Islam and Economic Practice: The Potential Role of Economic Students

by Muhammad Syafii Antonio

Presented at FOSSEI Workshop Tazkia Matriculation Centre Gilang Kencana

Executive Director of STEI Tazkia

Muhammad Syafii Antonio (Nio Gwan Chung)

Personal and Educational background Born in Sukabumi Indonesia, May 12 1967 Converted from Christianity to Islam in the end of 1980s Graduated from Faculty of Shariah University of Jordan (1990), Islamic Studies Program Al-Azhar University Cairo (1990), Master of Economics International Islamic University, Malaysia (1992), Doctorate in Micro Finance University of Melbourne,Australia (2004) ). Responsibilities Board of Islamic Banking Expert, Central Bank of Indonesia Board of Commissioner Bank Shariah Mega Indonesia Board of Shariah Bank Shariah Mandiri Advisor to Board of Director Bank Muamalat Indonesia Board of Shariah Takaful Islamic Insurance Board of Shariah PNM Holding (state-owned company) Chairman of Tazkia Group Chairman of Batasa Tazkia Consulting
Published 9 books Bank Syariah dari Teori ke Praktek (Islamic bank from theory to practice) Bank Syariah Wacana Ulama dan Cendekiawan (Islamic bank: a discourse of scholars & jurists) Bank Syariah bagi bankir dan Praktisi (Islamic banks for banker and financial practitioners) Bank Syariah untuk Umum (Islamic bank for public) Wawasan Ekonomi Islam (Horizon of Islamic economics) Arbitrase Islam di Indonesia (Islamic arbitration in Indonesia) Zakat Kaum Berdasi (Zakat of Muslim professionals) Apa dan Bagaimana Bank Islam (What and How Islamic Bank is) Sistem Operasional Bank Islam (Operational System of Islamic bank)

How far Islam can influence

Is Islam a way of belief, worship or life ?

Towards adopting Islam as a Way of Life

Way of Belief

Way of Worship

Way of Life

a
Shahadah Khitan Nikah Wafat

b c
Shahadah Khitan Nikah Wafat
Ibadah Other Rituals Practising Muslim (santri)

A+B
Business & Economy Politics & Laws Family & Social Life Cultural & Entertainment Thought & Education Holistic Muslim (kaafah)

Passive Muslim (abangan)

The Urgency of Transformation

Disoriented and Confused Personality

Economy Social

Cultural

Politics

Education

Free-Fight Liberal Capitalism

Individualism

Hedonism Personal/ Inner group benefit

IQ, and materialism

Growth w Ukhuwah Equity n N tasamuh Wider participation

Art w Dignity

Public n Wider Group interest

Success f IQ/EQ/SQ

A True Muslim

ECONOMIC SYSTEM

SOCIALISM

ISLAMIC ECONOMICS

CAPITALISM

MARXIST PARADIGM

SHARIAH PARADIGM

MARKET PARADIGM

MICRO BASIS FOUNDATION

No private ownership

MICRO BASIS FOUNDATION MICRO BASIS FOUNDATION

Ownership is a trust Individual owns everything

Philosophical foundation
Materialism Dialectic

Philosophical foundation
Individual as His vicegerent in this world

Philosophical foundation
Individual utilitarian with laissez faire

Islamic Paradigm of Economic Theoretical Development

MUAMALAH SHARIAH

EXPERIENCE OF MUSLIMS ECONOMY THROUGH CENTURIES

CURRENT ISSUES & PROBLEMS

CONTEMPORER STATE OF THE ART OF ECONOMIC ANALYSIS / TOOLS

ISLAMIC ECONOMICS POSTULATES

EMPIRICAL STUDIES & ANALYSIS

INSTITUTIONS & POLICIES

FEED BACK

BARE OUTLINE OF THE ISLAMIC ECONOMICS SYSTEM

SYSTEM ISLAMIC ECONOMIC SYSTEM SIYASI SECTOR
(Public Sector)

SECTOR

TIJARI SECTOR
(Private Sector)

IJTIMAI SECTOR
(Social Welfare Sector)

SOME MAJOR FUNCTION

o o o

Maintenance of law, order, justice and defence Promulgation and implementation of economic policies Management of properties under state ownership Economic Intervention as necessary

o o

Creation of Wealth Economic activites of production consumption and distribution

Islamic Social Security (al-Takaful al Ijtimai)

