Islamic banking in Indonesia: a study of ribā and the development of the Islamic banking industry and its role in the advancement of small and micro financing

© 2004 Dr. Muhammad Syafii AntonioFor many reasons, the establishment of Islamic banking in Indonesia was considerably late, almost 25 years behind other Muslim and some Western countries, even though Indonesia is the largest and most populous Muslim country in the world. This study seeks to identify the factors responsible for that delay, to investigate the opinion of leading Islamic organizations and scholars in contemporary Indonesia on the issue of ribā (interest) as the raison d'être of Islamic banking and to identify the role of Islamic banks in advancing alternative schemes of finance to small and micro enterprises, the group into which most Indonesian Muslim enterprises fall. In order to achieve these objectives the study adopts a combination of a critical explorative methods and a comparative case study. In the case study, more than 40 scholars and experts were interviewed and 420 questionnaires were distributed to six Islamic and conventional financial institutions. The research findings suggest that several factors are responsible for the late appearance of Islamic banks in Indonesia: among others, the New Order policies of Soeharto towards Islam, socio-cultural aspects, and legal constraints. The most critical factor of the three is the policies of Soeharto towards Islam. The social and legal aspects became less significant once those policies were resolved. Interestingly, after the changes in the Indonesian political landscape in 1988, Soeharto became the most determining factor in promoting the establishment of Islamic banking. This opportunity has been carefully utilized by the Majelis Ulama Indonesia (MUI - Indonesian Council of ‘Ulamā’) and Ikatan Cendekiawan Muslim Indonesia (ICMI - Association of Indonesian Muslim Intellectuals) to establish Bank Muamalat Indonesia as the first Islamic commercial bank in the country. With the exception of Persatuan Islam, none of the leading Islamic organizations under study has a clear standing and final fatwā (legal decision) on the issue of ribā and bank interest. Although the issue of ribā has not yet been resolved thoroughly, it is becoming less controversial as Indonesian society and the national banking industry accept the concept and products of Islamic banking. At the practical level, some leading Islamic organizations, such as Muhammadiyah and Nahdhatul Ulama (NU), are very pragmatic, involving themselves in traditional interest-based banking and insurance. Interestingly, Majelis Ulama Indonesia was only able to make a clear stance on the issue in late 2003, or almost 28 years of its establishment. The Islamic banking industry has a significant role in promoting small and micro financing in Indonesia and has been able to develop a strong strategic synergy with the national program for the development of small and micro enterprises (SMEs). This positive role can be identified from some financial measures, most importantly the increase in sales and the accumulation of working capital over time. This synergy was made possible by common objectives in philosophical and technical terms. The introduction of qard hasan product served the bottom group of SMEs through self-provided funds. The Islamic banks were also able to bridge the gap between the poverty alleviation approach and the commercial-based methods of micro finance. The Islamic banking industry in Indonesia has succeeded in overcoming the limitations of operating under an interest-based monetary system and the severe impact of the Asian financial crisis. It has received remarkable acceptance from the national banking industry as well as support from the monetary authority. From 1999 onward there has been a massive conversion to Islamic banking operations. However, the Islamic banks’ customers are rational and commercial-driven in nature. They prefer commercial benefits to spiritual values such as avoiding ribā. There is also a phenomenon of dual customership: more than 85% of the Islamic bank's customers are at the same time the customers of conventional banks. Any substantial differences in product mix and prices might lead the customers to shift completely to the conventional alternatives