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THESISAN ANALYSIS OF PERFORMANCE DEPOSITOR
FUND IN THE OPERATION OF INDONESIANISLAMIC BANKING SYSTEM
Sayakhmad OlimovID: 21140850000009
PROGRAM OF MAGISTER SHARIAH BANKINGFACULTY OF ECONOMICS AND BUSINESS
STATE ISLAMIC UNIVERSITYSYARIF HIDAYATULLAH
JAKARTA1438 H. / 2016 M.
1
THESISAN ANALYSIS OF PERFORMANCE DEPOSITOR
FUND IN THE OPERATION OF INDONESIANISLAMIC BANKING SYSTEM
Sayakhmad OlimovID: 21140850000009
PROGRAM OF MAGISTER SHARIAH BANKINGFACULTY OF ECONOMICS AND BUSINESS
STATE ISLAMIC UNIVERSITYSYARIF HIDAYATULLAH
JAKARTA1438 H. / 2016 M.
1
THESISAN ANALYSIS OF PERFORMANCE DEPOSITOR
FUND IN THE OPERATION OF INDONESIANISLAMIC BANKING SYSTEM
Sayakhmad OlimovID: 21140850000009
PROGRAM OF MAGISTER SHARIAH BANKINGFACULTY OF ECONOMICS AND BUSINESS
STATE ISLAMIC UNIVERSITYSYARIF HIDAYATULLAH
JAKARTA1438 H. / 2016 M.
2
3
4
5
ABSTRACT
The objective of study is to analyze the performance Depositor Fund of Islamic
banks in the case of Indonesia. Islamic banks also depend on depositors’ money as a
major source of fund, due to interest is forbidden in Islam, and the flexibility of
Islamic bank in collecting inflow money for expenses and financing is limited. For
that reason, deposits are even more important in Islamic bank. In performing these
roles, deposit money banks must realized that they have the potentials, scopes and
prospects of mobilizing financial resources and allocating them to productive
investments and, in return, promote sustainable performance and sores that businesses
are flourishing and alive. The research methodology is quantitative analysis based on
the Multiple Regression Model as statistical process to estimate the relationships
among dependent and independent variables. In this study secondary data is used and
collected from Annual Report of Islamic Banks. The sample of study is the bank
which is selected from 36 samples of Islamic Commercial Banks (BUS and
UUS/Model of Islamic banking in Indonesia) relates to non-probability purposive
sampling method as a statistical research techniques. The result of study showed that
the performance of Depositor Fund in the operation of Islamic banks has negative
proficiency and otherwise Islamic banks have weaknesses capability to improve the
high ratio of increasing productivity Depositor Fund based on the financial ratio
factor which are analysed.
6
ACKNOWLEDGMENT
Praise be to Allah SWT, the most gracious and the most merciful, who gave
blessing and his protection to all Muslim Ummah, Prayer and for the Prophet
Muhammad PBUH, who has successfully brought us from the darkness of the
lightness. And I am mostly aware that writing and analyzing originally a case study
such as this thesis in Master degrees will not be possible without the generosity and
help from the professional scholars and experts of faculty of university around me
during study and research education. This is never an individual work. Therefore, I
would like to mention many special thanks to those people who gave me some of
their direct or indirect contribution to make this work in existence, and I am most
grateful to them following as:
1. My Thesis Supervisors Professor Dr. Abdul Hamid MS., Vice - Rector
State Islamic University Sharif Hidayatullah Jakarta, and Dr. M. Arif Mufraini M.
Lc, Dean Faculty of Economy and Business UIN Sharif Hidayatullah Jakarta both
together have provided professionally to support, recommend, advice, and corrected
this case study. I am dedicate my deepest gratitude to both of them for valuable
supervising.
2. My gratitude to the Professor Dr. Muhammad M Said at the Faculty of
Economy and Business UIN Sharif Hidayatullah Jakarta, Dr. Herni Ali HT SE,
MM., Director Program Magister Islamic Banking in Faculty of Economy and
Business UIN Sharif Hidayatullah Jakarta, and Dr. Muniaty Aisyah Ir, MM. Docent
FEB UIN Sharif Hidayatullah Jakarta for their advice and recommendations.
3. I am very grateful to Mr. Ade Suherlan SE, MM, MBA., Secretary
Program Magister Islamic Banking Faculty of Economy and Business UIN Sharif
Hidayatullah Jakarta, to Miss. Ismawati Haribowo SE, M.si., Assistant Vice-Rector
UIN Sharif Hidayatullah Jakarta and although I would like to thank to my classmate’s
Miss. Rahayu Suminarni B.EA, student Magister Program of Islamic Banking at the
Faculty of Economy and Business of UIN Sharif Hidayatullah Jakarta for her
honestly helping to complete my research thesis from beginning to the and.
7
THE TABLE OF ARABIC-LATIN TRANSLITERATION1
A. Consonants
Arabic Latin Arabic Latin
ء ‘ ط Th
ب B ظ Zh
ت T ع ‘
ث Ts غ gh
ج J ف F
ح H ق q
خ Kh ك k
د D ل l
ذ Dz م m
ر R ن n
ز Z و w
س S ھة h
ش Sy ي y
ص Sh ة t
ض Dh
B. Vowels
Short Vowels Long Vowels
Arabic Latin Arabic Latin
◌ /a/ ا a’
◌ /u/ ي◌ iy
◌ /i/ و uv
_________________________________
1. Adopted from “Pedoman Academic Program Magister dan Doctor Kujian Islam”
(Academic manual for Master and Doctoral Programs in Islamic studies 2007 / 2008), (Jakarta:
Sekolah Pascasarjana UIN Jakarta, n.d), (Pg. 50).
8
LIST OF TABLES, CHARTS AND FIGURES
Tables Description Page
Table: 1.1: Strategy of Development Islamic Banking in Indonesia…............ 1
Table: 1.2: Islamic Banks Assets in Indonesia………………………………. 2
Table: 2.1: The Historical Progress of Islamic Banking in Indonesia………. 8
Table: 2.2: Progress of Changing Islamic Banking Model in Indonesia……. 9
Table: 2.3: Differences between Conventional and Islamic Banking……….. 10
Table: 2.4: Indonesian Islamic Banking Industry Blueprint Program……….. 13
Table: 2.5: Mudharabah Contract Elements in Practice Islamic Bank……….. 31
Table: 2.6: Composite CAMEL and their Interpretation…………………... 40
Table: 2.7: Overview of Previous Researches Survey……………………… 57
Table: 3.1: Operational Research Variables……………………………….. 66
Table 4.1: The Result of One-Sample Kolmogorov-Smirnov Test……….. 72
Table 4.2: The Result of Multicollinerity Test………………………………. 73
Table 4.3: The Result of Glaser Test (Simultaneous)……………………… 74
Table 4.4: The Result of Glaser Test (Partial)……………………………… 75
Table 4.5: The Result of Autocorrelation Test……………………………… 75
Table 4.6: The Result of t-Test……………………………………………… 76
Table 4.7: The Result of F-Test……………………………………………… 78
Table 4.8: The Result of Multiple Linier Regressions……………………… 79
Table 4.9: The Result of Determinant Coefficient…………………………… 81
Chart: 1.1: Islamic Banking market share growth in Indonesia…………….... 2
Figure: 2.1: Operations of Commercial Islamic Bank in Indonesia………… 11
Figure: 2.2: Liquidity risk management in Islamic Commercial Bank……… 12
Figure: 2.3: Conceptual Thinking…………………………………………… 56
Figure: 2.6: Mudharabah financing capital trust partnership model…………. 29
Figure: 3.1: Analysis Multiple Regression Model Structure………………… 67
Figure: 4.1: The Result of Heteroscedasticity Test………………………....... 74
9
LIST OF ABBREVIATIONS
Following is a list of abbreviations and acronyms used throughout this thesis
for the Indonesian Islamic banking system.
AIB Architecture of the Indonesian Banking
AIFS Architecture of the Indonesian Financial System
BMI Bank Muamalat Indonesia
BI Bank of Indonesia
CAMEL Capital, Asset, Management, Earning, Liability
CAR Capital Adequacy Ratio
DIFC Dubai International Financial Centre
FDR Financing to Deposit Ratio
GCG Good Corporate Governance
FSA Financial Service Authorities
ICB Islamic Commercial Bank
IUB Islamic Unit Bank
IRB Islamic Rural Bank
IBS Islamic Banking System
ISLAMI Indonesian Islamic Banking Dynamic Model
ITL Islamic Transactions of Law
LIBI Law of Islamic Bank of Indonesia
MUI Majlis Ulema Indonesia
MM Mudharabah and Musharakah
MRMA Multiple Regression Model Analysis
NPF Non-Performing Financing
OEOI Operating Expense to Operating Income
PLS Profit and Loss Share
ROA Return on Assets
SBBM Shariah Board of Bank Muamalat
SCM Securities Commission Malaysia
10
CONTENTS
LETTER OF STATEMENT………………………………………………… I
ABSTRACT ………………………………………………………………… II
ACKNOWLEDGMENT……………………………………………………. III
ARABIC-LATIN TRANSLITERATION…………………………………… IV
LIST OF TABLE, CHART AND FIGURES……………………………….. V
LIST OF ABBREVIATIONS………………………………………………. VI
CONTENTS…………………………………………………………………. VII
CHAPTER I INTRODUCTION……………………………………….... 1
A. Background of the Study………………………………… 1
B. Statement of the Problem………………………………… 5
C. Research Objective ……………………………………. .. 5
D. Research Question….…………………………………… 5
E. Significance of the Study………………………………… 6
F. Limitation of the Study……………………………………. 6
J. Systematic of Writing…………………………………..… 7
CHAPTER II LITERATURE REVIEW……………………………….. 8
A. Islamic Banking System in Indonesia………………….. 8
B. Product of Depositor Fund in Islamic Bank…………….. 16
1. Mudharabah Deposit Fund……………………………. 17
C. Types of Mudharabah Deposit………………………….. 20
1. Mudharabah Saving Deposit…………………………. 22
2. Mudharabah Time (Investment) Deposit…………….. 23
D. Wadiah Deposit………………………………………….. 24
E. Characteristics of Depositor Fund………………………. 25
1. Depositor Behavior…………………………………… 25
2. Deposit Insurance……………………………………. 27
F. Mudharabah Practice in Islamic Bank…………………. 29
11
J. Supervision Banking Regulation Methodology…………... 35
H. Assessment CAMELS Model in Islamic Banking………. 38
1. Capital Adequacy……………………………………… 41
2. Asset Quality………………………………………….. 42
3. Management Soundness………………………………. 43
4. Earnings and Profitability…………………………… .. 45
5. Liquidity……………………………………………… 46
6. Sensitivity to Market Risk………………………….... 46
I. Previous Research……………………………………… 47
G. Theoretical Framework ………………………………... 55
K. Hypothesis of Research………………………………... 57
CHAPTER III RESEARCH METHODOLOGY………………………. 58
A. Scope of Research…………………………………….. 58
B. Sampling Method………………………………………. 58
C. Data Collection………………………………………… 59
D. Data Analysis Techniques…………………………….. 60
1. Normality Test………………………………………. 60
2. Classic Assumption Test……………………………. 61
a. Multicollinerity Test……………………………… 61
b. Heteroscedasticity Test…………………………... 61
c. Autocorrelation Test……………………………… 62
2. Hypothesis Test…………………………………....... 62
a. t-Test……………………………………………... 62
b. F-Test……………………………………………. 63
3. Multiple Regression Method……………………….. 64
4. Determinant Coefficient……………………………. 65
E. Operational Research Variables……………………….. 66
1. Independent variables……………………………….. 66
2. Dependent variable………………………………….. 67
12
CHAPTER IV FINDING AND ANALYSIS ……………………………. 69
A. General Description of Research Object……………… 69
1. Brief History of Islamic Banking in Indonesia……... 69
2. Islamic banking Rating System Principles…………. 69
B. Result and Discussion…………………………………. 71
1. Descriptive Statistic Analysis………………………. 71
a. Normality Test…………………………………… 71
2. Classic Assumption Test……………………………. 73
a. Multicollinerity Test……………………………… 73
b. Heteroscedasticity Test…………………………… 74
c. Autocorrelation Test…………………………….... 75
2. Hypothesis Test…………………………………........ 76
a. t-Test……………………………………………… 76
b. f-Test……………………………………………… 78
3. Multiple Regression Analysis………………………… 79
a. Regression Equation……………………………….. 79
b. Determinant Coefficient (Adjusted R2)………….... 81
CHAPTER V CONCLUSION ……………………………………………..... 82
A. Summary of the Research……………………………….. 82
B. Implication of the Research……………………………… 83
C. Recommendation for further Research………………….. 84
REFERENCES ………………………………………………………………. 87
APPENDIXES………………………………………………………………. .. 93
Appendix A: Sample of Data Collection ………………………………….... .. 93
Appendix B: The Result of Normality Test Analysis……………………….... 94
Appendix C: The Result of Classic Assumption Tests……………………….. 96
Appendix D: The Result of Hypothesis Tests………………………………… 98
Appendix E: The Result of Multiple Regression Analysis…………………… 99
13
CHAPTER I
INTRODUCTION
A. Background of the Study
Indonesia is the largest community Muslim in the world, and is one of the
optimist on implementing Islamic economy perspective after the previous global
financial crisis which has made the attention to turn on the Islamic financial model,
and in general the Islamic banking system (Rahajeng, 2005).There are some engines
of growth, which is trigger in particular of such as industry, especially the big Muslim
population, need of costumers, banking regulations, alternative education program
and authorities with Islamic economics researchers solution (Rifki, 2011).
