Syaria Financing, Usuryless Credit and Financing

Alternative methods for financing activities has emerged over the past few decades. When compared to the conventional financing methods in a capitalistic economy, alternative methods do not follow methods from the former. The reason can range from non-compatibility issue to religious concerns. In fact, several religions consider the conventional financing method as a strictly materialistic economic activity that does not align with their teachings. Therefore, alternative financing methods from religious solutions have emerged to answer this concern as well.

One of the most common financing method from religious teachings in Indonesia is the sharia method financing. Sharia finance, or sharia-compliant finance, is a banking activity that aligns with the sharia (Islamic law). To put it simply, the application of this religious law-compliant finance takes place within the confines of the Islamic economic framework. Compared to other models of financing in the modern economy, sharia financing emphasizes social responsibility in all of its activities. Which means, sharia-financing aims for the welfare of all of the people that revolve in this particular branch of economy.

Despite Islamic economy has already taken place in the seventh century, formalized forms of Islamic finance only began to take place in the 1960s. With the emergence of major oil exporter countries such as Saudi Arabia, other Muslim countries steadily followed suit. Therefore, the implementation of Islamic financing slowly began to take shape as an alternative method for financing in many countries.

One of the most peculiar aspect of Islamic financing is the avoidance of riba (usury). In the Arabic language, riba can literally means as excess or addition, whereas it can be defined as interest or usury in modern economic terms. Islamic law heavily defies the existence of interest payments as it favors the lender more than the borrower. Islamic law considers interest payment as exploitative in nature, which results in the prohibition of riba in the Islamic economy.

This prohibition resulted in a unique form of economic framework when compared to the conventional economic framework. With the interest payment is prohibited in the Islamic financing, other forms of economic transactions exist to replace it. While Islamic law opposes all forms of exploitative economic practices, it does not prohibit the maximization of wealth. Therefore, some forms of Islamic economic activities are similar to conventional economic framework, but they have to comply with the Sharia law. 

Compared to the conventional financing, Islamic financing is based on several crucial principles and services. The first is the concept of profit and loss sharing in the form of mudharabah. It means that all of the involved parties will share the same amount of risk within the particular transaction. No party will be overly handicapped from one another in this form of risk sharing. As a result, no party shall attain excessive benefit from the disadvantaged party and vice versa.

Next is the musharakah or joint venture in the sharia economy. Slightly similar to the first concept, musharakah is a relationship between two or more parties that contribute capital to a business. In this service, all of the parties will receive profit based on a previously agreed deal along with the possible amount of losses.

Other forms of financing can also take shape in the form of ijarah (leasing) for items in a specified time. In this financing, the lessor must own the leased object to ensure the legitimacy of the object’s ownership. Other than merely leasing the object, the object can be a subject of transfer of ownership in some cases. Ijarah wa-iqtina (lease and ownership), for example, may end up with a purchase scenario by or for the involved customer.

Since these forms of Islamic financing activities must comply with the existing sharia law, specialized organizations have been founded to supervise them. It is obligatory for all Islamic financing products to have their own Sharia Supervisory Board (SSB) to ensure the legitimacy of the involved practices with the sharia law. In Indonesia, Malaysia, and in other countries with a majority Muslim population, SSBs have been founded to perform this task. To create an SSB, there are several requirements that needs to be fulfilled:

• Must be composed of Islamic jurists specializing in Islamic commercial jurisprudence (fiqh al-muamalat)
• Having a binding and ruling fatwa (legal opinion)
• Consisted of at least three board members
• Having members that are not from the financial institution they supervise

Therefore, it is common for banks with a substantial amount of Muslim population to have their SSB in their ranks. Several banks from Indonesia and Malaysia such as Bank Mandiri and Bank Negara Malaysia are famous for having their own SSB. Since these banks are providing sharia-financing services over the past two decades, they are obliged to have their own SSB. While many of these SSBs are independent in nature, their standards are becoming more regulated over the years.

Many of these SSBs are following a regulated standard by a legal organization in recent years. Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a Bahrain-based not-for-profit organization whose aims is to establish and maintain Islamic financial institutions worldwide. Due to the increase of Islamic financial services in many countries, this organization aims to create a standard for all Islamic financial activities in those countries. Their standard has been fully implemented for all sharia-based accounting and finance standards supervision in Indonesia and Malaysia.

The substantial rise of sharia financing services in the past few decades has given a new landscape of economy in many countries. In countries with a majority Muslim population such as Indonesia and Malaysia, sharia financing is seen as an alternative for conventional financing services. Aimed specifically to cater to this demography, sharia financing undergoes more advanced progression in recent years. As it progresses, sharia financing also creates more new standards to better implement the system and supervise its implementation as per the existing sharia laws.

With extensive knowledge and experience, CONFINS has supported vast variants of multi-finance business lines including syaria financing by unlocking the full potential of your business process. CONFINS is the right solution which have been used by various multifinance companies in Indonesia. Complete with seamless and high performing features and modules, you can entrust your business operational to CONFINS.