gif Risk Management
Although Bank Muamalat did not suffer as severely as many large banks from the fi- nancial crisis, it did require some manage- ment change and has begun healthy growth again. BPRS and BMT have been growing despite the monetary crisis. The BMT have mobilised a great deal of savings and provid- ed financial services to a large constituency, many of whom have never been served be- fore. They have a large prospective market and the advantage of building on the infor- mal network created by the Islam- ic institutions with which they are associated as well as the moral sanction that comes with that af- filiation. However, as largely un- supervised and not guaranteed institutions, many of which are run by relatively inexperienced personnel using new methodolo- gies, they clearly present pruden- tial dangers, though not different in principle from those posed by all savings and loan cooperatives in Indonesia.
Bank
Bank Muamalat Bank Mandiri
In form rather than substance Islamic finance is familiar. Many of its instruments are the same as those used by other financial institutions leasing, advance pur- chase, etc. The difference lies in the first instance in the social impulse for sharing responsibility, risk, and property. Consequently, fixed-interest transactions in which risk is assigned entirely to the borrower are avoided. More important for participants, Is- lamic finance represents part of a divinely sanctioned economic gestalt into which they fit.
Thus Islamic finance • Enables financial services to an otherwise underserved group, including small, rural, and agricultural producers; • Furthers a social thrust to assist smaller producers and
References and Further Reading
• Financial Times, March 25, 2003, inter alia. • Mahmoud Amin El-Gamal, A Basic Guide to Contemporary Islamic Banking and Finance, June 2000, at
http://www.ruf.rice.edu/~elgamal/files/primer.pdf • Zamir Iqbal, “Islamic Financial Systems,” Finance and Development, June 1997 • V. Sunderarajan and Luca Errico, Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead, IMF Working Paper No. WP/02/192, Washington, D.C.: IMF, 2002, at
http://www.imf.org/external/pubs/ft/wp/2002/wp02192.pdf • Perbankan Shariah: Islamic Banking Statistics, Bank Indonesia, December 2002. • Bank Indonesia, Blueprint of Islamic Banking Development in Indonesia,
http://www.bi.go.id/bank_indonesia2/utama/publikasi/upload/syariah%20blue%20print- engl.pdf • Comptroller of the Currency, Administrator National Banking, Office of the Counsel, NY. • Interpretative Letter #867, November 1999, 12 USC 34 (7), 12 USC 29; No. 806, December 1997, 12 USC (7), 12 USC 371. From bibliography at http:/www.failaka. com/Failaka/
20Research.html • Dr. Amin Aziz, “The Development of Micro Enterprise Institutions in Indonesia: The Case of National Board of Revenue Sharing Micro Enterprise Cooperatives (Induk Koperasi Syariah Bmt, Baitul Maal Wat Tamwil), presented at the Symposium of the APEC Center for Entrepreneurship, Jakarta, August 10, 1999. • Luca Errico and Mitra Farahbaksh, Islamic Banking: Issues in Prudential Regulations and Supervision, IMF Working Paper, March 1998. • Operations and Government Debt Management under Islamic Banking, IMF Working Paper, September 1998. These documents can be accessed at
http://www.imf. org/external/
pubind.html • V. Sundararajan and Luca Errico, op. cit., pp 21–22.
36 Global Islamic Finance April 2012
consumers and is often given in the context of a movement to assist them; but • Requires some adjustment, mostly for- mal, of techniques and regulation to take account of Islamic values.
Islamic finance, as part of a financial sector development strategy, ought to be encour- aged, mainstreamed, and adjusted to. An IMF study on the matter concludes that Is-
Figure 1
Assets 238
28,103
Credit 190
7,101 Banking System 123,556 45,556
Deposits 190
20,444 92,778
Nonperforming Loans (%)
4.8 6.6 8.1
lamic finance should be encouraged by regu- lation and supervision that accommodate its forms while ensuring that their unfamiliarity is not exploited to defraud clients. Normal prudential and supervision norms should be adequate. The IMF study does, however, sug- gest that higher capital adequacy ratios and more detailed disclosure requirements may be appropriate. The paper suggests a modi- fied CAMEL (capital adequacy, asset quality, management, earnings, liquidity) system of banking supervision for Is- lamic banking. Special risks are the generally uncollateralized nature of Islamic banking and greater risks in the profit-sharing forms of lending. To the extent that Islamic banking is collat- eralised or does not engage in profit-sharing forms, the issues are less serious.
Figure 2: Bank Muamalat Loans by Type of Shariah Instrument (Rp billion)
Financing Instrument
Bai Bitsaman Ajil Murabahah Mudharabah Musyarakah Al Qardhul Hasan Total
Bai Bitsaman Ajil Murabahah Mudharabah Total
Grand Total Figure 3
Savings and Returns
Mudharabah Time Deposits
Securities
Mudharabah Savings Deposits
Wadiah Deman Deposits
Others 1998 For Rupiah
141 83 68 13 1
306 For Foreign Currencies
78 71 7
156 462
1998 Amount 221 *** 103
68
86 21 1
108 459
1998 Returns 28 23 7
3 3
179 130 29 12 1
351 1997
Nonetheless, the Islamic banks are often more comfortable with specialised regulations and infrastructure that recognise their peculiarities. The BMT in particular need adequate su- pervision and some guarantee for their depositors, though not as elaborate as those pro- vided commercial banks and BPRs. Islamic banking should be mainstreamed by maximis- ing the interaction between Is- lamic institutions and the rest of the financial system, subject to the constraints of Shariah. The financial system and its regu- lation should be adjusted as necessary to accommodate the other two
thrusts.Donors should ensure that their assistance to financial system development includes Islamic financial insti- tutions. This will help include otherwise excluded groups and avoid regulatory loopholes.
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