1st Edition

The Growth of Islamic Banking in Indonesia Theory and Practice

By Yasushi Suzuki, Sigit Pramono Copyright 2021
    144 Pages
    by Routledge

    144 Pages
    by Routledge

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    Indonesia is the most populous Muslim country in the world. Taking into account also its endowment and potential economic resources, the Islamic banking industry in Indonesia was expected to take on an important role in facilitating more financial resources and to contribute to the internationalization of the Islamic mode of financing particularly in the Asia-Pacific region. However, the reality is far from the expectation. This book aims to clarify the causes and fundamental constraints leading to the extraordinarily low level of Indonesia’s Islamic financial deepening.

    The authors draw on the traditions of Institutional Economics which are concerned with the rules or mechanisms of creating the 'incentive' and 'threat' for economic players because the rules (institutions) would matter as the determinant for economic development and economic efficiency. This book offers a fairly new analytical lens by hypothesizing that Islamic banks must earn additional profit– the authors coined as ‘Islamic bank rent’ - to maintain their franchise value as prudent Shari’ah-compliant lenders when compared to conventional banks. The authors argued that insufficient provision of the Islamic bank rent opportunity may have caused the Indonesia’s Islamic banks the opportunity to learn and improve their skill and capacity for the credit risk management. The book also offers evidence in support of implementing economic and affirmative policy necessary for incubating and developing the Islamic banking industry in Indonesia and making Indonesia an international Islamic financial hub in the Asia-Pacific region.

    This book will be a useful resource for policy makers and researchers interested in Islamic banking in Indonesia.

    1 Introduction  2 Indonesia’s Islamic banking: Shari’ah implementation, genesis, and socio-political context  3 Recent development of Indonesia’s Islamic banking: The economic realities  4 Theoretical background and review of related literature  5 Comparative study of Islamic banking regulation frameworks in Indonesia and Malaysia  6 Analyses of financial performance and stability of Asian Islamic banks  7 Analyses of the dynamic concentration and competition level of the Islamic banking sector in Indonesia  8 Comparative analysis of the operational efficiency of conventional and Islamic banks  9 Structural dilemma of Indonesia’s Islamic banking  10 A hypothesis of explaining the low penetration of Indonesia’s Islamic banks; Shari’ah-compliant benchmark and Shari’ah-based 'raf' al-haraj' benchmark on prohibition of riba  11 Epilogue – A Quarter-century journey of Islamic banking development in Indonesia: A revisited


    Sigit Pramono is Chairman of SEBI School of Islamic Economics and Lecturer at University of Indonesia, Indonesia

    Yasushi Suzuki is Professor at the Ritsumeikan Asia Pacific University, Japan.

    "This  important  book  assesses  the  factors  affecting  the  growth  of  Indonesia’s  Islamic banking sector from 2004 to 2018. Even though there is much research published in academic journals addressing this issue, the book incorporates various aspects, such as eco- nomics,  finance,  society,  politics,  government,  and  Sharia  (religion).  In  addition,  it compares the development and growth of Indonesia’s Islamic banking sector with that of Malaysia, Indonesia’s closest neighbor and the most developed in the field. It also investigates Asian banks more widely to gain a broader perspective.

    Finally,  this  book  is  highly  recommended  for  regulators,  market  players,  customers, suppliers, depositors, and all stakeholders because it delivers very important assessments and  results  on  factors  affecting  the  slower  growth  of  Islamic  banking  in  Indonesia. Despite  some  limitations  in  its  scope  and  analysis,  the  book  is  quite  comprehensive  in answering the two puzzles noted earlier, from both economic and noneconomic perspec- tives, and both locally and internationally. International Islamic finance stakeholders can also  benefit  from  the  book,  especially  from  its  assessment  of  Malaysian,  Bangladeshi, and other Asian banks."

    The Developing Economies, Volum 59, Issue 2, June 2020