POSSIBLE INSTITUTIONS

o o

Government, Ministries and Departments Statutory Bodies Government Comnaies

o o

Owner operator Sharikah (partnership, joint-stock company and cooperative society)

Public-Sector Entities: Bait al-Maal Bait al-Zakah Private-Sector Entities: Charitable Organizations Individuals

SOME RELEVANT SHARIAH LAWS

Various Government Administration Laws: Company Laws Commercial Laws Land Laws Mining Laws Taxation Laws

Various Fiqh al-Muamalat Laws Al-Mudharabah Al-Musharakah Al-Bai Al Murabahah Al-Ijarah Al-Rahn Al-Kafalah

Various Ijtimai Laws : Al-Zakah Al-Waqf Al-Tarikah Al-Sadaqah Al-Qard al Hasan

Strategic roles awaiting the students of Islamic economics

Academic

Corporate

The teacher/lecturer The researcher/theory developer

The manager The entrepreneur The policy maker Agent of change

Business

Bureaucrat

Community

ISLAM A COMPREHENSIVE WAY OF LIFE

ISLAM AQIDAH

SHARIAH

AKHLAQ

MUAMALAH SPECIAL RIGHTS PUBLIC RIGHTS CIVIL LAWS

CRIMINAL LAWS INTERIOR AFFAIRS

IBADAH MAHDLAH

EXTERIOR AFFAIRS INTERNATIONAL RELATION

POLITICS ECONOMICS FINANCE

SOCIAL

CULTURE

ETC

LEASING INSURANCE BANKING

MORTGAGE VENTURE CAPITAL

The Wrecked vs Holistic Body Islam and Economic Practice

Ford Volvo

BMW

Suzuki

Honda

Hyundai Nissan Peugeuot

Timor
Toyota

Islam and personal ownership

Is bank interest identical to riba and hence is prohibited

Ruling of international and national Fiqh Academy The development of Islamic financial industry

Fatw on Rib by Leading International Islamic Organizations

Institutions 1 Al-Azhar Council of Islamic studies Topic Bank operation Fatw Prohibited Muft Incharge Committee Year 1965 Remarks Interest on all loans is rib. Urged Muslim jurists, investors and government to seek for an alternative. Analogy to wakalah. The absence of clear and final text either from the Qurn or h? adith that prohibit such transaction. All increments (or interest) in return for the postponement of paying a debt on its due date are legally prohibited. Urged Islamic governments to encourage the establishment of Islamic banks. Unlawful and condemned by the Qurn, Sunnah and consensus of jurists. Modern economic research has confirmed that usury is a threat to the worlds economy and politics. Domination of Western banking style represents a psychological defeat of Muslim. Similar to pre-Islamic usury and prohibited by Qurn

Deposit with fixed rate of return 2 O.I.C. Council of Fiqh Academy Bank interest and dealing with banks

Permissible

Chaired by T? ant? aw

2003

Prohibited

Committee

1985

Council of Fiqh Academy, the Muslim World League

Conventional banks and bank interest

Prohibited

Committee

1986

Genereal Presidencys Department of Ift Saudi Arabia Supreme Court of Pakistan

Bank interest

Prohibited

Ibn Bz

1979

Bank interest

Prohibited

Chaired by Khalil ur Rahman

1999

Bank interest has fulfilled every condition of the prohibited rib

Source: Field work data, Antonio PhD Dissertation.

Fatw of Leading Islamic Organizations in Indonesia Concerning the Issue of Rib and Bank Interest
Organization Year and Place of Fatw 1968 (Sidoardjo) 1927 (Surabaya) Fatw Explanation The fatw is applies to state-owned bank only. Lajnah Bahsul Masail was not able to reach a consensus. Instead it presented three contradictory opinions during the meeting. No concessus. No concessus. The fatw is more specific on credit interest of cooperatives. Return on bank deposits. Interest on compulsory savings and administrative costs of cooperatives. Three (3) contradictory opinions on bank interest. Interest is riba of any kind, and at any rate. For political reason, MUI was reluctant to provide decisive fatw on the issue. MUI was not able to reach an agreement regarding the issue but recommended the establishment of Islamic banks as an alternative solution. Dewan Syariah Nasional Komisi Fatwa

Muhammadiyah Nadhatul Ulama

Shubhat h? all h? arm shubhat

1937 (Surabaya) 1938 (Menes) 1939 (Magelang) 1971 1987 (Cilacap) 1992 (Bandar Lampung) 1991 (Bandung) 1975-1990 (Jakarta) 1990 (Cisarua)

h? all h? all

h? arm h? arm h? arm h? arm h? arm

shubhat shubhat

h? all

h? arm h? arm

shubhat

Persatuan Islam Majelis Ulama Indonesia

Abstain h? all h? arm

shubhat

2000 haram 2003 haram Source: Field work data, Antonio PhD Dissertation.

