THE PERSISTENT LACK OF PROFIT-AND-LOSS SHARING FINANCING IN INDONESIA’S ISLAMIC BANKS Ascarya Center for Central Banking and Education Studies, Bank Indonesia Jl. MH Thamrin No.2, Sjafruddin Prawiranegara Tower, 20th fl., Jakarta 10350, Indonesia Email:
[email protected]; Phone: +6221.381.7345; Fax: +6221.350.1912
ABSTRACT Lack of profit-and-loss sharing (PLS) financing in Islamic banking has become a classic problem which has not been given proportional attention by practitioners as well as academicians. This study analyzes the problems of persistence low PLS financing in Indonesia’s Islamic banking and proposes alternative solutions using Analytic Network Process (ANP) method. The root causes of low PLS financing can be grouped into three aspects, namely 1) Internal problems, which include upper management, human resources and technical aspects; 2) System conditions, which include conventional bank domination, unsupportive environment and competition; and 3) Externalities which include society, the authorities and customers. The results show that the primary problems come from: 1) Authority (External); 2) Top Management (Internal); 3) Customer (External); 4) Unsupportive Environment (System); and 5) Conventional Domination (System). In more detail, the primary problems are: 1) Lack of Knowledge of the Customer; 2) Lack of Commitment of the Authority; 3) Value in the Environment; 4) Business Oriented of the Top Management; and 5) Conventional Competition on Products. The primary solutions are: 1) Customer Education; 2) Top Management Commitment; 3) Protocol and Grand Strategy; 4) Law and Regulation; and 5) Government Commitment. Meanwhile, policies and strategies that should be prioritized are: 1) Product Development; 2) Fair Treatment; 3) Service Improvement; 4) Market Mapping; and 5) Professionalism. Furthermore, the levels of agreements among respondents (Kendall’s W) are generally low, with Islamic bankers show higher rater agreement than that of Experts. However, the priority of choices shows greater agreement among respondents, especially among Islamic bankers. JEL Classification: C14, G21, G28 Keywords: ANP, Islamic Banking, Profit-and-Loss Sharing
Awarded Best Paper at “The International Islamic Finance Conference 2013”, International Journal of Islamic and Middle Eastern Finance and Management, Park Hyatt Hotel, Abu Dhabi, UAE, April 14-16, 2013.
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1. INTRODUCTION 1.1 Background Islamic finance in Indonesia has been developing rapidly in the past decade, especially Islamic banking, where its total asset has been growing at the average rate of 50.5% annually. This rapid growth of asset has been accompanied by the rapid growth of deposits and financing, which have been growing at the average rate of 53.5% and 49.5%, respectively (see figure 1.1). Asset
Deposits
Financing
gAsset
gDeposits
gFinancing
48.8%
51.8% 50.6% 49.2%
47.6% 45.5% 45.4% 41.8%
36.2% 32.6% 31.4%
34.2% 32.7%
36.7% 35.5%
36.7% 35.6%
115
33.4%
31.6%
76
28.0% 4 3 3
8 6 6
15 12 11
21 16 15
27 21 20
37 28 28
2002
2003
2004
2005
2006
2007
50
37
52 38
2008
66
22.8% 98 47
2009
68
2010
145 103
2011
Figure 1.1 Development of Islamic Banking in Indonesia At the end of 2011, asset of Indonesian Islamic banking grew at 49.2% rate totalling Rp.145.5 trillion (or US$.16.2 billion), deposits grew at 51.8% annually totalling Rp.115.4 trillion (or US$.12.8 billion), and financing grew at 50.6% annually totalling Rp.102.7 trillion (or US$.11.4 billion). This rapid growth of Indonesian Islamic banking has outperformed the average growth of global Islamic finance, which has been growing at 15% - 20% annually. Conceptually, Islamic banking can follow two-tier mudharabah model or one-tier mudharabah combined with multiple investment instruments model (Iqbal and Molineaux, 2005). In practice, most Islamic banking follows two-tier mudharabah model combined with multiple modes of financing, including Islamic banking in Indonesia. On the liabilities side, the portfolio of deposits is based on wadi’ah (for demand deposits and saving deposits) and mudharabah (for saving deposit and investment deposits). Wadi'ah
Mudharabah
0.88
0.89
0.85
0.86
0.82
0.84
0.86
0.85
0.84
0.85
0.12
0.11
0.15
0.14
0.18
0.16
0.14
0.15
0.16
0.15
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
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Figure 1.2 Deposits Portfolio of Islamic Banking in Indonesia As can be seen in figure 1.2, mudharabah deposits have always been the majority in the past decade with the share varied between 82% and 89%. The heavy domination of profitand-loss sharing (PLS) mode of deposits has been in line with the conceptual two-tier mudharabah model, since Islamic bank as mudharib (entrepreneur) has information advantage over depositors as sahibul maal (owner of capital). However, most Islamic banks prefer to extend their financing using non PLS modes of financing, especially trade-based modes of financing, including Islamic banking in Indonesia. On the asset side, the portfolio of financing comprises of PLS-based financing (mudharabah and musharakah), trade-based financing (murabahah, salam and istishna’), lease-based financing (ijarah) and loan (qardh). In the past decade, murabahah has always been the most preferred mode of financing with the share varied between 54.9% and 71.5%. Meanwhile, PLS financing has only been placed as secondary modes of financing with the share varied between 17% and 36.3%. In the past three years, the share of PLS financing has been declining to 28.5%. The domination of non PLS financing has not been in line with twotier mudharabah model, since Islamic bank as sahibul maal has information disadvantage over financing customers as mudharib. 6.7 5.3
5.4 3.2
70.9
71.5
5.5
Mudharabah 2.7
Musharakah 2.1 4.1
Murabahah 1.8 1.9
61.7
59.2
12.5
11.4
15.8
19.9
20.0
2006
2007
66.5
62.3
11.1
1.8 15.2
14.4
18.0
20.5
2002
2003
2004
2005
Qardh 2.0 2.5
Ijarah 2.8 3.9
Others 3.4 6.9
58.9
55.9
55.0
19.4
3.7 12.6
54.9
22.2
21.4
16.2
14.1
12.7
10.0
2008
2009
2010
2011
18.5
Figure 1.3 Financing Portfolio of Islamic Banking in Indonesia The never-ending issue on lack of PLS financing in Islamic banking has always been an important subject to be discussed, even though new studies on this issue have been very limited. It seems that current conduct of Islamic banking with minimum application of PLS financing has been generally accepted by the majority of stakeholders. The implication of the domination of non-PLS financing brings the public to perceive that Islamic banking is almost no different from conventional banking. This perception could form a reputation risk to Islamic banking that could create cynicism in public that Islamic banking is just only a rebranding, while the mind-set of the bankers are still conventional. The problem of implementing PLS financing becomes even more acute in countries with dual banking system, such as Saudi Arabia, Bahrain, Turkey, Pakistan, Malaysia, as well as Indonesia. The persistent lack of PLS financing clearly is not the expected ideal. Islamic banking industry, the government, as well as the central bank, must strive to improve the system and infrastructure and to find appropriate solutions to promote PLS financing. Even though the problems of implementing PLS financing in Islamic banking tend to be complex and multi dimensional, they have to be identified, so that alternative gradual and systemic solutions 3
can be proposed, so that the development of Islamic banking can be redirected towards its natural character.
1.2 Objectives The objectives of this study is to identify factors causing the persistent lack of PLS financing in Indonesia’s Islamic banking and to find alternative solutions, as well as to determine gradual and systemic policies and strategies to stimulate and improve the implementation of PLS financing in Indonesia’s Islamic banking, so that related stakeholders such as Islamic banking industry, investor, entrepreneur, Bank Indonesia, and the government can take appropriate policy actions to deal with the current problems and attain the expected goals of strong and sound Islamic banking.
1.3 Methodology This study will apply Analytic Network Process (ANP) method with three steps. First, indepth interview will be conducted with various stakeholders, such as scholars, experts, practitioners, customers, and regulators of Islamic banking, to fully understand the real problems and to identify factors affecting low implementation of PLS financing. Second, the results of the first steps will be used to develop an appropriate ANP network and its questionnaires to obtain proper data from experts and practitioners of Islamic banking. Third, ANP analysis will be applied to set priority on alternative solutions as well as policies and strategies to formulate optimal policy recommendations.
2. LITERATUR REVIEW The raison d’être of Islamic economics, finance and banking is derived from the Islamic injunction against riba (interest), maysir (excessive risk or gambling) and gharar (unclear transaction). In banking operation, Islam prohibits interest on deposits taking and loans or financing extension regardless of their nature or purpose. As replacements, Islamic bank provides various deposit products and financing products which are based on various modes of finance. Among those various modes of finance, conceptually, profit-and-loss sharing (PLS) is the prime mode of finance, represented by mudharabah and musharakah modes of finance, which are also termed as equity-based finance or PLS modes of finance.
