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Islamic Banking in Indonesia

Islamic Banking in Indonesia New Perspectives on Monetary and Financial Issues

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9781118509937
  • Published In: March 2013
  • Format: Hardback , 544 pages
  • Jurisdiction: Indonesia ? Disclaimer:
    Countri(es) stated herein are used as reference only

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    A comprehensive overview of key developments in Islamic banking

    In Islamic Banking in Indonesia, renowned economist Dr. Rifki Ismal explores current issues in Islamic banking and financial products with a particular focus on the danger of liquidity risk in Indonesia. It approaches liquidity risk from the conventional perspective of international banking standards, as well as from the Islamic banking perspective. Dr. Ismal also covers the issues of asset-liability balancing, liquidity risk index, organizational structures for managing liquidity, industrial analysis, withdrawal risk, bankruptcy risk, moral hazard risk, and market risk.

    Compiling all the latest academic research on liquidity risk and other risks in Islamic banking, the book provides a theoretical foundation for managing risk that will is highly useful for researchers on Islamic banking and practitioners and academics.

    • Written by a renowned expert on Islamic banking who works on monetary policy at the central bank of Indonesia
    • Covers the latest developments in Islamic banking, particularly liquidity risk, for a rapidly expanding market
    • Ideal for European and American readers, in addition to Asian readers, who need a fuller understanding of Islamic banking institutions, markets, and products

    With the latest academic research and the expertise of a leading practitioner in Islamic banking, this book offers in-depth coverage of the most pressing issues in the field.

  • Foreword xvii

    Preface xix

    Acknowledgments xxi

    CHAPTER 1 Classic Arab Financial Contracts in Modern Financial Institutions 1

    Introduction 1

    Economic Conditions in the Prophet Muhammad’s (pbuh) Era 1

    Development of Classic Economic Contracts 6

    Conclusion 12

    Notes 13

    References 13

    CHAPTER 2 Program to Develop Indonesian Islamic Banking 15

    Introduction 15

    The Indonesian Islamic Banking Industry 15

    A Program to Improve the Performance of the Islamic Banking Industry 26

    Conclusion 27

    References 27

    CHAPTER 3 Understanding Characteristics of Depositors 29

    Introduction 29

    Studies on the Output of Empirical Surveys 30

    Segmentations of Banking Depositors 33

    Investment Behavior of Banking Depositors 35

    An Integrated Program to Develop the Industry 41

    Conclusion 43

    References 44

    CHAPTER 4 Liquidity Risk Management in Banks: The Conventional Perspective 45

    Introduction 45

    Liquidity Risk in Banking Institutions 45

    Process of Liquidity Risk Management 49

    Asset-Liability Imbalance and Maturity Mismatch Risks 52

    Techniques to Mitigate Liquidity Risk 55

    Financial Instruments as Sources of Banks Liquidity 58

    Conclusion 60

    Note 61

    References 61

    CHAPTER 5 Liquidity Risk Management in Banks: The Sharia Perspective 63

    Introduction 63

    Liquidity Risk Issues in Islamic Banking 63

    Characteristics of Islamic Banks Facing Liquidity Risk 64

    Sharia Issues in Liquidity Risk Management 67

    Approaches to Manage Liquidity Risk Based on Sharia 71

    Techniques to Mitigate Liquidity Risk Based on Sharia 75

    Conclusion 80

    Notes 81

    References 81

    CHAPTER 6 Islamic Banking Characteristics, Economic Conditions, and Liquidity Risk Problem 83

    Introduction 83

    Supporting Factors of Development 83

    Characteristics of the Industry in Relation to Liquidity Problems 85

    Investment Behavior of Depositors and Economic Conditions 88

    Ideas for Improvements 94

    Conclusion 95

    References 95

    CHAPTER 7 Performance of the Islamic Banking Industry 97

    Introduction 97

    Background of the Indonesian Islamic Banking Industry 98

    Organizational Approach to Managing Liquidity 99

    Liquidity Risk Management Related to the Liability Side 102

    Instruments to Manage the Demand for Liquidity 120

    Conclusion 124

    Notes 125

    References 125

    CHAPTER 8 Growth of the Islamic Banking Industry 127

    Introduction 127

    Islamic Banking Industry and Its Development Programs 128

    Literature Reviews 129

    Construction and Output of the Models 133

    ARIMA Models 134

    Conclusion 143

    References 144

    CHAPTER 9 The Optimal and Decreasing Growth Rate of the Islamic Banking Industry 145

