00074918.2014.980391

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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

Islamic Banking in Indonesia: New Perspectives on

Monetary and Financial Issues

Rahmatina Kasri

To cite this article: Rahmatina Kasri (2014) Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues, Bulletin of Indonesian Economic Studies, 50:3, 500-502, DOI: 10.1080/00074918.2014.980391

To link to this article: http://dx.doi.org/10.1080/00074918.2014.980391

Published online: 03 Dec 2014.

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500 Book Reviews

political economy of ethnic Chinese business during the colonial era, and possibly beyond.

The book relects some similarities between the economy of the Netherlands Indies and that of contemporary Indonesia. It shows how the Netherlands Indies economy depended heavily on the export of primary products, such as sugar, coffee, rubber, tobacco, copra, and oil, and was therefore extremely vulnerable to price luctuations in those commodities. More than a century later, the Indonesian economy remains dependent on exports of primary commodities and on the busi -ness activities of ethnic Chinese entrepreneurs.

Claver’s book is a great source of historical information on long­term com -mercial relations between the Dutch and Chinese in Java, and should be a recom -mended reading for any economic historian with an interest in colonial Indonesia. Its strength is its rigorous use of new and neglected archival sources, while its chronological episodes and case studies support what is a coherent story. Yet the book would have beneited from discussions about the environmental impact of the extensive natural resource exploitation in Java during the commodity boom, in particular, and the role of the Chinese in the political arena, especially during key political transitions.

Siwage Dharma Negara

Indonesian Institute of Sciences (LIPI)

© 2014 Siwage Dharma Negara

http://dx.doi.org/10.1080/00074918.2014.980390

Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues. By Rifki Ismal. Chichester: John Wiley, 2013.

Pp. xxi + 544. Hardback: A$114.95; e­book: A$74.99.

As the world’s largest Muslim country, Indonesia is often seen and even assumed to have tremendous potential in Islamic banking. Yet little is known about Indo -nesia’s Islamic banking industry, particularly by international readers. Against this background, Rifki Ismal attempted to write a pioneering book on the subject. The result is a comprehensive volume consisting of 27 essays and covering a wide range of topics, including, in particular, liquidity risk management, depositors’ withdrawal behaviour, and Islamic monetary issues.

The book provides a thorough analysis of the concepts and practice of liquid -ity risk management in Indonesia. After reviewing conceptual literature related to liquidity risk management from conventional and Islamic perspectives, Ismal explains the general practices in Indonesia. He then constructs a liquidity man -agement index for the industry, using primary data from Indonesia’s three largest Islamic banks (which hold around 82% of the market share). He concludes that the relatively high index value suggests that the industry has been largely suc -cessful in managing liquidity risk.

From this macro perspective, Ismal investigates market liquidity behaviours. Using a questionnaire­based survey, he identiies three segments of Islamic banking depositors in Indonesia: Sharia­driven, proit­driven, and transaction­ driven depositors. He also identiies and criticises the liquidity management

Book Reviews 501

approaches adopted by the banks, from both the liability side and the assets side. Ismal subsequently proposes the so­called Islamic Banking Behaviour Model of Indonesia, which gives conventional banking models the features of Indonesian Islamic banking in order to produce a dynamic inancial model of Islamic banking liquidity behaviour. He also discusses relevant programs for managing liquidity risk in the industry and estimates the amount of short­term liquidity in Islamic banking in Indonesia. His indings have important implications for regulators and bankers.

Another important aspect elaborated in the volume is the withdrawal behav -iour of depositors. Using a moderate­scale survey, Ismal identiies the three most common reasons for depositors to withdraw their funds from Islamic banks: higher returns offered by other banks (49% of respondents), anticipation of future inancial crises (36%), and failure by the bank to comply with Sharia requirements (10%). Ismal suggests that the banks should ensure that they perform robustly and comply with Sharia regulations in order to keep their customers. The impor -tance of robust performance is also conirmed by his modelling and his equilib -rium results related to general revenue sharing.