Table: 1.1:
Fundamental Strategy of Development Islamic Banking system in Indonesia.
CountryPopulation Muslim
%GDP (USD
Billion)Financial
Sector(USD Billion)
Islamic BankingAsset
(USD Billion)
Islamic BankingMarket Share
In 2015Indonesia 237,512,355 85 410.3 180.13 3.9 5%
DOMAIN ISSUE INITIATIVE
Regulators(BI, DSN, IAI)
Publication of Islamic Banking Act,Tax related regulations, Productlicense
To accelerate Islamic Banking Act, To acceleratespecific taxes regulation, Harmonization of productregulation
Islamic Bankingproducts & services
Product and Service InnovationBranding & communicationInnovation Enhancement of marketcapacity
To actively innovate & adopt Islamic Banking products& services, New approach of branding & communicationInternal marketing, empowerment of qualified humanresources, network and capital
Support of Developmentof Islamic Banking
To make a more universal IslamicBanking, Assistance in the promotionof Islamic Banking
To show that Islamic Banking is an attractive globaltrend To show more variations in Islamic Banking
Main complementof Islamic Banking
Accountancy standardizationImproving the quality of IslamicScholar Different Sharia principles &standards
Adoption & harmonization of accounting standardTargeting Islamic Scholar with international qualityAccommodation & harmonization of Sharia principles& Standards
Source: Directorate of Islamic Banking Bank Indonesia July 2008
The contribution of Islamic banks in Indonesia towards national economic
growth remains dependent to large extent on how they are able to operate effectively,
either in offering attractive product and services or other in playing a constructive as
social welfare role (Adnan, 2005). According to the Law of Islamic banking of
Indonesia No. 21 of 2008 social-religious functions of Islamic bank which is as a
unique characteristic of Islamic bank must be as strong attraction for the community
financial services to the customers (Article 4 paragraph (2). Despite having the
14
world's largest Muslim population and being a dynamic emerging economy,
Indonesia plays only a very minor role in the global Islamic banking industry. With
nearly 85 percent of the 250 million people living in Indonesia, the market share of
sharia banking is remarkably low. As an illustration, with a figure of USD $24
billion, Indonesia’s Islamic banks only held 5 percent of the country’s total banking
assets in 2015 year.
Chart: 1.1:
Islamic Banking market share growth in Indonesia
Source: Financial Services Authority (FSA)
Progressively, from 2010 to 2014 year, Indonesia’s Islamic banking assets grew
from IDR 100 trillion to IDR 279 trillion or at a compound annual growth rate
(CAGR) of 29.2 percent. In this context, Indonesia’s Financial Services Authority
(FSA/OJK) developed and launched a five-year roadmap earlier this year, which aims
to triple the market share of Islamic banks to 15 percent by 2023.
Table: 1.2:
Islamic Banks Assets in Indonesia (in trillion IDR)
Islamic Banking System Indonesia 2010 2011 2012 2013 2014
Islamic Commercial Banks & Islamic Business Units 975 145.5 195.0 242.3 272.3
Islamic Rural Banks 2.7 3.5 4.7 5.8 6.6
Total Assets 100.3 149.0 199.7 248.1 278.9
Source: Financial Services Authority (FSA)
2.5 %
2.75 %
3.9 %
4.9 %
5 %
0
1
2
3
4
5
6
2011 2012 2013 2014 2015
15
Similar to its conventional counterpart, Islamic banks also depend on
depositors’ money as a major source of funds. In fact, since interest is forbidden in
Islam, the flexibility of Islamic bank in collecting inflow money for expenses and
financing is limited. For that reason, deposits are even more important in Islamic
bank compared to conventional bank. Consequently, significant fluctuation in total
deposits is a big concern to Islamic banks and thus need to be carefully managed. One
of the way is by being able to identify factors affecting fluctuation of Islamic banking
deposits. Deposit money banks which are also known as commercial banks are
financial institutions that provide services, such as accepting deposits, giving business
loans and auto loans, mortgage lending, and basic investment products like savings
accounts and certificates of activities deposit. According to mainstream theory, they
act as financial intermediaries to channel savers’ money to firms and individuals who
seek funding for their acts. Their importance as a catalyst to economic
growth/development is widely recognized by both monetary and development
economists.
In banking, the verbs "deposit" and "withdrawal" mean a customer paying
money into, and taking money out of, an account. From a legal and financial
accounting standpoint, the noun "deposit" is used by the banking industry in financial
statements to describe the liability owed by the bank to its depositor, and not the
funds that the bank holds as a result of the deposit, which are shown as assets of the
bank. Typically, an account provider will not hold the entire sum in reserve, but will
loan most of the money out to other clients, in a process known as fractional-reserve
banking. This allows providers to earn interest on the asset and hence to pay out
interest on deposits. By transferring the ownership of deposits from one party to
another, banks can avoid using physical cash as a method of payment. Commercial
bank deposits account for most of the money supply in use today.
In performing these roles, deposit money banks must realized that they have the
potentials, scopes and prospects of mobilizing financial resources and allocating them
to productive investments and, in return, promote sustainable performance and sores
16
that businesses are flourishing and alive. They not only store our saved cash and lend
us money when we need it, but act as the system of arteries that transport money
round the economy, that is why they are often known as financial intermediaries.
Hence their key function is to transfer money, en masse, from those who want to lend
to those who want to borrow. Optimization of projects on comprehensive education
of Islamic economics and finance and the information distribution about the fatwa on
impermissibility of bank interest by the National Ulama Council (MUI). This is due
to many Muslim depositors in Indonesia, both individual and corporate depositors,
are still driven by bank interest in their deposit behavior. Deposit money banks are
the most important savings mobilizing and financial resource allocation institutions.
Consequently, their roles make them an important phenomenon and strong pillar in
economic growth and development.
This is to say that deposit money banks are inseparably linked to economic
growth of any nation. Figuratively, they are like the body and soul in the overall
functions of the human person. Proper functioning of this banks leads to economic
growth of a nation. They play an important role in economic growth of a nation. They
are patterns of resources that aim to meet the needs of medium and small scale
enterprises.Therefore, in this case researcher focuses in performing Depositor Fund
based on the Mudharabah transactions in the operations of Islamic Commercial
Banking sector in Indonesia during the last five (2010-2014) years. Mostly, Islamic
scholars have argues that, it is importance the understanding of origins Islamic
banking operation in Muslim countries to evolve it’s divergences to the conventional
banks (Kathrine, 1998). Accordingly, the analysis of challenges Islamic banks should
be addressed appropriately to Mudharabah a trustee financing which is a product that
provides a high benefits for the growth of Islamic economy system, and to the
Moslem society in general terms of reducing inflation, stabilizing the economy,
catalyzing real sector development, reducing unemployment, promoting justice and
equality, as well as improving the social-welfare generally (Choudhury, 2005).
17
B. Statement of the Problem
Despite of increasing Depositor Fund based on the profit and loss mode of
financing in the operation of Islamic banking sector in Indonesia, the results of
previous empirical researchers showed that Islamic banks face to many challenges in
performance Depositor Fund which is identified such as; short terms saving and
investment deposits, similar transactions conventional banking deposits money
costumers, lack of costumers in understanding quality product and services Islamic
bank, low of demand deposit costumers, conflict in distribution profit between
participants and also unauthorized Islamic deposit insurance are the most serious
problem that still unresolved. Essentially, the lack of profit and loss sharing (PLS) in
increasing productivity Depositor Fund is a global challenge affecting Islamic banks
worldwide, and accordingly the causes of these problems are human resource
management challenges, agency problem in capital trust corporation in partnership,
high risk of equity based transactions, and risk of moral hazard effected to growth
slowly Islamic banking market share in the modernization of financial and money
markets as a real sector.
C. Research Objective
The objectives of study have two main objectives:
1. To analyze the performance of Depositor Fund in the operation of Islamic
banking system as an alternative banking sector in financial market based on the
profit and loss modes of financing in the case of Indonesia.
2. To evaluate empirically assessment the capability of Islamic banks
performance based on the financial ratio factors that consist of capital asset,
management quality, operations income and expensive, nonperforming finance, and
liabilities under principles of sharia compliant requirements.
D. Research Question
Based on the background of study, statement of the problem and research
objectives research questions following as:
18
1. What kind of product Islamic banks provide in performance of Depositor
Fund?
2. What factors significantly influence to the performance of Depositor Fund in
operation Islamic banks?
3. What is the result of positive or negative performance of Depositor Fund in
increasing productivity Islamic banks based on the financial ratio factors?
E. Significance of the Study
Deposits from savers are an important source of financial strength for the
Islamic banks. They use it to increase their capacity for financing operations and
thereby increase profit for the shareholders. The existing body of knowledge
demonstrate that research on Islamic banking deposits is still scarce. During a review
of the existing literature concerning Islamic banking operations it was found that only
a handful of sources discuss the real issues related to Islamic banking deposits and
suggests practical mechanisms to overcome the problems. Moreover, the Islamic
bankers also support the argument that the behaviour of Islamic banking depositors is
similar that of conventional banking depositors, as can be seen in their presentations
at some of the professional seminars and conferences organised by the industry-
related institutions. Based on the trend of the existing literature, this research
concludes that the area of deposits in Islamic banking is considered as a settled issue
by the Islamic bankers, and also by most researchers who have an interest in the
Islamic banking industry, as the Islamic banks continue carry on their normal
business without any attempt to solve the real problem embedded within it. In
addition, the previous studies on depositors’ behavior only highlight the issues
without offering any feasible solutions. Therefore this study is considered as distinct
and departs from previous studies with the objective of filling the gaps in the existing
body of knowledge.
F. Limitation of the Study
It is important to note the methodological limitations of the study involved in
this thesis because of the limitations of the study are those characteristics of design or
19
methodology that impacted or influenced the interpretation findings of research
result. There are the constraints on generalizability, applications to practice, and
utility of findings that are the result of the ways in which my initially chose to design
the study and the method used to establish internal and external validity. As
previously discussed, an important limitation in this research program is the study of
Islamic banking performance analysis researches. Otherwise the lack of available
data, lack of prior research studies on the topic, and measure used to collect the data
limitations which are this is faced.
J. Systematic of Writing
Chapter one: Introduction. This chapter elaborates a brief background study
for caused and effects of the result progress operations Islamic banking system in
Indonesia. And also the chapter consist the Problem of Statement, Identification,
Significance, Limitation, Purpose of Research, Research Questions and the
Importance of Research.
Chapter two: Literature Review. This chapter explains literature review
relevant for the Islamic Banking System in Indonesia as an alternative banking sector
in competition with conventional banking system in its operation. The chapter
considered the CAMLES method assessment in Islamic Banking, and also includes
the Previous Research, Theoretical Framework, and Hypothesis of Research.
Chapter three: Research Methodology. This chapter discusses the
methodology of research consists the Scope of Research, Sampling Method, Data
Collection, Data Analysis Techniques, and the Theoretical of Research Framework.
