CHAPTER 01 INTRODUCTION
5.3 RECOMMENDATIONS
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Whereas conventional banks operates in major cities as well and rural in roots.This figures suggest that Amana bank is not geographically widespread in the country where most people of the country lives in rural areas.
Question Agree
I consider, based on my awareness when selecting IB Products 91%
I consider, based on rate of return when selecting IB Products 82%
I consider, availability branches of bank when selecting IB
Products 57%
Based on responses 91% of the respondents select Islamic banking products based on its Awareness ,82% on attractiveness of rate of return and while 57% on branches and ATM‘s availability
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2. Amana bank should re design its marketing and promotional activities to reach its marketing objectives. Especially promotional activities to be aimed at product awareness since it‘s an emerging market.
3. Amana bank should consider to extend its branch network and ATM network to more rural areas where more customer potential are available.
REFERENCES
A paradigm of success‖, The Sunday Times, Sri Lanka, Vol. 42, No: 31
A. Naziruddin. (2008), Al Hosn University, Abu Dhabi, United Arab Emirates, Journal of Efficiency and competition of Islamic banking in Malaysia, 24 (1), 28-48.
A. Saiful, A. Mohd. (2003), Department of Economics, International Islamic University Malaysia, Kuala Lumpur, Malaysia, Journal of Performance of Islamic and Mainstream Banks in Malaysia, 30 (12), 1249-1265.
E. M. Shahid. (2001), University of Brunei Darussalam/National University of Singapore, Journal of Islamic Banking in Brunei Darussalam, 28 (4), 314-337.
Farook, Riyazi (December, 2007). ―Islamic banking and finance in Sri Lanka:
Farah AmalinaMdNawi, Ahmad Shukri Yazid and Mustafa Omar Mohammed(2013). ―A Critical Literature Review for Islamic Banks Selection Criteria in Malaysia‖, International Business Research, Vol. 6, No. 6, pg 143-151.
H. Ahasanul, O. Jamil, Z.Ahmad. (2009), Department of Business Administration, Faculty of Economics and Management Sciences, Journal of Factors Influence Selection of Islamic Banking: A Study on Malaysian Customer Preferences, 6 (5), 922-928.
H. Ahasanul. (2010), Faculty of Economics and Management Sciences International Islamic University Malaysia, Journal of Islamic Banking in Malaysia: A Study of Attitudinal Differences of Malaysian Customers, 7-18.
Haron, S. (2001). Islamic banking and finance, Leading issues in Islamic Banking and Finance, 20 (1), pp 17-32.
H. Sudin, A. Norafifah. (1994), International Journal of Bank Marketing, Journal of Bank Patronage Factors of Muslim and Non-Muslim Customers, 12 (1), 32-40.
H.Kassim Salina. (2010), Department of Economics, Kulliyyah of Economics and Management Sciences, Journal of Impact of Financial Shocks on Islamic Banks, 3 (4), 291-305.
Jamaldeen Faleel (2012) ,Islamic Finance for Dummies.
Khalid Owais.(2010), Department of Management Sciences, BahriyaUniverstiy Karachi.
O. Ismah. (2009), Faculty of Business Management, UniversitiTeknologi MARA, Journal of Customer Satisfaction in Malaysian Islamic Banking, 1 (1), 197-202.
Luther Denton, Allan K.K. Chan, (1991) "Bank Selection Criteria of Multiple Bank Users in Hong Kong", International Journal of Bank Marketing, Vol. 9 Iss: 5, pp.23 – 34.
Pollard, J., &Samers, M. (2007). Islamic Banking and Finance: Postcolonial Political Economy and The Decentring of Economic Geography. Trans Inst Br Geogr NS 32.
S. Hamim, A. Naziruddin, M. Syed. (2006), Journal of Efficiency of Islamic Banking in Malaysia: A Stochastic Frontier Approach, 27 (2), 37-70.