The book’s discussion of monetary issues includes theoretical analyses of the main types of Islamic monetary instruments as well as other Islamic monetary instruments (such as ‘gracious’ instruments or gracious central­bank certiicates). Although the choice of the most appropriate instrument depends on the target of the Islamic monetary operation, Ismal argues that gracious instruments can increase economic activities rather than create excessive liquidity. Yet their use is currently limited —the Sharia requirement to use asset­based inancing makes them less attractive than conventional, interest­based monetary instruments. To enrich the theoretical discussions, Ismal estimates the impacts of monetary poli -cies on the balance sheets of Islamic banks in Indonesia, providing evidence for the creation of an Islamic banking lending channel and its support for real eco -nomic activities.

Most of Ismal’s lessons learnt and empirical indings and analysis, derived from high­quality primary and secondary data, have rich policy implications. This is the main strength of the book. His identiication of the liquidity management approaches of Islamic banks is based on primary data from banking authorities and market players that represent around 97% of the industry. Similarly, the book uses important survey data from Bank Indonesia, the central bank, that are not available to the public. Ismal was able to collect and analyse these data because of his position in the bank—he has been an assistant director in the Department of Islamic Banking since 1998—and because of his understanding of Islamic bank -ing issues in Indonesia. As such, the book gives readers access to data, facts, and analysis that might not be available otherwise.

Despite these strengths, the volume could be improved in some important aspects. A more proportional discussion between monetary and inancial issues in the Islamic banking industry—part of the book’s title—would be welcome in future editions; only three chapters in this edition are dedicated to monetary issues. A more detailed history of Islamic banking in Indonesia would also be wel -come. Unlike in countries such as Malaysia, where Islamic banking was developed with a top­down approach, Islamic banking in Indonesia started at the grassroots and developed with little government support. Accordingly, many challenges

502 Book Reviews

and dynamics surrounded its development—a discussion of which might be useful for policymakers, academics, and analysts in countries trying to develop their Islamic banking sector. Furthermore, some chapters have very general titles, which do not accurately relect the contents of the chapters themselves. Take, for example, chapter 2, ‘Program to Develop Indonesian Islamic Banking’; aside from proposing programs for improving the industry’s performance, it provides a brief review of the development of the Islamic banking industry in Indonesia, includ -ing legal aspects and its operation, performance, and challenges.

A brief chapter that integrates the discussions and analysis in the book would be helpful to readers. At present, the only such chapter is limited to liquidity risk management. Moreover, less relevant chapters (such as chapter 22, on Indonesian iscal policy) could be excluded, and chapters that share the same topic could be grouped into speciic clusters. Some typographical errors also need to be cor -rected.

Notwithstanding these shortcomings, the author should be praised for his efforts in producing a breakthrough book that is accessible to international read -ers—there could hardly be a more important volume for those interested in Islamic banking in the world’s largest Muslim country. I recommend that academ -ics, analysts, bankers, and policymakers interested in the industry in Indonesia adopt Ismal’s book as their main reference.

Rahmatina Kasri

University of Indonesia

© 2014 Rahmatina Kasri

http://dx.doi.org/10.1080/00074918.2014.980391

Indonesia in ASEAN: Vision and Reality. By Donald E. Weatherbee. Singapore:

Institute of Southeast Asian Studies, 2013. Pp. xiii + 109. Hardback: $15.90; e­book: $16.00.

The ASEAN Economic Community: A Work in Progress. Edited by Sanchita

Basu Das, Jayant Menon, Rodolfo C. Severino, and Omkar Lal Shrestha. Singapore: Institute of Southeast Asian Studies and the Asian Develop

-ment Bank, 2013. Pp. xxiv + 507. Hardback: $59.90; paperback: $49.90;.

These books discuss the political and economic aspects of ASEAN, covering two of the association’s three pillars (alongside the ASEAN Socio­Cultural Commu -nity). Donald E. Weatherbee’s Indonesia in ASEAN focuses on the political aspect of ASEAN and places Indonesia at the centre of its analysis, while Sanchita Basu Das et al.’s edited collection discusses issues essential to the ASEAN Economic Community (AEC).

In order to establish a central role in ASEAN, Weatherbee argues, Indonesia has put the association’s foreign policy interests before its own bebas dan aktif (inde-pendent and active) foreign policy. Yet he inds that Indonesia can lead ASEAN in the face of political crisis, as it did in stopping a potential border war between Thailand and Cambodia in 2011 and in rescuing the South China Sea dispute in 2012. Yet under normal political circumstances, no one country, including Indone