Source: Bank Indonesia. 2002. The Blueprint of Islamic Banking Development in Indonesia
The development of sharia banking in Indonesia is a realization of the needs of the public seeking an alternative banking system that is both capable of delivering sound banking/ financial services and compliant with sharia rules. As a matter of fact, the development of sharia financial institution has started well before a formal legal base for sharia banking operation came into force. Therefore, the stipulation of the Act No. 7 of 1992 concerning Banking as amended by the Act No. 10 of 1998 and the Act No. 23 of 1999 concerning Bank Indonesia is the answer to the needs.
After the stipulation, the sharia banking has shown rapid development in terms of total assets (at average 74 percent annual growth). Bank Indonesia, as the banking regulatory authority, is in a position to conduct the task as mandated in the Banking Act to establish a sound sharia banking system. The development of sharia banking should be aligned with the Indonesian Banking Architecture that is currently in the process of development.
A Brief History of Islamic Banking Development
The development of the sharia banking in Indonesia has started well before a formal legal base for sharia banking operation came into force. Before 1992, there have been several non-bank financial institutions that apply share base contract founded. This evidence shows a public need of the existence of financial institutions applying sharia principles in their operations.
In order to accommodate the public needs for the existence of the new banking system, the government has implicitly allowed the sharia banking operations in the Act No. 7 of 1992 concerning Banking which is elucidated in the Government Decree No. 72 of 1992 concerning Bank Applying Share Base Principles. The set of regulations have served as legal foundations for sharia banking operations in Indonesia (the new era of dual banking system).
During the period between 1992 to 1998, there was only one sharia commercial bank and 78 sharia rural banks came into operation. In 1998, the Act No. 10 of 1998 on the amendment of the Act No. 7 of 1992 concerning banking came into force to give stronger legal foundation for the existence of sharia banking system. The new Act No. 23 of 1999 concerning Bank Indonesia gives an authority to Bank Indonesia to also conduct its task according to sharia principles. Since then, sharia banking industry has been growing more rapidly.
Sharia Banking in Statistics
The economic and monetary turmoil happening during the period 1997 to 1998 resulted in tremendous impact to the Indonesian economy. During the period of crisis, many financial institutions, including banking institutions, experienced financial hardship. High interest rate has resulted in a high cost of capital to the entrepreneurs i.e. the real sector and finally caused low productivity. The quality of bank assets has deteriorated significantly while the banking system was burdened by a high cost of funds caused by high market interest rates.
Furthermore, low productivity and high risk investments have prevented the banks from investing their funds in the real sector. As the consequence, the banking system started to loose its intermediary function as indicated by a low LDR ratio.
Contrariwise, during the economic crisis, sharia banking could still perform better than the conventional banking as indicated by a relatively low level of non-performing loans and the absence of negative spread in the operational activities. This could be understood since the rates of returns paid to the depositors are not determined by market interest rates. Therefore, sharia banks are able to channel a relatively lower cost of funds to the entrepreneurs. The evident shows that sharia banks are relatively more able to conduct lending as indicated by a relatively high LDR ratio
i.e. between 113 – 117 percent. This experience has brought a hope to the public for the presence of sharia banking as an alternative banking system that is capable of both delivering economic benefits and ensuring compliance with sharia principles.
During the period between 1998 to 2001, sharia banking system has grown quite rapidly at about 74 percent annually (in terms of asset size) from Rp. 479 billion in 1998 to Rp. 2.718 billion in 2001. The third party managed funds has also increased from Rp. 392 billion to Rp. 1.806 billion. The sharia banking system has also developed institutionally. There has been another commercial bank converting its operations into sharia commercial bank, besides there have also been 3 sharia unit banks and 3 sharia rural bank came into operations by the end of 2001. The number of sharia
branch offices and sharia unit banks has also increased from 26 to 51 branches.
In spite of its rapid development, sharia banking system still acquires a small portion of market share (approximately 0.26% of the total asset size of the national banking system). Many steps have been taken to improve the operational quality of the sharia banking in order to gain public confidence and customer satisfaction.