2.1 Profit-and-Loss Sharing The most important modes of finance agreed by Muslim scholars are PLS modes of finance, namely, mudharabah (trustee profit sharing) and musharakah (joint venture profit sharing), that embed the principle of al-ghunm bi’l-ghurm or al-kharãj bi’l-damãn, meaning that there is no return without involvement in risk (Al-Omar and Abdel-Haq, 1996), or for every real economic benefit there must be real economic cost (Khan, 1995). According to Shiddiqi in Karim (2002), the issues of PLS and partnership have been discussed by Muhammad bin Hasan Al Syaibani (132-189 AH/750-804 AD). 4
Several authors state that according to theoretical models developed by Muslim economists, Islamic banking based on the principle of PLS modes of finance claims to be superior to interest-based commercial banking in terms of equity, efficiency, stability and growth. In comparison with other financial systems, Islamic banking will be more just because the contract of PLS modes of finance is based on the principles of justice and equity. It will be more efficient as it will help attain a more rational and balanced allocation of financial resources among the competing projects because the main consideration in the allocation of funds under Islamic banking would be the profitability of relevant projects and not the safe return of the principal amount as in the case of conventional banking. Mudharabah is a mode of financing based on trustee partnership for a specific venture in which the bank provides capital finance and the customer-entrepreneur provides managerial and professional skills to operate the business project. Profits are shared in the pre-agreed ratio, while losses are entirely absorbed by the bank if the client is not negligent or in violation of the terms. Mudharabah can cover one deal, several deals, or a specified period of time up to a specified ceiling. The Practical steps of Mudharabah are as follows: 1. Establishing a Mudharabah project. The bank provides the capital as a capital owner or Shahibul Maal, while the customer as Mudharib (entrepreneur) provides his effort and expertise for the investment of capital in exchange for a share in profit agreed upon. 2. The results of Mudharabah. The two parties calculate the earnings and divide profits at the end of Mudharabah. This can also be done periodically in accordance with the agreement and legal compliance. 3. Payment of Mudharabah capital. The bank: Recovers the Mudharabah capital it contributed before dividing the profits between the two parties because profit is protection to capital. In case of agreement to distribute profits periodically before the final settlement it must be on account until the security of capital is assured. 4. Distribution of wealth resulting from Mudharabah. In case of loss, the capital owner (the bank) bears the loss. Profits are divided between the two parties in accordance with the agreement between them with observance to the principle "profit is protection to capital". Mudharabah mode of financing is considered to be an important mode by the Islamic banks in their relationship with the depositors who tender their moneys to the bank as capital owner. This money is invested by the bank as Mudharib on the basis of profit sharing according to specific pre-agreed rates. The Islamic banks use this product to finance capable professionals such as physicians, engineers, traders or craftsmen. The bank provides required finance as a capital owner in exchange for a share in the profit to be agreed upon. It is worth noting that this mode carries high risk for the bank because the bank delivers capital to the Mudharib who undertakes the work and management and the Mudharib is held responsible for loss only in case of negligence. The Islamic banks take necessary precautions to minimize risk and to ensure better execution of Mudharabah transaction. Meanwhile, Musharakah is a mode of financing based on joint venture partnership in which both the bank and its customer-client contribute to entrepreneurship and capital. Profits are shared in the pre-agreed ratio, while losses are shared in proportion to their capital contributions. This mode of finance is represented in the contribution of partners to equal or unequal ratios of capital to establish a new project or to participate in an established one, 5
whereby each participant owns a share in the capital permanently and deserves his share of the profit. The partnership originally is intended to continue up to the dissolution of the company. It is possible that for one reason or another, one of the partners sells its share in the capital to withdraw from the project. The Islamic banks use the mode of partnership in many projects. They finance their customers with part of the capital in exchange of a share of the output as they may agree upon. Mostly they leave the responsibility of management to the customer partner and retain the right of supervision and follow up. The practical steps of Musharakah are as follows: 1. Partnership in Capital. The bank tenders part of the capital required in its capacity as a partner and authorizes the customer / partner to manage the project, while the partner (customer) tenders part of the capital required for the project and becomes the trustee for bank's funds. 2. Results of the project. The work in the project is for the growth of capital. The project may achieve positive or negative results. 3. Distribution of wealth accrued from the project. In case of loss, each partner bears part of the loss proportionate to its share in capital. Profit is divided between the two parties (the bank and the partner) in accordance with the agreement. Musharakah mode of financing or partnership is considered to be an appropriate mode for collective investment in modern economic life. The Islamic banks use partnership by contributing capital to new or established projects. They also bear part of the cost of a project in the ratios of their shares in capital. The Islamic banks by using partnership as a mode of investment make sufficient liquidity available to the customer for a long period. The Islamic banks are usually active partners and participate in determining the methods of production and the objectives of the establishment. They also supervise and follow up the performance of the establishment. The Islamic banks share profit or loss with the customer (partner) without burdening the customer with debt or any financial liabilities which the customer has to pay under all circumstances. PLS modes of finance have been proven theoretically superior to other modes of finance in generating macro-economic benefits. Some empirical studies have also been done to prove this superiority for the case of Indonesia. Ryandono (2006) compares interest system and PLS system. He concludes that interest (riba) system has negative relationship with the economy and causes money turn over becomes ineffective and inefficient at macro and micro levels that subsequently will cause instability in the economy. Interest (riba) system can also impede investment and economic growth. Thus, it is difficult to synchronize monetary sector and real sector, since the two sides have different interests and objectives in the economy which is difficult to settle. In contrast, PLS system has positive relationship with the economy and causes money turnover becomes effective and efficient at macro and micro levels that subsequently will cause stability in the economy. PLS system can also stimulate investment and economic growth. Thus, it will synchronize monetary sector and real sector, since the two sides have similar interests and objectives in the economy. Ascarya, et al. (2008) tries to compare demand for money and monetary stability under dual monetary system. The results show that demand for money in Islamic system is more stable in response to the shock of other variables than that of demand for money in conventional 6
system. Conventional demand for money shows the behavior for transaction and investment, while Islamic demand for money shows the behavior for transaction only. Moreover, PLS system outperforms interest system in terms of efficiency, fairness, and stability. Therefore, PLS return can be used as an alternative to interest rate as a monetary policy instrument. Ascarya and Yumanita (2009) tries to compare the financial stability under conventional and Islamic financial systems. The results show that although its share is still small, Islamic banking has given positive impact to Indonesian financial system as a whole in terms of financial stability. The study finds that Islamic FSI (Financial Stability Index) is more stable than Conventional FSI. Moreover, Islamic FSI influences the stability of Conventional FSI to the better, while Conventional FSI does not influence Islamic FSI. Furthermore, Ascarya (2011) tries to investigate the determinants of Inflation under dual monetary system in Indonesia. The result shows that the main sources of inflation (78.1%) in conventional economic/financial system are interest rate (54.7%) and fiat money (23.4%). When these two main pillars of conventional economic/financial system are replaced by PLS and gold standard, they only affect inflation by 2.9% and 0.5%, respectively. This means that the implementation of PLS system to replace interest system will reduce 51.8 percent share of inflation in Indonesia.
2.2 Previous Studies PLS financing has been proven to be theoretically and empirically superior to other modes of financing in micro and macro levels. However, from practical point of views, PLS financing has been unpopular and not preferable in the eye of Islamic bankers. The earliest study by Khan (1995) has mentioned aversion to risk from Islamic bankers, as well as moral hazard due to asymmetric information from customers as the main causes why PLS financing is not popular. Other scholars, such as Dar and Presley (2000), Chapra (2000), Algoud and Lewis (2001), Muljawan (2001), Al Jarhi (2002), and Iqbal and Llewellyn (2002), agree with these main problems with the addition of adverse selection due to asymmetric information from Islamic bankers. In addition, Sarker (1999) divides the lack of PLS financing problem of Islamic banking into several macro and micro operations. Macro operation include: a) there is no uniform opinions on the Shariah jurisprudence; b) lack of skilled and expert human resources in Islamic banking and Shariah; c) fierce competition in financial sector; and d) lack of uniform operational procedures. While, micro operations include: a) increase cost of information; b) not ready to handle higher risk; c) lack of Shariah manual; d) lack of methodology to analyze and measure investment risk Islamicly; d) unsupportive tax regulation; and e) lack of Shariah management manual. Gafoor (2004) states that there are four main areas where the Islamic banks find it difficult to finance under the PLS scheme: a) participating in long-term low-yield projects, b) financing the small businessman, c) granting non-participating loans to running businesses, and d) financing government borrowing. IFSB (2005) concludes that the lack of PLS financing is caused by credit risk, equity investment risk, market risk, liquidity risk, rate of return risk, and operational risk. Meanwhile, the main study of the lack of PLS financing in Indonesia’s Islamic banking has done by Ascarya and Yumanita (2006). The problem was grouped into four aspects, namely 7
Islamic bank internalities, customers, regulations, and the Government. The clusters were grouped into problems, alternative solutions, and development strategies. Internal problems include: 1) Lack of understanding of Islamic banking fundamentals; 2) Emphasis on business or profit orientation (business-oriented); 3) Lack of quality and quantity of human resources; 4) Islamic banks are still averse to efforts; and 5) Islamic banks are still averse to risks. Customer problems include: 1) Lack of understanding of Islamic banking fundamentals; and 2) Customers are still averse to risks. Regulation problems include: 1) Lack of incentives to stimulate PLS financing; and 2) Lack of supportive regulations. Meanwhile, government problem is lack of government commitment and support. Some of these earlier lacks of PLS financing problems have been resolved in Indonesia, such as fatwas (legal Shariah opinion) on PLS financing, equal tax treatment Act, Islamic Banking Act, and Sukuk Act. However, fundamental problems still remain, such as asymmetric information (moral hazard, adverse selection, and increased costs) and lack of human resource. Moreover, dynamic development of Islamic banking also generates new problems (or previously unseen problems). After the study by Ascarya and Yumanita (2006), there are only a few new studies on the lack of PLS financing, lately. Iqbal and Greuning (2007) study finds that inherent risks, low appetite for risk, monitoring cost, lack of transparency, depositors’ risk aversion, as well as asymmetric information are the causes of low PLS financing. Moreover, Febianto and Kasri (2007) find that lack of risk management is the main cause of the lack of PLS financing. The study of Ascarya and Yumanita (2006) has been revisited by Ascarya (2010) to see the newest development on lack of PLS financing in Indonesia’s Islamic banking. Internal problem priorities have been shifted to technical (no management tools and higher risk) and upper management (lack of commitment and business oriented), while external problem priorities have been expanded to authority (lack of commitment and lack of support) and society (lack of trust and lack of perception). Nevertheless, the main problem of lack of PLS financing remains. The newest study and analysis on PLS financing has done by Tarsidin (2010), which views that the determinants of the lack of PLS financing are; a) asymmetric information problems, such as private information, adverse selection, moral hazard type I (disincentive), and moral hazard type II (falsification); b) profit function and utility function of capital owner and entrepreneur, c) willingness to pay; d) reservation utility; e) incentive compatibility; and f) participation. Other determinants include risk aversion, financial constraint, length of contract, performance standard, and signal. Based on these constraints he develops optimal scheme (first best and second best) of PLS financing (mudharabah and musharakah), which can be applied by Islamic financial institutions, in static and dynamic environments. PLS financing or equity financing does not exclusively belong to Islamic finance, but also has long been used and discussed in conventional finance. Stiglitz (1974) states that profit-andloss sharing has been widely adopted in farming sector using sharecropping scheme, where labor will equalize his/her share of output with marginal productivity of labor multiplied by marginal disutility of work. Laffont and Matoussi (1995) develop theory of sharecropping based on moral hazard and financial constraints, as well as risk aversion. Both Stiglitz (1974) as well as Laffont and Matoussi (1995) conclude that sharecropping is a tradeoff between incentive and risk-sharing.