    Introduction 145

    Conditions Leading to the Optimal and Decreasing Growth Rate 146

    Papers Analyzing Growth and Development of the Islamic Banking Industry 146

    Construction of the ARIMA Models and Estimations 147

    Findings and Strategic Policy Recommendations 154

    Conclusion 155

    References 155

    CHAPTER 10 Liquidity Management Index 157

    Introduction 157

    Liquidity Risk Problem in Sharia Perspective 157

    Construction of Liquidity Risk Management Index 158

    Assessing the Indonesian Islamic Banking Industry 160

    Overall Assessments of the Islamic Banking Industry 163

    Conclusion 164

    Appendix 10A: Liquidity Risk Management (Survey Manuals) 165

    Appendix 10B: Bank X Survey Results 171

    Appendix 10C: Bank Y Survey Results 177

    Appendix 10D: Bank Z Survey Results 183

    Note 189

    References 189

    CHAPTER 11 An Empirical Survey on Liquidity Risk Management 191

    Introduction 191

    Depositors Understanding of Islamic Banking 192

    Investment Behavior of Depositors 193

    Liquidity Behavior of Depositors 198

    Risk Management Committee in Islamic Banks 205

    Sources of Liquidity Risk Problem and Liquid Instruments 212

    Conclusion 214

    Notes 214

    References 215

    CHAPTER 12 Islamic Banking Behavior Model of Indonesia (ISLAMI) 217

    Introduction 217

    Framework of ISLAMI 217

    Model Review and Justification 219

    Asset Liability Balance Models: Theoretical Background 221

    Liquidity Reserves Model: Theoretical Background 227

    Model of Islamic Monetary Operation: Theoretical Background 231

    Econometric Analysis 236

    Interpretation of the Models 250

    Long-Run Causality and Dynamic Responses of Variables 253

    Findings and Recommendations 261

    Conclusion 262

    Notes 263

    References 263

    Appendix 12A: Proofing Formula 265

    Appendix 12B: Proofing Formula 266

    Appendix 12C: Proofing Formula 266

    Appendix 12D: Proofing Formula 266

    CHAPTER 13 Strengthening and Improving Liquidity Management 267

    Introduction 267

    Organizational Structures 268

    Integrated Output of the Previous Chapters 269

    Discussion of the Depositors’ Side 270

    Discussion of the Islamic Banking Side 273

    Liquidity Problems and Islamic Liquid Instruments 274

    A Proposed Program to Manage Liquidity Risk 275

    Conclusion 280

    References 281

    CHAPTER 14 Demand and Supply of Liquidity in Islamic Banks 283

    Introduction 283

    Short-Term Demand for Liquidity 284

    Short-Term Suppliers of Liquidity 285

    Historical Performance of Short-Term Liquidity Management 287

    Future Performance of Short-Term Liquidity Management 289

    Findings and Suggestions 299

    Conclusion 301

    References 301

    CHAPTER 15 An Empirical Survey on Depositors’ Withdrawal Behavior 303

    Introduction 303

    Potential Problems of Withdrawals Risk in Islamic Banks 304

    Depositors’ Behavior in Withdrawing Funds 304

    Empirical Survey on Deposit Withdrawal Behavior 308

    Policy Recommendation 315

    Conclusion 316

    Notes 316

    References 316

    CHAPTER 16 An Econometric Model of Depositors’ Withdrawal Behavior 319

    Introduction 319

    Flow of Funds in Islamic Banking 320

    Model of the Liability Side in the Competitive Banking Sector 321

    Econometric Analysis 323

    Findings from Models and Suggestions 329

    Limitation of the Models 331

    Conclusion 331

    References 331

    CHAPTER 17 Formulating Withdrawal Risk and Bankruptcy Risk 333

    Introduction 333

    Characteristics of Islamic Banking Industry 334

    Assumptions and Risk Formulas 335

    Withdrawal Risk Scenarios 336

    Bankruptcy Scenarios 338

    Soundness and Failure of Islamic Banks 339

    Revenue-Sharing Equilibrium Ratio 340

    Conclusion 342

    Notes 342

    References 343

    Appendix 17A: Proofing Formula of the Invulnerable and Vulnerable Condition 343

    Appendix 17B: Proofing Formula of Solvency and Bankruptcy Condition 344

    Appendix 17C: Proofing Formula of Combination of Scenarios 345

    CHAPTER 18 An Optimal Risk-Return Portfolio of Islamic Banks 347

    Introduction 347

    The Dominant Islamic Financing Instruments 348

    Risk-Return Portfolio Theory 348

    Efficient Portfolio Theory 350

    Risk-Return Analysis of Islamic Financing Instrument 351

    An Efficient Portfolio Financing Frontier 360

    Conclusion 362

    References 362

    Appendix 18: Derivation of Variances of 1–4 Financing Instruments 363

    CHAPTER 19 Volatility of the Returns and Expected Losses of Islamic Bank Financing 365