Chapter four: Finding and Analysis. This chapter is analyzing the finding
and result of research consists of Result of Classical Assumption Tests, Multiple
Regression Analysis, Hypothesis Test, and Operational Research Variable Equations.
Chapter five: Conclusion. This chapter presents the summary of research
based on the theoretical and practical aspect and approaches, Implication of the
research and Recommendation for Future Research which are considered three
suggestions.
20
CHAPTER II
LITERATURE REVIEW
A. Islamic Banking System in Indonesia
The same as most of the Moslem countries, Indonesia has progressive Islamic
banking industry which relies on the performance of the real sector (Rifki, 2011).
Historical progress of Islamic banking in Indonesia according to Raise, S. it can see at
(Table 2.1)., formally began with the Workshop MUI on banking in 1990, which was
subsequently followed by the issuance of Banking Act No.7/1992 about banking
which accommodate banks activities with profit-sharing principle (Raise, 2002).
Table: 2. 1:
The Historical Progress of Islamic Banking in Indonesia
1990 1992 1998 1999 2000 2001 2002-2009MUI
WorkshopFoundingthe FirstIslamicBanking
Allowed DualBankingSystem
Monetary Policy basedon Islamic Sharia
Principles
Issued TheLaw of
Operationand
Institution
FoundingBPS inCentralBank
Progress andLaunchIslamicBanking
TheParticipants
agree tofound
IslamicBanking
Immediately
1.BankMuamalatIndonesiafound as a
firstIslamicBank
2.IssuedBanking
Act
1.Banking ActNo.10/1998:Central Bank
recognizeIslamic and
ConventionalBanking
2.ConventionalBank allowed
open UUS
Government LawNo.10 of 1999:
1. BI have responsibleon development andsupervisory IslamicBank2. BI determinemonetary policy inIslamic Principles
BI has research teamand Islamic banking
arrangement
1. BI createand
determine thelaw ofIslamicbanking
institution2.DevelopPUAS &
SWBI
The Era ofprogressIslamicBanking inIndonesia
Many varietyand Innovation
of IslamicBankingProducts
Source: Financial Services Authority (FSA/OJK).
In 2008 the Government issued Islamic Banking Law No.21/2008, that
expected to provide a more solid legal basis and greater opportunities in the
development of Islamic Banking in Indonesia so that equal and parallel to the
conventional banks (Hasbi and Haruman, 2011). In Indonesia, the development of
Islamic banking is based on two considerations. Firstly, there is a large niche market
in Indonesia, which refuses to be serviced and catered by conventional banks, and
secondly, the Islamic banking is an alternative system, which could be implemented
as one of the banking-restructuring programs initiated by the Indonesian government
21
(Mulya and Nasirwan, 2011). The development of Islamic banks in Indonesia has
showed significant progress, but their role in the economy is still small. It is
envisioned that the industry could achieve a significant contribution and play a
greater role in national economy. To support these efforts, the central bank has
devised a long-term plan for the next decade, based upon three phases of
implementation (Table 2. 2).
Table: 2. 2:
Progress of Changing Islamic Banking Model in Indonesia
No ASPECT CURRENT IMAGE FUTURE IMAGE1 POSITIONIN
GBank for Muslim society/people who aregoing for pilgrimage
For all communities looking for mutual benefitsbetween bank & customer
2 ATTRIBUTE Focusing more on Islamic symbol Focusing more on substantial/universal values(benefits for all)
3 PRODUCTProfit and Loss Sharing (PLS) savingsand deposits Loan without interest, butsimilar with conventional bank
Product with variety of banking financial schemes
4 OFFERINGMETHOD
Many Arabic terms that are actuallyincomprehensible to customers orpotentialcustomers
The use of other terms that are more understandablein addition to Arabic terms in the agreement legaldocuments
5 SERVICES Limited network Service facilities arefrequently in problem
Wide networkService facilities are reliable
6 BRAND Fair and reassuring Bank More than just a bank (Beyond banking)
Source: Financial Services Authority (FSA/OJK).
According to the researchers of Financial Services Authority Central Bank of
Indonesia the problems faced in developing Islamic banking in Indonesia are both
operational and macroeconomic in nature. The major problems have been associated
with the low level of development of Islamic banks are the concept of modern Islamic
banking is relatively new and the majority of people still lack a clear concept of the
Islamic banking system and its products, inadequate Islamic banking infrastructure.
For example, the lack of special regulations for Islamic banking activities, and lack of
human resource expertise in Islamic banking (Khoutem and Hichem, 2014).
Practically, the development of the Indonesian Islamic banking industry is conducted
under the dual banking system (conventional and Islamic banking systems) as well
you can see (Table 2. 3.), in the micro and macro framework, namely the Architecture
of the Indonesian banking (AIB) and the Architecture of the Indonesian Financial
System (AIFS) (Rifki, 2009). Islamic finance is a form of banking or banking activity
22
that is consistent with the principles of sharia (Islamic law). For example, the
prohibition of interest (riba) payments and excessive uncertainty (gharar) or gambling
(maysir).
Table: 2.3:
Differences between Conventional and Islamic Banking
No Conventional Banking Islamic Banking
1
Money is a commodity besides medium of
exchange and store of value. Thus, it can be sold at
a price higher than its face value and it can also be
rented out
Money is not a commodity though it is used as a medium of
exchange and store of value. Thus, it cannot be sold at a price
higher than its face value or rented out
2
Time value is the basis for charging interest on
capital
Profit on trade of goods or charging on providing service is
the basis for earning profit
3
Interest is charged even in case the organization
suffers losses by using banks' funds. Thus, it is not
based on profit or loss sharing
Islamic banks operate on the basis of profit/loss sharing. In
case the businessman has suffered losses, the bank will share
these losses based on the mode of finance used (Mudharabah,
Musharakah)
4
While disbursing cash finance, running finance or
working capital finance, no agreement for exchange
of goods & services is made
The execution of agreements for the exchange of goods &
services is a must, while disbursing funds
under Murabaha, Salam & Istisna contracts
5
Conventional banks use money as a commodity
which leads to inflation
Islamic banking tends to create a link with the real sectors of
the economic system by using trade-related activities. Since
the money is linked with the real assets it therefore contributes
directly to economic development
Source: Indonesia Investment News Company (IINC)
According to Banking Act No.21, 2008, the Indonesian Banking Industry is
classified according to three levels. Namely, Sharia (Islamic) Commercial Bank
(ICB) is a Sharia (Islamic) Bank providing services in the transaction of payments,
Sharia (Islamic) Rural Bank (IRB) is a Sharia (Islamic) Bank which do not provide
services in the transaction of payment, and Sharia (Islamic) Business Unit (IBU) is a
working unit of the Conventional Commercial Bank (CCB) head office functioning
as head office of offices or units conducting business activities based on the Sharia
Principle (Act of the Republic of Indonesia No. 21 of 2008: (Article 1). Thus the case
study, accordingly belongs to analyses Mudharabah contract on operation Islamic
Banks in Indonesia which includes Islamic Commercial Bank (ICB) is a Sharia Bank
23
providing services in the transaction of payments (Report BMI: 2014). For example,
the strategy BMI such as an Islamic Commercial Bank, provides Mudharabah
contract on its system operation activities of Islamic banks can be carried out through
investment deposits (mudharabah or PLS investment accounts), investment savings
(mudharabah), and how the bank earns a profit, this profit is shared with its funding
partners (see Figure 2.1).
Figure: 2.1:
Operations of Commercial Islamic Bank in Indonesia
Funding FinancingBONUS Profit
Margin
PLS Return PLS Return
Source: Centre of Education and Central Banking Studies Bank of Indonesia
And also according to the one Indonesian Islamic financial scholar Dr. Ismal
Rifki in Indonesia, there is a dynamic model of Islamic banking that mostly relates to
liquidity management called Islamic Banking Dynamic Model of Indonesia
(ISLAMI) to manage liquidity in Islamic banking industry. He has argument that
specifically, ISLAMI captures four essential sectors to successfully manage
liquidity represented by four dynamic models. The first sector is depositors
represented by liability model to analyze the liquidity behavior of depositors. The
second sector is Islamic banks and entrepreneurs represented by asset model to
inform how Islamic banks manage depositor’s funds. The third sector is bank’s
liquidity reserves represented by bank’s liquidity reserves model to analyze the
Entrepreneur
DD & Savings
Depositor
Time Deposit/Investment
PoolingFund
TradeFinancing
InvestmentFinancing
FeeBased
24
management of liquidity reserves. And the finally is banking regulator (Central Bank)
represented by Islamic monetary operation model to assess the central bank’s policies
to manage liquidity (Rifki, 2012). And in the other hand, he argues that in Indonesia
Islamic banks strategically adopt internal and external approaches to manage
liquidity. Internally, Islamic banks design an organizational structure to manage
liquidity and balance the asset and liability sides accordingly. Meanwhile, externally,
they maintain good relations with stockholders that it can see in Table 2.4 how it does
work and the characteristic of Islamic banking operation is based on partnership and
mutual benefits principle provides an alternative banking system with mutual benefits
both for the public and the bank. (Ibid, 2009).
Figure: 2.2:
Liquidity risk management in Islamic Commercial Bank (ICB)
Source: Ismal. Rifki Model Theory in the Indonesian Islamic Banking Industry
PresidentDirector
ShareholdersMeeting
Commissioners
Other Divisions
OtherDirectorates
RiskManagement
Division
Asset andLiability
ManagementCommittee/
ALCO
Other Divisions
Directorate ofCompliance and
RiskManagement
Risk MonitoringCommittee
Sharia’sSupervisory
Board
InternalSupervisoryCommittee
25
Therefore, to improve and foster the development of the industry, Central Bank
of Indonesia has set up long-term Islamic banking development policies, namely a
blueprint of the Indonesian Islamic banking industry that encloses sixth initiative to
be implemented in the ten years (Bank of Indonesia, 2006), of the blueprint program
(2005-2015). And also the central bank strategic and tactically decided that the
program concentrates on achieving quantitative target growth through short-term
policies to boost the market share of the industry which as well can be seen in Table
2.4., what it considered (Rifki, 2009).
Table: 2.4:
Indonesian Islamic Banking Industry Blueprint Program (2005-2015).
No Strategies Steps
1 Increasing the Sharia compliance1. Pushes the growth of Islamic banking industry from bothdemand and supply sides;
2. Strengthens the capital of Islamic banks, management andhuman resources;
3. Optimize the roles of government (fiscal authority) andBank Indonesia (monetary authority) as the growth initiators;
4. Involves all stakeholders to actively in charge in theprogram.
2 Increasing the quality of prudential banking
operations.
3 Increasing the operational efficiency and
competitiveness
4 Increasing the stability of banking system
5 Increasing the expertise and quality of human
resource
6 Optimizing the social roles of Islamic banks in
developing the small and medium enterprise (SME)
Source: Annual Report Indonesian Islamic Banking 2006
In Indonesia, the development of Islamic banking is based on two
considerations. Firstly, there is a large niche market in Indonesia, which refuses to be
serviced and catered by conventional banks, because of Islamic principles. The
introduction of an Islamic banking system will assist the banking system as a whole
to effectively mobilize funds in this market. Secondly, the Islamic banking is an
alternative system, which could be implemented as one of the banking-restructuring
programs initiated by the Indonesian government (Mulya and Nasirwan, 2000).
Based on the Act Islamic Banking Law of Indonesia, the aim of establishing Islamic
banks belongs to the objective of the Indonesian national development to achieve a
26
just and welfare society based on economic democracy, an economics system based
on the value of justice, mutuality, equality, and benefit according to the principles of
sharia is to be developed, and the objective of Sharia (Islamic) banking is to support
the implementation of national development in the framework of improving justice,
cooperation, and the people’s welfare equitable distribution (2008: Article 3).