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3. METHODOLOGY 3.1 Data The data used in this study is primary data from survey. Samples are selected from the most knowledgeable respondents as required by ANP (Analytic Network Process) method, including seven Islamic bankers and seven Islamic banking experts, which are chosen to fill out simplified pair-wise questionnaires to maintain their consistency.
3.2 Analytic Network Process Saaty (1999) defined analytic network process (ANP) as a general theory of relative measurement used to derive composite priority ratio from individual ratio scale reflecting relative measurement of interconnected elements within control criteria. While, Azis (2003) described ANP as a mathematic theory that allows one to deal systematically with dependence and feedback and that can capture and combine tangible and intangible factors by using ratio scale. ANP is a new approach in decision making process that provides general framework in treating decisions without making any assumption about independency of elements in higher level from elements in lower level and about independency of elements within the same level. Moreover, ANP uses network without having to determine level as in hierarchy used in Analytic Hierarchy Process (AHP), which is a starting point of ANP. The main concept of ANP is influence, while the main concept of AHP is preference. AHP with its dependency assumptions on clusters and elements are a special cases of ANP. In AHP network, there are levels of goal, criteria, sub criteria, and alternative, where each level has its own elements. Meanwhile, in ANP network, level in AHP is called cluster that can consist of criteria and alternative which now is called node (see figure 3.1) With the feedback, alternatives can depend on criteria, like in a hierarchy, but it can also depend on other criteria. Furthermore, those criteria themselves can depend on alternatives and other criteria (see figure 3.1). Meanwhile, feedback improves priority which derived from judgment and makes prediction more accurate. Therefore, the result of ANP is expected to be more stable. From feedback network in figure 3.1, it can be seen that the parent node or element and nodes to be compared can be in different clusters. For example, there is a direct link from parent node cluster C4 to the other clusters (C2 and C3), which called outer dependence. Meanwhile, there is parent node and nodes to be compared lie within the same cluster, so that this cluster will be connected with itself and create loop link. This is called inner dependence. In a network, element of the cluster can be a person (e.g. an individual in Bank of Indonesia) and element in another cluster can be also a person (e.g. an individual in the parliament). Element in one cluster can influence other elements in the same cluster (inner dependence) and can also influence elements in other clusters (outer dependence) with respect to each criteria. The intended output of ANP is to determine the overall influence from all elements. Therefore, all criteria must be configured and set their priority in a framework of control 9
hierarchy or network. After that, do the comparison and synthesis to obtain the order of priority from these criteria. Then, we derive the influence from element in feedback system with respect to each criterion. Finally, the results of these influences are weighted according to the important level of the criteria, and summed them up to get overall influence from each element. Goal Criteria
Subcriteria
Linear Hierarchy ■ ■■■■■
Feedback Network C4■■■■ Component, Cluster (Level)
■■ C1■■
■■■
Feedback
■■■ C2■
Element Alternatives
■■■■
C3■■■ A loop indicates that each element depends only on it self
Source: Saaty and Vargas (2006)
Figure 3.1 Comparisons of Hierarchy and Network ANP is a combination of two parts. First part consists of control hierarchy or network from criteria and sub criteria that control interaction. The second part is network of influences among elements and clusters. ANP utilizes ratio scale. Priorities in ratio scales are fundamental number which makes basic arithmetic operation possible, such as addition and subtraction within the same scale, multiplication and division of different scale, and combination of both operations by weighting and adding different scales to obtain unidimensional scale. It should be noted that ratio scales are also absolute scales. Both of them are derived from pairwise comparisons using judgments or derive from pairwise dominance ratios using actual measurements. The construction of ANP network, which has interrelated relationships among clusters and elements with dependences and feedbacks, has similar characteristic to Ibn Chaldun’s model (in Muqaddimah) of eight wise principles of political wisdom (kalimat hikammiyah), where each principle dovetailed with the other for mutual strength, in such a circular manner that the beginning or the end is indistinguishable (Chapra, 2007). This model can be illustrated as interrelation among political authority (G), values (S), people (N), wealth (W), as well as justice and development (j&g), as can be seen in figure 3.2.
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Source: Chapra C2007).
Figure 3.2 Ibn Chaldun’s Model Moreover, the fundamentals of ANP can be summarized in seven pillars of AHP/ANP (Saaty and Vargas, 2001), which are: 1) ratio scales derived from reciprocal paired comparisons; 2) paired comparisons and the psychophysical origin of the fundamental scale used to make the comparisons; 3) conditions for sensitivity of the eigenvector to changes in judgments; 4) homogeneity and clustering to extend the scale from 1-9 to 1-∞; 5) additive synthesis of priorities, leading to a vector of multilinear forms as applied within the decision structure of a hierarchy (AHP) or the more general feedback network (ANP) to reduce multi-dimensional measurements to a unidimensional normalized ratio scale, that is thus an absolute “dominance” scale, free of a measurement unit; 6) allowing rank preservation (ideal mode) or allowing rank reversal (distributive mode); and 7) group decision making using a mathematically justifiable way for synthesizing individual judgments which allows the construction of a cardinal group decision compatible with the individual preferences. Further elaborated mathematical and technical details can be read in Saaty (2005) and Saaty and Vargas (2001 and 2006).
3.3 Step of Research Based on ANP discussion, the main steps of ANP modeling are: 1) Decomposition, which is the development of ANP network of the problem; 2) Measurement, which is pairwise comparisons on the elements and relative weight estimation of all dependence and feedback relationships in the ANP network; and 3) Synthesis, which includes construction and calculation of original unweighted supermatrix, weighted supermatrix, and limiting supermatrix (the global priority weights). Literature Review FGD Indepth Interview ANP Model Construction ANP Model Validation
PHASE 1 Model Construction
PHASE 2 Model Quantification PHASE 3 Results Analysis
RESEARCHER
Pair-wise Questionnaire Design Pair-wise Questionnaire Testing Pair-wise Survey Data Synthesis & Analysis
EXPERTS
Results Validation Results Interpretation
Figure 3.2 Steps of Research This study comprises of several extended steps of main ANP modeling, which can be grouped into three phases. Phase 1 is model construction or decomposition to identify, analyze and structure the complexity of the problems into an appropriate ANP network, which includes: a) Literature reviews, questionnaires and in-depth interviews with experts and practitioners (Islamic bankers) to comprehend the problem fully; b) Construction of ANP network; and c) Validation of ANP network. Phase 2 is model quantification or pair-wise comparison, includes: a) Design pair-wise questionnaires in accordance with ANP network; b) Test the pair-wise questionnaires to respondents (experts and/or Islamic bankers); and c) 11
Survey to respondents to fill out pair-wise questionnaires. Phase 3 is synthesis and results analysis, which includes: a) Data processing and synthesis using ANP software SUPERDECISIONS, as well as results analyses to calculate geometric mean and rater agreement; b) Validation of the results; and c) Interpretations of the results.
4. RESULTS AND ANALYSIS The discussion of this chapter will follow the steps of ANP, which are decomposition, pairwise comparison, synthesis, and analysis.
