Diversification of Islamic Financial Insturments
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Perhaps this is because, the dominant financing in Islamic banking services is consumptive
(consumer) financing. In 2016, the consumptive financing in Indonesian Islamic banks was
higher (41%) than that of conventional banks (which was about 28%). Most of those financing
prodicts were using Murabahah contract. On the other hand, working capital financing is lower
in Indonesian Islamic banking - 40% compared to conventional banks’ 47%. Probably this is
because Islamic banking does not prefer to use Mudharabah and Musharakah due to higher
risk. Investment financing in Islamic banking industry (19%) was also lower than conventional
banking industry (25%) in 2015 (OJK Islamic Banking Statistic, January 2017).
In general, it is observed that the instruments used and products offered in Indonesian Islamic
banking are very limited or much less diversified, as compared to the conventional banking
products and instruments. With limited products range and features to offer, Islamic banks can
be relatively unable to meet the needs of the costumers or industry at large. This implicates the
room for Islamic banks to develop is very limited, and hence the profitability remains low as
compared to conventional banks. Some common contracts used in other Islamic finance
jurisdictions such as in Malaysia and Middle East Countries are not used in Indonesian Islamic
banking products. Bay’ ‘inah and Bay’ Tawarruq, for example are used in Malaysia and Middle
East Countries to structure various financial products, but those contract are not allowed in
Indonesian Islamic banking practices by the National Religious Council – Indonesian Ulama
Council (DSN – MUI).
Moving forward, the Islamic bank players in Indonesia have to think strategically to find a
workable solution to diversify their products and instruments in order to attract customers
and fulfil their various needs. Various contracts as found in Islamic commercial law (Fiqh al-
Muamalat) can be used to cater various needs of industry. Product innovation and
development to meet the people needs and productive sector in society is very important.
3.2.4. ISLAMIC CAPITAL MARKET IN INDONESIA
Industry Development
The capital market is a very important segment in Indonesian Islamic financial market to
stimulate economic growth. The capital market can assist in providing capital to assist
government budget in developing infrastructure as well as corporate structure in expanding
their businesses.
The Islamic capital market in Indonesia is developing gradually in the last decade, to become a
greater part of domestic financial system. The market is currently dominated by Sukuk that
provide alternative financing and investment for Indonesian government, companies and
public at large. Besides Sukuk, Islamic stocks and unit trust are among the products that have
been developed intensively in Indonesian Islamic capital market.
Indonesia started Sukuk issuance when Indosat (telecommunication firm) issued one
amounting to IDR175 billion - the first corporate Sukuk - based on Mudharabah contract in
2002. This was followed by an Indonesian retail company, Matahari Putra Prima, through an
IDR150 billion 5-years based on Ijarah in 2004.