Arifin (2015), describes that as a part of the national banking system, Islamic
banking in Indonesia nowadays does not only become an alternative for conventional
banking but also becomes a solution for facing the crisis, and even simultaneously
becomes the solution in facing various banking problems and global economy. The
comparison of the superiority of the Islamic economy with conventional economy can
be analyzed from three main issues as follows: first, the practice of financial
transaction and the position of interest system; secondly, opinion about distributive
equality and the implication of its policy; and thirdly, opinion about the moral basis
in each activity and economic decision (Arifin; 6). Islamic banking in Indonesia,
which is also called sharia banking, has obtained regulations which become the legal
basis for the recognition of the existence of sharia banking institution and its
products. Regulation is important in giving strong position for sharia banking
institution. It is also important in providing legal certainty for people to do transaction
on products and services, and, at the same time, to provide protection for people in
their sharia banking activities. It is also important that regulation is functioned to
develop people’s trust in transferring their funds to be managed and invested
productively by sharia banks. National Islamic Council (DSN 2003) said that Islam is
a deen (Way of Life) practically, which teaches all things good and beneficial to
mankind, regardless of time, place or stages of its development. Islam is a fitrah
religion, which according to human nature. Financial and banking activities can be
viewed as a place for modern society to bring them to two kinds of Sharia of the Al
Quran, namely:
1. Principle of Al Ta'awun, namely mutual assistance and cooperation among
members of society for good, as stated in the Al Qur'an: “And please to help each
27
other among of you in doing goodness and piety, and not helping in sin and offense.”
(QS 5:2)
2. The principle of avoiding Al Iktinaz, which is holding the money (fund) and
let it idle and does not rotate in transactions that the benefit for publics, as stated in
the Al Qur'an: “The peoples who trust to Allah, do not take each other neighbor's
property by way of vanity, except by way of commerce that applies that applies with
deals among of you” (QS. An Nisaa: 29).
Just like other financial intermediary institutions, Antonio (2001) and
(Muhammad; 2005) explain the basic mechanism of Islamic bank is to receive funds
from customers and channel money to other customers in need. He said that the
difference in the provision of benefits received both of customers and banks, which is
conducted with appropriate financing schemes in Islamic law that free of riba-free. In
principle there are five concepts in its operations (Swandani 2010), as follows:
1. Contract (Akad); all transactions must use wa’ad ala wa’ad (promise over
promise) where there are two clauses promise. The first clause of what promises
associated with itself and the second clause dealing with the consequences if the
promise is ignored.
2. Profit-Sharing; used the concept of Islamic bank is profit sharing. Customer
funds channelled by the bank in financing the scheme. The revenue of the financing
will be divided according to contract between customer and bank
3. Financing Targets; bank was restricted of Islamic principles in distribute the
funding. Financing should not be distributed on business sectors that opposed or
forbidden the Islamic law, such as gambling business, beverages and foods that are
forbidden.
4. Customers are Partners; for Islamic banking customers are business partners,
not a customer who require funds and who save their funds in the banks, so that
business can be run based on mutual need.
5. Profit Oriented and Prosperity; for business continuity, operational Islamic
bank needs funds to hire and conduct its business, for that the bank needs funds
28
drawn from the operations revenue. While the rest of the other businesses provided to
customers in the form of profit-sharing for their welfare.
B. Performance of Deposit Fund in Islamic Bank
Like interest-based conventional banks, the main function of Islamic banks is to
mobilize savings and provide financial support to the entrepreneurs. Yet there are
differences in techniques applied in the process of savings mobilization and financing
investment by the two banking systems. Depositors receive interest in a
predetermined rate for their deposits made with an interest-based bank. Similarly, the
investors are to pay a predetermined rate of interest to the bank. The technique, thus,
involves each and every partner in the transaction process (i.e. the depositor, the
investor and the bank) with the element of interest. Islamic bank, on the other hand,
neither pays nor receives interest from any of its transactions thereby saving
everybody from the curse of interest. Islam disapproves hoarding of savings and
encourages its productive investment (Chapra, 1985). It puts emphasis on savings and
the productive use of savings. Thus, the bank assembles the small deposits and
savings of individuals into a common pool and makes these deposits available for
large investment opportunities, ensuring the productive use of society's savings.
Islamic banking is a response to such exigencies.
It mobilizes savings of the common people in line with Islamic Shariah and
techniques employed by Islamic banks for saving mobilization are following that
According to the scholars Hasbi and Tanuman (2011), analyzed that in Indonesia
Islamic banks in their business get started with capital from the founders, in addition
get funds from a Depositor Funds, the profit-sharing will be given to the founders and
customers over the invested funds to banks, from the profit-sharing of each set aside
sharing into zakat. Funds are distributed to customers require, bank share their
operations in two terms of distribution of these funds (1) the financing in Ba'i
bithaman Ajil, Murabahah, and Ijarah (2) Equity Financing in Musharakah and
Mudharabah (Hasbi and Tanuman: 2011). Practically, Islamic bank in its operation
provides Depositor Funds products based on the Mudharabah and Wadiah
29
transactions for saving and investing money of depositors such as; Mudharabah Time
Deposit, Mudharabah Saving Deposit, and Wadiah Deposit which are practiced in the
Indonesian Islamic Banking Industry (Annual Report: 2014). Mudharabah is
cooperation between an investor who gives fund or capital to a party who will
manage the fund or capital for trading. The profit will be shared between two parties,
investor and the care taker. The rationale of this Sharia parameter is to provide
reference on the nature and features of the Mudharabah contract to Islamic financial
services industry, which is to promote the harmonization of Islamic finance market
practices (Arshad, 2005). And the Wadhi’ah deposits in the case of Islamic banks is
refers to the action of leaving an item with a person who is not the owner for the
purpose of safe-keeping for a temporary period of time. Therefore, in this sections
chapter there are discussions of Depositor Fund products of Islamic Banks based on
the Mudharabah Time Deposit, Mudharabah Saving Deposit and Wadiah Deposit that
how these transactions can be managed in the operations of Islamic Banking System.
The Bank takes permission from the depositor to use the deposit according to Islamic
Shariah but guarantees that the amount deposited would be available to depositors
whenever depositor demands.
1. Mudharabah Deposit Fund
Deposits from savers are an important source of financial strength for the
Islamic banks. They use it to increase their capacity for financing operations and
thereby increase profit for the shareholders. Islamic Banks raise funds generally
based on Amanah or Wadhiah arrangements, on Mudharabah and on Wakalah for
Fund Management. There are two main bases of mobilization of deposits by Islamic
banks that are Current account deposits and Savings deposits. Banks may also get
permanent or redeemable equity capital through investment deposits that practically
take the form of a running partnership between the depositors. Depositors in Islamic
finance can be compared with investors/shareholders in companies, who earn
dividends when the investment makes a profit or lose part of their capital if the
investment posts a loss. The contractual agreement between depositors and Islamic
30
banks does not pre-determine any rates of return, it only sets the ratio according to
which profits and losses are distributed between the parties to the deposit contract.
Practically, Islamic Bank based on the Agreement Mudharabah establishes Depositor
Fund based on the requirements that following as:
The Parties hereby agree that:
(i) the Bank shall establish the regulations and procedures for the purpose
of the management and administration of the Mudharabah Fund, for the
interest of the Parties herein;
(ii) (ii) The Mudharabah Fund is divided into four (4) independent
Investment Funds and each Investment Fund is independent from other
Investment Funds in its capital and investments. These funds will be
known as Investment Fund 1, 2, 3 and 4 and the investment of the
respective Investment Fund shall be on the 1st for Investment Fund 1,
the 8th for Investment Fund 2, the 15th for Investment Fund 3 and the
23rd for Investment Fund 4 of every month;
(iii) (iii) The Bank shall have the right to enter into any arrangement with
any other parties for the purpose of providing the benefit or protecting
the interest of the Parties in the Mudharabah Arrangement.
(b) The evaluation and computation of the rate of return for each Investment
Fund of the Mudharabah Fund shall be held on a monthly basis on the Evaluation
Date and upon such evaluation:
(i) the accrued profit, if any, will be distributed between the Bank and the
Customer based on the agreed profit sharing ratio as set out in the
Placement Deposit Form, and the Customer's entitlement will be credited
into the Account;
(ii) (ii) The current Mudharabah Arrangement will expire and a new
Mudharabah Arrangement will commence subject to clause 2.5 hereof.
31
(c) If the Customer intends to participate in more than one Mudharabah
Arrangement, then he must state so in the Placement Deposit Form and determine the
new Investment Amount to be invested. For the avoidance of doubt the new
Investment Amount will be the initial Investment Amount or initial Investment
Amount plus the accrued profit or the available amount in the Account.
(d) The Bank and the Customer agree that their respective contributions to the
respective Investment Fund of the Mudharabah Fund shall be used for the purpose of
investing in Shariah compliant ventures based on structures approved by the Bank's
Shariah Committee, with a view to profit
(e) Each Investment Fund's capital and investments are independent from each
other and of the Bank's capital and all transactions in respect of each Investment Fund
of the Mudharabah Fund shall be recorded separately to ensure their segregation from
the Bank's transactions.
(f) The majority of investments (more than 50%) of each respective Investment
Fund of the Mudharabah Fund must be based on tangible and/or leased assets.
(g) Subscription to and withdrawal from each respective Investment Fund of the
Mudharabah Fund is only allowed on the Investment Date. The Customer has no right
to withdraw the Investment Amount unless such Investment Amount has been
invested for a full complete month.
(h) For customers participating in more than one Mudharabah Arrangement, the
Bank may at its sole discretion give up part of its profit sharing to the customers.
(i) All actual operational costs incurred such as marketing, remittance, legal
consultancy and services costs for each Investment Fund is borne by the respective
Investment Fund with a maximum limit of five per centum (5%) of the Investment
Fund's capital and the costs of managing each of the Investment Fund (such as
employees' salaries) will be borne by the Mudharib.
Return of Profit
(a) The Bank and the Customer agree that the return of profit (if any) shall be
based on the published evaluation rate on the Evaluation Date.
32
(b) The net profit of the respective Investment Fund shall be the full Investment
Fund value less the capital and the incurred operational costs.
(c) The net profit shall be distributed based on the profit sharing ratio as set out
in the Placement Deposit Form. The Bank and the Customer further agree that the net
profit (if any), shall be credited into the Account.
Renewal of Mudharabah Agreement:
(a) Unless the Customer issues a written notice as set out in Schedule 3 hereof
to the Bank to discontinue the Mudharabah Arrangement, the Bank and the Customer
hereby agree that upon the expiration of the current Mudharabah Arrangement, a new
Mudharabah Arrangement shall be automatically commenced and the period of
participation in the Mudharabah Fund shall be in accordance with the Period of
Investment as set out in the Placement Deposit Form. All other terms and conditions
stipulated in this Agreement shall apply.
(b) The Bank and the Customer hereby agree that upon the renewal of the
Mudharabah Arrangement, the Investment Amount and the profit (if any) will be
reinvested in the respective Investment Fund unless the Customer indicates his desire
to withdraw the said profit. The Investment Amount and the profit shall be treated as
a new Investment Amount of the Customer to the respective Investment Fund.
C. Types of Mudharabah Deposit
Banks receive deposits in a Mudharabah account on the basis of a Mudharabah
contract. Generally the Mudaraba account is not for any specific duration. Funds
deposited in the Mudharabah account may only be invested in Shariah approved
ventures through the application of a legitimate Islamic method of financing. This is
why these deposit accounts are given the title Mudharabah deposits. Specifically, in
this transaction, the depositor is the sahib al mal and the bank is the Mudharib. As
mentioned above, profit sharing percentages are determined at the inception of the
contract. It is not uncommon for the profits generated by the investment to be
distributed such that the Sahib al Mal would receive 50 to 75 percent of the profit and
the bank would receive the difference. Islamic banks cannot reduce the ratio of the
33
sahib al mal, but it can reduce its own share and increase the share of the sahib al mal,
if it wishes. Here the relationship between the bank and the depositor is shareholder
and not a debtor-creditor relationship as before. Islamic banks receive deposits in
Mudharabah accounts that are invested into business ventures by the bank directly or
through some other third party. Any profit earned from these investments is
distributed among the Mudharabah depositors at a predetermined percentage and the
bank retains the residual amount as its profit. In the event no profits are earned, the
depositors receive nothing for their deposit. In addition, should a loss be incurred, the
Mudharabah depositors are liable to share in the losses in the proportionate share of
their deposits. However, if the loss incurred is due to the fault, negligence or non-
adherence of bank rules on behalf of the bank or bank personnel, liability of loss is
the banks sole responsibility. Thus, unlike the deposits in the interest based system
where the interest rate return is known with certainty, the returns in a Mudharaba
account are uncertain.
