HOUSE ENDORSES ISLAMIC BANK LAW

Aditya Suharmoko , The Jakarta Post , Jakarta
Wed, 06/18/2008 10:44 AM
Headlines

The House of Representatives on Tuesday passed the Islamic banking law aimed at accelerating growth in the industry, while failing to address the issue of double-taxation.
Nine of the 10 factions at the House agreed to pass the law, aiming to provide certainty for investors in an industry that has grown rapidly in the past two years.
Sharia bank lending increased by 30 percent in 2007, higher than the 25.5 percent lending growth of conventional banks.

Melchias Markus Mekeng, a member of the House's Commission XI overseeing financial affairs, said after the session that the commission would try to address double taxation in later discussions with the director general of taxation.
"It (the double taxation issue) is complicated. Investors may retreat from injecting funds into sharia banks if the tax is higher than the amount of return they receive," Markus said.
"Perhaps we will insert it in the value-added tax (VAT) bill."

In an Islamic bank, interest payments are forbidden.
A bank customer can obtain profit in an exchange transaction called murahaba in which a buyer (bank) purchases items from a seller (customer) at a specified profit margin payable to the seller.
However, as the transaction involves the buying and selling of items, it will be subjected to value-added tax twice, both when the items are bought and sold.

The Finance Ministry's head of fiscal policy Anggito Abimanyu said the ministry would try to solve the double taxation matter through existing instruments.
"Actually, there is not a buying and selling of items as they are used only as underlying assets. It is a matter of interpretation," Anggito said.
He agreed with Markus that the government might include the double taxation matter in the value-added tax bill, which would be discussed with Commission XI.

The Islamic banking law also stipulates that conventional banks hosting sharia units must separate the business if its capital reaches 50 percent of the bank's total capital, to further expand the sharia banking industry.
Bank Indonesia (BI) aims to increase the market share of sharia banks to 5 percent by 2010. The sharia banking industry accounted for only 1.98 percent of the total market as of February, a small increase from 1.64 percent a year earlier.

Indonesia has three commercial sharia banks -- Bank Syariah Mandiri, the largest sharia bank by assets, Bank Muamalat Indonesia and Bank Syariah Mega Indonesia.
Numerous conventional banks, meanwhile, have established sharia units to tap into the industry.

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DEFINITION

Ijara
Ijara is a form of leasing. It involves a contract where the bank buys and then leases an item – perhaps a consumer durable, for example – to a customer for a specified rental over a specific period. The duration of the lease, as well as the basis for rental, are set and agreed in advance. Islamic Bank of Britain retains ownership of the item throughout the arrangement and takes back the item at the end.

Ijara-wa-iktana
Ijara-wa-iktana is similar to Ijara, except that included in the contract is a promise from the customer to buy the equipment at the end of the lease period, at a pre-agreed price. Rentals paid during the period of the lease constitute part of the purchase price. Often, as a result, the final sale will be for a token sum.

Ijara with diminishing Musharaka
The principle of Ijara with diminishing Musharaka can be used for home-buying services. Diminishing Musharaka means that we reduce our equity in an asset with any additional capital payment you make, over and above your rental payments. Your ownership in the asset increases and ours decreases by a similar amount each time you make an additional capital payment. Ultimately, we transfer ownership of the asset entirely over to you.

Mudaraba
Mudaraba refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agree to the division of any profits made in advance. In other words, Islamic Bank of Britain would make Sharia’a compliant investments and share the profits with the customer, in effect charging for the time and effort. If no profit is made, the loss is borne by the customer and Islamic Bank of Britain takes no fee.

Mudarib
In a Mudaraba contract, the expert who manages the investment is known as a Mudarib.
MurabahaMurabaha is a contract for purchase and resale and allows the customer to make purchases without having to take out a loan and pay interest. Islamic Bank of Britain purchases the goods for the customer, and re-sells them to the customer on a deferred basis, adding an agreed profit margin. The customer then pays the sale price for the goods over instalments, effectively obtaining credit without paying interest.

Musharaka
Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward. The difference between Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested.

Qard
A Qard is a loan, free of profit. We use this arrangement for our Current Accounts. In essence, it means that your Current Account is a loan to the bank, which is used by the bank for investment and other purposes. Obviously it has to be paid back to you, in full, on demand.
RibaRiba means interest, which is prohibited in Islamic law. Any risk-free or guaranteed interest on a loan is considered to be usury.

Wakala
Wakala is an agency contract, which usually includes in its terms a fee for the expertise of the agent. We may use it for our large Deposit accounts: you own the capital invested, you appoint us as your agent and pay a fee for our expertise.

www.islamic-bank.com

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