Risk Management gif
The Example of Indonesia Indonesia, with the world’s largest popula- tion of Muslims, has come to Islamic or Sha- riah banking fairly late. Many of Indonesia’s Muslim leaders do not believe that commer- cial interest in its modern form is prohibited, although others do. After some false starts, Islamic financial institutions are developing rapidly and have the enthusiastic support of many young people and intellectuals. The work of the Shariah Bureau of Bank Indone- sia demonstrates that Indonesia, especially in particular parts of the country, has consid- erable unmet demand for Islamic banking.
Islamic banking in Indonesia has some unu- sual characteristics. Like most microfinance institutions in Indonesia, Islamic institu- tions, micro or otherwise, are generally pri- vate, for-profit institutions based on the in- termediation of depositor funds secured on a competitive market. In this they are differ- ent from microfinance institutions in almost every other country in the world. They typi- cally have no explicit social goal other than profit maximisation and conformity with Is- lam, though in some cases a social element is present, as we will see. Social impacts are thus the result of the market impacts of the Islamic institutions.
Many Islamic institutions in Indonesia, par- ticularly the Bait Maal Wat Tamwil (BMT) Islamic savings and loan cooperatives are located in rural areas and provide agricul- tural financing. Nonetheless, the focus of Indonesian Islamic financial institutions is typically urban and geared toward the fi- nancing of trading operations. There has been some discussion of Islamic banking for micro credit, but most documented experi- ence that I know of is in Pakistan, where in- stitutions charge a service fee to cover their costs, something that is not permitted now in many Islamic banking systems.
In terms of agricultural finance, I have en- countered only one institution, a BMT in Solo, that provided crop loans. This trans- action, which involved a fixed repayment in kind, also might not meet the standards of many Islamic lenders. I am sure other crop loans exist. A couple of Islamic financial in- struments are particularly According to one source, some particular Islamic financial models were traditionally designed for agri- cultural purposes.
The lending of the various venture capital firms in Indonesia, the Modal Ventura, did support a number of agribusiness ventures on an Islamic, profit-sharing basis. The ex- ample is not necessarily an attractive one, however, because although repayment was frequently high, the profit-sharing element, in which low profits were reported, and the devaluation of the Indonesian rupiah, led to
Thomas A. Timberg, Freelance Consultant, Nathan Associates Inc.
Dr. Timberg has more than 40 years of experience concerning issues of economic and social development. For more than twenty years he was employed by Nathan Associ-
ates Inc., with whom he continues to work as a freelance consultant since his retirement. He has been
particularly associated with work on the financial sector, SME develop- ment and microfinance. He is at present Senior Adviser and Access to Finance Specialist for the World Bank supported Micro, Small and Medium Enterprise Project in Ni- geria with components concerned with access to finance, business
development services, investment climate, and public private dia- logue. He is also Chief of Party for a World Bank supported study of Shariah Finance in Indonesia.
have grown from US$52 million to US$302 million but still accounts for only 0.26 per- cent of assets in the banking system. The figure is somewhat higher if we exclude the considerable assets of conventional banks that represent government recapitalisation bonds of one sort or another. Bank Indone- sia has been moving to ensure that support institutions are developed for Islamic banks. I will present some data on the largest and oldest Islamic bank, Bank Muamalat, and the BMT.
Bank Muamalat Bank Muamalat’s position as of December 31, 2002 can be seen in figure 1. Various small approximations were made; precise concepts are specified in Bank Indonesia sources. Bank Muamalat loans, according to its recent annual audited reports, are distributed among Islamic financial instru- ments as shown in figure 2. About two-thirds of the rupiah financing and half of the for- eign currency financing are for less than one year. This is a high level of longer-term financing for a commercial bank. There is a trend toward Mudharabah. The average re- turn on loans seems to be a little more than 10 percent, which is not high by Indonesian standards.
Bank Muamalat splits gross revenues with borrowers, not net profit as in other Islamic institutions, and almost always insists on collateral. Its “sharing,” non-fixed term lend- ing is thus easier for it to manage than it would be in some other countries. The bank made a profit when many Indonesian banks were losing money. It used to have a higher percentage of non performing loans, but the situation appears to be improving. The pattern of outside funds deposited in Bank Muamalat by instrument can be seen in the following figures.
the recapitalisation of these venture capital firms. Islamic financial institutions in Indone- sia include the Bank Muamalat Indonesia, which has been functioning since 1992, sev- eral new Islamic branches of regular com- mercial banks, one other newer commercial bank, 80 Bank Perkreditan Rakyat Shariah (BPRS—smaller banks limited to borrowing and lending in limited areas), and 2,470 BMT (of which a few are reported to be regis- tered with the Ministry of Cooperatives and Small Business). The Islamic commercial banks and BPRS file frequent and detailed reports with Bank Indonesia and thus pro- duce reliable and current statistics. This is not yet the case with BMT.
The amount of funds in Islamic institutions has been growing rapidly, as the paper, “The Blueprint of Islamic Banking in Indonesia,” which is also being presented at this ses- sion, illustrates. Assets in Islamic banks
The cost of outside funds seems to be roughly half that charged borrowers—again somewhat low by Indonesian standards. Bank Muamalat reports that despite its relatively low payment of 10–12 percent on deposits, while other banks were pay- ing in the mid-20s, the nominal amount of deposits declined by only 15 percent. This reflects the strong customer loyalty enjoyed by all Islamic financial institutions. In recent months a number of banks have opened or announced that they will shift to Islamic principles or open Shariah branches, so competition for Bank Muamalat is likely to increase.
Bank Muamalat has a specifically social focus, as noted in its 1998 annual report. Its mission is “to become the catalyst for Islamic financial institution development,” and “enhance its role in small scale industry finance.” Almost 17 percent of its lend
2012 April Global Islamic Finance 33
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