4.1 Decomposition 4.1.1 Problem Identification According to several experts’ opinions1, as well as questionnaire and in-depth interviews with local experts and practitioners, contemporary factors causing low PLS financing can still be viewed from internally and externally. Internal aspects include upper management, human resources, and technical, while external aspects include society, the authorities, and customers. The subsequent clusters are grouped into problems, solutions, policies and strategies with the details as follows. a. Internal Problems Internal problems (IP) are lack of PLS financing problems coming from internal organization. IP could be grouped into three, namely: 1) Upper Management (including Board of Commissioners and Board of Directors); 2) Human Resources; and 3) Technical. Elements of each group are as follows. 1. Upper Management (Board of Commissioners and Board of Directors), include: a) Lack of understanding in Islamic economy, finance and banking fundamentals; b) Emphasis on business or profit orientation (business-oriented); c) Risk averse and risk transfer behavior still leads to the inability to accept the possibility of loss; and d) Lack of commitment to improve the portfolio of PLS financing. 2. Human Resources, include: a) Lack of knowledgeable and skilled human resources with expertise in Islamic banking and Shariah Law; b) Emphasis on business targets or profit (target-oriented); c) Risk averse and risk transfer behavior still lead to inability to accept the possibility of loss; and d) Aversion to diversification efforts because it is more complicated to deal with PLS financing than to deal with other modes of financing. 3. Technical Aspects, include: a) Less applicable than other modes of financing for working capital, small businesses or long-term projects; b) Higher risk than other modes of financing, while Islamic banks are still unable to manage higher risk; c) More complicated to structure and deal with PLS financing than to structure and deal with other modes of financing; and d) Islamic banks have insufficient management tools to 1
Chapra (2000), Iqbal and Llewellyn (2002), Dar and Presley (2000), Sarker (1999), Algaoud and Lewis (2001), Mulyawan (2001), and Al-Jarhi (2002).
12
manage higher risk or to analyze and measure investment risk adhering to Islamic principles. b. System Problems System problems (SP) are lack of PLS financing problems coming from existing conditions of the system. SP could be grouped into three, namely: 1) Conventional Domination; 2) Unsupportive Environment; and 3) Conventional Competition. Elements of each group are as follows. 1. Conventional Domination reflects the condition of general system in Indonesia which still dominates by conventional system. This includes: a) Mindset and ideology of all stakeholders and general population, which are still mostly conventional capitalistic; b) Existing Social system; c) Existing Political system which is largely democratic system; and d) Existing Economic system which is dominated by capitalistic system. 2. Unsupportive Environment reflects the condition of general environment in Indonesia which is influenced by monarchy, Dutch occupation and Islam. This includes: a) Value system; b) Culture which is dominated by a mix of local culture and pop culture; c) Infrastructures; and d) Rules and regulations. 3. Conventional Competition reflects the condition of financial market which is dominated by conventional banking and finance. This includes: a) Financial institutions; b) Financial instruments; c) Financial products; and d) Financial services. c. External Problems External problems (EP) are lack of PLS financing problems coming from outside organization. EP could be grouped into three, namely: 1) Society; 2) Authority; and 3) Customer. Elements of each group are as follows. 1. Society, include: a) Multi-ethnic and multi-religious affiliations have sensitized society to issues of ethnicity and religiosity (unity through diversity is more important); b) Lack/loss of trust in society has introduced agency problem and asymmetric information that lead to moral hazard and adverse selection; c) Inaccurate perceptions of Islam and riba have made society ignorant to Islamic finance and banking; and d) Lack of understanding and knowledge regarding the fundamentals of the Islamic economy, finance and banking; 2. Authority, include: a) Lack of understanding in Islamic economy, finance and banking fundamentals; b) Lack of political commitment, political will, and political courage to support the development of Islamic finance and banking; c) Lack of supporting infrastructure (hard and soft) in the development of Islamic finance and banking; and d) Lack of incentives and efforts to promote PLS-based finance. 3. Customer, include: a) Lack of understanding and knowledge concerning the fundamentals of the Islamic economy, finance, and banking; b) Customers (depositors/borrowers) are naturally risk averse because they are not accustomed to the possibility of loss and are accustomed to an interest rate system; c) Low demand for PLS financing due to its limited applicability and unpopularity; and d) The majority of Islamic banks’ customers are floating (not loyal) customers. d. Internal Solutions
13
Internal solutions (IS) are alternative solutions to internal problems of lack of PLS financing. IS could also be grouped into three, namely: 1) Upper Management (including Board of Commissioners and Board of Directors); 2) Human Resources; and 3) Technical. Elements of each group are as follows. 1. Upper Management, include: a) Appropriate ‘Fit and Proper Test’ for BOC or BOD candidates; b) Management commitment to apply PLS financing as the main mode of financing; and c) Reward and Punishment mechanism to promote PLS financing. 2. Human Resources, include: a) Introduce a thorough human resource selection process; b) Ameliorate human resources knowledge and skills in Islamic banking and Shariah Law; and c) Incentive system for Islamic bank officers extending PLS-based financing. 3. Technical Aspects, include: a) Simplification of standards and procedures in the application of PLS based financing; b) Development of innovative and attractive yet simple PLS-based products; and c) Development of Information Technology and Standard Operating Procedures in the extension of PLS financing. e. System Solutions System solutions (SS) are alternative solutions to system problems of lack of PLS financing. SS could also be grouped into three, namely: 1) Conventional Domination; 2) Unsupportive Environment; and 3) Conventional Competition. Elements of each group are as follows. 1. Solutions to conventional domination include: a) Union and cooperation; b) Protocol and grand strategy; and c) Economic strengthening. 2. Solutions to unsupportive environment include: a) Laws and regulations; b) Appropriate infrastructures; and c) alternative Islamic system. 3. Solutions to conventional competition include: a) Increase share of Islamic banking; b) Improve standards to be comparable to their conventional counterparts; and c) Diversification of Islamic financial products and services. f. External Solutions External solutions (ES) are alternative solutions to external problems of lack of PLS financing. ES could also be grouped into three, namely: 1) Society; 2) Authority; and 3) Customer. Elements of each group are as follows. 1. Society, include: a) Extensive and intensive socialization of IEFB and PLS financing; b) Effective da’wah (outreach to the people) for IEFB and PLS financing; c) Systematic and comprehensive education system from elementary school up to higher education; 2. Government/Authority, include: a) Political commitment, political will and political courage to support the development of IEFB and PLS financing; b) Government support of hard and soft infrastructure in the development of IEFB; and c) Supportive regulations to foster IEFB and PLS-based financing. 3. Customer, include: a) Education offered to customers and potential customers regarding PLS financing; b) A systematic and concerted national promotion program to nurture PLS financing; and c) An incentive system for customers to choose PLS-based financing. g. Policies
14
Policies are some recommended general policies which can be taken to solve the problems of lack of PLS financing. These recommended policies could include: 1) Directed market-driven policy; 2) Fair Treatment; 3) Gradual and Sustainable; 4) Shariah Compliant; and 5) Professionalism. h. Development Strategies Development strategies are programs that can immediately be implemented to solve the problems of lack of PLS financing for certain periods. These could include: 1) New Image Program; 2) New Mapping of Market Segmentation; 3) Product Development Program; 4) Service Improvement Program; and 5) Socialization and Communication Program. 4.1.2 Conceptual Framework Based on the previous problem identification, the conceptual framework of this study can be read in figure 4.1 in appendix 1. [Insert Figure 4.1] 4.1.3 ANP Network Design Therefore, the ANP network of the above framework will be as can be seen in figure 4.2 in the appendix. [Insert Figure 4.2]
4.2 Pair-wise Comparison The most knowledgeable respondents (seven Islamic bankers and seven experts) are chosen to be the respondents of phase 2 to fill out pair-wise questionnaires. To simplify the original rather complicated pair-wise questionnaires and to maintain consistency, modified pairwise questionnaires are used as shown in figure 4.3 in appendix 1. Meanwhile, the respondents are equipped with a show card describing the scale and the ANP network. [Insert Figure 4.3] The modified pair-wise questionnaire will significantly reduce the time required for in-depth interviews with respondents and will provide consistent results. For example, the time taken to complete the entire pair-wise questionnaire of more than 1,200 questions was less than two hours.