W. Asyraf, I. Nurdianawati (2007), International Islamic University Malaysia, Kuala Lumpur, Malaysia, Journal of Why Do Malaysian Customers Patronise Islamic Banks, 25 (3), 142-160.
Y. Remali, W. Rodney. (2005), International Association for Islamic Economics, Journal of An Econometric Analysis of Conventional and Islamic Bank Deposits in Malaysia, 9 (1), 31-52.
Islamic Banking country report 2012. KPMG.
www.sampath.lk www.hnb.net www.combank.net.
LIST OF TABLES
Table No. Page No
Table 4.1: Products Awareness chart 21
Table 4.2: Rate of return figured of bank as at 31/10/14-A 22 Table 4.3: Rate of return figured of bank as at 31/10/14-B 22
Table 4.4: Availability of branches 23
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INDONESIAN SYARIAH BANKS: SYARIAH COMPLIANCE AND FINANCIAL HEALTH FALIKHATUN
YASMIN UMAR ASSEGAF [email protected]
ABSTRACT
This research mean to analyse and examine the impact of syariah principles implementation to financial health in Indonesian Syariah Banks. Hypothesis proposed is the implementation of syariah principles will affect to the financial health of syariah banking in Indonesia.
Research population are all of the public syariah banks (BUS) and the syariah business unit (UUS) in Indonesia, and we take all of the general syariah banks and syariah business unit of foreign exchange bank in Indonesia that existed in Indonesia since 2002 that issued financial report between 2007 – 2010. After purposive sampling selected, there are 36 publicated financial report as research sample. Research Variables are Financial health of syariah banking as dependent variable and syariah principles implementation as independent variable which are proximate with Islamic investment Ratio, Profit sharing Financing ratio, Islamic Income ratio dan Director's – Employee Welfare Ratio.
Hypothesis testing are done by using Linier Multi Regression and conclude that there is positive significant effect of implementation of syariah principles to the Indonesian syariah banking‘s financial health.
Research Implications are advisories for syariah bankings practisioners to implement syariah principles as a syar‘i duty to get hablun minallah and hablun minannas, and not just as a regulations duty. Future researches are recommended to test another variables which are suspected will affect to financial health of syariah banking, such as implementation of Islamic corporate governance, lengthen research period and larger research sample.
Keywords: syariah principles, financial health, syariah banks.
Introduction
Economic Islam issue started by non-riba economic and business concepts, that is prohibited of riba practices to replace conventional economic system which based on interest (riba), and followed by formation of countryside financial institution name Mit Ghamr Bank initiated by Dr. Ahmad Najjar in 1963 (Karim, 2007). That Experiment was very success either in social capital funding in the form of saving, money deposit of zakah, infaq and shadaqah or in capital borrowing for society with low income, specially in agriculture until 1967 (Ready, 1981 in Suyanto, 2006).
Islamic banking development become wider by establishment of Islamic Development Bank (IDB) in 1975 that centered at Jeddah which become a trigger of Islamic banks over the worlds including in Europe. Islamic bank popping up in the middle east like Dubai Islamic Bank (1975) and Kuwait Finance House (1977). The development of Islamic banks in southeast Asia started at beginning of 1983 by establishment of Bank Islam Malaysia Berhad (BIMB) followed by establishment of Bank Muammalat Indonesia, the first Islamic bank in Indonesia at 1993 (Karim, 2007).
The development of Islamic banking in Indonesia intensified after the enactment No. 21 law No. 21, 2008 about Syariah banking specially in the last year, specifically syariah public bank (BUS) and Syariah Business Unit (UUS). Total asset at October 2011 has reach Rp127,19 triliun or increased by 48,10% and is the highest growth over the last 3 years and plus assets amounting to Rp3,35 trillion, BPRS total Islamic banking assets as of October 2008 has reached Rp130,5 trillion.
The high growth of the assets of the high growth of third party funds on the liability and the growth of remittances on the side of assets.