The only thing that is known with certainty is that the depositor will share
proportionately in the profits and losses of the lending or investing activities of the
bank. In the end, the depositor can withdraw the balance in the account plus or minus
any profits or losses incurred from the loans. It may further be mentioned for the sake
of clarity that Mudharabah depositors, in spite of being partners in the profits and
losses, are not partners in the total profits and losses as in the case of bank
shareholders. Rather, they are entitled to share in the profits or losses from the bank's
lending activity in the proportion they actually have on deposit in the Mudharabah
account. Some experts have recommended establishing a loss-offsetting fund in order
to ensure that the money deposited by Mudharabah depositors is not reduced or
exhausted by investments or loans that do not perform well (Ibid, p.44). This would
be accomplished by depositing a percent of profits (5% or 10%) from favorable
business transactions into a loss offsetting reserve account. The loss offsetting
reserve account would then be used to reimburse Mudharabah depositors for any
losses due to unfavorable business deals.
34
1. Mudharabah Saving Deposit
Mudharabah saving account is opened in Islamic Banking under the Mudaraba
principal of Islami Shariah. Under the above principal the clients is the Shaheb-Al
Mal and the Bank is Mudarib. Mudaraba Saving’s accounts are mainly meant for
Non-Trading customers who have some potential saving with small savings account.
A guardian on behalf of a minor can open a Mudarabah Savings A/C. In which case a
declaration stating the date of birth of the minor should be obtained from the
guardian. Mudharabah Savings Account is designed specifically to meet the
requirements of customers who authorize the Bank to invest their cash deposits.
Customers can deposit or withdraw money at any time they wish, and they will earn
Halal profits on their savings. Mudharabah is an investment contract where one party
provides the capital for investment and the other party using skill and experience does
the investment. Here the investor/mudharib has no direct participation in the business.
On the other hand the owner of the capital does not participate in the activities of the
business and acts only as the supplier of cash/capital. In case of deposit Mudharabah,
the depositor, acts as the capital supplier of the investment and the Bank acts as the
investor/mudharib. Mudharabah Savings Bank (SB) Account is designed for savers
who want to save a small part of their income to be used in the near future and also
intend to have some income on such savings. They can deposit a small amount and
can withdraw whenever they desire but the total numbers of withdrawals over a
period of time are limited.
Finally, savings play an important role in capital formation, income-generation
and creation of employment opportunities and contribute towards the increase in
wealth of the individual and nation through profitable investment. Savings Account
(Mudharabah) is based on the Shari'ah principle of Unrestricted Muhdarabah. Under
Mudharabah principle the customer will act as a capital provider and the bank will act
as a Mudharib or 'entrepreneur' using its expertise. The bank pools all customer funds
along with its own capital and invests it in Shari'ah compliant modes of investments.
The resulting profit is shared between the bank and customers according to
35
predetermined ratios. Mudharabah is the most dynamic product that can provide
continuous return to the depositors, as long as the funds invested are generating
enough profit. The returns declared by the Islamic banks are based on a profit-sharing
ratio that was agreed earlier by both parties. However, the set-back of using the
Mudharabah contract is that the capital or the principal sums of the deposits are not
protected, which in actual fact contradicts the intended purpose of savings accounts
acting as safe-custody for depositors.
2. Mudharabah Time (Investment) Deposit
The another types of Depositor Fund product in Islamic Bank is Mudharabah
Time Deposit or it is called Mudharabah Investment account. Islamic banks also
receive term deposit from their clients. The time deposit is, of course, altogether
different from that of the interest-based banks. Islamic financial scholar Chapra
(1985), describes that fixed term deposits received by Islamic banks are called "Term
Mudharabah Deposits". Generally an Islamic bank receives these types of deposits for
a minimum period of 3 months to 3 years at the maximum. The bank invests the
money, and shares any profits with the depositor based upon a percentage agreed
upon at the time of contract. In the event a loss in incurred, depositors share the loss
in proportion to the deposit in their account. At the end of the term the contract
terminates and the depositors withdraw their money, plus or minus any gains or
losses. The depositors, if they like, can again deposit their money for a new term
under a new contract. No check book is issued against a Time Mudharabah Deposit,
however, Time Mudharabah Certificate is provided to the depositor. Since the term
Mudharabah deposit has restrictions on the withdrawals, the bank can invest the
money in projects that match the term without concerns of liquidity. In exchange for
this benefit, the bank offers higher rate of profit to a Term Mudharabah Deposit than
that offered on a General Mudharabah Deposit. In fact, the longer the term deposit,
the higher the profit sharing percentage and vice versa. Therefore, the basic
difference between a term Mudharabah account and a general Mudharabah account is
the specified term of the deposit. In other words, there is no specific duration or term
36
for a general Mudharabah account, whereas the term Mudharabah deposit does have
specific stated duration or term (Chapra, 1985).
D. Wadiah Deposit
Wadi’a refers to the action of leaving an item with a person who is not the
owner for the purpose of safe-keeping for a temporary period of time. Under this
mechanism, the deposits are held as amanah or in trust and utilized by the bank at its
own risk. The depositor does not share in the risk or return in any form. Any profit or
loss resulting from the investment of these funds accrues entirely to the bank.
Another feature of such deposits is the absence of any condition with regard to
deposits and withdrawals. The term “wadhiah account” or “trust account” is used for
such deposits. Wadiah corresponds to safekeeping, custody, deposit and trust. In
Islamic finance, wadiah refers to the deposit of funds or assets by a person with an
Islamic bank. In this arrangement, the depositor deposits his funds or assets with the
bank for safekeeping and in most of the agreements the bank charges a fee for the
safe custody of the depositor’s funds. There are two basic types of wadiah:
Wadiah yad amanah refers to property is deposited on the basis of trust
(guarantee safe custody).
Wadiah yad Dhamanah refers to savings with guarantee or safe-keeping.
The term wadiah relates to the old concept of amanah where one person hands
over his or her assets to other person for the purpose of safekeeping. Generally,
Islamic banks charge an accounts maintenance fee for wadiah accounts, which can be
attributed to the administrative costs incurred by the bank in managing the assets or
funds in safe custody. Some features of Wadiah Bank Accounts this is a non-profit
and loss bearing product. Bank gives the guarantee to return the full amount on
demand / maturity at its own risk (depositor will not share the risk). Bank can invest
this deposited fund with the permission of the depositor. Bank may share the profit
with the depositors as per management’s decision. Accounts maintenance fees apply.
Related Verses from the Qur’an “Indeed, Allah commands you to render trust to
whom they are due and when you judge between people, to judge with justice” (Al
37
Quran, Al Nisa, 4:58) Hadith on Safekeeping The Prophet (PBUH) said: “Render
back the trust to the one who entrusted it to you, and do not betray those who betray
you.” Narrated by al-Tirmidhi, 1264; classed as saheeh by al-Albaani in Saheeh al-
Tirmidhi (Hosen, 2012). The public in general place their money in banks for two
main purposes, namely for fulfilling transactional and investment needs. To fulfill the
transactional objective, Islamic banks offer facilities such as Wadiah yad dhamanah
deposit, which provides safekeeping with guarantee services. In using this product,
depositors no longer supply funds to earn a fixed income. Instead, they place deposits
for protection. Wadiah yad dhamanah means safekeeping with guarantee. Wadiah yad
dhamanah depositors allow the Islamic bank to invest the depositors’ money in return
for deposit protection that they got for free. Since the custodian service is given
without a price, the Islamic bank holds no legal obligation to pay depositors a fixed
return and may do so only on voluntary basis. In this manner, the bank holds
prerogative on profit distribution policy in the form of gift (hibah).
E. Characteristic of Depositor Funds in Islamic Bank
Similar to its conventional counterpart, Islamic banks also depend on
depositors’ money as a major source of funds. In fact, since interest is forbidden in
Islam, the flexibility of Islamic bank in collecting inflow money for expenses and
financing is limited. For that reason, deposits are even more important in Islamic
bank compared to conventional bank. Consequently, significant fluctuation in total
deposits is a big concern to Islamic banks and thus need to be carefully managed. One
of the way is by being able to identify factors affecting fluctuation of Islamic banking
deposits (Abduh and Sukmana: 2011).
1. Depositor Behavior
Despite all positive banking indicators above, the Indonesian Islamic banking is
like other financial institutions. It faces various banking risks such as liquidity risk,
exchange rate risk, market risk, reputation risk, deposit withdrawal risk, credits risk.
Amongst all risks, deposit withdrawal risk is the most important one to be
anticipated. Nonetheless, not many studies had been done with respect to this risk in
38
the case of Indonesian Islamic banking industry. Particularly, the study that focuses
on the psychological aspects of depositors towards their deposit withdrawal behavior
is never found in the literature so far (Abduh: 2012). The general study on liquidity
risk management done by Ismal (2009), addressed several potential problems that
might cause deposit withdrawals in Islamic banks. He said that for the case of
Indonesia as well as other countries having dual banking systems (Islamic and
conventional banks), liquidity risk is indeed very imperative risk to be managed by
Islamic banks. At least there are three reasons underlying his argument:
i. The Islamic banks operate side by side with the conventional ones and this
requires Islamic banks to perform well and always generate sustainable profit for
their depositors.
ii. Islamic banking depositors expect the banks to pay competitive return and
provide comprehensive banking services.
iii. During the global financial crisis 2008-2009 especially when the
conventional banks offered attractive (higher) return on deposits, Islamic banks
appeared into a dilemma. It is because such high interest return on deposit caused a
higher expected return on Islamic deposits while the business was in downturn. This
might lead into a displaced commercial risk and at the end is the deposit withdrawal
risk (Islaml: 2009).
Previous researches about depositors’ behavior to withdraw money in Islamic
banks are rarely found particularly the specific research which accommodates
depositors’ attributes to withdraw money from Islamic deposits. But, there are many
researches which utilize macro-economic variables to explain volatility of deposits in
the conventional banks. Meanwhile, literatures related to the Islamic banking
depositors’ withdrawal behavior are for example Ahmed (2003) and Ahmed (2002).
Ahmed (2003), by using some mathematical notations and logic, concluded that asset
preservation in terms of minimizing the risk of loss due to a lower rate of return was
an important factor explaining depositors’ withdrawal behavior. In another paper,
Ahmed (2002) arranged a survey involving 468 respondents and covered three
39
different countries, which are: Bahrain, Bangladesh, and Sudan. The result was
summarized in the following:
Depositors would withdraw funds if there were rumors about the poor
performance of Islamic banks.
In the short run, the lower rate of return would not force depositors to
withdraw funds. But in the long run, it might lead significant number of
depositors to take their funds from Islamic banks.
Depositors would shift their funds to other banks because of the non-Sharia
compliant Islamic banks.
Depositors would shift their funds to other banks if they found out that some
parts of the banks’ incomes came from interest incomes.
2. Deposit Insurance
The Islamic banking industry has recorded an enormous increase in its assets,
which have grown in tandem with its sources of funding, mainly in the forms of
Islamic deposits and investment accounts. As Islamic deposits and investment
accounts continue to grow significantly, a more comprehensive regulatory
infrastructure is necessary to safeguard the resilience of the Islamic banking industry.
The protection of Islamic deposits and investment accounts under a deposit insurance
system has generated much discussion in the Islamic finance fraternity as to whether
or not the products, especially the latter, could, in the event of a bank failure, be
covered under the system from the Islamic law (Shari’ah) viewpoint.
In contrast to Islamic deposits, whose amounts are principal guaranteed,
investment accounts are non-principal guaranteed products. Investment accounts also
commonly form the bulk of customer funds held at institutions offering Islamic
financial services (IIFS: 2014). Generally, an Islamic deposit is defined as any unpaid
balance of money received from or held on behalf of a person by an IIFS in the usual
course of deposit-taking business, for which the IIFS is obliged to repay on a fixed
day or on demand by that person or within a specified period of time following
40
demand by that person, including any profit which is payable to that person. Deposit
insurance undoubtedly protects depositors and maintains their confidence in the
banking system. In theory, the deposit insurance system provides financial stability in
the banking system by preventing bank runs (Abdullah: 2012). In Indonesia for
deposit in shariah banks there are checking accounts whether its contract based on Al
Wadiah or Al Mudharabah, saving accounts (Al Wadiah or Al Mudharabah), and
time deposit accounts (Al Mudharabah) and this insurance based on the fatwa of
National Shariah Board concerning deposits with Al Mudharabah contract, bank as
mudharib should pay overhead/operasional cost out of their ratio (Firdaus; 2009).