4.3 Synthesis and Analysis The detailed synthesis results of individual respondents (Islamic bankers and Experts) can be seen in Appendix 2, while overall and summary synthesis results (geometric means of 7 Islamic bankers, 7 Experts and 7 Islamic bankers + 7 Experts) will be discussed in this section. The complete results of the synthesis from geometric mean can be read in tables 4.1 – 4.3 in appendix 1. These results reflect statistically generated ‘consensuses’ of Islamic bankers, Experts, and all respondents (7 Experts and 7 Islamic bankers). [Insert Table 4.1 – Table 4.3] 15
Experts view that External and System are two most important aspects, but with very low rater agreement (We = 0.036). Meanwhile, Islamic bankers view that Internal is the most important aspect, with high rater agreement (Wi = 0.39). The overall results, which resemble Islamic bankers’ view, shows that the most important issues of low implementation of PLS financing lies within Internal aspect of Islamic banking, followed by Existing System and External Environment aspects (see figure 4.4), with low rater agreement (Wt = 0.162). ASPECT
Total
Wi = 0.39 We = 0.036 Wt = 0.162
Experts iBankers
0
0.1
0.2
0.3
0.4
0.5
0.6
Internal System External
Figure 4.4 Priorities of Aspects Table 4.4 in the appendix 1 shows the summary results of Kendall’s coefficient of concordance, which represent level of agreement (rater agreement) among respondents divided into three groups, namely, Islamic bankers, Experts and Total (Islamic bankers and Experts). [Insert Table 4.4] The results show that the levels of agreement among respondents are generally low. Islamic bankers show slightly higher level of agreement than Experts. Moreover, the priority of choices shows greater agreement among respondents, especially among Islamic bankers. Furthermore, Islamic bankers agree the most in External Problems (0.571), External Solutions (0.571), as well as in Strategies (0.441). In more detail, Islamic bankers agree the most in Conventional Competition of System Problems (0.724) and Customer of External Problems (0.663). Meanwhile, Experts agree the most in Conventional Domination of System Solutions (0.679) and Customer of External Solutions (0.551). Finally, all respondents agree the most in Conventional Domination of System Solutions (0.537) and Customer of External Problems (0.464). 0.050 0.040 0.030 0.020 0.010
0.000
16
Figure 4.5 Priority Problems of Low PLS Financing Summary results show that the most crucial and primary problems of low implementation of PLS financing are (see figure 4.5): 1) Authority (External); 2) Top Management (Internal); 3) Customer (External); 4) Unsupportive Environment (System); and 5) Conventional Domination (System). It seems that root causes of the problems lie in people who involve in the implementation of PLS financing, including authority of Islamic banking, Islamic bank’s top management as well as customer of Islamic banking. Furthermore, the most crucial and primary internal problems of low implementation of PLS financing are (see figure 4.6 left-blue): a) too much emphasis on business or profit oriented (top management); b) too complicated to structure and deal with PLS financing (technical); c) lack of commitment to PLS financing (top management); d) risk averse and risk transfer behavior (top management); and e) lack of IEF understanding (top management). It is obvious that the root cause of the internal problems prevalent in top management. The most crucial and primary system problems of low implementation of PLS financing are (see figure 4.6 center-red): a) existing value system (unsupportive environment); b) product (conventional competition); c) existing economic system (conventional domination); d) mind set (conventional domination); and e) existing culture (unsupportive environment). All elements of the existing system contribute to the system problems. The most crucial and primary external problems of low implementation of PLS financing are (see figure 4.6 right-green): a) lack of knowledge (customer); b) lack of commitment (authority); c) lack of support (authority); d) floating majority (customer); and e) lack of understanding (authority). Elements of authority and customers mostly contribute to the external problems. When all problems (internal, system, and external) are combined, the most crucial problems of low implementation of PLS are: a) lack of knowledge (customer - external); b) lack of commitment (authority - external); c) existing value system (unsupportive environment system); d) too much emphasis on business or profit oriented (top management - internal); and e) lack of support (authority - external). 0.003 0.002 0.002 0.001
0.000
Effort Averse L.Know&Skill Risk Averse Target Oriented Complicated Higher Risk Less Applicable No Mgt Tools Averse Risk Business Oriented L Commitment L Understanding Institution Instrument Product Service Economy Politics Social Thought Culture InfraStructure Rule Value L.Commitment L.Incentive L.Support L.Understanding Averse to Risk Floating Majority L.Knowledge Low Demand Diversity L Knowledge L Perception L.of Trust
0.001
Figure 4.6 Detailed Priority Problems of Low PLS Financing 17
The most urgent internal solutions of low implementation of PLS financing are (see figure 4.7 left-blue): a) management commitment to apply PLS financing as the main mode of financing (top management); b) development of Information Technology and Standard Operating Procedures in the extension of PLS financing (technical); c) Ameliorate human resources knowledge and skills in Islamic banking and Shariah Law; (human resource); d) Appropriate ‘Fit and Proper Test’ for BOC or BOD candidates; (top management); and e) Reward and Punishment mechanism to promote PLS financing (top management). It is obvious that the most urgent internal solutions should be started from top management. The most urgent system solutions of low implementation of PLS financing are (see figure 4.7 center-red): a) Protocol and grand strategy (conventional domination); b) Laws and regulations (unsupportive environment); c) Improve standards to be comparable to their conventional counterparts (conventional competition); d) Union and cooperation; and e) alternative Islamic system (unsupportive environment). The most urgent external solutions of low implementation of PLS financing are (see figure 4.7 right-green): a) Education offered to customers and potential customers regarding PLS financing (customer); b) Supportive regulations to foster IEFB and PLS-based financing (authority); c) political commitment, political will and political courage to support the development of IEFB and PLS financing (authority); d) a systematic and concerted national promotion program to nurture PLS financing (customer); and e) government support of hard and soft infrastructure in the development of IEFB and PLS financing (authority). The most urgent external solutions should address the authority. 0.0030 0.0025 0.0020 0.0015 0.0010 0.0005 HR.Improvement HR.Incentive Selection Innovation IT & SOP Simplification Fit&Proper I.Commitment Reward&Punish Diversification Improve Std. Incr.Share Econ.Strengthening G.Strategy Union/Coop Alt.Islamic System Infrastructure Law/Regn E.Commitment Regulation Support C.Education Incentive Promotion Communication Da'wah S. Education
0.0000
Figure 4.7 Detailed Priority Solutions of Low PLS Financing When all alternative solutions (internal, system, and external) are combined, the most urgent solutions to the problems of low implementation of PLS are: a) Education offered to customers and potential customers regarding PLS financing (customer - external); b) management commitment to apply PLS financing as the main mode of financing (top management - internal); c) Protocol and grand strategy (conventional domination - system); d) supportive regulations to foster IEFB and PLS-based financing (authority - external); and e) political commitment, political will and political courage to support the development of IEFB and PLS financing (authority – external). 18
Finally, policies and grand strategies that should be implemented to stimulate PLS financing are (see figure 4.8): a) Product development (grand strategies); b) Fair treatment (policies); c) Service improvement (grand strategies); d) Market mapping (grand strategies); and e) Professionalism (policies). A combination of grand strategy and effective policies are expected to be able to stimulate PLS financing. 0.035 0.030 0.025 0.020 0.015 0.010 0.005 0.000
Figure 4.8 Priorities of Policies and Strategies to Stimulate PLS Financing
4.4 Analysis The problem of low implementation of PLS financing in Islamic banking has been existed since the early development of Islamic banking. This problem has not been given sufficient attention by scholars and practitioners, as well as by the authority. Consequently, customer and the society at large do not aware of this problem, which can be a disadvantage to macro-economic soundness. Problems which have been persisted since previous study in Ascarya and Yumanita (2005) are: a) lack of understanding/knowledge of human resource and customer; and b) lack of support from the government or authority. These are external factors which cannot be controlled by Islamic bank. In general, the root causes have not been changed so much, which have been still persisted in people who are involve in Islamic banking, namely, the Islamic banker, the authority and the customer. However, the issues have been slightly changed in priority (see table 4.5). Alternative solutions which have still been priorities are: a) education or socialization to customer and society at large; and b) supportive regulations from the authority, although there have been some improvements on these issues. Some new supportive Acts have been stipulated, such as Islamic Bank Act no.21/2008 in 2008, Sovereign Sukuk Act no.19/2008 in 2008, and Tax Act no.42/2009 in 2009. It seems that more genuine commitments from the authority and the management of Islamic bank are desperately needed to improve the implementation of PLS financing. Furthermore, strategy which has not been effectively implemented and which has still been a priority is product development. So far, there has not been significant improvement in 19
new products innovations based on PLS mode of finance. One emerging product based on PLS mode of finance is home financing using musharakah mutanaqisah contract, which has some resemblance with mortgage financing. Further strategies and policies are needed to improve PLS financing. Table 4.5 Comparison of Summary Results ASPECTS
Problems
Solutions
Policies/ Strategies
PREVIOUS STUDY (2010)
CURRENT STUDY
1. No Management Tools (Technical Internal) 2. Lack of Commitment (Authority External) 3. Lack of Trust (Society – External) 4. Lack Commitment (Top Management – Internal) 5. Lack of Knowledge & Skill (Human Resource – Internal) 1. IT & SOP (Technical – Internal) 2. Commitment (Authority – External) 3. HR. Incentive (Human Resource – Internal) 4. Internal Commitment (Top Management – Internal) 5. Education (Customer – External) 1. Service Improvement (Strategies) 2. Socialization & Communication Programs (Strategies) 3. Professionalism (Policies) 4. Directed Market Driven (Policies) 5. Shariah Compliance (Policies)
1. Lack of knowledge (Customer - External) 2. Lack of commitment (Authority - External) 3. Value system (Unsupportive Environment System) 4. Business or profit oriented (Top Management Internal) 5. Lack of support (Authority - External)
1. Education on PLS financing (Customer - External) 2. Management commitment to apply PLS financing (Top Management - Internal) 3. Protocol and grand strategy (Conventional Domination - System) 4. Supportive regulations (Authority - External) 5. Political commitment, political will and political courage (Authority – External) 1. Product development (Strategies) 2. Fair treatment (Policies) 3. Service improvement (Strategies) 4. Market mapping (Strategies) 5. Professionalism (Policies)
Therefore, the problem of low implementation of PLS financing in Indonesia’s Islamic banking has not been resolved, yet, although some partial solutions have been emerged, both internally and externally. Main problems have always been in the people who involved in Islamic banking. On the supply side, Islamic bankers should commit to implement PLS financing through product development and service improvement, as well as professionalism. On the demand side, education and socialization to customer and society at large should be improved. On the authority side, the government should provide real political commitment, political will and political courage to honestly develop Islamic banking and PLS financing.
