gif Risk Management


RISK MANAGEMENT: ISLAMIC FINANCIAL POLICIES


ISLAMIC BANKING AND ITS POTENTIAL IMPACT


Author: Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc.


Abstract: Since the representatives of the Shariah Bureau of Bank Indonesia responsible for the supervision and development of Islamic finance will focus on the experience and progress of Islamic banking in Indone- sia, this article will focus on some questions about the impacts of that banking, particularly in rural areas, and aspects that the Bank Indonesia representatives will not focus on.


Keywords: Islamic Banking, Indonesia, Bank Muamalat, Islamic Finance


Islamic Banking and Its Potential Impact Islamic banking is a worldwide phenomenon involving a variety of institutions and instru- ments, not one “project” or institution. In the past few decades, Islamic institutions and instruments have developed in many coun- tries, including the United States. In certain countries—Iran, Sudan, and Pakistan—all or most financial intermediation conforms to Islamic Shariah (religious law) as defined by local authorities.


All three of these countries also have bank- ing authorities that govern the general level of charges and returns in the system and these are not usually market-governed sys- tems.


In most other countries, including Indonesia, Islamic transactions and institutions make up a small part of the total and must com- pete with conventional financial institutions. There is even considerable Islamic banking in the United States. If the terms and condi- tions of Islamic transactions differ too much from those of conventional institutions they become hard to sustain. The terms and con-


32 Global Islamic Finance April 2012


ditions of Islamic institutions therefore tend to converge with conventional ones. Islamic instruments are simply a narrow group of familiar financing instruments. Any transac- tion, with any distribution of proceeds, can be conducted as a lease, a sale, a partner- ship, a fee-generating transaction, or a loan. Islamic instruments generally avoid loans. Though the scheduled distribution of pro- ceeds may be the same as for a conventional loan, the legal risk in case of default is often different in the different forms of financing.


Those who promote Islamic finance often prefer partnership arrangements in which profits or turnover is shared because this conforms more fully to the goals of Islamic banking. One goal of Bank Indonesia in pro- moting Islamic banking is to increase the proportion of financing involving such shar- ing. Nonetheless, more than 80 percent of Indonesian Islamic financing is in fixed-term forms, mirroring the pattern throughout the world.


Many involved in Islamic banking would like to minimise the differences between Islamic


and conventional banking and thus they wel- come fixed-term forms. However, because the instruments differ in some degree they typically require some adjustment from their conventional counterparts. For example, in Islamic transactions, the bank often holds the title of the property concerned. U.S. banking authorities have ruled this unob- jectionable provided that title holding is only a matter of form to accommodate Islamic structures.


Although U.S. and other banking supervision authorities have accommodated Islamic banking with few changes in procedures, some countries consider that this is not enough.


They have moved to develop national and international Islamic institutions, money markets, bank regulators, deposit protec- tion, bank accounting, and so on. Centres have been developed for all these matters for bank supervision in Malaysia, for ac- counting in Bahrain, and several academic centres, including centres at Harvard and Oxford universities.


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