Indonesian Islamic Banks: Adhering to Principles or Market Logic?

A fundamental question is being debated within Indonesian Islamic banking: does it genuinely uphold Sharia principles, or does it simply conform to conventional market logic? This query arises when customers compare Sharia home financing installments with conventional ones and find the Sharia rates to be higher, prompting a critical look at the industry's core practices.

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When a customer compares Sharia home financing installments with conventional ones and finds the Sharia figures are actually higher, the question that comes to his mind is simple but poignant: if it's like this, where is the 'Sharia' in it?

Legally, Indonesian Islamic banks operate under strict Sharia oversight. Their financing products are audited by Sharia Supervisory Boards and must align with fatwas from the National Sharia Council-MUI. For instance, in a murabahah (cost-plus financing) contract for home purchases, the bank is legally obligated to own the asset before selling it to the customer, assuming risks of damage before handover, and setting a fixed margin. Late payment penalties, in many cases, are directed to social funds rather than becoming bank income. These aspects are legally sound and not mere formalities.

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In terms of contract law, the claim that Islamic banks are 'different' is not baseless. Every financing product is audited by the Sharia Supervisory Board and must be based on a fatwa from the National Sharia Council-MUI. In a murabahah contract for home purchases, for example, the bank is legally obligated to own the asset first before selling it to the customer, bearing the risk of damage before handover, and setting a fixed margin. Late payment penalties, in many products, are not bank income but are channeled to social funds.

However, the debate centers on whether adherence to the form of valid contracts translates into embodying the true spirit of Islamic finance. The ideal of Islamic finance extends beyond merely avoiding the term 'interest'; it aims to establish a system that fairly shares business risks between capital providers and entrepreneurs. This is the essence of mudharabah and musyarakah contracts, where banks would share in the profits and losses alongside customers.

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The ideal of Islamic finance is not just to avoid the word 'interest', but to build a financial system that fairly shares business risks between the fund owner and the fund manager – this is the spirit behind mudharabah and musyarakah contracts. In this scheme, the bank should share in the profits and losses together with the customer, not just collect the principal plus a fixed margin.

The reality in Indonesia falls short of this ideal. Murabahah financing dominates the portfolio, accounting for 58% to over 70% of total financing, while profit-sharing schemes, the substantive hallmark of Islamic finance, remain marginal. Economically, murabahah functions as a fixed-margin sale, leaving the bank with minimal risk while the customer bears most of it, mirroring conventional credit arrangements. The issue is further complicated when murabahah margins are often set by referencing Bank Indonesia's benchmark interest rates to remain competitive, making it difficult to argue that these products originate purely from the logic of real goods trading rather than the time value of money, a concept central to the interest-based system Islamic finance seeks to avoid.

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The reality is far from that. In Indonesia, murabahah financing dominates, accounting for 58% to over 70% of the total financing portfolio of Islamic banks, while profit-sharing schemes, which are the most substantive characteristic of Islamic finance, are only marginal players.