The Chronicles of a Capitalist Lawyer

" If you owe your bank a hundred pounds, you have a problem. But if you owe a million it has ." (John Maynard Keynes - British Economist and founder of the Keynesian School) Introduction Keynes' brilliant statement above can accurately describes one of the most crucial problems of international financing activities, i.e., overconfidence in giving loans to companies from emerging markets, which is highly risked, tends to create problems rather than improvements. Problems not only to the financial institutions involving in such financing activities but also to the debtors, as in the end both of them are facing losses, not profits. This overconfidence, combined with a lack of supervision from the Indonesian authorities can be considered as one of the main factors of the financial crisis in 1997. In that fateful tragedy, an already huge amount of foreign debts which were borrowed recklessly by Indonesian private companies suddenly turned into an endless pool of debt w

In Part I of my article, we have discussed two of the major challenges that are being currently faced by the Indonesian Islamic banking industry, the taxation and regulatory issues. In this article, we will discuss the remaining two challenges, i.e the risk management issues and the segmentation and marketing issues. 1. Risk Management Issues We will start our discussion by asking this question: "Why murabahah financing sits at the top of Islamic banking financing products in Indonesia?" As of June 2009, the murabahah financing which involves a sale and purchase of assets between an Islamic bank and its customers with a deferred payments mechanism plus margin is the queen of all Indonesian Islamic financing products, comprising of approximately 57% of the total Islamic financing products. Meanwhile, the mudharabah financing (revenue sharing financing) and the musyarakah financing (joint venture financing) only comprise 21.6% and 14.5%, respectively, of the total Islamic

1. Introduction For quite a long time, it is very common for us to hear critics saying that the Indonesian Islamic banking industry has failed to capture a bigger market share in Indonesia despite the fact that Indonesia is the biggest moslem country in the world. To certain extent, this might be true. If we compare the total assets of Islamic banks (based on Bank Indonesia's Islamic Banking Statistic per June 2009, the amount of which is approximately Rp.55 trillion) with the assets of commercial banks (based on Bank Indonesia's General Banking Statistic per June 2009, the amount of which is approximately Rp.2,028 trillion), we will found out that Islamic banks' assets only represent 2.64% of the total assets of Indonesian banking Industry (excluding rural credit banks). True, that if we compare the current data with 2005's data, Islamic banks' assets have increased around 250%, but that is not significant enough if we see the total cumulative assets of the Indones