Funding Strategy Used by the Islamic Bank in Surabaya
Chapter 1
INTRODUCTION
1.1 Background The Islamic banking industry today stands at more than 200 billion USD, and consists of more than 250 financial institutions in and outside the Muslim world.[1] It is the product of the collective effort of bankers, economists, and Islamic legal scholars over the past several decades to develop financial solutions that meet the religious requirements of Muslims. Malaysia • Saudi Arabia • UAE • UK
Furthermore, it is an inclusive paradigm: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking.[2] In Indonesia during the period of 1997 – 1998, many financial institutions, including banking institutions experienced hardship, due to high interest rate that resulted in a high cost of capital to the entrepreneurs. 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.
[pic]
Figure 1.1
Financial performance of Sharia Banking as compared to the conventional banking in Indonesia
Source: The Blueprint of Islamic Banking in Indonesia
Contrariwise, during the economic crisis, sharia banking could still perform better that the conventional banking as indicated by a relatively low level of non – performing loans and the absence of negative spread in the operational activities (figure 1.1). 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 conduct lending as indicated by a relatively high LDR ratio i.e. between 113 – 117 percent (figure 1.1). This experience has brought a hope to the public for the presence of
INTRODUCTION
1.1 Background The Islamic banking industry today stands at more than 200 billion USD, and consists of more than 250 financial institutions in and outside the Muslim world.[1] It is the product of the collective effort of bankers, economists, and Islamic legal scholars over the past several decades to develop financial solutions that meet the religious requirements of Muslims. Malaysia • Saudi Arabia • UAE • UK
Furthermore, it is an inclusive paradigm: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking.[2] In Indonesia during the period of 1997 – 1998, many financial institutions, including banking institutions experienced hardship, due to high interest rate that resulted in a high cost of capital to the entrepreneurs. 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.
[pic]
Figure 1.1
Financial performance of Sharia Banking as compared to the conventional banking in Indonesia
Source: The Blueprint of Islamic Banking in Indonesia
Contrariwise, during the economic crisis, sharia banking could still perform better that the conventional banking as indicated by a relatively low level of non – performing loans and the absence of negative spread in the operational activities (figure 1.1). 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 conduct lending as indicated by a relatively high LDR ratio i.e. between 113 – 117 percent (figure 1.1). This experience has brought a hope to the public for the presence of