Sharia Banking and the Financial Industry

The majority of Indonesia’s population is Muslim, but products based on Islamic law or sharia have been developed only recently, that is in the past three or four years. Indeed some Muslims consider insurance to be against the laws of God, but others are of the opinion that accidents, misfortune and death are God’s creation. So it is allowed, according to them, to minimize the risk, especially the financial risks that may occur. One’s efforts, like savings, are often not sufficient, so one should turn to sharia insurance instead. In short, taking insurance is not against God’s will, in fact, God advises us to plan for our future and protect it by, among other things, sharia insurance.
In conventional life insurance there are three factors that are considered as sins by the ulema: gharar (funds that are not transparent), maisir (gambling) and riba (interest). The sharia insurance avoids all three forbidden factors. There is not much difference between conventional and sharia insurance procedure-wise. However, the basic difference lies in transaction agreement. In conventional insurance a customer purchases protection, while in sharia insurance a customer agrees to commit himself or herself in a community that is based on paying damages for each other should a catastrophe or accident occur.
This very principle is applied by PT Asuransi Takaful Indonesia (ATI), which was established in 1994. The company is a pioneer in sharia insurance in Indonesia. It is also the largest among the country’s sharia insurance companies in terms of premium revenue. In 2007, its gross revenue increased drastically by 47.7 percent to Rp 352.01 billion (about US$38 million), from Rp 238.39 billion in the previous year. Two subsidiaries of the company have contributed to the 2007 figure, PT Asuransi Takaful Keluarga (ATK), 71 percent, and PT Asuransi Takaful Umum (ATU) with 29 percent.
Saiful Yazan bin Ahmad, the company’s president director, ascribed the growth in the insurance premium partly to the conducive macro-economic condition. “Internally, we also strategically revamped many things. For example, development of innovative products that cater to the market’s needs, enhancing our services, improvement of distribution and creating alternative distribution system, upgrading our human resources. In short, we put our best effort into making our company effective and efficient,” he added. (more…)

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Introducing the concepts and practices of sharia finance and banking to the public at large in the UK and for potential investors from around the world, the Embassy of Indonesia in London, in cooperation with the Bank of Indonesia, Bank Mandiri Sharia, BNI 46 Sharia, the Indonesian Investment Coordinating Board and PT Indometal, has held the Indonesian Islamic Financial Forum 2009 on 5 November 2009.
With an annual growth rate of 10-20 percent and asset increases of 10-15 percent each year, the sharia finance is one of the most rapidly growing industry in the world. According to Moody’s, the global Islamic finance market has grown by about 15 per cent for each of the past three years and is worth more than US$700 billion.
Indonesia is poised to become a major player in the field of Islamic banking and finance, where for the last five years this industry has grown by more than 30 percent annually. Improvements in regulatory framework and high profitability are some of the factors which support the continuous growth of this field of business.
The event, which was held in the Mandarin Oriental Hotel in London, is aimed at promoting the fast growth of Sharia-compliant banking and finance in Indonesia to the people in the United Kingdom. In his welcoming address, the Ambassador of Indonesia, Yuri Octavian Thamrin, underlined Indonesia’s potentials in the field of Islamic financial and banking industry in Indonesia and emphasized the necessity to build links between UK’s well-developed financial market with Indonesia’s emerging Islamic financial sector. This in turn will bring benefit not only for the Indonesian people but will also be profitable to Indonesia’s external partners.
The forum highlighted the existing policies, regulations, institutions, products and promising prospects of Sharia-compliant banking and financial industry in Indonesia and an exhibition that displayed relevant information and various products of Sharia banking offered by several Islamic financial institutions and banks in Indonesia. It has been attended by close to one hundred participants from the business community and other interested parties in the UK.

