institutions (Asutay 2012).

The role of non-government institution such as Indonesian Ulama Council (MUI) is one of the unique features of Islamic finance development in Indonesia. The demand on the Islamic finance service increased significantly after MUI issued a verdict on the prohibition on interest as riba transaction in 2003, which followed by the opening of Bank Mega Syariah in 2004 (Husman 2015). The role of MUI is also important in safeguarding Islamic finance development to be consistent in promoting its socio-economic objectives. The National Sharia Board (DSN), affiliated with MUI, is one the most ideal model in sharia-governance regulatory regimes (Ahmed 2008). By having national level sharia board such as DSN, the problem of diversity of fatwa as faced by many Gulf countries can be prevented. Another crucial role of DSN is providing check and balance to the industry like screening product development before entering to the market. In 2005, DSN required fourteen conditions attached for the bank, who wanted to introduce a tawwaruq-based product with the result this controversial product is not exist in Indonesia.

The government also plays pivotal role in providing a supportive regulatory framework for Islamic finance development. It can be said that the significant growth of Islamic bank in Indonesia found its moment after a dedicated Islamic Banking act was issued in 2008. Following this supporting regulatory environment, eight Islamic banks started to operate from January 2009 to October 2010.

In a conclusion, it can be demonstrated that the left behind of Islamic finance development in Indonesia can be seen from its historical profile and its model of economic change in the new institutional economics perspective. As marginal adaptation model, the speed of development process in Indonesia is not as high as Malaysia. However, the unique feature of the Indonesian development model as an interactive dynamic model of the multicultural nation results a more convergence Islamic finance model to its foundational principles, which promotes socio-economics goals and fulfils the maqasid al shariah.


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