Element of Islamic Financial System

Islamic Financial Institutions: 1. Islamic Bank 2. Takaful or Islamic Insurance 3. Hajj Fund 4. Mudharabah Company 5. BPRS/BMT/Kopontren 6. Ijarah Company 7. Capital Market 8. Mortgage/ Pawn shop

Factors believed to be the strategic aspects of Islamic finance

1.

2.
3. 4. 5. 6. 7.

8.

Promoting Halal oriented business More elastic with profit n loss sharing Partnership cooperation Promoting Efficiency Moral and Value Driven More equity and less loan Strong commitment to small and micro enterprises Wider Participation & Distribution

Islamic Banking Development Strategy adopted by the Central Bank of Indonesia

Phases and Priorities for Initiatives Implementat ion

Source: Mulya Siregar BI

18

The Existing Islamic Financial Institutions in Indonesia

Full Pledge Islamic Commercial Bank

Capital Market

Bank Muamalat Islamic Branch of Bank Syariah Mandiri Conventional Bank Bank Tugu BNI JABAR SUMUT Danamon Aceh Niaga BRI Permata Kalsel Bukopin BTN IFI NTB BII

Dana Reksa Mutual Fund PNM Asset Management BATASA Shariah fund

Insurance

Asuransi Takaful Asuransi Mubaarakah Div Great Eastern Div MAA

Rural Bank

86 BPRS

Div Bringin Life

Div Jasindo dll

Micro-Fin House
2000 5000 BMT

Islamic Cooperative

KOPONTREN 300-1000 units

Islamic Market Share

Conventional banks loyalists

228 T

720 T

Floating customers

12 T

Islamic banks loyalists

Total Asset & Share of Islamic Bank v.v. Total National Bank

Miliar Rp. 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Tw IV/02 Tw I/03 Tw II/03 Tw III/03 Tw IV/03 Jan-04 0.3% 0.2% 0.8%

Total Aset Pangsa thd total perbankan

0.7% 0.6% 0.5% 0.4%

Linkage of Islamic Banking Industry in Indonesia

Public Depositors : Individual and Institution Commercial fund

BPRS BPRS

BMT

BPRS

ICB
BPRS

BMT
BMT

BMT

Subsidized fund PNM

Various Dept

Dept Of Finance

BI

Dept Of Coop

BEPPENAS

LOCAL NGOs

INTL NGOs

Supporting infrastructure of Islamic Financial Industry

Central bank Fatwa Authority on Financial Matters (DSN-MUI) Arbitration/Shariah Court/Dispute Settelement Agency Standard Audit and accounting body External Shariah Auditor Rating Agency Credit Guarantee agency Communication Board Islamic bank association Special Purpose Company (e.g. Asset Securitization, Clearance,) 3 Ombudsmen), dll.

Structure of Financial System (case: Indonesia)

Source of fund Investment
Asset Asset Financing Asset Processing/ Product Product Accumulation Holding Creation Creation

Financing
Financing Financing Processing Distribution Support

users of funds

Regulator institution

BANKING
House hold

Bank (124 BUN, 40 Foreign&JV)

Securitization, Consumer Financing, Car Financing, Pembiayaan Perumahan

House hold

proceed

Banking: BI Supervision Regulation License

expense

INVESTM. INTERMED. Mutual fund Pension Fund Insurance

Brokers-Dealers PT. KPEI (Clearing&Settement) PT.KSEI (Sec. Depository)

FINANC. INTERMED.

enterpri se

Private Equity
CAPITAL MARKET

Asset Securitization

enterp rise

Non-Bank: SECURITIES COMMISSIO Ministry of Finance

Enterprises expense

JSX - SSX
PAYMENT SYSTEM
Credit Card Company Debit Card Company

Underwriters Rating Agency Investment Managers

Capital marke Security Commission Ministry of Finance

Islamic Financial industry under three possible monetary systems:

Interest-based Financial System (in most countries) Dual Financial System (Islamic and Conventional) (e.g. Malaysia, Indonesia, Bahrain, UEA, Kuwait) Fully Islamized Financial System (Iran, Sudan, Pakistan)

Structure of International Islamic Financial Institution

1. Islamic Development Bank, (world Islamic bank) Jeddah, KSA
2. Islamic Financial Services Board (Islamic IMF), Kuala Lumpur

3. International Islamic Financial Market (IIFM), Bahrain

4. International Islamic Rating Agency (IIRA), Jeddah 5. Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI-the Islamic Basle governing body), Bahrain 6. General Council of Islamic Bank and Financial Institutions (GCIBFI) 7. Islamic Off-shore Banking Center (incl. Labuan OBC, Bahrain OBC)

Landscape for robust Islamic financial system

Strong capital structure
Independent and effective Supervision (operational & sharia)

Robust Islamic Financial Prudent and Effective regulation

information center and rating agency

Consumer protection, arbitration, public education

Good corporate Governance, risk management

Contemporary Islamic Banking infrastructure

BANK INDONESIA

SWBI

Takaful
National Shariah Arbitration Body Indonesian Accountant Association
Transactioni Supervision Supervision, regulatory and licence
Notes * ** :

PUAS** IMA Certificate***

Shariah BPR

Non bank

Shariah Bank

DPS*

DPS

DPS

DPS

DPS

National Shariah Board (MUI)

DPS: Dewan Pengawas Syariah (Shariah Supervisory Board) PUAS : Pasar Uang Antar-bank Syariah (Islamic inter bank money market)

*** IMA: Investasi Mudharabah Antar Bank (inter bank Mudharabah investment)

Strategic choices for developing Islamic finance

1. 2.
3.

Integrate into global financial markets or develop parallel system? Find immediate solutions or make long-term plans? Market-based or financial intermediary, institutionalbased?
6

Strategic suggestions
(Prof. Mahmoud El-Gamal)

1. Integration vs. isolation:

recommend integration with supervision/monitoring 2. Short vs. long-term horizon for Islamic finance: recommend longterm planning 3. Market-oriented vs. institutionoriented (banking): recommend market-oriented
7

Regulation Islamic Financial Institutions: Why Necessary? 1. Maintaining financial stability and sustainability 3 Main Reasons for Banking Regulation 2. Public protection (esp. unsophisticated & small investors) 3. Optimizing Economic Efficiency

Regulation

VS

Market Discipline/ Self Regulation

8

Problems if relying on the market alone

1. Anti competitive behavior

Competition is fundamental to efficiency We need: 1. Clear entry procedures/ licensing 2. Rules on Structure of Industry and competition on Islamic banking industry

Problems if relying on the market alone 2. Frauds and misconducts

Syariah Prudential banking

Unfair behaviour and fraud Inadequate disclosure

We need: 1. Supervision System and Mechanism 2. Good corporate governance (incl. Role of DPS/DSN) 3. Legal Lending Limits 4. CAMEL Plus Rating System
10

Problems if relying on the market alone

3. Asymmetric Information

Moral hazard problems Incentive mechanisme We need: 1. Transparency regulation (Accounting and Auditing Standard incl. Reporting System) 2. Research on Incentive mechanism

11

Problems if relying on the market alone

4. Systemic instability

Issue too holy to be closed bank runs due to syariah compliance issue We need: 1. Liquidity Management, syariah financial market and instruments 2. Role of the lender of the last resort by central banks 3. Portfolio restrictions & guidance
12

ECONOMIC ACTIVITIES Production Trade - Services

Asset

Profit

Income

ZAKAT Infaq, Waqf, Hibah, Shadaqah

o Empowerment o Poverty Alleviation

Value, SWOT and Economic Environment

Value-migrator CHANGE
Certain/uncertain Important/Unimportant

Technology

Pol leg

Economy

Soc Cul

Market

Value Supplier

Value demander TOWS Analysis

COMPETITOR
Winner, Loser, Emerging

CUSTOMER
Committed, Lost, New

Value-decider

COMPANY
Existing-competence, Risk-attitude, Stretch-possibility

Choice

Source:Kottler,Kartajaya

Major Issues

Economics as an integrated part of Islamic Way of Life. The issue of ownership. The issue of riba and its consequence on financial life of Muslim.