5. CONCLUSION AND RECOMMENDATION 5.1 Conclusion The low implementation of PLS financing in Islamic banking has been a persistent global phenomenon since the early development of Islamic banking in early 1970s, and Indonesia is no exception. However, the implementation of PLS financing in Indonesia has been better 20
than those of other neighboring countries like Malaysia and Pakistan, or those of other Middle East and North Africa countries, except Sudan. The data shows that the implementation of PLS financing in Indonesia is among the highest compared to that of Islamic banks in other countries. At the end of September 2011, the share of PLS financing (mudharabah and musharakah) in Indonesia’s Islamic banking reached 29.3%. Nevertheless, PLS financing has never been placed as the main and dominant mode of finance. The problem of low implementation of PLS financing in Islamic banking has not been given sufficient attention by people who directly or indirectly involve in it, such as Islamic bankers, scholars, the authority, as well as the customer and the society at large. Therefore, this problem has persistently existed and stakeholders have unconsciously accepted as a given condition. The most crucial problems of low implementation of PLS are: a) lack of knowledge (customer - external); b) lack of commitment (authority - external); c) existing value system (unsupportive environment - system); d) too much emphasis on business or profit oriented (top management - internal); and e) lack of support (authority - external). The most urgent solutions to the problems of low implementation of PLS are: a) Education offered to customers and potential customers regarding PLS financing (customer - external); b) management commitment to apply PLS financing as the main mode of financing (top management - internal); c) Protocol and grand strategy (conventional domination - system); d) supportive regulations to foster IEFB and PLS-based financing (authority - external); and e) political commitment, political will and political courage to support the development of IEFB and PLS financing (authority – external). Policies and grand strategies that should be implemented to stimulate PLS financing are: a) Product development (grand strategies); b) Fair treatment (policies); c) Service improvement (grand strategies); d) Market mapping (grand strategies); and e) Professionalism (policies). The levels of agreements among respondents, reflected by Kendall’s coefficient of concordance W, are generally low, with Islamic bankers show higher rater agreement than that of Experts. However, the priority of choices shows greater agreement among respondents, especially among Islamic bankers.
5.2 Recommendation PLS financing should become the main and dominant mode of finance in Islamic banking, since it provides greater macro-economic benefits to the economy and society as a whole in terms of reducing inflation, stabilizing the economy, catalyzing real sector growth, reducing unemployment, promoting justice and equality, as well as improving the welfare of society in general. Therefore, the authority (the Government and Bank Indonesia) should take this problem seriously in order to optimize the benefits of PLS-based finance in the nationwide financial system. This implies that PLS-based finance should not only be the principle mode of financing in Islamic banking, but also in the entire Islamic financial system and Islamic monetary system.
21
The bottom line strategies to stimulate and improve the implementation of PLS-based finance are to create supply, to create demand and to gain support. Supply can be created by the innovation of competitive PLS-based Islamic financial products and services. Demand can be created by effective education, socialization, communication, and marketing of Islamic finance and banking. Moreover, supports could be obtained from real government commitment and support in all areas/sectors, the implementation of PLS-based sovereign sukuks, and the implementation of PLS-based monetary instruments.
REFERENCES Algaoud, L.M. and Lewis, M.K. (2001), Perbankan syariah [translation], Serambi, Jakarta. Al-Jarhi, M.A. (2002), Islamic finance: an efficient and equitable option, Islamic Research and Training Institute, Jeddah. Ascarya (2010), “The Lack of Profit-and Loss Sharing Financing in Indonesian Islamic Banks: Revisited”, Review of Indonesian Economic and Business Studies, Vol.1, No.1. Ascarya (2011), “How to Eradicate Inflation under Dual Monetary System, IEF TRISAKTI, Jakarta, Indonesia”, paper presented at 8th International Conference on Tawhidi Methodology Applied to Microenterprise Development , IEF-TRISAKTI, Jakarta, Indonesia, January 7-8. Ascarya and Yumanita, D. (2006), “The lack of profit and loss sharing financing in Indonesian Islamic banks: problems and alternative solutions”, paper presented at INCEIF Islamic Banking and Finance Educational Colloquium, Kuala Lumpur, Malaysia, 2-5 April. Ascarya and Yumanita, D. (2011), “Formulation of Conventional and Islamic Financial Stability Indices under Dual Financial System in Indonesia,” in Afiatno, et al. (2011). IRSA Book Series on Regional Development, No.9, Chapter 10, IRSA. Ascarya, Hasanah, H. and Achsani, N.A. (2008), “Demand for money and monetary stability under dual financial system in Indonesia”, paper presented at the Third Islamic Banking, Accounting and Finance Conference 2008, Universiti Sains Islam Malaysia, Kuala Lumpur Malaysia, 29-30 July. Azis, I.J. (2003), “Analytic network process with feedback influence: a new approach to impact study”, paper presented in seminar organized by the Department of Urban and Regional Planning. University of Iullinois, Urbana-Campaign. Chapra, M.U. (2000), The future of economics: An Islamic perspective, Islamic Economics Series – 21, The Islamic Foundation, United Kingdom. Chapra, M.U. (2007), “Ibn Khaldun’s theory of development: does it help explain the low performance of the present-day Muslim world”, The Journal of Socio-Economics, doi:10.1016/j.socec.2006.12.051.
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Dar, H.A. and Presley, J.R. (2000), “Lack of profit loss sharing in Islamic banking: management and control imbalances”, International journal of Islamic financial services, Vol.2, No.2. Febianto, I and Kasri, R.A. (2007), “Why do Islamic banks tend to avoid profit and loss sharing arrangement?” proceedings of the 2nd Islamic Conference 2007 (iECONS 2007), Kuala Lumpur: Faculty of Economics and Muamalat, Islamic Science University of Malaysia. Greuning, Hv and Iqbal, Z. (2007), “Banking and the risk environment”, in Karim, R.A.A. and Archer, S. [eds] (2007), Islamic finance: the regulatory challenge, John Wiley & Sons, Singapore. IFSB (2005), Guiding principles of risk management for institutions (other than insurance institutions) offering only Islamic financial services, Islamic Financial Services Board, Kuala Lumpur. Iqbal, M. and Llewellyn, D.T. [eds] (2002), Islamic banking and finance: new perspectives in profit sharing and risk. Edward Elgar, Cheltenham. Iqbal, M. and Molyneux, P. (2005), Thirty years of Islamic banking: history, performance and prospects, Palgrave McMillan, New York, NY. Kasri, R.A. (2007), “Displaced commercial risk in Islamic banking: the case of Indonesia”, proceedings of the 2nd Islamic Conference 2007 (iECONS 2007), Faculty of Economics and Muamalat, Islamic Science University of Malaysia, Kuala Lumpur. Khan, T. (1995), “Demand for and supply of mark-up and PLS funds in Islamic banking: some alternative explanation”, Islamic Economic Studies, IRTI, Vol. 3, No. 1, December. Laffont, J.J. and Matoussi, M.S. (1995), “Moral hazard, financial constraints and sharecropping in El Oulja”, The Review of Economic Studies, Vol.62, No.3. Ryandono, M.N.H. (2006), “Mempertanyakan kebenaran paradigma hubungan bunga, investasi (kredit), dan pertumbuhan ekonomi: haramnya sistem bunga (riba) secara teoritik dan empirik”, paper presented in Seminar dan Kolokium Nasional, ITB, Bandung, September. Saaty, T.L. (1999), “Fundamentals of the analytic network process”, paper presented in ISAHP 1999, Kobe, Japan, August 12-14. Saaty, T.L. (2005), Theory and applications of the analytic network process: decision making with benefits, opportunities, costs, and risks, RWS Publications, Pittsburgh, PA. Saaty, T.L and Vargas, L.G. (2001), Models, methods, concepts and applications of the analytic hierarchy process, Kluwer Academic, Norwell. Saaty, T.L and Vargas, L.G. (2006), Decision making with the analytic network process: economic, political, social and technological applications with benefits, opportunities, costs and risks, Springer Science+Business Media, New York, NY. Stiglitz, J.E. (1974), “Incentives and risk sharing in sharecropping”, The Review of Economic Studies, Vol.41, No.2. Tarsidin (2010), Bagi hasil: konsep dan analisis. Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia, Jakarta. 23
APPENDIX 1 Lack of PLS Financing Internal B.O.C./B.O.D. Lack of Understanding Business Oriented Averse to Risk Lack of Commitment
Human Resource Lack of Knowledge & Skill Target Oriented Averse to Risk Averse to Effort
Technical
System Conv. Dominant Thought & Ideology Social Politics Economy
Unsupportive Envrnmnt Value Culture Infrastructure Rule
Conv. Competition Institution Instrument Product Service
Less Applicable Higher Risk More Complicated Lack of Management Tools
External Society Diversity Lack/Lost of Trust Lack of Perception Lack of Knowledge
Authority Lack of Understanding Lack of Commitment Lack of Support Lack of Incentive
Customer Lack of Knowledge Averse to Risk Low Demand Floating Majority
Solutions Internal B.O.C./B.O.D. Fit & Proper Commitment Reward & Punishment
Human Resource Selection Improvement Incentive
Technical Simplification Innovation IT & SOP
Directed Mkt Driven Fair Treatment Gradual & Sustainable Product Development Program Service Improvement Program
System Conv. Dominant Union & Cooperation Protocol & Grand Strategy Economic Strengthening
Unsupportive Envrnmnt Law & Regulation Infrastructure Alternative Islamic System
Conv. Competition Increase Share Improve Standard Diversification
Policies Strategies
24
External Society Communication Da’wah Education
Authority Commitment Support Regulation
Customer Education Promotion Incentive
Shariah Compliance Professionalism New Image Program New Market Mapping Socialization & Communication Program
Figure 4.1 Conceptual Framework
Figure 4.2 ANP Network
Figure 4.3 Samples of Simplified Pair-wise Questionnaires
25
Table 4.1 Overall iBANKERS Geometric Mean Results Normalized By Cluster
Name
Limiting
Normalized Limiting By Cluster
Name
Normalized Limiting By Cluster
Name
ASPECT Internal
0.52283 0.014865
System
INTERNAL PROBLEMS
0.29038
0.008256
External
SYSTEM PROBLEMS
H Resource
0.28146 0.032333
Conv.Competition
Technical
0.31976 0.036733
Conv.Dominant
Top Mgt
0.39879 0.045812
Unsupportive Env.
