Islamic Banks in Indonesia: Truly Different or Just Rebranded?

Islamic banking in Indonesia has experienced substantial growth over the past two decades, evolving from a niche alternative to a significant component of the national financial system, particularly following the merger of three state-owned Islamic banks into a single large entity.

Conceptually, Islamic banking operates on principles designed to be more humanistic than conventional banking. The prohibition of riba (interest), gharar (excessive uncertainty), and maysir (gambling) theoretically guides Islamic banks toward cautious risk management and equitable profit-sharing with customers. Schemes like mudharabah (profit-sharing), musyarakah (equity partnership), murabaha (cost-plus sale), and ijarah (leasing) are intended to position banks as risk-sharing partners rather than mere lenders. This ideal suggests a move away from predatory lending towards a model embodying fairness (adl) and collective benefit (maslahah).

However, the practical application often falls short of these ideals. A primary concern is the dominance of the murabaha contract, which constitutes the majority of financing in Indonesian Islamic banks and closely resembles conventional credit. While legally distinct from interest, the profit margin is frequently benchmarked against market interest rates. Profit-sharing contracts like mudharabah and musyarakah, considered the core of Islamic banking, are used less frequently due to perceived higher risk and difficulties in monitoring.

Furthermore, risk management in Islamic banks is often described as immature. Effective profit-sharing requires deep understanding and monitoring of customer businesses, demanding robust human resources and information systems. In the absence of such capacity, banks tend to favor instruments with more predictable risks, even if it means deviating from the partnership spirit of Islamic finance. The role of the Sharia Supervisory Board (DPS) is also frequently criticized as being merely symbolic, undermining the oversight necessary to ensure adherence to Islamic principles.