    Introduction 365

    Islamic Financing Instruments 366

    Value at Risk Approach 367

    Value at Risk (VAR) Analysis for the Indonesian Islamic Banks 369

    Value at Risk Result 372

    Recommendations 376

    Conclusion 377

    References 377

    CHAPTER 20 The Moral Hazard Problem in Murabahah Financing 379

    Introduction 379

    Murabahah Financing 380

    Moral Hazard in Murabahah Financing 382

    Minimizing Moral Hazard in Murabahah Financing 386

    Conclusion 388

    Note 389

    References 389

    CHAPTER 21 Central Bank Islamic Monetary Instruments: A Theoretical Approach 391

    Introduction 391

    General Assumptions 392

    Islamic Monetary Instruments 393

    Utility of Islamic Monetary Instruments 402

    Conclusion 403

    Notes 405

    References 405

    Appendix 21A: Derivation of Central Bank Wakalah wa Ijarah Certificate 406

    Appendix 21B: Derivation of Central Bank Wakalah wa Ijarah Muntahia Bitamlik Certificate 407

    Appendix 21C: Derivation of Central Bank Islamic Securitization Wa Ijarah Certificate—Ijarah Rental Rate 407

    Appendix 21D: Derivation of Central Bank Islamic Securitization wa Ijarah Certificate—Investors Investment Decision 408

    CHAPTER 22 Assessing Economic Growth and Fiscal Policy in Indonesia 409

    Introduction 409

    Wagner’s Law and Keynes’s Law on Economic Development 410

    Assumptions and Economic Modeling 411

    Defining Variables and Model Specification 412

    Autoregressive Distributed Lag (ARDL) Model 415

    Long-Run Dynamic Model 417

    Findings and Historical Conditions 418

    Conclusion 421

    Notes 421

    References 421

    CHAPTER 23 Bank Lending Channel and Islamic Banks 423

    Introduction 423

    Underlying Conditions and Assumptions 424

    Econometrics Analysis 425

    Findings from Econometrics Analysis 430

    Conclusion 431

    Note 432

    References 432

    CHAPTER 24 Islamic Gracious Monetary Instruments: A Theoretical Approach 433

    Introduction 433

    General Assumptions 434

    The Islamic Gracious Monetary Instruments 436

    Utility of the Islamic Gracious Monetary Instruments 448

    Conclusion 450

    References 451

    CHAPTER 25 Assessing Gold Murabahah in Islamic Banking 453

    Introduction 453

    Underlying Finance Theory 454

    Analysis of Gold Murabahah Financing in Islamic Banking 457

    Regulating Gold Murabahah 465

    Conclusion 466

    References 466

    CHAPTER 26 Simulation-Based Stress Testing 467

    Introduction 467

    Stress-Testing Guidance 467

    Stress-Testing Simulations and Findings 471

    Conclusion 480

    References 482

    CHAPTER 27 Does the Return on Islamic Deposits Mimic the Interest Rate? 483

    Introduction 483

    Performance of Islamic Deposit Return 484

    Literature Review 486

    Research Framework 490

    Results of Applying Ayuda Neurointelligence 490

    Interpretations of the Results 497

    Conclusion 497

    References 498

    About the Author 501

    Index 503

  • RIFKI ISMAL became an Associate Professor in Islamic Banking and Finance at the Australian Centre for Islamic Financial Studies in 2012. Besides working as an Assistant Director in the Department of Islamic Banking at Bank Indonesia (Central Bank of Indonesia) since 1997, he has been lecturing at the Faculty of Economics, University of Indonesia (FEUI), in the Graduate School of Management (MMUI). While conducting economic and banking research projects and giving lectures, Ismal served as visiting researcher at the Bank for International Settlements (BIS) Hong Kong in 2006 and as a visiting lecturer in the Masters of Science Islamic Finance Program at Strasbourg University, France in 2009. Ismal earned a bachelor's degree in economics from the FEUI. In 2002 he graduated from the University of Michigan with a master's degree in applied economics and later received a PhD in Islamic economics and finance from Durham University, UK. Ismal is also an active writer in Indonesian newspapers/ magazines as well as a speaker at many international conferences on Islamic banking/finance.

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