Sharia Banking and the Financial Industry

The government’s successful selling of US dollar-denominated Islamic bonds known as sukuk at a cheaper rate signals declining risks of investing in Indonesia. The sukuk sales came amid global financial market uncertainty, bringing the country closer to an investment grade rating. The selling of the nation’s second-ever sharia-compliant global sukuk was oversubscribed by 6.5 times, and the government collected US$1 billion, according to Finance Ministry debt management office Director General Rahmat Waluyanto on Tuesday. Yield — the annual return that indicates investment risk — has been set at a relatively low level of 4 percent for the seven-year government debt papers. The first sukuk issuance in 2009 forced the government to offer an 8.88 percent yield with five-year maturity, with proceeds of $650 million. A smaller yield means lower costs of borrowing for the government. The lower yield will also be a benchmark for local companies to issue similar bonds. The cheaper yield also beat out investment grade-rated Italy earlier this week when the country sold five-year bonds worth ¤3 billion with a 6.29 percent yield. Top international rating agencies Standard & Poor’s (S&P), Fitch Ratings and Moody’s Investors Service upgraded Indonesia’s sovereign credit rating to one notch below investment grade earlier this year. An investment grade rating confirms a nation’s ability to buy back debt papers it issues, reducing risks for investors. Lower risks translate to lower yields, easing borrowing costs that strain state budgets to pay back the bonds. Indonesia’s condition is getting better while, relatively, global conditions — especially in developed nations — are worsening. Our debt ratio and sustainability improved and our credit rating prospects are increasing while many other countries are declining. The global financial market has not yet fully recovered from the August-September turmoil, which saw trillions of dollars of investors’ funds wiped out, as signs were clear that the world’s economy was headed for a slowdown due to the debt-stricken eurozone and stalling economic recovery in the US. However, Indonesia still attracted $6.5 billion in orders from 250 investors, Rahmat said, citing HSBC Holdings Plc., Citigroup Inc. and Standard Chartered Plc. as selling agents for the global sukuk issuance. Investors from Asia and the Middle East dominated the purchase by 32 percent and 30 percent, respectively, while Indonesian investors accounted for 12 percent, European for 18 percent and the US for 8 percent. The global sukuk is part of the government’s Rp 124.7 trillion net bond issuance program this year to plug state budget deficit and finance development projects.

The economic crisis rocked the United States and back to outbreaks of European countries. Indonesia’s economy, especially banking is perceived to be more able to resist the impact of the global economic crisis is if you want to convert to this concept. In fact, sharia banking is perceived to be more robust despite the global crisis continues. Withstand the power of sharia banking in the global economic crisis in Indonesia has been proven in 1998. Secretary General of Islamic Economic Society (MES), Muhammad Shakir Sula reveals the global economic crisis when it has caused almost all conventional banks went bankrupt. “Only Bank Muamalat as the only sharia banks are relatively strong withstands the crisis. Although only standstill, at least the bank is not bankrupt,” said Shakir. Conventional banks are insolvent are then assisted the government through the Bank Indonesia Liquidity Assistance (BLBI) worth Rp 650 trillion. The grant awarded to the bank entirely conventional. sharia banks proved able to survive until now without help. The economic crisis and then repeated again in 2008 a more shocked the capital markets. However, the economic crisis continues to repeat itself until in 2011 and has reached the United States and Europe. With a wide experience of the crisis, Islamic economics has proven able to survive. Therefore, conversion to the Islamic financial services to banking could be a solution Indonesia out of the next economic crisis. Indonesia Economy is supported by the real sector. Therefore, the government should side to the real sector by saving the perpetrators of Micro Small Medium Enterprises (MSMEs). With the conversion to sharia banking, real sector will be automatic saved. The reason, the value of Finance to Deposit Ratio (FDR) of sharia banking has now penetrated 98 percent. This means that third-party funds have been almost entirely channeled back into society. “FDR was almost 95 percent of the entire real sector, while conventional banks with LDR (Loan to Deposit Ratio) is only 60-70 percent more fled to the capital, instead of the real sector,” he said. Because of this, the government should begin to slowly convert the concept of sharia in the economy, especially banking. He added that the government has actually acknowledged resilience of Islamic banking on the economic crisis hit. Unfortunately, the government is still a lot of talk than action to convert this concept.

The growth of sharia banking in Indonesia is relatively fast in the last five years, with an average asset growth of 40 percent. The position of Islamic banking assets as of September 2011 has reached Rp 126 trillion. With that position, Indonesia sharia banking occupied the fourth position of the world after Iran, Malaysia, and Saudi Arabia. Deputy Governor of Bank Indonesia, Halim Alamsyah, last Friday (11 November 2011), said the growth of sharia banking assets of Indonesia is relatively fast compared to the average growth of sharia banking in another country, while the average growth of sharia banking in the world is only 10-15 percent. Indonesia sharia banking growth rate is predicted to continue rising. It was influenced by the economic potential of Indonesia which is better than other countries that have sharia banking. Indonesia’s economic growth by September 2011 recorded 6.5 percent. Economic growth was supported by the population of Indonesia reached 237 million inhabitants. This is a potential market of sharia banking. “Our position in a number of prominent Islamic banks including in the world,” said Halim. In Indonesia, the number of Islamic Banks (BUS) has reached 11, plus 23 Sharia (UUS). In terms of institutional, Indonesia sharia banking is also considered superior. Indonesia fatwa for sharia banking issued by an agency, namely, the National Shariah Council of Indonesian Ulemas Council (DSN-MUI). While other countries, a fatwa is still derived from each bank.

