ISLAMIC FINANCE AND BANKING IF

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ISLAMIC FINANCE AND BANKING (IF B) AS AN
ALTERNATIVE IN GLOBALIZED ECONOMY

• Ainun Naim, Ph.D
• Institute of Indonesian Accountants
• and Professor of Accounting at
• Universitas Gadjah Mada

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PRINCIPLES OF IF B

• Syariah laws and values that comprehensively
  guide individuals in (ritual and non-ritual)
  life.
• In business and economy, syariah laws explicitly
  state that Allah allow trade (business) but
  prohibit riba (Ahallallahul baia wa
  harramarriba).
• Dealings with haram (unlawful) services and
  commodities, such as gambling, liquors, etc. are
  prohibited.
• Contracts should be based upon profit and risk
  sharing and in the forms of buyer seller
  (murabahah), lessor leasee (ijaarah),
  partnership (musyarakah), and or debtor
  creditor (qard hasan) relationship.

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PRINCIPLES CONT.

• Islamic laws do not allow business contracting
  under future uncertain events. No speculation.
• Islamic laws do not allow business on monetary
  instruments money is medium of exchange only
  that should not have any intrinsic value.
• Zakat should be included in managing assets, as
  the obligation to contribute to social welfare.
• Segragation between syariah and non-syariah
  fund.
• Syariah supervisory board or other institutions
  to maintain that the transactions are conducted
  in accordance to syariah laws.
• Syariah based accounting standards.

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EXPECTATIONS

• More ethical business and economy.
• Better governance, due to participation of
  investors (debt holders) in risk sharing.
• Less uncertainty and less transaction costs.
• Less speculation.
• Syariah businesses deal only on real sector
  (goods and services), so that it will add
  economic value.

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NATURES AND FACTS OF THE IF B

• Relatively new and at the developing stage that
  needs more socialization and evidence that it is
  better (more efficient) than the conventional
  ones.
• Syariah finance and banking scheme has a high
  growth potential. Studies indicate that it grows
  at 15 per year (Ghannadian and Goswami, 2004).
• Conventional banks, including multinationals get
  into the business, offering islamic financial
  products.

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NATURES AND FACTS OF THE IF B

• Grais Pellegrini (2006) reported that the
  global Islamic financial services industry
  consisted of 284 institutions offering Islamic
  financial services (IIFS) operating in 38
  countries, both Muslim and non-Muslim.
• Solé (2007) identified that there were more than
  300 Islamic financial institutions spread over 51
  countries, plus well over 250 mutual funds that
  comply with Islamic principles.
• Assets held by fully shariah-compliant banks or
  Islamic banking windows of conventional banks
  rose by 28.6 percent to 822bn from 639bn in
  2008, compared to just 6.8 for that of
  conventional bank (The Bankers Top 500 Islamic
  Financial Institutions Survey).

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GLOBAL ISLAMIC BANKING ASSETS
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MARKET SHARE
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NATURES AND FACTS OF THE IF B

• The major contributors to asset growth for
  Islamic funds
• Gulf Cooperation Council (GCC) countries
  (US262.7bil)
• Asia (US67.1bil)  
• Australia/Europe/the United States (US35.3bil)
  and non-GCC Middle East countries, Middle East
  and North Africa (US248.3bil).

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NATURES AND FACTS OF THE IF B

• The IF B has involved in all of industries
  energy, consumer discretionary, staples,
  financials, materials, information technology,
  health care, telecommunication, utilities,
  education, etc.
• IF B also provide financing for large scale
  projects such as those in energy and
  infrastructure through sukuk (asset based)
  financing.

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SUKUK GLOBAL ISSUANCE
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INFRASTRUCTURE, REGULATORY FRAMEWORK AND
GOVERNANCE FOR IF B

• Islamic law and regulatory framework exist,
  including those deal with modern business.
  However, there are limitations in terms of the
  capacity of the jurists to deal with large scale
  economic transactions, and that there is no
  court of final appeal that result in
  controversies (Monger and Rawashdeh 2008).
• the most notable initiative is the establishment
  of Accounting and Auditing Organization of
  Islamic Financial Institutions (AAOIFI). This
  international consortium is to develop standards
  for accounting, auditing, governance, and ethics
  to ensure Sharia compliance.
• The Islamic Financial Services Board (IFSB) was
  created to set standards for the industry, in
  which twenty-two agencies, including several
  national central banks, International Monetary
  Fund and World Bank are members. The board
  intially focussed on risk management and capital
  adequacy for islamic financial industry.

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INFRASTRUCTURE, REGULATORY FRAMEWORK GOVERNANCE
FOR IF B - 2

• The IDB initiatives are also important to support
  the infrastructure for operation and development
  of islamic financial industry.
• Other supporting structures, such as ratings,
  indexes, studies, predictions and analysis for IF
  B institutions are available and provided by
  conventional and international institutions (such
  as SP, Dow Jones, etc.).

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CHALLENGES ON THE IF B

• In governance, independence of SSBs is being
  questioned, because they are part of management
  (paid by the banks).
• Differences in practice and application of
  syariah laws, that may result in confusion in
  market. As an example, a practice of guaranteeing
  profit in some institutions is against islamic
  laws since it is similar to interest rate.
• Studies (using Indonesian Islamic Index) indicate
  that speculation plays an influencial role in
  islamic market (Kurniawan 2008), and there is
  moral hazard in syariah based financing practices
  (Nasution and Wiliasih 2007).

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IF B IN THE DOWNTURN ERA

• Islamic financial institutions are affected by
  the financial crisis. They are not risk immune,
  however, during the economic crisis their growth
  is remained strong, and they have shown
  resilience to global market dislocation (SP,
  2009).
• During the crisis, similar to conventional
  market, islamic indexes indicate a material
  decrease.

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DJIA vs. ISLAMIC INDEX
International Financial Service London (IFSL),
2009.
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CONCLUSIONS

• IF B has been a choice of financial and banking
  services for moslem and non-moslem communities.
• The size of their businesses and the asset
  managed grow significantly.
• To improve their role in global economy, IF B
  need to improve their infrastructure and
  governance, so that the islamic laws and values
  are consistently and essentially actually applied.

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REFERENCES

• Ghannadian, F.F. and Goswami, G. 2004. Developing
  Economy Banking The Case of Islamic Banks.
  International Journal of Social Economics, 31(8),
  pp. 740-752.
• Grais, W. M. Pellegrini. 2006. Corporate
  Governance and Shariah Compliance in Institutions
  Offering Islamic Financial Services. World Bank
  Policy Research Working Paper 4054.
• International Financial Service London (IFSL),
  2009. Islamic Finance 2009.
• Monger, R. and M. Rawashdeh 2008. Islamic finance
  enters mainstream. Management Accounting
  Quarterly vol. 9 no. 3.
• Nasution, M.E. and R. Wiliasih. 2007. Profit
  sharing dan moral hazard dalam penyaluran dana
  pihak ketiga bank umum syariah di Indonesia.
  Jurnal Ekonomi dan Pembangunan Indonesia. Vol
  vii, No. 2.
• Standard Poors. 2009. The Islamic Fund and
  Review, surviving and adapting in a dowturn.
• Solé, J. 2007. Islamic Banking Makes Headway.
  Working paper. IMF Monetary and Capital Market
  Department.
• Kurniawan, T. 2008. Volatilitas Saham Syariah
  Analisis Atas Jakarta Islamic Index. February.
  Karim Consulting.