INDONESIAN ISLAMIC BANKING :

HISTORY,CONCEPT &
DEVELOPMENT

Dr.Phil. Ninik Sri Rahayu

IN THIS
CHAPTER
YOU WILL
LEARN
▪ History and origin of Islamic Banking in
Indonesia
▪ Islamisation movement
▪ Islamic economic movement
▪ Invention of IB in Indonesia
▪ Development of Recent Growth of Islamic
Banking
▪ Opportunities and Challenges for the
Development of Islamic Banking
HISTORY AND ORIGIN
▪ Islamization Movement
▪ After Suharto came to power in 1965, political Islam was
usually seen as a threat.
▪ In the late 1980s, President Suharto's position on Islam shifted
significantly & he began to accommodate urges for Islamization.
▪ Islamization: a movement that typically manifests itself
through a push towards 'greater commitment to Islamic laws and
values, with Islam playing a more central role in public and
political life' (Evans, 2011).
HISTORY AND ORIGIN
▪ After the regime's shift, Indonesia experienced an Islamic renewal
characterized by the increased influence of Islam in both the political and
social spheres. (the establishment of elite Islamic schools, IAIN, infrastructural
developments, focusing on the construction of mosques, Islamic school)
▪ Through the 1990s, the New Order progressively granted more support to
Islamization: The establishment of ICMI (Indonesian Association of Muslim
Intellectuals) in December 1990.
▪ The first chairman of ICMI was B.J. Habibie, the Indonesian Secretary of
Research and Technology at the time.
THE ESTABLISHMENT OF ICMI
▪ Through the 1990s, the New Order progressively granted more support to
Islamization. This was manifested most influentially in the establishment of the
Ikatan Cendikiawan Muslim se-Indonesia (Indonesian Association of Muslim
Intellectuals, ICMI) in December 1990.

▪ The first chairman of ICMI was B.J. Habibie, the Indonesian Secretary of
Research and Technology at the time.
ISLAMIC ECONOMIC MOVEMENT

▪ The movement that was organized by individuals or groups that sought

the Islamization of the entire economic system (Choiruzzad, 2012).
▪ Global level: in the late 1970s/early 1980s. It was signalled by the
establishment of Islamic banking in a number of countries, including the Dubai
Islamic Bank (1975), Islamic Commercial Bank of Abu Dhabi (1977), Faisal
Islamic Banks (1977) in Egypt and neighboring countries, and Darul Mal
al-Islami (DMI) in Malaysia (1981.
ISLAMIC ECONOMIC
MOVEMENT
▪ In 1976, A.M Saefuddin was one of five Indonesians delegated to the conference in Mecca.
Then, he established the Center for Agribusiness Development (Pusat Pengembangan
Agribisnis or PPA) together with such Muslim scholars as Abdillah Thoha, Amin Aziz, Adi
Sasono, and Dawam Raharjo—men who would later come to be known as leading figures
behind the rise of ICMIs in the 1990s.
▪ The first National Conference on Islamic Economy was held at the Islamic University of
Bandung in 1983. In1984, Islamic economics supporters develop baitul tamwil, a division of
the Teknosa Cooperative in Bandung.
THE DEVELOPMENT OF THE FIRST
ISLAMIC BANK
▪ In 1989, Amin Aziz, a PPA leader who had first
promoted the establishment of Islamic banking in
Indonesia, became a secretary at MUI.
▪ MUI decided to hold a two-day workshop about
non-interest banking on August 19–20, 1990. The
result: creation of an Islamic bank.
▪ November 1, 1991, with the blessing of Suharto,
Indonesia's first Islamic bank, Bank Muamalat
Indonesia (BMI) was incorporated.
 ISLAMIC BANKING