Profit sharing financing is one of Islamic financing schemes. This scheme should be a main scheme in Islamic financing sector, because it represents fairness business scheme, which each partner will share both profit and loss. But the reality is different. Most of Islamic financing scheme in Indonesia is not profit sharing (mudharabah/musyarakah)2, but mark up financing (murabahah). Murabahah scheme is financing scheme which customer proposes for Islamic Financial Institution to finance an asset, Islamic Financial Institution will buy the asset from supplier at certain price and sell to the customer in higher price (mark-up financing). Customer will pay the asset at “fixed” price in certain financing period.
Due to my experience, one of the problems of this condition is “adverse collection”. If the customer business is a start up company/new entrepreneur, the business risk is rather high and the profit is still low, – because lack of business experience -, the collateral is insufficient. In the situation where he/she has no collateral, the customer prefers profit sharing financing scheme (mudharabah/musyarakah) rather than mark-up financing scheme (murabahah). This is due to the need of the customer to share its risk. On the other hand, Islamic Financial Institution will avoid profit sharing scheme and prefer to use mark-up financing, because the business is too risky on their term.
Implementation of murabaha is still mired in controversy because it is deemed not shariah. Banking transactions in the form of murabaha however is still considered controversial. This is because it still relies on the financial sector and not to the real sector. Since the system is considered efficient, because it uses a ribawi index (associated with interest) to assess the facilities used. To further improve the performance of Islamic banking and more able to control the risks in managing third party funds, the provisions necessary to issue guidelines on the management of risk management as applied in conventional banking. This is because Islamic banking has the risk of a more diverse and different as compared with conventional banking. Completion of the elements of corporate governance and risk management practices. Risk Management in Islamic banking is different from the conventional. Conventional financing focus on three things: market risk, credit risk and operational risk. Islamic banking risk is more complex interaction between market risk, credit risk and operating risk. It is because of the nature and depth of risk that they will always change and affect the overall exposure to the bank. To that end, the provisions and application of corporate governance and risk management needs to be refined.
Source : Edi Tri S.

Issuance of global sukuk, might not run smoothly as expected the government. This may happen especially if associated with the domestic political situation that occurred recently. According to economic analysts sharia, Wahyu Dwi Agung, the country’s political stability can not be denied is one reason investors are willing to invest their funds. Managing Director of MC Consultin said that investors certainly will also see that there is risk. If it turns out great because of political risks, of investing in global sukuk now will not be profitable for investors. In addition, Revelation admitted competitive returns will also be another determinant in the global sukuk sales. Thus, it should be considered correct.
However, hopes for the success of this instrument to raise funds is still open. Economic conditions are not good in the United States and Europe, making investors from the Middle East will inevitably have to channel funds to other countries that are relatively stable.
Investor especially from Middle East need to allocate the finance portfolio. Asian countries, including Indonesia, could become a favorite destination of investors.

The government is considering reactivating the crisis alert status that it deactivated recently as negative external sentiment hit the nation’s financial markets hard again on Monday. The rupiah dropped 1.7 percent to Rp 8,938 against the US dollar as refreshed fears of a global economic slowdown over eurozone debt woes and the US’ stalling economic recovery prompted foreign investors to dump risky assets and shift to savings or safer instruments such as the US dollar. In the stock market, international funds, which control more than half of publicly traded stocks at the Indonesia Stock Exchange (IDX), sold a net Rp 532 billion (US$59.75 million) on Monday, pressuring the benchmark stock index to tumble 5.64 percent or more than 200 points to 3,348.71.

The government continue to monitor market updates. The alert status indicates the need to utilize the coordinated crisis management protocol between the government, Bank Indonesia (BI) and related institutions including the IDX which would step into the market to calm volatility and stabilize prices. Spiking government bond yields — which means falling prices — has strained the government’s and companies’ balance sheets as borrowing costs surge, while lower stock prices could have negative impacts on listed companies’ valuation.
Past crises show that financial market turmoil could affect the real sector as negative perception about the economy could multiply as a weaker rupiah could hurt people’s purchasing power and the government’s and companies’ ability to repay foreign debts. The Jakarta Composite Index (JCI), however, has over performed regional and global peers as it lost 9.59 percent so far this year versus more than a 10 percent slump in Singapore, Thailand, South Korea, Japan, Hong Kong and India. A stronger base of domestic investors had helped minimize the stock index’s slump despite heavy foreign selling pressures amounting to Rp 14 trillion in the past two months. Indonesia’s domestic stock investors increased by 200,000 in the past two years, a number Ito considered “enough” to mitigate negative external shocks in the stock market. Domestic investors’ transaction currently accounts for 66 percent of the overall 115,000 transactions. Authorities have reiterated the urge for investors not to panic and be overly worried as Indonesia’s fundamentals remain strong despite global economic uncertainties, with economic growth targeted at 6.5 percent, while inflation remains manageable at below 5 percent, public debt level low at about 26 percent of the country’s gross domestic product (GDP).