As a Muslim who bows his head to his Creator it is a serious question: How to obey Him? In a world that revolves around interest (Riba). A world that runs on it. Banks, financing, mortgage, all involve interest. There are millions of Muslims and non-Muslims who live without interest. This article discusses practical ways of living a successful life here without compromising success in the hereafter.
1. Interest from Credit and credit cards
Credit cards are the pillar of consumerism. They are also based on a system of interest-buy now, pay later, and the later you pay, the higher the interest. I suggest that you send your credit card back to the company in two pieces.
If you still owe money, they will continue to send you bills. Plan now to make a final payment soon. Pray that Allah liberates you from this burden.
If you are sure that you must have a credit card, pay the bill in full as soon as you receive it. If you wait for the due date, it is likely that you will forget once in a while and end up paying interest on it. Since interest is forbidden, we must avoid it.
A Muslim forgot to pay his bill on time and ended up with finance charges on the next bill. He called the service representative, saying that he had always paid his bills in full and on time.
This was a mistake and he wanted the finance charges removed. It did not not take long for the service agent to check his record and delete the finance charges.
Another Muslim whose request for the same thing was denied, wrote a letter explaining that he had paid his bills on time in full for the last seven years. An excellent credit history.
He said: If you cannot remove the finance charges which I have incurred this time then maybe I need to take my business somewhere else. He made it clear that his position on interest was not to be compromised. With his letter he enclosed his Mastercard in two pieces.

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An alternative for the contemporary insurance contract. A group of persons agree to share certain risk (for example, damage by fire) by collecting a specified sum from each. In case of loss to anyone of the group, the loss is met from the collected funds.

A Takaful company has the following features:

i) The company is not the one who assumes risks nor the one taking any profit. Rather, it is the participants, the policy holders, who mutually cover each other.

ii) All contributions (premiums) are accumulated into a fund. This fund is invested using Islamic modes of investment and the net profit resulting from these investments is credited back to the fund.

iii) All claims are paid from this fund. The policy holders, as a group, are the owners of any net profit that remains after paying all the claims. They are also collectively responsible if the claims exceed the balance in the fund.

iv) The company acts as a Trustee on behalf of the participants to manage the operations of the Takaful business. The relationship between the company and the policy holders is governed by the terms of mudarabah contract. Therefore, should there be a surplus from the operation, the company (mudarib) will share the surplus with the participants (rabb-al-mal) according to a pre-agreed profit-sharing ratio.

Indonesian Sukuk

The government of Indonesia plans to sell Rp 1 trillion (US$100.4 million) of Islamic bonds (sukuk) on November 2009 through an auction mechanism, the Finance Ministry’s debt management office stated.
The bonds auction will be held every month throughout this year, but the amount issued will likely depend on the market.
In mid-August, the government will auction the sukuk at a reasonable level of Rp 1 trillion. The auction mechanism would be more efficient than the bookbuilding method – in which an underwriter attempts to determine the amount of shares investors want and the price they are willing to pay. The government want to show the auction is more transparent.
Through the auction, the debt management office also expects to create the benchmark series of sukuk, which will be useful to determine the yield and price of Islamic bonds to be issued in the future.
The government first sold Islamic bonds in August 2008, amounting to Rp 4.7 trillion. It then issued its first retail sukuk in February, with an order of Rp 5.56 trillion. The first-ever international sale of dollar-denominated sukuk was carried out in April, raising US$650 million, with a yield of 8.8 percent for the five-year Islamic bonds maturing in 2014.

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The goldsmith bankers of seventeenth century England engaged in the seemingly innocuous practice of holding precious metal coins on behalf of their depositors. In return for each deposit of coins, a goldsmith would issue the depositor with a paper receipt that promised redemption on demand. If a particular goldsmith was well trusted, many merchants would be happy to accept his receipts in payment for goods and services. A large proportion of the public therefore came to see goldsmiths’ paper not as receipts for money, but as money itself. Accordingly, depositors came to seek redemption of their receipts in ever decreasing numbers. Why bother going to the goldsmith to withdraw gold coins, if shopkeepers would accept the paper in payment anyway?
The goldsmiths soon realised the incredible business opportunity implicit in their customers’ behaviour. Instead of acting as mere safe-keepers of gold, they now offered their services to the public as money lenders. But when the public came to borrow money, they would be loaned paper receipts not gold. From the perspective of these early bankers, such a policy had one great advantage. Unlike gold, paper money could be created in the back office at almost no cost.
Naturally, many businessmen wanted to join in this new game of banking. What easier way could one find of earning a living than creating money with a printing press, and then lending it at interest? “The Bank hath benefit of interest on all moneys which it creates out of nothing”, said William Paterson upon founding the Bank of England.

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