Major challenges the current Islamic bank of which is how to achieve the confidence of its stakeholders. As long as this market share Indonesia Islamic banking for only 3.8% of all national banking markets, so as to do a wide range of breakthrough to increase customer loyalty while holding the principles of Syariah research associated with the implementation of Shariah principles carried out by Khan and Mirachor (1990) in Suyanto (2006) against the Islamic banks in Pakistan and Iran concluded that banks based on syariah principles didn't cause the financial system to collapse or
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alarming. Then Samad and Hasan (1999) examine the performance of Bank Islam Malaysia Berhad (BIMB) between 1984-1997 using a ratio of profitability, liquidity, risk, solvency, and commitment to the community. The results showed relatively more liquid and BIMB less risky compared to conventional banks in Malaysia. Sarker (1999) conducted a study of Islamic banking in Bangladesh with regard to performance, the prospects of Islamic banks and barriers. The results of this study concluded that banks with Profit and Loss Sharing model (PLS) is very conductive to the development of the economy, have a better chance to work as a system, though it has not been able to work with full efficiency compared with conventional banks. Ibrahim et.al. (2003) present some alternative performance measurement and reports used in Islamic banks in accordance with its founding objectives, namely the socio economic justice by comparing between the Bahrain Islamic Bank with Bank Islam Malaysia Berhad. This research uses the Islamic Disclosure Index (IDI) with three main indicator i.e. indicator of adherence to Syariah, an indicator of corporate governance and social/environmental indicators. The results of this research show that the performance of Bahrain Islamic Bank better than Bank Islam Malaysia Berhad (BIMB). Furthermore Suyanto (2006) implementation of syariah principles, conduct studies on performance and well-being of the community in the activities of Islamic bank in Indonesia during the period 2002-2005. The results of this study concluded that the implementation of sharia principles-a significant positive influence on the performance of Islamic banking and community welfare in Islamic banking activities. Kusumo (2008) conducted an assessment of the financial performance of Bank Syariah Mandiri (BSM) from 2002 – 2007 using the ratio of CAEL that concluded that the financial performance of BSM is really good. As for Bonhomme (2009) did a study about the health of financial and social performance of public bank syariah in Indonesia. The results of the overall study concluded in the period 2003 – 2007, the financial health of Bank Muamalat Indonesia (BMI) better than Bank Syariah Mandiri (BSM), whereas the social performance of BSM is better than BMI. Kupussamy et al (2010) do research on the performance of Islamic banks in Malaysia, Bahrain, Kuwait, and Jordan with the use of Syariah Conformity and Profitability (SCnP) model. The results of research they concluded that the majority of Islamic banks in Malaysia, Bahrain, Kuwait, and Jordan have a high profitability and the level of adherence to the Syariah. Furthermore Hasbi and Light (2011) initiate an investigation against the concept of Islamic Syariah and the financial performance of Syariah bank in Indonesia based on the Bank Indonesia Regulation No. 8/6/PBI/2007 with the summary that the Syariah bank in Indonesia has an excellent performance in terms of the ratio of the CAMEL, then the problem is formulated in this research is whether the principles of Syariah implementation effect on the financial health of Islamic banking in Indonesia?
Theorytical Background and Hypothesis Development
The theory of Islamic banking emerged after Qureshi (born 1946 in Suyanto, 2006) issued a book entitled “Islam and the theory of interest”. In his book, Qureshi explained that a bank is social service institution sponsored by the Government for social education and health, so that the banks will not pay interest to the depositors or take interest from the borrower. Qureshi also said the partnership between the bank and the entrepreneur as an alternative that might be done for profit or loss sharing.
