Shariah Banking: For richer or poorer [Archives:2006/1007/Business & Economy]

December 14 2006

Dr. Terry Lacey
There are over 250 Islamic Banks registered in the world and over 100 of them are registered in just three countries: Malaysia, Bahrain and the United Kingdom. Malaysia is therefore the nearest source of advanced know how on Islamic to Indonesia, where the Shariah Banking sector is still in its relative infancy. Malaysia has registrations for 14 Islamic Banks and Funds; 14 Conventional Banks which have Islamic windows where customers can access Islamic banking services; 7 Islamic Discount Houses and 5 Islamic Merchant Banks.

A second similar workshop in Surabaya was organized by the same network along with the U.K.'s BritCham, Co-operation for Development the University of Surabaya and a cluster of Shariah Banking institutions including Pusat Komunikasi Ekonomi Syariah, Dompet Dhuafa Republika, Masyarakat Ekonomi Syariah, and Bank Tabungan Negara and Asosiasi Bank Syariah Indonesia Jawa Timur.

The Surabaya workshop looked at the history of Shariah Banking in Indonesia, its current expansion and potential roles in supporting housing, infrastructure, new energy and environmental markets, water supply, SMEs and microfinance. Also at the international organization of Islamic Banking at global and ASEAN level and the context in which Indonesian Small & Medium Enterprises can work with Islamic Finance.

Indonesian Shariah banking started from small beginnings in the early 1990s. Organizations like the Shariah Economic Association, the Centre for Shariah Economy Communication and the Islamic Economic Experts Association are now pushing the development of shariah banking in Indonesia. The workshop sought to identify common issues and synergies between these Islamic Banking networks and the new Global B2B SME network covering 11 cities in provincial Indonesia, and how to promote EU-Indonesia SME links in support of two-way trade and inward investment.

The Surabaya workshop therefore focused on some practical economic and banking issues concerning the direction and emphasis of Shariah Banking and possible synergies with the needs of Indonesian SMEs and their European SME partners. In particular:

1. Is shariah banking devoted more to high end banking clients as in richer countries or can it help smaller SMEs and microfinance entrepreneurs to grow ?

2. Is shariah banking flexible enough to support trade as well as investment ?

3. Is Islamic Banking open to co-operation with Western funds including private, ethical and environmental funds and multilateral and bilateral aid ?

The organizations behind the Surabaya workshop advocate expansion of Shariah Financing in Indonesia in support of local SMEs and microfinance including networks like the second tier lending mechanism Bitulmal Watamil, the Bank Perkreditan Rakyat national branch network, and the Shariah Division of the State Owned Enterprise Perum Sarana Shariah, which issues Guarantees to SMEs borrowing from Shariah Banks.

International literature also confirms shariah banking is flexible enough to support trade as well as investment. Shariah Banking has greatly expanded since the 1970s. Its US $300 billion capital portfolio includes fixed and variable rate instruments, lending, leasing and profit and loss sharing instruments covering a range of traditional and non traditional hybrid instruments and new products, including securitization and bonds.

Concerning co-operation between Islamic Finance and Western finance Minister of Defence Juwono Sudarsono recently advocated (Jakarta Post June 20) forums on inter-faith employment funded jointly by Islamic and Western agencies. He saw this as part strategy of non military defence, so as to tackle economic and social problems, especially unemployment, so that young people would be less exposed to extremism.

Articles and web sites confirm that Islamic Banking and Finance at global level is already interdependent with Western private sector banking and equity funds. Almost one third of the worlds Islamic Banks are registered in Western Counties; half are registered in six key low population upper income countries (were 10 percent represent western banks). However only 11 percent of Islamic Banks are registered in six high population low-income countries where most of the worlds Muslims live. While global Islamic banking and Western partnerships are not in doubt it remains paradoxical that shariah banking seems more established institutionally in richer and Western countries, and weaker in the countries where perhaps it is needed most. Hence the need to work together to make progress in the implementation of Shariah Banking in Indonesia.

The workshops covered the history of shariah banking in Indonesia, the prospects for expansion of the market and capital base, the possibilities for financing of social infrastructure. The organizers also distributed recent articles about the international progress of Islamic Finance from academics and practitioners. This showed lively discussions within the Islamic Banking movement on the terms and conditions of lending with some observers arguing for improved conditionality and more focus on variable rate profit and loss sharing rather than on fixed rate Islamic Finance instruments.

The Global B2B SME Network seeks to promote EU-Indonesia two way SME trade and investment both to build Indonesian SMEs and to finance small and medium social provincial infrastructure. Medium term B2B will help mobilize small and medium scale infrastructure investment under 10 million Euros in support of water supply with or in support of Small Power developers under 10 Mwe, especially for New & Renewable Energy, using Export Credits, Carbon Credits and Shariah Finance.

There will be scope for Shariah Finance for innovative low cost direct marketing to help increase export income for Indonesian SMEs which will need working capital to buy materials and to raise trade volume and quality, collateralized by new sales contracts. B2B will promote a wider range of collateral substitutes alongside sharia finance plus support from EU banks and export credits. International precedents will tell us all the ground-rules we need to know on sharia compliance on trade financing and joint ventures for all of the above activities. Not bad for a financial system rooted in 7th Century Islamic Jurisprudence and adapted to meet modern needs.

Dr. Terry Lacey is a British Muslim with a background in economic and social development in Asia, Africa, the Caribbean Basin, and the Middle East.

[email protected]