The Chronicles of a Capitalist Lawyer

At last, the long awaited draft amendment to the VAT law has been passed by the Indonesian legislative board (the " New VAT Law "). You can see the soft copy here . The law will be effective as of 1 April 2010. The most important thing here is the fact that the New VAT Law recognizes the existence of Islamic finance and exempts VAT for transactions that fall under the term of Islamic finance. Article 1A Paragraph (1) h of the New VAT Law states that with respect to delivery of taxable goods by taxable entrepreneur in the context of Islamic financing activities, such delivery shall be only considered between the taxable entrepreneur and the party needing such taxable goods. While the elucidation of this Article does not provide specific explanation, it gives an example of a murabahah transaction for a vehicle financing, where an Islamic bank buys a car from a taxable entrepreneur based on an order from the Islamic bank customer. In this example, the New VAT Law acknowledges t

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