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Shariah is the Islamic law that governs a Moslem daily life. It is derived from alQuran (the Holy Book) and al-Hadist (the sayings of Nabi Muhammad) The main important tenet of the Shariah in doing business and economy is the prohibition of riba (usury, interest)
Moslem scholars contend that riba is exploitative, unjust and makes an economic system unhealthy. Instead of riba, the Shariah directs Moslem to employ profit-loss sharing system (PLS) and zakat
Philosophical Foundations
Islamic economics is a social science which studies the economic problems of a people imbued with the values of Islam (Mannan 1986, 18)
Islamic economics is a science that studies the allocations of resources to create and distribute wealth for mankind and universe for the purpose of returning (worshipping) to God
What is meant by wealth here is a holistic one that includes economic wealth (money income), mental wealth (such as happiness, empathy, feeling of brotherhood, etc), and spiritual wealth (such as, thankfulness to God, feeling of closeness to God, feeling of unity with God, other persons, and universe, etc).
In the broadest sense, the resources includes physical (economic) resource, mental resource (such as, honesty, respect for others, justice, etc), and spiritual resource (such as the belief of that all things belong and return to God, the belief of that all human beings are vicegerents of God, the belief that human beings should be accountable for their actions to God, etc)
A credo of Islamic economics says that any increase on wealth or any consumption of wealth will make an individual to be closer to God
There will be a different reality if the concepts of resources and wealth merely are limited to physical or economic ones. Under the concepts, human beings are entrapped only on a worldly life and never be directed to a spiritual life. Thus, the reality of life is just a materialistic life
In micro contexts, Islamic economic system ideally is supported by management system and accounting system that are also based on Islamic values
Islamic Management (Shariah Management) is a science or a practice of managing resources to make and distribute holistic wealth for guiding all human beings to return to God
Islamic Accounting (Shariah Accounting) is a science or a practice of accounting that functions as a medium for providing information and fulfilling accountability to awake users God consciousness
The above concepts highly appreciate the relationship between human being and human being, between human being and nature, and between human being and God
Tawhid is the essence of Islamic teaching. It is about the recognition that there is no gods, except the God (Allah). The God is One. It implicates that human being only submits him/her self to the will of God that implicitly recognizing the Gods sovereignty
The will of God governs the relationship between human being and human being, between human being and nature, and between human being and God
Rububiyyah is divine arrangements that relate to nourishment, sustenance, and power of directing all things towards their perfection
Khilafah is human beings status and role as vicegerent of God on earth and his/her relations with other human being, nature, and God
Tazkiyah is purification of human being in the sense of purifying his/her self from any (physical and non-physical) dirty, purifying the relationship between human being and human being, between human being and universe, and between human being and God
Under the PLS, an Islamic bank is running a business based on a real economy, that is, profit or loss yielded from a business. The profit or loss then is shared with a businessman and those who have saving account or deposit account on the bank accordance with an agreement or based on capital shared on the business.
In the case of musharakah (partnership), the profit earned from a business is shared based on the capital invested in the business
Musharakah (partnership) is actually participation of two or more persons in a certain business with defined amount of capital invested according to a contract for jointly carrying out a business and for sharing profit and loss in specified proportions
Musharakah essentially is a joint capital. Islamic bank and businessman contribute capital to a business. Profit (or loss) earned from the business is shared in an proportion (the capital shared)
Under mudharabah, one party provides capital and the other utilizes it for business purposes under the agreement that profit from the business will be shared according to a specified proportion
In a simpler notion, mudharabah is a joint capital-skill. Islamic bank contributes 100% capital and businessman contributes skill (in doing business). Profit earned from the business is shared on an agreed portion
Equity-based financing
Musharakah Mudharabah
Sales-based financing
Murabahah Bai bi tsaman ajil
Fee-based financing
Indonesia at the first time legally functions Islamic bank in 1992, that is, at a few moment after issuing Banking Act No. 7/1992. The Act consents any bank to operate based on interest or based on profit-sharing
In 1992, there were 1 Islamic commercial bank and 2 Islamic rural banks In 2008, there were 5 Islamic commercial banks, 131 Islamic rural banks, 27 Islamic business units with 953 offices
Up to 2008, the Islamic banks transactions volume has reached Rp. 49,55 trillion which covers 2.14% of market share in Indonesia (Bank Indonesia 2008)
Islamic bank No 1 2 3 4 Islamic commercial bank Islamic rural bank Islamic business unit Islamic saving and loan cooperative
Source: Bank Indonesia (2008), Timberg (2009), and other sources *) This amount is not exactly in 2008 (see Timberg 2009, 3)
1992 1 2 0 na
Table 2 The Growth of Islamic Banks Assets and Market Share in Indonesia (US $)
Islamic bank
No 1 Assets 2 Market share
1992
52 million n.a.
2008
260 trillion 2.14%
Concerning Banking
Description The Act utilizes the term of profit-sharing system, instead of Shariah banking system. Explicitly the Act mentions the terms of Shariah principle as the basis for Islamic bank The Act specially regulates the Islamic banking in Indonesia
Islamic bank
PSAK No
Year
Concerning
1
2 3 4 5 6 7
PSAK No. 59
PSAK No. 101 PSAK No. 102 PSAK No. 103 PSAK No. 104 PSAK No. 105 PSAK No. 106
2002
2007 2007 2007 2007 2007 2007
8
9
2009
2009
10
2009
When the Islamic bank is assessed by utilizing the CAMELS, then it is possible that the behavior and the performance of the management of Islamic bank is the same as the conventional bank
Ideally, there should be an instrument that is designed and applied special for the Islamic bank based on Islamic values. Say, ANGELS [Amanah management, Non-economic wealth, Give out (a broader distribution of wealth), Earnings, Liquidity, and Sensitivity to market] may be recognized as an alternative instrument for that purpose (Triyuwono 2005)
At the national level, there is also a National Shariah Board [Dewan Syariah Nasional (DSN)]. DSN can issue fatwas regarding all products and services. It undertakes critical assessment on Islamic financial institutions products and services and ensures that all of them are in accordance with Islamic injunctions
Islamic capital market and Islamic pawnshop have not been practiced yet independently, they are attached to the conventional one. The Islamic insurance (takaful) has been run as an independent business entity
The practice of capital market is closely related to the injunction of not doing gambling. In Islamic capital market, gambling is not permitted. Thus, shortselling is not allowed in that market
In Indonesia, there is no special Islamic entity for stock exchange. But, there is Jakarta Islamic Index (JII) in the Indonesian Stock Exchange [Bursa Efek Indonesia (BEI)]. JII is a group of shares of thirty companies listed in BEI
They are the shares the companies of which are grouped by certain Islamic criteria such as not producing and selling products or services that prohibited by the Shariah, not involving in riba transactions, not doing gambling, and so forth
Concluding Remarks
It is worth to note that Islamic economy is not identical with Islamic bank and other Islamic financial institutions. The Islamic bank and other Islamic financial institutions are only ones of economic institutions of the economic system. They are the financial sector of the system
Other institutions in real sector are also a part of the system. The institutions in real sector should not be forgotten in developing Islamic economic system
Other instrument that should be implanted and be always in action is morality. It is a very soft instrument that its existence is a must in the Islamic economy. Without it, there is no Islamic economy, even though the products and services are the Islamic ones. Morality is an esoteric spirit. It makes the Islamic economy to be alive