Funding Strategy Used by the Islamic Bank in Surabaya

Topics: Islamic banking, Bank, Sharia Pages: 83 (28289 words) Published: March 7, 2013

Chapter 1

The Islamic banking industry today stands at more than 200 billion USD, and consists of more than 250 financial institutions in and outside the Muslim world.[1] It is the product of the collective effort of bankers, economists, and Islamic legal scholars over the past several decades to develop financial solutions that meet the religious requirements of Muslims. Malaysia • Saudi Arabia

• UK
Furthermore, it is an inclusive paradigm: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking.[2]
In Indonesia during the period of 1997 – 1998, many financial institutions, including banking institutions experienced hardship, due to high interest rate that resulted in a high cost of capital to the entrepreneurs. The quality of bank assets has deteriorated significantly while the banking system was burdened by a high cost of funds caused by high market interest rates. Furthermore, low productivity and high risk investments have prevented the banks from investing their funds in the real sector. As the consequence, the banking system started to loose its intermediary function as indicated by a low LDR ratio.

Figure 1.1
Financial performance of Sharia Banking as compared to the conventional banking in Indonesia Source: The Blueprint of Islamic Banking in Indonesia

Contrariwise, during the economic crisis, sharia banking could still perform better that the conventional banking as indicated by a relatively low level of non – performing loans and the absence of negative spread in the operational activities (figure 1.1). This could be understood since the rates of returns paid to the depositors are not determined by market interest rates. Therefore, sharia banks are able to conduct lending as indicated by a relatively high LDR ratio i.e. between 113 – 117 percent (figure 1.1). This experience has brought a hope to the public for the presence of sharia banking as an alternative banking system that is capable both delivering economic benefits and ensuring compliance with sharia principles. [3]

Furthermore, Adiwarman Karim, the director of Karim Business Consulting predicted that Syariah Banking will experience high growth in 2007. Those condition occur because there’re transfer of the fund from the instrument of conventional finance to Syariah on huge amount on 2007 due to its attraction of profit sharing increased together with the declining of the deposit’s interest rate on conventional banks. [4]

Moreover, this paper initially outlines the funding strategy used by the Syariah Banks in Surabaya. This topic is interesting because the Indonesia Syariah Banking Economic Indicator from 2003 until 2006 shows that there’s significant improvement on the assets and Third Party fund in which it shows there’s increased on demand for Syariah Banking. [pic]

Figure 1.2 Syariah Banking Economic Indicators 2003 – 2006 Source: Syariah Banking Statistics, Bank Indonesia, 2003 – 2006

Furthermore, according to Adimarwan Karim the growth of Syariah Banking in 2007 resulting from the fall of the interest BI rate became below 10 percents, in fact it was estimated will continue until 8.5 percents on the end of the year. Furthermore, the declining of the BI rate will also pushed the declining rate of other Conventional Bank on both saving and the fixed deposit, in which the stable profit sharing in Syariah Bank will attract more customers to choose Syariah Banking over Conventional Bank Thus the Syariah Bank would be interesting topic to discussed due to the several factors that already mention on previous page. An illustration and explanation, which will be presented, will show how and what are the funding strategies used by the Syariah Banking in Surabaya in order to survive and become the leading on Syariah Banking

1.2.Problem Statement
Based on the paragraph above, the research will focus on:...
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