Principles and Products of Islamic Finance

This paper gives an overview of the principles and products of Islamic finance in Indonesia. The paper delineates vision and mission of 'Sharia' banking in Indonesia, asserting that a sound Sharia banking system should be:

• Competitive, efficient and compliant with prudential practices;
• Capable of supporting real economic sector;
• In the spirit of brotherhood and good deeds to promote well-being for all society.

According to the paper, the Islamic finance instruments and products are:

• Equity oriented;
• Based on various forms of risks, profit and loss sharing;
• Provided only to real transactions with underlying assets, excluding speculative investment;
• Prohibitory of paying or taking of riba, which means interest.

The paper describes two types of Islamic financial institutions in Indonesia.

• Banking institutions, which fall under the banking law viz:
  • Full-fledged Islamic commercial banks;
  • Islamic banking units of commercial banks;
  • Islamic rural banks.
• Financial cooperatives, not a part of the formal financial sector, viz:
  • Baitul Maal wat Tamwil (BMT), comprising about 95% of Islamic cooperatives, having a mixed commercial and social objective;
  • Baitul Tamwil Muhamadiyah (BTM), comprising about 5% of Islamic cooperatives, having a more definite commercial orientation.

The paper concludes with a typology of Islamic financial products, listing:

• Financing products;
• Deposit products;
• Insurance products.