TOP MANAGEMENT PROBLEMS
0.1868
0.005311
EXTERNAL PROBLEMS
0.28356
0.032064
Authority
0.4376
0.049132
0.4064
0.045954
Customer
0.39181
0.043991
0.31004
0.035058
Society
0.17058
0.019152
CONV.COMPETITION PROBLEMS
SOCIETY PROBLEMS
Averse Risk
0.19268 0.001069
Institution
0.0881
0.000342
Diversity
0.11902
0.000276
Business Oriented
0.28803 0.001598
Instrument
0.25554
0.000992
L Knowledge
0.37732
0.000875
L Commitment
0.19737 0.001095
Product
0.40443
0.00157
L Perception
0.32773
0.00076
L Understanding
0.32192 0.001786
Service
0.25193
0.000978
L.of Trust
0.17594
0.000408
HUMAN RESOURCE PROBLEMS
CONV.DOMINANT PROBLEMS
AUTHORITY PROBLEMS
Effort Averse
0.22503 0.000881
Economy
0.33879
0.001885
L.Commitment
L.Know&Skill
0.27816 0.001089
Politics
0.19033
0.001059
Risk Averse
0.19336 0.000757
Social
0.17416
Target Oriented
0.30345 0.001188
Thought
0.29673
TECHNICAL PROBLEMS
0.3446
0.00205
L.Incentive
0.19818
0.001179
0.000969
L.Support
0.24054
0.001431
0.001651
L.Understanding
0.21668
0.001289
UNSUPPORTIVE ENV. PROBLEMS
CUSTOMER PROBLEMS
Complicated
0.23994 0.001067
Culture
0.25512
0.001083
Averse to Risk
0.22452
0.001196
Higher Risk
0.22689 0.001009
InfraStructure
0.19694
0.000836
Floating Majority
0.21419
0.001141
Less Applicable
0.27614 0.001228
Rule
0.22968
0.000975
L.Knowledge
0.45485
0.002423
No Mgt Tools
0.25703 0.001143
Value
0.31826
0.001351
Low Demand
0.10644
0.000567
INTERNAL SOLUTION
SYSTEM SOLUTIONS
EXTERNAL SOLUTIONS
S.H Resource
0.27121 0.031156
S.Conv.Competition
0.28396
0.032109
S.Authority
0.42954
0.048227
S.Technical
0.32393 0.037212
S.Conv.Dominant
0.41525
0.046955
S.Customer
0.39409
0.044247
S.Top Mgt
0.40486
S.Unsupportive Env.
0.3008
0.034013
S.Society
0.17636
0.019801
0.04651
TOP MANAGEMENT SOLUTIONS
CONV.COMPETITION SOLUTIONS
SOCIETY SOLUTIONS
Fit&Proper
0.30984 0.001745
Diversification
0.30898
0.001201
Communication
0.51877
0.001244
I.Commitment
0.44158 0.002487
Improve Std.
0.47312
0.001839
Da'wah
0.24562
0.000589
Incr.Share 0.21791 CONV.DOMINANT SOLUTIONS
0.000847
S. Education 0.23561 AUTHORITY SOLUTIONS
0.000565
Reward&Punish 0.24858 HUMAN RESOURCE SOLUTIONS
0.0014
HR.Improvement HR.Incentive
0.46117 0.00174 0.2987 0.001127
Econ.Strengthening G.Strategy
0.1956 0.55954
0.001112 0.003181
E.Commitment Regulation
Selection
0.24013 0.000906
Union/Coop
0.24485
0.001392
Support
TECHNICAL SOLUTIONS UNSUPPORTIVE ENV. SOLUTIONS Innovation 0.27763 0.001251 Alt.Islamic System 0.2974
0.001225
IT & SOP Simplification
0.46982 0.002117 0.25255 0.001138
Infrastructure Law/Regn
0.26973 0.43287
0.001111 0.001783
0.41308 0.39082
0.002412 0.002282
0.1961
0.001145
CUSTOMER SOLUTIONS C.Education 0.44588
0.002389
Incentive Promotion
POLICIES
0.18813 0.36599
0.001008 0.001961
STRATEGIES
Directed Mkt Drvn Fair Treatment
0.22178 0.023144 0.23599 0.024627
Mkt Mapping New Image
0.24371 0.11094
0.025433 0.011577
Gradual&Sustain Professionalism Shariah Complance
0.16219 0.016926 0.23442 0.024463 0.14563 0.015197
Product Dev Service Improve Sos.Comm.Prog.
0.30511 0.23662 0.10362
0.031841 0.024693 0.010814
26
Table 4.2 Overall EXPERTS Geometric Mean Results Normalized Limiting By Cluster
Name
Normalized Limiting By Cluster
Name
Normalized Limiting By Cluster
Name
ASPECT Internal
0.29692
0.008442
System
INTERNAL PROBLEMS H Resource
0.34999
0.009951
External
SYSTEM PROBLEMS
0.35309
0.010039
EXTERNAL PROBLEMS
0.3197
0.036167
Conv.Competition
0.31636
0.035919
Authority
0.39373
0.044713
Technical
0.29739
0.033643
Conv.Dominant
0.28307
0.032139
Customer
0.40565
0.046067
Top Mgt
0.38291
0.043318
Unsupportive Env.
0.40057
0.04548
Society
0.20062
0.022783
TOP MANAGEMENT PROBLEMS
CONV.COMPETITION PROBLEMS
SOCIETY PROBLEMS
Averse Risk
0.26864
0.001409
Institution
0.16142
0.000702
Diversity
0.12545
0.000346
Business Oriented
0.29438
0.001544
Instrument
0.25592
0.001113
L Knowledge
0.25925
0.000715
L Commitment
0.27645
0.00145
Product
0.31892
0.001387
L Perception
0.25018
0.00069
L Understanding
0.16053
0.000842
Service
0.26374
0.001147
L.of Trust
0.36512
0.001007
HUMAN RESOURCE PROBLEMS
CONV.DOMINANT PROBLEMS
AUTHORITY PROBLEMS
Effort Averse
0.24817
0.001087
Economy
0.28854
0.001123
L.Commitment
0.30089
0.001629
L.Know&Skill
0.17785
0.000779
Politics
0.20349
0.000792
L.Incentive
0.15811
0.000856
Risk Averse
0.32717
0.001433
Social
0.18063
0.000703
L.Support
0.28814
0.00156
0.2468
0.001081
Thought
0.32734
0.001274
L.Understanding
0.25286
0.001369
Target Oriented TECHNICAL PROBLEMS
UNSUPPORTIVE ENV. PROBLEMS
CUSTOMER PROBLEMS
Complicated
0.38856
0.001583
Culture
0.28763
0.001584
Averse to Risk
0.24727
0.001379
Higher Risk
0.2813
0.001146
InfraStructure
0.17323
0.000954
Floating Majority
0.29855
0.001665
Less Applicable
0.10825
0.000441
Rule
0.16906
0.000931
L.Knowledge
0.33369
0.001861
No Mgt Tools
0.22189
0.000904
Value
0.37007
0.002038
Low Demand
0.12049
0.000672
INTERNAL SOLUTION
SYSTEM SOLUTIONS
S.H Resource
0.32097
0.036311
S.Conv.Competition
S.Technical
0.29624
0.033513
S.Conv.Dominant
S.Top Mgt
0.38279
0.043304
S.Unsupportive Env.
TOP MANAGEMENT SOLUTIONS
EXTERNAL SOLUTIONS
0.31265
0.035498
S.Authority
0.39304
0.044635
0.2878
0.032677
S.Customer
0.41262
0.046858
0.39955
0.045364
S.Society
0.19434
0.02207
CONV.COMPETITION SOLUTIONS
SOCIETY SOLUTIONS
Fit&Proper
0.22178
0.001163
Diversification
0.31317
0.001346
Communication
0.39469
0.001055
I.Commitment
0.52136
0.002734
Improve Std.