Algaoud and Lewis (2001) concluded that the main purpose of Islamic banking and finance from the perspective of Islam include: (1) Elimination of the interest of all financial transactions and updates all bank activities to conform with Islamic principles; (2) the distribution of income and wealth are reasonable; and (3) achieve economic development. Dusuki (2008) categorize the goals of Islamic Bank (IB) from the perspective of stakeholders, among others, maximize profit, the contribution of social well-being, reduce poverty, promote sustainable development projects, minimizing operating costs, improve the quality of products and services, providing financial products that are viable and competitive and promote the value of Islamic values and way of life through the staff, clients and the general public. The implementation of the principles of the Shariah in the Islamic finance includes the prohibition of usury, prohibition of fraud (mudallis), avoidance of speculation (gharar), prohibition of gambling (maysir), an investment that involves pork, liquor and pornography. These restrictions are intended to improve fairness in business transactions (Rosly, 2004). Next the Chapra (2000: 5) suggests the Islamic bank to be supported by the values of Islam which is fundamentally like sharing the risks, rights and responsibilities of individuals, property rights, the sanctity of contracts and the responsibility of nation or Ummah. Bashir (1999) examine the effect of the size and risk of Islamic banking against the financial performance of Islamic banking in the Sudan for the period 1979-1993.
The results showed that the size of banking (proximate by total asset) effect on the profitability of
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Islamic banking in Sudan, and the size of the company are also influential negative direction against the risk of Islamic banking. That means the bigger the total assets held by Islamic banking, the smaller risks being faced. Dar and Presley (2000) did a study about the lack of Profit and Loss Sharing (PLS) at Bank Muamalat Indonesia (BMI). An inefficient provision of rights management and control became the biggest cause of lack of PLS in the practice of Islamic finance. Further study was suggested for developing venture capital in Islamic banking, without any worries of ruined systems or prohibit development. Next is Ibrahim et.al. (2003) present some alternative performance measurement and reports used in Islamic banks which use the Islamic Disclosure Index (IDI) with three main indicator i.e. indicator of adherence to Syariah, an indicator of corporate governance and social/environmental indicators. The results of this research show that the performance of Bahrain Islamic Bank better than Bank Islam Malaysia Berhad (BIMB). The indicators used to measure adherence to the principles of the syariah is the ratio of the results, the ratio of the Islamic order to invest, the ratio of salary of the employee with the Director, Islamic income ratio and the ratio of zakah. Suyanto (2006) implementation of Syariah studies on performance and well-being of the community in the activities of Islamic banks in Indonesia during the period 2002-2005. The results of this study concluded that the implementation of syariah principles has a significant positive influence on the performance of Islamic banking and community welfare in Islamic banking activities. Hamid and Azmi (2011) tested the financial performance of Bank Islam Malaysia Berhad (BIMB) syariah- based with some conventional banks in Malaysia based rates between 2000-2009. Financial performance measured with several criteria i.e. profitability, liquidity, risk and solvency, and community involvement to the bank. The results showed that BIMB more liquid and less risky than conventional banks in Malaysia. Furthermore the study also concludes the mudharabah financing and musyarakah financing is high among other financing types in BIMB, so the hypothesis presented in this study was the implementation of Syariah principles of positive financial health of influential Islamic banking in Indonesia.
Population, sample, and Data
The population in this research is the entire Public Bank Syariah (BUS) and Syariah Business Units (UUS) in Indonesia. As for the sample is the entire Public Bank Syariah and Syariah Business Unit of foreign exchange Bank that had existed in Indonesia since 2002 and published financial statements between the years 2007 – 2010. Collecting data and samples are done by purposive sampling selection and obtained of 36 financial statements published.
Data required including (1) data concerning the implementation of Shariah principles, namely the level of adherence to the Islamic Bank implementing Islamic principles in the activities of groupings and the channeling of funds, (2) data on the financial health ratings achievements earned on investment capital that is used in Islamic banking operations on a specific period in accordance with Bank Indonesia standards.
The Data retrieved from the banking industry and Bank Indonesia, the Central Bureau of statistics, relevant agencies, and relevant publihed financial statements which collected from the internet with address http://www.banksyariah.co.id.