A sub-sector in the Islamic finance industry that functions to raise funds,

channel funds, and provide banking services to its customers. In its
implementation, the Islamic banking industry refers to Shariah principles, which
are regulated and supervised by several institutions and teams including the
National Shariah Council of the Indonesian Ulama Council, the Financial
Services Authority (OJK), and the Shariah Supervisory Board
CORE PRINCIPLES OF ISLAMIC BANKING
▪ Islamic banking emerged to meet demand for Islamic financial services, while
avoiding haram practices, such as riba, maysir and gharar.
▪ Islamic banking also emerged in response to public demand for economic and
financial activity in line with Islamic teachings and principles.
▪ As the philosophical underpinnings of Islamic banking, the overarching
objective of the Islamic economy is Falāḥ, namely spiritual and material
salvation in terms of socio-economic aspects and maṣlaḥa.
▪ The vision of prosperity under the Islamic economy embraces maqāṣid
al-sharīʿa (objectives of sharia), with its objective to protect faith and piety (ad
Din), progeny (an Nasab), soul (an Nafs), wealth (al Maal) and intellect (al
Aql)
 GLOBAL AND NATIONAL
CONDITIONS OF ISLAMIC BANKING
▪ Islamic banking is the largest sector in the Islamic finance industry, contributing to 69%, or
USD 1.992 trillion, of the industry's assets.
▪ There were 526 Islamic banks in 2020. However, the number of players is not necessarily
indicative of the size of the industry, In terms of assets.
▪ The top 3 markets of Iran, Saudi Arabia, and Malaysia contribute to 63% of the Global Islamic
Banking Assets, and Morocco is the fastest growing market in Islamic Banking Asset where
assets doubled in 2020.
▪ Sector growth is likely to be muted in 2020 as Islamic banks around the world move to
preserve their capital bases rather than expand operations as they face the economic fallout of
Covid-19. Although the bottom lines of Islamic banks in core markets have taken a hit during
the pandemic, Islamic banking assets are projected to reach US$2.44 trillion by 2024.
TOP ISLAMIC FINANCE MARKETS
IN ASSETS (2018)
 TOP ISLAMIC FINANCE MARKETS IN
ASSETS (2018)
▪ The entry of Indonesia into the top 10 biggest Islamic financial asset owners
into the world is a sign that Indonesia is increasingly competent to participate
in legitimizing the development of Islamic finance in the world.
▪ The Islamic banking sector is one of the highlights in the development of the
Islamic finance industry.
▪ Indonesia’s Islamic banking market share for the past 20 years is still at 5%,
although various efforts have been made by stakeholders through policies to
increase.
THE PROBLEMS FACED IN ISLAMIC
BANKING IN INDONESIA
▪ First, market potential is not accompanied by a large growth in market share,
given that the majority of Indonesia’s population are Muslims.
▪ Second, the condition of Islamic banking human resources, whether in terms of
quantity and quality as well as information technology, have not been able to
support the product and services development
▪ Third, in comparing the performance of Islamic banks with conventional
banks, using various performance assessment measures in the banking
industry, namely CAR, ROA, BOPO, LDR/FDR, NIM/ NOM, NPL/NPF it is
below the performance of conventional banks
THE PROBLEMS FACED IN ISLAMIC
BANKING IN INDONESIA
▪ Fourth, efforts to improve regulation have not been maximised where it has to
harmonise with the operations of Islamic banks in variaous conditions on a
macro basis.
▪ Fifth, aspects of research and development still needs to be developed in order
to ascertain the opportunities, challenges, advantages and disadvantages.
▪ Finally, education and socialization that are not inclusive
OPPORTUNITIES AND CHALLENGES FOR
THE DEVELOPMENT OF ISLAMIC
BANKING
OPPORTUNITIES AND CHALLENGES
FOR THE DEVELOPMENT OF ISLAMIC
BANKING
 ISLAMIC BANKING SUPPORT FOR
THE HALAL INDUSTRY
▪ The main support that Islamic banking can provide is financing. However, to
maximise financing potential, banks experience asymmetrical information
problems. Therefore, an information technology system and the synergy of the
digital economy are needed in reaching out to the wider community.
▪ The second form of support that can be provided is the introduction of new
banking products that are suitable for every halal industries, where problems in
each halal industry can be resolved through the financial system (banking).
▪ The third form of support that can be provided is by positioning banks as an
intermediary between domestic and global halal investors who are interested in
investing in Indonesia’s halal industry
 ISLAMIC BANKING SUPPORT FOR THE
HALAL INDUSTRY
▪ The third form of support that can be provided is by positioning banks as an
intermediary between domestic and global halal investors who are interested in
investing in Indonesia’s halal industry.
▪ The fourth form of support that can be provided is by increasing facilities and
ease of access from Islamic banking to the halal industry. This is important for
Islamic banking to possess a distinctive appeal factor other than just bearing
Shariah names.
AN EXAMPLE OF SUPPORT PROVIDED BY
ISLAMIC BANKING ▪ Support for Halal Food and Beverage Cluster

The halal food and beverage sector is

supported by two business sectors: (1)
Agriculture, Hunting and Forestry and (2)
Provision of Accommodation and Provision
of Food and Beverages
 COMPARISON OF FINANCING TO
BUSINESS FIELD SECTORS (2014 - 2018)
ISLAMIC BANKING SUPPORT TO MAIN
HALAL INDUSTRIES
ISLAMIC BANKING SUPPORT TO MAIN
HALAL INDUSTRIES