0.42299
0.001818
Da'wah
0.32286
0.000863
Reward&Punish
0.25686
0.001347
Incr.Share
0.26384
0.001134
S. Education
0.28245
0.000755
HUMAN RESOURCE SOLUTIONS HR.Improvement HR.Incentive Selection
0.32932 0.37548 0.2952
CONV.DOMINANT SOLUTIONS 0.001448 0.001651 0.001298
TECHNICAL SOLUTIONS
Econ.Strengthening G.Strategy Union/Coop
0.14004 0.49671 0.36325
AUTHORITY SOLUTIONS 0.000554 0.001965 0.001437
UNSUPPORTIVE ENV. SOLUTIONS
E.Commitment Regulation Support
0.3337 0.38975 0.27654
0.001804 0.002107 0.001495
CUSTOMER SOLUTIONS
Innovation
0.27667
0.001123
Alt.Islamic System
0.30007
0.001648
C.Education
0.52159
0.002959
IT & SOP Simplification
0.32299 0.40034
0.001311 0.001625
Infrastructure Law/Regn
0.24854 0.45138
0.001365 0.002479
Incentive Promotion
0.2593 0.21911
0.001471 0.001243
POLICIES
STRATEGIES
Directed Mkt Drivn Fair Treatment Gradual&Sustain
0.16283 0.28759 0.17426
0.016993 0.030012 0.018185
Mkt Mapping New Image Product Dev
0.19482 0.22554 0.25386
0.020331 0.023537 0.026492
Professionalism Shariah Complance
0.19327 0.18206
0.020169 0.018999
Service Improve Sos.Comm.Progm
0.20195 0.12383
0.021075 0.012923
27
Table 4.3 Overall iBANKERS + EXPERTS Geometric Mean Results Normalized By Cluster
Name
Limiting
Normalized By Cluster
Name
Limiting
Name
Normalized By Cluster
Limiting
0.26372
0.007498
ASPECT Internal
0.40588
0.01154
System
0.3304
INTERNAL PROBLEMS
0.009394
External
SYSTEM PROBLEMS
H Resource
0.30043
0.03424
Technical
0.30842
0.035151
Top Mgt
0.39115
0.04458
TOP MANAGEMENT PROBLEMS
EXTERNAL PROBLEMS
Conv.Competition
0.30005
0.034021
Authority
0.41574
0.046925
Conv.Dominant
0.34396
0.039
Customer
0.39889
0.045023
0.356
0.040365
Society
0.18537
0.020923
0.1251
0.000317
Unsupportive Env.
CONV.COMPETITION PROBLEMS
SOCIETY PROBLEMS
Averse Risk
0.23268
0.001256
Institution
0.12017
0.000495
Diversity
Business Oriented
0.29659
0.001601
Instrument
0.25783
0.001062
L Knowledge
0.32123
0.000814
L Commitment
0.23935
0.001292
Product
0.36222
0.001492
L Perception
0.294
0.000745
L Understanding
0.23138
0.001249
Service
0.25977
0.00107
0.25967
0.000658
HUMAN RESOURCE PROBLEMS
CONV.DOMINANT PROBLEMS
Effort Averse
0.24071
0.000998
Economy
L.Know&Skill
0.23251
0.000964
Risk Averse
0.25519
Target Oriented
0.27159
L.of Trust
AUTHORITY PROBLEMS
0.313
0.001478
L.Commitment
0.32313
0.001836
Politics
0.19737
0.000932
L.Incentive
0.17793
0.001011
0.001058
Social
0.17726
0.000837
L.Support
0.26417
0.001501
0.001126
Thought
0.31237
0.001475
L.Understanding
0.23478
0.001334
TECHNICAL PROBLEMS
UNSUPPORTIVE ENV. PROBLEMS
CUSTOMER PROBLEMS
Complicated
0.31525
0.001342
Culture
0.27256
0.001332
Averse to Risk
0.23129
0.001261
Higher Risk
0.25957
0.001105
InfraStructure
0.18539
0.000906
Floating Majority
0.25367
0.001383
Less Applicable
0.17876
0.000761
Rule
0.19767
0.000966
L.Knowledge
0.40114
0.002187
No Mgt Tools
0.24642
0.001049
Value
0.34438
0.001683
Low Demand
0.1139
0.000621
INTERNAL SOLUTION
SYSTEM SOLUTIONS
EXTERNAL SOLUTIONS
S.H Resource
0.29575
0.033707
S.Conv.Competition
0.29993
0.034008
S.Authority
0.41348
0.046669
S.Technical
0.31005
0.035337
S.Conv.Dominant
0.35055
0.039748
S.Customer
0.40462
0.045669
S.Top Mgt
0.3942
0.044927
S.Unsupportive Env.
0.34951
0.03963
S.Society
0.18191
0.020532
TOP MANAGEMENT SOLUTIONS
CONV.COMPETITION SOLUTIONS
SOCIETY SOLUTIONS
Fit&Proper
0.26397
0.001436
Diversification
0.31156
0.001283
Communication
0.45597
0.001134
I.Commitment
0.48235
0.002624
Improve Std.
0.44779
0.001844
Da'wah
0.28388
0.000706
Reward&Punish
0.25368
0.00138
Incr.Share
0.24065
0.000991
S. Education
0.26015
0.000647
HUMAN RESOURCE SOLUTIONS
CONV.DOMINANT SOLUTIONS
HR.Improvement HR.Incentive
0.39319 0.33782
0.001605 0.001379
Selection
0.26899
0.001098
TECHNICAL SOLUTIONS Innovation IT & SOP Simplification
Econ.Strengthening G.Strategy
0.16705 0.53169
0.000804 0.002559
Union/Coop
0.30127
0.00145
UNSUPPORTIVE ENV. SOLUTIONS 0.28214 0.39551 0.32235
0.001207 0.001692 0.001379
Alt.Islamic System Infrastructure Law/Regn
0.29825 0.25969 0.44206
POLICIES Directed Mkt Drivn Fair Treatment Gradual&Sustain Professionalism Shariah Complance
AUTHORITY SOLUTIONS
0.19133 0.26165 0.16897 0.21406 0.16399
E.Commitment Regulation
0.37392 0.39179
0.002113 0.002214
Support
0.23429
0.001324
CUSTOMER SOLUTIONS 0.001431 0.001246 0.002121
C.Education Incentive Promotion
0.48897 0.22387 0.28716
0.002704 0.001238 0.001588
STRATEGIES 0.019967 0.027305 0.017633 0.022339 0.017114
Mkt Mapping New Image Product Dev Service Improve Sos.Comm.Progm
28
0.22065 0.15908 0.28297 0.22318 0.11412
0.023027 0.016601 0.02953 0.023291 0.011909
Table 4.4 Kendall’s Coefficient of Concordance (W) Respondent
Wi
Respondent
We
Respondent
Wt
ASPECT Islamic Bankers
0.390
Experts
INTERNAL PROBLEMS
0.036
Total
SYSTEM PROBLEMS
0.162
EXTERNAL PROBLEMS
Islamic Bankers
0.020
Islamic Bankers
0.061
Islamic Bankers
0.571
Experts
0.143
Experts
0.082
Experts
0.143
Total
0.061
Total
0.066
Total
0.321
TOP MANAGEMENT PROBLEMS
CONV.COMPETITION PROBLEMS
SOCIETY PROBLEMS
Islamic Bankers
0.149
Islamic Bankers
0.724
Islamic Bankers
0.520
Experts
0.178
Experts
0.073
Experts
0.310
Total
0.060
Total
0.313
Total
0.289
HUMAN RESOURCE PROBLEMS
CONV.DOMINANT PROBLEMS
AUTHORITY PROBLEMS
Islamic Bankers
0.065
Islamic Bankers
0.210
Islamic Bankers
0.069
Experts
0.153
Experts
0.118
Experts
0.167
Total
0.014
Total
0.156
Total
0.088
TECHNICAL PROBLEMS
UNSUPPORTIVE ENV. PROBLEMS
CUSTOMER PROBLEMS
Islamic Bankers
0.004
Islamic Bankers
0.055
Islamic Bankers
0.663
Experts
0.516
Experts
0.220
Experts
0.318
Total
0.121
Total
0.121
Total
0.464
INTERNAL SOLUTION
SYSTEM SOLUTIONS
EXTERNAL SOLUTIONS
Islamic Bankers
0.020
Islamic Bankers
0.061
Islamic Bankers
0.571
Experts
0.143
Experts
0.082
Experts
0.143
Total
0.061
Total
0.066
Total
0.321
TOP MANAGEMENT SOLUTIONS
CONV.COMPETITION SOLUTIONS
SOCIETY SOLUTIONS
Islamic Bankers
0.107
Islamic Bankers
0.291
Islamic Bankers
0.388
Experts
0.388
Experts
0.082
Experts
0.020
Total
0.216
Total
0.170
Total
0.143
HUMAN RESOURCE SOLUTIONS
CONV.DOMINANT SOLUTIONS
AUTHORITY SOLUTIONS
Islamic Bankers
0.184
Islamic Bankers
0.450
Islamic Bankers
0.250
Experts
0.015
Experts
0.679
Experts
0.020
Total
0.073
Total
0.537
Total
0.096
TECHNICAL SOLUTIONS
UNSUPPORTIVE ENV. SOLUTIONS
CUSTOMER SOLUTIONS
Islamic Bankers
0.143
Islamic Bankers
0.097
Islamic Bankers
0.321
Experts
0.097
Experts
0.143
Experts
0.551
Total
0.017
Total
0.116
Total
0.356
POLICIES
STRATEGIES
Islamic Bankers
0.177
Islamic Bankers
0.441
Experts
0.081
Experts
0.134
Total
0.099
Total
0.194
29