At the same time, the continuously growing size of the Islamic banking system
that operates in parallel to the conventional banking system raised the interest of
regulators and policymakers regarding the adequacy of its financial safety net. Except
Turkish and Malaysian Islamic banks whose depositors benefit from having
guarantees on their savings/deposits, most of the Islamic banks’ depositors in other
countries have no such explicit guarantees. In case of a serious liquidity shock,
insured depositors (mainly from conventional banks) will receive their money back
from the deposit insurance fund, at least the guaranteed portion of it, whereas Islamic
banks’ depositors (other than in Turkey and Malaysia) will not necessarily benefit
from such a reimbursement mechanism since their banks are not members of an
explicit deposit insurance system (Hassan: 2013).
The concept of deposit insurance in Islamic finance is quite new. So far, there
are three models of Islamic deposit insurance adopted by Islamic countries. The first
one keeps Islamic deposits under a conventional deposit insurance scheme. The
second one develops an Islamic deposit-insurance system that runs with the
conventional system. The third one develops a complete Islamic deposit insurance
system and the implementation of Islamic deposit insurance system depends on how
governments of these countries allow deposit insurance from an Islamic principles
perspective.
41
F. Mudharabah Practice in Islamic Bank
Mudharabah is a contract between two parties to conduct a particular joint
venture. Muqaradah and Qirad are also synonymous with Mudharabah. Profit from
the outcome of the venture is shared between the capital provider and manager
according to mutually agreed profit sharing ratio whilst losses are borne solely by the
capital provider, provided such loss is not due to the manager’s negligence or
violation of specified conditions.It involves the Rabbul mal as investor who provides
the capital, and the Mudharib as entrepreneur who manages the joint venture. Any
profits generated from the joint venture will be shared between the investor and the
entrepreneur based on the agreed terms and ratio, whereas any losses will be solely
borne by the investor (Hussin, 2010: 50).
Figure: 2.6:
Mudharabah financing capital trust partnership model
60%
40%
100%
A contract where the owner of capital entrusts his funds to an entrepreneur who
contribute skills in a business and the profit generated is to be shared between them.
In case of loss, the loss is borne by capital provider only (Usmani, 1998:34). The
contract of Mudharabah can be terminated at any time by either of the two parties.
The only condition is to give a notice to the other party. If all the assets of the
Mudharabah are in cash form at the time of termination, and some profit has been
earned on the principal amount, it shall be distributed between the parties according
1. Agree on Profit Sharing Ratio: e.g.40:60 (40% to Bank, 60% to Customer
based on profit)
BANK
2. Project is managedby Customer
3. Profit is shared
In case of financialloss
CUSTOMER
42
to the agreed ratio (Adnan, 2005). A full understanding of product offered, like
Mudharabah, is one important internal factor and the readiness to deal with risk is
another. The legitimacy of the Mudharabah contract is founded on the basis of the
Quranic verses, the Sunnah of the Prophet Muhammad (SAW), and the consensus of
Muslim Jurists (Ijma’). The following Quranic verses imply the general permissibility
of commercial ventures including Mudharabah. 1. “Others travelling through the
land, seeking of Allah’s bounty (Al-Muzammil: 20). 2. “And when the Prayer is
finished, then may ye disperse through the land, and seek of the Bounty of Allah; and
celebrate the Praises of Allah often (and without stint): that ye may prosper.” (Al-
Jumu`ah: 10). These verses do not directly address the permissibility of Mudharabah
but are interpreted to imply Mudharabah by referring to those who travel for the
purpose of trading and seeking permissible income including those who undertake
labour with someone else’s capital in exchange for part of the profit.
From the Sunnah of Prophet Muhammad SAW in applying Mudharabah
contract also was narrated by Ibnu Abbas r.a. reported that: “When our leader Abbas
Ibn Abd al-Mutallib gives his property to someone for Mudharabah, he stipulated
conditions for his partner not to bring the capital throughout the sea; and not to bring
with him the capital crossing a valley; and not to buy livestock with the capital; and if
his partner violates the conditions, he should guarantee the loss occurred. These
conditions have been brought to the attention of Prophet Muhammad (SAW) and he
approved them.” (Mu’jam Al-Awsat; Al-Tabrani). The Narration of Suhayb reported
that the Prophet Muhammad (SAW) said: “Three matters that have the blessing (of
Allah): A deferred sale, Muqaradah (Mudarabah), mixing the wheat with barley for
domestic use and not for sale.” (Sunan Ibn Majah). Mudharabah venture has being
practised before the Prophet’s (SAW) first revelation and he did not raise or show any
objections against the practice. This is considered a tacit approval by the Prophet
Muhammad (SAW). The Muslim jurists have reached Ijma’ among them upon
conducting Ijtihad on the permissibility of the Mudharabah contract. It has also been
established that the companions of the Prophet Muhammad (SAW) such as Umar,
43
Uthman, Ali, Abdullah Ibn Mas`ud, Abdullah Ibn Umar, Ubaydullah Ibn Umar and
A`ishah have placed the property of orphans under the Mudharabah contract with no
objections from other companions. Mudharabah is a contract based on fiduciary
relationship (aqd al-amanah). Under this principle, mudharib manages the
mudharabah asset in trust and is not liable for the impairment of the asset except for
impairment which is a result of the mudarib’s misconduct (ta`addi), negligence
(taqsir) or breach of specified terms (mukhalafah al-shurut). For example, most
Islamic Bank Managers are accustomed to a risk-averse than a risk-taker approach.
This implies that Mudharabah has been perceived as a risky product. This risk is in
fact related to agency issues associated with the external factors, where the honesty,
transparency and trustworthiness of the consumer cannot be guaranteed (Ibid, p.111).
It is important therefore to understand that this functions effectively when both
parties are ready and willing to be transparent.Table: 2.5:
Mudharabah Contract Elements in Practice Islamic Bank
1 Essential Elements 4 ProjectOwner of CapitalEntrepreneurCapitalProject / BusinessProfit SharingContract (Offer & Acceptance)
Must be Halal in nature according to Shari’ahManaged by entrepreneur
2 Necessary Conditions 5 ProfitCapable of accepting responsibilityNot restricted from dealing in business transactionNot forced to enter into contract
Profit shared according to agreement in fraction, ratio orpercentage; not in absolute amount.Loss borne by the owner of capital only
3 Capital 6 Contract (Offer & Acceptance)Money onlyNot a debtSpecific amountPaid to entrepreneurFrom owner of capital only
In definite and decisive languageAcceptance must agree with offerOffer and acceptance must be made in the one and thesame meeting
Capital is an asset provided by rabbul mal to the mudharib for the purpose of
Mudharabah. Mudharabah capital shall be provided by rabbul mal and managed by
the mudarib. Mudarabah capital shall be identifiable, readily available and accessible
for mudharib to commence business activities. Mudharabah capital may be in the
form of cash or in-kind which may include intangible assets. The Investor is principal
44
and Mudarib is agent. The Investor is depositor and Mudarib is depositee. The
investor provides the Capital and Mudharib manages the business. The Investor can
cancel the agreement even after delivery of capital if it is not sued in purchasing the
goods , and after purchasing of goods by the Capital the Investor has not right to
exercise such choice. Profit is called in Arabic Ribh. It is sale price minus purchase
(cost) price. Thus a thing cost to the vendor for $10 he sold it for $15. The profit is
$5. Capital in business is of the Investor. The labour and mind is of the Mudharib.
Loss is called in Arabic Nuqsan. It is cost price minus sale price. Thus a thing cost to
the vendor for $10 but when sold it fetched only $5. The loss is $5. Finally, in
Mudharabah, one party who has capital but has no skill in managing business
contributes his capital to the party who has skill to manage the business, but has no
capital. As such, only one party provides the capital and the other party puts his skill
and faculty to manage the business. The party who has no skill gives his consent to
the mudharib, so as to allow him to run the business without any intervention from
him (the capital provider).
Noraina (2015), argues that currently, in the competitive Islamic financial
system, mudharabah (profit sharing) is seen as an alternative mechanism in financing
techniques that differentiate it from the conventional financing that consist interest
mechanism. Since its introduction, mudharabah (profit sharing) has gone through
various evolution to fulfill the needs of the fast-developing Islamic financial market.
However, in the current Islamic financial system, mudharabah (profit sharing) has
become less preferable compared to Islamic debt financing instruments such as
murabahah and bai’ bithaman ajil. This is caused by the existence of asymmetric
information that continuously presents in mudharabah (profit sharing) contracts and
creates problems of adverse selection and moral hazard. Due to this, mudharabah
(profit sharing) has declined it importance as a financing vehicle.
And otherwise, the development of new products in the modern Islamic
financial system is based on the rulings of contemporary scholars that the contract is
valid as long as it does not contradict the provisions in the al-Quran and Sunnah.
45
Generally, many contemporary Islamic economic scholars encourage the usage of
profit loss sharing (PLS) i.e. mudharabah (profit sharing) and musyarakah (profit loss
sharing) instruments due to its absence of riba and gharar for the development of
current economic activities. However, in reality the PLS contract is less favored by
financial institutions because of various barriers such as legal requirements and moral
hazard problems. And also more important issue is that Contemporary scholars also
approve on the idea of giving a third party guarantee (al-kafala) to the mudarabah
(profit sharing) capital as it would be able to mitigate risk exposures and secure the
return of the capital.
The guarantee can protect investors (rabbul maal) from misconduct or fraud,
but not from market risk. According to Dalla Albaraka, giving a guarantee to the
entrepreneur (mudharib) in mudharabah (profit sharing) capital is prohibited. Yet, if
the guarantee is given by the government, then it is allowed (Rosly, 2005). Currently,
third party guarantees can be obtained from the government or from private entities.
In June 2002, the Shariah Advisory Committee of Bank Negara Malaysia ruled that
third party guarantee is permissible for Islamic deposits. This guarantee scheme is
based on the concept of mutual guarantee (al-kafala) among Islamic financial
institutions as participants of the scheme. This scheme does not violate the Shariah
principles since its objective is to protect the public interest (maslahah), especially the
depositors and the banking industry. However, Islamic banking institutions need to
ensure that the funds gained from Islamic deposit insurance schemes are invested in
Shariah-compliant instruments (Ibid: p. 10). There are 2 types of Mudarabah namely:
Mudarabah Al Muqayyadah: Rab-ul-Maal may specify a particular business
or a particular place for the mudarib, in which case he shall invest the money in that
particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted
Mudarabah).
Mudarabah Al Mutlaqah: However if Rab-ul-maal gives full freedom to
Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al
Mutlaqah (unrestricted Mudarabah). However Mudarib cannot, without the consent of
46
Rab-ul-Maal, lend money to anyone. Mudarib is authorized to do anything, which is
normally done in the course of business. However if they want to have an
extraordinary work, which is beyond the normal routine of the traders, he cannot do
so without express permission from Rab-ul-Maal. Equity financing instruments for
Islamic business contracts are based on the mudharabah (profit sharing) and
musharakah (profit loss sharing) principles. These financing methods are an
alternative to conventional debt financing that is based on rate of interest (riba).
Equity financing involves mutual sharing of risks and profits, depending on the
performance of the investment project. However, from the practical side, mudarabah
contract is less preferred compare to debt financing instruments because of the
asymmetric information problems that continuously exist in this mode of financing.
The asymmetric information on mudharabah (profit sharing) contract,
especially on the asset side, normally occurred as an entrepreneur (mudharib) who
manage the mudharabah (profit sharing) fund have full control of the project and have
more information regarding the project and its profitability which the Islamic bank
(rabbul mall) does not usually have access to. The inefficiency in information
delegation will generate two major problems, i.e. adverse selection and moral hazard
that makes it difficult for the contracting parties to achieve an optimal contract.
Conditions of Offer & Acceptance are applicable to both. A Rab-ul-Maal can contract
Mudharabah with more than one person through a single transaction. It means that he
can offer his money to ‘A’ and ‘B’ both so that each one of them can act for him as
Mudharib and the capital of the Mudharabah shall be utilized by both of them jointly,
and the share of the Mudharib. An unrestricted mudharabah is one in which the
capital provider allows the mudharib to invest the mudharabah funds without any
restrictions. An example is when the capital provider permits the mudharib to do
business according to his best judgment and in accordance with the interests of both
parties without breaching the terms of the mudharabah contract. Despite all the
growth and achievements, this is also a truth that Islamic banking and finance
paradigm has failed to reach its full potential.