The development of sharia banking in Indonesia is a realization of the needs of the public seeking an alternative banking system that is both capable of delivering sound banking/ financial services and compliant with sharia rules. As a matter of fact, the development of sharia financial institution has started well before a formal legal base for sharia banking operation came into force. Therefore, the stipulation of the Act No. 7 of 1992 concerning Banking as amended by the Act No. 10 of 1998 and the Act No. 23 of 1999 concerning Bank Indonesia is the answer to the needs.
After the stipulation, the sharia banking has shown rapid development in terms of total assets (at average 74 percent annual growth). Bank Indonesia, as the banking regulatory authority, is in a position to conduct the task as mandated in the Banking Act to establish a sound sharia banking system. The development of sharia banking should be aligned with the Indonesian Banking Architecture that is currently in the process of development.
A Brief History of Islamic Banking Development
The development of the sharia banking in Indonesia has started well before a formal legal base for sharia banking operation came into force. Before 1992, there have been several non-bank financial institutions that apply share base contract founded. This evidence shows a public need of the existence of financial institutions applying sharia principles in their operations.
In order to accommodate the public needs for the existence of the new banking system, the government has implicitly allowed the sharia banking operations in the Act No. 7 of 1992 concerning Banking which is elucidated in the Government Decree No. 72 of 1992 concerning Bank Applying Share Base Principles. The set of regulations have served as legal foundations for sharia banking operations in Indonesia (the new era of dual banking system).
During the period between 1992 to 1998, there was only one sharia commercial bank and 78 sharia rural banks came into operation. In 1998, the Act No. 10 of 1998 on the amendment of the Act No. 7 of 1992 concerning banking came into force to give stronger legal foundation for the existence of sharia banking system. The new Act No. 23 of 1999 concerning Bank Indonesia gives an authority to Bank Indonesia to also conduct its task according to sharia principles. Since then, sharia banking industry has been growing more rapidly.
Sharia Banking in Statistics
The economic and monetary turmoil happening during the period 1997 to 1998 resulted in tremendous impact to the Indonesian economy. During the period of crisis, many financial institutions, including banking institutions, experienced financial hardship. High interest rate has resulted in a high cost of capital to the entrepreneurs i.e. the real sector and finally caused low productivity. The quality of bank assets has deteriorated significantly while the banking system was burdened by a high cost of funds caused by high market interest rates.
Furthermore, low productivity and high risk investments have prevented the banks from investing their funds in the real sector. As the consequence, the banking system started to loose its intermediary function as indicated by a low LDR ratio.
Contrariwise, during the economic crisis, sharia banking could still perform better than the conventional banking as indicated by a relatively low level of non-performing loans and the absence of negative spread in the operational activities. This could be understood since the rates of returns paid to the depositors are not determined by market interest rates. Therefore, sharia banks are able to channel a relatively lower cost of funds to the entrepreneurs. The evident shows that sharia banks are relatively more able to conduct lending as indicated by a relatively high LDR ratio
i.e. between 113 – 117 percent. This experience has brought a hope to the public for the presence of sharia banking as an alternative banking system that is capable of both delivering economic benefits and ensuring compliance with sharia principles.
During the period between 1998 to 2001, sharia banking system has grown quite rapidly at about 74 percent annually (in terms of asset size) from Rp. 479 billion in 1998 to Rp. 2.718 billion in 2001. The third party managed funds has also increased from Rp. 392 billion to Rp. 1.806 billion. The sharia banking system has also developed institutionally. There has been another commercial bank converting its operations into sharia commercial bank, besides there have also been 3 sharia unit banks and 3 sharia rural bank came into operations by the end of 2001. The number of sharia
branch offices and sharia unit banks has also increased from 26 to 51 branches.
In spite of its rapid development, sharia banking system still acquires a small portion of market share (approximately 0.26% of the total asset size of the national banking system). Many steps have been taken to improve the operational quality of the sharia banking in order to gain public confidence and customer satisfaction.
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