Operational definition and measurement of variables
The dependent variable in this study is financial health as measured by summing all the financial ratios of KAP, NOM, REO and STM who previously had been given a specific value weights. Proxy to measure this variable refers to the regulation of Bank Indonesia No. 8/2/PBI/2007.
Furthermore its independent variable is the implementation of Shariah principles as measured by the level of adherence to the Islamic bank syariah principles implementation in the activity of gathering together and channelling funds Islamic bank, and proximate with Islamic Investment Ratio (IIR):
Islamic Investment/total investment, Profit Sharing Ratio (PFR) Financing: financing of Mudharabah Musyarakah Financing +/total financing, Islamic Income Ratio (Is IR): Islamic Investment Income/total income. Proxy to measure this variable refers to the study of Hameed et. al. (2004) The results of the research and the discussion
The research was conducted on 5 BUS and 8 UUS for the period 2007 – 2010 with total samples that can be processed through purposive sampling selection obtained 36 sample of financial statements publication. These descriptive statistics for each sample:
66 Table 2 Descriptive Statistics
N Minimum Maximum Mean
Std.
Deviation
IIR 36 0,109 0,159 0,105 0,009
PFR 36 0,054 0,036 0,029 0,013
Is IR 36 0,060 0,486 0,075 0,007
DEWR 36 0,696 0,854 0,783 0,049
Kes. Finansial 36 87,96 7,18 78,63 6,15
Sources: The Results Of The Data Processing
After classical assumptions test, data processed by using Multiple Linear Regression and the hypothesis test results can be shown in the following table:
Table 3
Multiple Linear Regression analysis:
Implementation of Syariah principles to Financial Health
Variables B T p
IIR PFR Is IR DEWR
0,376 0,602 0,476 0,801
1,866 1,512 1,385 2,317
0,035*
0,062**
0,047*
0,044*
Constant
Adjusted R Square (R2) F
P
-201251 0,279 3,891 0,008*
* Significant at the = 0,05
** Significant at the = 0,10
Sources: The Results Of The Data Processing
Hypothesis 1a aims to test the influence of Islamic investment proximate with IIR financial health of Islamic banking in Indonesia. The results of the regression coefficients of the regression shows with 0,376 p-value of 0,035. These tests give positive results are significant so it can be stated that the positive effect significantly to IIR financial health Islamic banking in Indonesia. This hypothesis test results support previous research results that Ibrahim et. al. (2003) and Suyanto (2006) stating that the implementation of shariah principles will improve the financial performance of Islamic banking.
Hypothesis 1b aims to test the effects of profit-sharing Financing to the financial health of Islamic banking in Indonesia. The value of the regression coefficients indicate the numbers of 0.628 with p-value of 0,062. Testing the hypothesis above shows a positive value meaning the higher the mudharabah and musyarakah financing ratio that was released to the society the higher the financial health of Islamic banking in Indonesia. Further test this hypothesis also showed the existence of significant influence between the profit-sharing Financing against the financial health of Islamic banking in Indonesia. These results are in line with research results Rosly (2004) stating that the implementation of sharia principles affect performance. Furthermore the results of this research was to break what was said in (1986) Homoud Suyanto (2006) suggested that the Muslim community's lower moral standards does not allow the use of profit loss sharing (mudharabah and Musyarakah) in a broad scale as mechanisms for investment.
Hypothesis 1c aims to test the influence of Islamic Income ratio to the financial health of Islamic banking in Indonesia. The test results showed a regression coefficient hypothesis of 0,476 with a p-value of 0.047. The test results are significant so it can be stated that the Islamic Income ratio affect the financial health of tangibility Islamic banking in Indonesia. The results of this study are consistent with the results of the study at Kapusammy. al. (2010) found that the majority of Islamic banks in Malaysia, Bahrain, Kuwait and Jordan had a higher profitability and better adherence to the