47
J. Supervision Banking Regulation Methodology
Financial sector of an economy plays an important role in its economic
development and prosperity of the country. Banking industry serves as the backbone
of the financial sector that accumulates saving from surplus economic units in the
form of deposits and provides it to deficit economic units in the form of advances
(Khan, 2006: 11). Performance of the banks is measured at two levels, one is at the
management and regulatory level of the banks and another is at external rating
agencies. Purpose of regulatory and supervisory rating systems is to measure the bank
performance at internal level and its compliance with regulatory requirements to keep
the bank on right track (Haseeb, 2011). According to the A, Sarker over the last few
year’s supervisors have adopted new approaches and developed new systems for
ongoing banking supervision in order to be better equipped to face newly created
manifold challenges presented by financial innovation and globalization measures.
(Sarker, p.3). These new systems seek to assess and track changes in a bank's
financial condition and risk profile and to generate timely warning for the supervisor
to help initiate warranted action following as:
1. PATROL Rating System
The Bank of Italy has introduced the annual PATROL rating system in 1993 as
an off-site supervision tool to give a systematic representation of the financial health
of individual banks and provide support in prioritization of the use of supervisory
resources in scheduling on-site examinations. As there is no specific mandate for
periodic on-site examinations of banking institutions in Italy, they are undertaken
based exclusively on evidence provided by the whole set of information available for
analysis to the supervisor for assigning PATROL ratings. The main inputs for the
PATROL off-site analysis include information from monthly, semi-annual and annual
regulatory reporting data received by the Bank of Italy. The five components of
PATROL are capital adequacy, profitability, credit quality, organization and liquidity.
Each component of PATROL is rated on a scale of 1 (best) to 5 (worst) based on
supervisory criteria and guidelines. Five individual component ratings are converted
48
into a composite rating, also on a scale of 1 (best) to 5 (worst), which includes all
other quantitative and qualitative information available to the analyst. Ratings
assigned are validated through comparisons with the actual results of on-site
examinations.
2. ORAP Rating system
The French Banking Commission introduced the annual Organization and
Reinforcement of Preventive Action (ORAP) Rating System in 1997 as a multi-factor
analysis system for individual institutions. The objective of the system is to detect
potential weaknesses in banking institutions by examining all components of risk
associated with the activity and environment of each institution making use of
quantitative and qualitative information. The ORAP rating makes use of various
internal and external sources of information. These include different databases of the
Bank of France and the Banking Commission (in particular the data provided by the
credit institutions themselves, which are stored in a special financial markets
database), as well as results of on-site supervisory inspections. The external sources
include external auditors, other supervisory bodies in France and information made
available under bilateral arrangements with supervisory bodies in other European
countries. The ORAP rating system works within a standardized and formalized
framework, with specific ratings on 14 components. The components relate to
prudential ratios (capital, liquidity, large exposures and capital adequacy), on- and
off-balance sheet activity (asset quality, bad loans and provisions for bad loans),
market risk, earnings (operating income, non-recurring items and return on assets)
and qualitative criteria (shareholders, management and internal control). Each
component is rated on a scale of 1 (best) to 5 (worst). Component ratings are
converted to a composite rating similarly scaled between 1 (best) and 5 (worst).
Every 5 rating implies corrective action.
3. GIRAFE Rating System
Planet Finance provides rating services to financial institutions, micro finance
institutions (MFIs), financial backers, supervisors and regulators, as well as auditors
49
and consultants. The financial and organizational performance of MFIs is objectively
evaluated, and the results are translated into rating reports, accompanied by a spread
on the Internet. A debriefing interview with the institution and the backers is also
included. There are six areas of assessment. Governance and decision making
processes, Information and management tools, Risks analysis and control Activities
and loan portfolio funding: equity and liabilities Efficiency and liability.
4. PEARLS Rating System
PEARLS use a set of financial ratios to monitor the financial stability of the
credit unions within WOCCU's developing movement projects6. These ratios provide
credit unions, project staff, national federations and regulators with essential tools for
monitoring, planning, standardizing, ranking and facilitating supervisory control in
credit unions. Each letter in the word PEARLS measures the key areas of credit union
operations: Protection, Effective financial structure, Asset quality, Rates of return and
costs, and Liquidity and Signs of growth. Protection is measured by comparing the
adequacy of the provisions for loan losses against the amount of delinquent loans. A
credit union has adequate protection if it has sufficient provisions to cover 100% of
all delinquent loans for more than 12 months and at least 35% of loans delinquent
between 1 and 12 months. Effective Financial Structure of the credit union is the
single most important factor in determining growth potential, earnings capacity and
overall financial strength. The PEARLS system measures credit union assets,
liabilities and capital, and then recommends the "ideal" structure. Credit unions are
encouraged to maximize earning assets as the means to achieve sufficient earnings. A
non-earning asset is one that does not generate income. An excess of non-earning
assets negatively affects credit union income. PEARLS indicators are used to identify
the impact of non-earning assets by analysing delinquency ratios, percentages of non-
earning assets and the financing of non-earning assets.
5. CAMEL Rating System
The CAMEL methodology was originally adopted by North American bank
regulators to evaluate the financial and managerial soundness of U.S. commercial
50
lending institutions. The CAMEL reviews and rates five areas of financial and
managerial performance: Capital adequacy, Asset quality, Management, Earnings,
and Liquidity. Based on the conceptual framework of the original CAMEL, ACCION
International developed its own instrument. Although the ACCION CAMEL reviews
the same five areas as the original CAMEL, the indicators and ratings used by
ACCION reflect the unique challenges and conditions facing the micro finance
industry. The MFI is required to gather the following information for a CAMEL
examination: (1) financial statements; (2) budgets and cash flow projections; (3)
portfolio aging schedules; (4) funding sources; (5) information about the board of
directors; (6) operations/staffing; and (7) macroeconomic information. Financial
statements form the basis of the CAMEL's quantitative analysis.
H. Assessment CAMELS Model in Islamic Banking
According the financial scholars El-Hawary, D., W, Grais and Z, Iqbal the
CAMEL Rating System cannot qualify as an adequate and appropriate system in
interpreting the accurate performance of the Islamic banking system since there is no
single component in it to measure the Shariah compatibility of the functions if judged
through the CAMEL rating system, the health of an Islamic bank would be visualized
but its Shariah compatibility would not be determined. Moreover, the present
framework of CAMEL rating may not include all aspects of Islamic banking if it is to
be as per the explanation and spirit of Shariah (Sarker, p. 13). He argues that though
all features of CAMELS are not repugnant or contradictory to the Shariah stance,
there should be some separate provisions to make it conducive and proper to analyse
the whole operation of the Islamic banks. But on the other hand, the one of
Indonesian Islamic financial scholar Dadang, (2009) suggested that practically,
Islamic banking could use the CAMELS rating system when assessing the soundness
of the Islamic banks, but there are some difference approaches which would be on
several aspects like: (1) the agency role in the capital assessment, (2) value added
distribution, (3) identification of risks which do not appear in the conventional banks,
and (4) the incorporation of the Islamic values and norms which particularly
51
emphasis professionalism, competence to promote conducive and friendly
atmosphere in the organization and other Islamic values like environment orientation
besides transaction ally sharia compliance (Dadang, 2009). It seems from the
foregoing discussion that CAMELS Rating System cannot qualify as an adequate and
appropriate system in interpreting the accurate performance of the Islamic banking
system since there is no single component in it to measure the Sharia compatibility of
the functions of a bank in an Islamic framework. CAMELS rating system has been
viewed in light of the principles and practices of Islamic banking. One of the most
important concerns of regulators and supervisors of Islamic banks is how to apply
internationally recognized standards to these institutions while, simultaneously,
enabling them to operate in conformity with the Shariah. In view of the special nature
of investment deposits and the risk faced by the assets of Islamic banks, application
of the international capital adequacy standards to Islamic banks has become a
challenging task (Chapra and Khan, 2000). The Islamic banking industry might also
use the same CAMELS framework when designing an appropriate rating system for
Islamic banking, but with some improvement and modifications to adopt the typical
differences in the Islamic banking operations. Like in conventional system, the rating
system designed is used as one significant base in conducting supervisory actions.
The supervisory authority should have strong confidence when letting the
particular Islamic bank to operate or even when deciding to stop an operation of one
particular Islamic bank (Ibid: 9). For example, A. Sarker has an explanation that
practically, a single CAMELS rating for each bank is the result of both off-site
monitoring, which uses monthly financial statement information, and an on-site
examination, from which bank supervisors gather further “private information” not
reflected in the financial reports. These examinations result in the development of
"credit points" ranging from 0 to 100. As noted above, the six key performance
dimensions – capital adequacy, asset quality, management, earnings, liquidity and
sensitivity to market risk – are to be evaluated on a scale of 1 to 5 in ascending order.
Following is a description of the graduations of rating:
52
Table: 2.6:
Composite CAMELS and their Interpretation
Rating Scale Rating Range Rating Analysis Rating Analysis interpretation
1 1.0-1.4 Strong Sound in every respect, no supervisory responses required.
2 1.6-2.4
Satisfactory Fundamentally sound with modest correctable weakness,
supervisory response limited.
3 2.6-3.4
Fair (watch
category)
Combination of weaknesses if not redirected will become
severe. Watch category. Requires more than normal
supervision.
4 3.6-4.4
Marginal
(some risk of
failure)
Immoderate weakness unless properly addressed could
impair future viability of the bank. Needs close supervision.
5 4.6-5.0
Unsatisfactory
(high
degree of failure
evident)
High risk of failure in the near term. Under constant
supervision/cease and desist order.
Source: Abdul Awwal, Sarker. “CAMELS Soundness Assessment Rating”
Each bank is accorded a composite rating that is predicated upon the evaluation
of the specific performance dimensions. The composite rating is also based upon a
scale of 1 through 5 in ascending order of supervisory concern. The CAMELS rating
components, 10 usually taken into consideration by the monetary authorities have the
following weights: capital adequacy 20%, asset quality 20%, management 25%,
earnings 15%, liquidity 10% and sensitivity to market risk 10%. The weightings are
subjective and based on regulators’ past experience. The numerical ratings assigned
to the criteria are:
1. Strong: It is the highest rating and is indicative of performance that is
significantly higher than average.
2. Satisfactory: It reflects performance that is average or above; it includes
performance that adequately provides for the safe and sound operation of the banks.
3. Fair: Represent performance that is flawed to some degree. It is neither
satisfactory nor unsatisfactory but is characterised by performance of below average
quality.
53
4. Marginal: Performance is significantly at below average; if not changed,
such performance might evolve into weaknesses or conditions of the bank.
5. Unsatisfactory: Is the lowest rating and indicative of performance that is
critically deficient and in need of immediate remedial attention. Such performance by
itself, or in combination with other weakness, threatens the viability of the institution.
It is very important to assess the soundness of financial institutions through
rating system which is used by federal and state regulators, usually known as
CAMELS rating system. To examine a bank or financial institution on the CAMELS
system, information is required from different sources such as financial statements,
funding sources, macroeconomic information, budget and cash flow projection,
staffing and business operations. As well is explained above according to the scholars
the CAMELS which stands for, Capital adequacy, Asset quality, Management,
Earning, Liquidity, and Sensitivity to market risk (Haseeb, 2011: 33). This
framework CAMELS methodology following as:
1. Capital Adequacy
Leverage: the relationship between the risk-weighted assets of the MFI and its
equity. Ability to raise equity: assessment of an MFI's ability to respond to a need to
replenish or increase equity at any given time. Adequacy of reserves: measure of the
MFI's loan loss reserve and the degree to which the institution can absorb potential
loan losses (Abdul Awwal, Sarker., p. 7). The deference between total assets and total
liabilities is called capital. Capital is rated on the following thoughts (Trautmann,
2006, p. 8):
On the basis of problems that capital adequacy has in relation
On the basis of Balance sheet structure, off balance sheet items, and different
type of risk like market and concentration
On the basis of business activities and bank risks
Dividend distribution and earning performance
Sources of capital and how to access capital markets?
54
On the basis of management ability to deal with the above factors.
2. Asset Quality
Asset quality is one of the most important elements of CAMELS frame work to
rate a financial institution/bank (Jerome. 2008, p. 6). Portfolio Quality: Portfolio at
risk: measures the portfolio past due over 30 days. Write-offs/ write off policy:
measures adjusted write-offs on CAMEL criteria. Portfolio classification system:
review of portfolios aging schedules; assesses institution's policies associated with
assessing portfolio risk. Fixed Assets: Productivity of long-term assets: evaluates
MFI's policies for investing in fixed assets Infrastructure: -evaluation of whether it
meets the needs of both staff and clients (Sarker., p. 7).Decision regarding allocation
of the deposited amount of the bank in loan portfolio, investments, owned real estate,
securities and off balance sheet transaction determines the quality of its assets. These
are taken into consideration while calculating the default/credit risk of a bank. Quality
27 of these assets indicates the future losses to the bank and its ability to overcome
these unanticipated loses. Madura, 2009 in his book Financial Market and Institutions
discusses that to evaluate quality of the loans pass on by the banks, Federal Reserve
System (Central banking of America) consider 5C‟s that are as under (Madura. 2009)
following as:
Capacity: Ability of the borrower to pay back the loan
Collateral: Amount and quality of backup assets
Condition: Situation that propel for requirement of the funds
Capital: It is calculated by the difference between the values of assets and
liabilities of the borrower
Character: Willingness and previous record of the borrower to repay the
loan.
For instance, Sundararajan & Errico (2002) in their working paper submitted to
International Monetary Fund (IMF) discussed that how asset quality is assessed in
standard CAMELS rating framework. According to them asset quality is assessed on
55
the following four classifications: (1) intensity, allocation and rigorousness of
classified assets (2) level and composition of nonperforming assets (3) the
competence of estimating reserves and (4) the established capabilities to manage and
collect bad debts.
3. Management Soundness
Sound management is a key pre-requisite for the strength, profitability and
growth of any financial institution. Since indicators of management quality are
primarily specific to individual institution, these cannot be easily aggregated across
the sector. In addition, it is difficult to draw any conclusion regarding management
soundness on the basis of monetary indicators, as characteristics of good management
are generally qualitative in nature. The capabilities of the Board of Directors and
internal management personnel to identify, measure, monitor and control different
risks associated in the activities and to ensure a safe, sound and efficient operation in
compliance with all applicable laws, regulations and especially the core risk
management guidelines introduced by the central bank might be a measuring rod of
that. In the standard CAMELS framework, management is evaluated according to:
technical competence, leadership, and administrative ability; compliance with
banking regulations and statutes; ability to plan and respond to changing
circumstances; adequacy of and compliance with internal policies; tendencies toward
self-dealing; and demonstrated willingness to serve the legitimate needs of the
community (Sundarajan and Errico, 2002). Governance: how well the institution's
board of directors functions, including the diversity of its technical expertise, its
independence from management, and its ability to make decisions flexibly and
effectively. Human Resources: evaluates whether the department of human resources
provides clear guidance and support to operations staff, including recruitment and
training of new personnel, incentive systems for personnel, and performance
evaluation system. Processes, controls and audit: the degree to which the MFI has
formalized key processes and the effectiveness with which it controls risk throughout
the organization, as measured by its control environment and the quality of its
56
internal and external audit. Information Technology System: assesses whether
computerized information systems are operating effectively and efficiently, and are
generating reports for management purposes in a timely and accurate manner.
Strategic planning and budgeting: whether the institution undertakes a comprehensive
and participatory process for generating short- and long-term financial projections
and whether the plan is updated as needed and used in the decision-making process
(Sarker, p. 7) and management can be evaluated in the CAMELS framework
according to (Sundararjan, and Errico, 2002):
Leadership, administration ability,
Competency in technical work
Bank’s management has the ability to deal with changing situations
Obedient to banking law and regulations
Agree on internal policies
To show keenness in fulfilling the legal need of the community.
Rating Factors: In the success of bank operation management is the most
important element. On the following factors rating is based on these are (Trumann,
2006, p. 22):
Board of directors and management of the bank have the abilities to
observe and support business activities and the
risk associated with these activities and also make plan for future
It is the management responsibility to develop and implement the
written policies, procedures, reporting, MIS,
documents safety, risk monitoring system,
Have the ability to deal with changing situation
Internal and external audit must be available
Job explanation, reward policies
Bank risk and overall performance.
57
4. Earnings and Profitability
Earning asset quality indicated the ability of an Islamic bank to operate
sustainably. The assessment is represented by two main indicators i.e. Break even
analysis and the industrial competitiveness (Dadang, 2009). Adjusted return on
equity: measures the ability of the institution to maintain and increase its net worth
through earnings from operations. Operational Efficiency: measures the efficiency of
the institution and monitors its progress toward achieving a cost structure that is
closer to the level achieved by formal financial institutions. Adjusted Return an
Assets: measures how well the MFI's assets are utilized, or the institution's ability to
generate earnings with a given asset base. Interest rate policy: assess the degree to
which management analyses and adjusts the institution's interest rates on micro
finance loans (and deposits if applicable), based on the cost of funds, profitability
targets, and macroeconomic environment (Sarker., p. 7-8). Earning of a bank is a
significant gauge to analyse its financial strength. As we know that money it is
merchandise of the banks, for a longer period of time banks can maintain losses
before they get out of cash. Supervisor must take action whenever they realize that
the bank’s earnings are decreasing or the bank may goes into bankruptcy. It is
difficult for the supervisor to look into the earnings record of the bank and simply
form an opinion about earning position (Haseeb, 2011). According to the Trautmann
(2006) Earning Rating factors following as:
Enough earnings are required to cover losses, ample capital and to pay
dividend
Operational sources
Business activities that are highly risky, trust on extraordinary items,
transactions of securities
Sufficiency of provisions
Budget sufficiency, forecasting
Earning risk such as variation in interest rate, and price risk
58
5. Liquidity
Liquidity is one of important aspect in the banking operation since its operation
is based on public confidence. Illiquidity could throw solvent bank into insolvency
since it has to sell its assets far below its market values to fulfil its current financial
obligations. A soundly operated Islamic bank should be able to synchronize the
possible liquidity mismatch to minimize unnecessary costs resulted from ‘panic’ sale
of the assets (Dadang, 2009). Liability structure: review of the composition of the
institution's liabilities, including their tenor, interest rate, payment terms, and
sensitivity to changes in the macroeconomic environment. Availability of funds to
meet credit demand: measures the degree to which the institution has delivered credit
in a timely and agile manner. Cash flow projections: evaluate the degree to which the
institution is successful in projecting its cash flow requirements. Productivity of other
current assets: evaluates extent to which the MFI maximizes the use of its cash, bank
accounts, and short-term investments by investing in a timely fashion and at the
highest returns, commensurate with its liquidity needs (Sarker., p. 8). Liability
structure: an overview of the composition of organic compounds, including their
content, payments of interest and sensitivity to changes in the macroeconomic
environment. Availability of funds for the credit indicates the extent to which credit
institutions, timely delivery and flexible. Cash flow: how far the organization has
succeeded in establishing the requirements for cash flow to evaluate. The
performance of other current assets: an assessment of the extent to which MFIs use
their own money, bank accounts and short-term investments to invest the time and the
best performance according to financial needs in order to maximize (Rehana and
Saba. 2012).
6. Sensitivity to Market Risk
The sensitivity to market risk is assessed by the degree to which changes in
market prices, notably interest rates, exchange rates, commodity prices, and equity
prices adversely affect a bank’s earnings and capital. The sensitivity of the bank’s
earnings or the economic value of its capital base or net equity value due to adverse
59
effect in the interest rates of the market. (Sarker, p. 12). Due to the higher exposure
to the market variables, Islamic banks are also experienced to have potential losses as
a result of the dynamics in the market variables. The market variables include interest
rate, commodity price and exchange rates. As mentioned earlier, the Islamic banks
face commercial displacement risk as a result of lower yields given by the Islamic
banks as compared to the conventional ones (Dadang, 2009). Earning and capital of
financial institutions can be adversely affected by changes in exchange rate, interest
rate, equity price or commodity price. Sensitivity of the market risk are examined by
the banks to assess the changes in foreign currency, interest rate, product purchase
and selling prices which totally effects the bank´s assets values and profits. All
CAMELS components there are need for understanding of composite rating which is
to be assigned to all banks (Habib 2011).
I. Previous Research
Accordingly, in the process of running the study is found that there are several
of references by Indonesian Islamic financial scholars in analysing performance of
Depositor Fund and operations of Islamic banking system in the case of Indonesia.
For example, previous studies concern by these scholars such as; M. Arief Mufraini
(2012) Hasbi and Tendi (2011), Amelia Erika (2015), Afrianto and Subaweh (2010),
Agung and Solikhah (2013), Dadang (2005), Islmal and Abduh (2012), which are
following as:
1. The title of this previous research is about “The lack of profit-and-loss
sharing financing in Indonesia’s Islamic Banks.” was researched by Collaborative
Researchers Group’s Center of Education and Banking Studies Bank of Indonesia in
2010 year.
The aim of this research is to analyzes problems that faced by Indonesia’s
Islamic banks using the Analytic Network Process (ANP) methodology. The root of
the problem can be grouped into two aspects, namely Islamic bank internalities,
which include upper management, human resources and technical aspects, and
externalities that include society, the authorities and customers. The results show that
60
Internal problems have shifted from human resources (lack of quality and quantity;
risk averse) to technical aspects (IT and SOP) as well as upper management
(commitment), while external problems have expanded slightly from the Government
(lack of supportive regulations; incentives) to the Government (lack of commitment;
lack of support) and society (lack of trust; lack of perception). The policies to be
instituted by regulators have broadened to include not only directed market-driven
policy, but also professionalism.
2. The title of this previous research is about “Relationship between the
Investor Confidence and Operational Stability of Funding Strategy: A Study on the
Islamic Bank in ASIA” was researched by M. Arief Mufraini in 2012 year.
The aim of this research is to uses the economics science approach in exploring
the field of bank management. The study paradigm refers to nonstructural approach in
evaluating the performance of banks. The hypothesis being developed are
concentrated stability and stabilized competition in banks. This study verifies are
variables of operational stability in sharia banks in Asia and their interactions in
relation to the variable of investor confidence and the variable of financing strategy.
The number of samples taken were as many as 87 sharia banks spread
throughout Asia, by taking advantage of the pure formative model of partial least
square (PLS), the study results showed that there were positive impact between
investor confidence and operational stability, and there positive and significant
impacts between investor confidence and operational stability toward financing
strategy as well as positive and significant impacts between investor confidence
toward financing strategy thorough operational stability. The findings in this study
affirmed that cases in Islamic banking in Asia were empirically strengthened by the
hypotheses of concentrated stability and stabilized competition, whereas the
conventional banks and sharia banks have not fully complied with the sharia laws.
3. The title of this previous research is about “Banking: According to Islamic
Sharia Concepts and Its Performance in Indonesia” was researched by Hariandy
Hasbi and Tendi Haruman in 2011 year.
61
The aim of this research is to investigates empirically Islamic Sharia Banking
concepts and to determine the performance of its based on Bank Indonesia Act
No.9/1/PBI/2007 on assessment system for performance level to Commercial Banks
based on Islamic Principles which consists of the aspects: capital, assets,
management, earning, and liquidity which called CAMEL. The all of aspects use
financial ratios as follow CAR, ROA, NPF, OEOI, FDR and Depositor Funds as a
comparison as a reflect level of public trust on Islamic banking. Samples were taken
from Bank Indonesia as a central bank period of 2007-2009 with 31 sample of
Islamic Bank (BUS, UUS, and BPRS) which was chosen based on a purposive
sampling method. Using descriptive method and multiple regression analysis, the
results of this study indicate that the Islamic banking have a good performance
reflected CAMEL on Depositor Funds.
4. The title of this previous research is about “Financial Ratio and Its
Influence to Profitability in Islamic Banks” was researched by Erika Amelia in 2015
year.
The aim of this research is to analyse the influence of the Capital Adequacy
Ratio (CAR), Non Performing Financing (NPF), Financing to Deposit Ratio (FDR)
and Biaya Operational Pendapatan Operasional (BOPO) to Return on Asset (ROA) in
Bank Muamalat Indonesia and Bank Sharia Mega. The data analysis method used in
this research is multiple regression analysis. From the test results show that the
Capital Adequacy Ratio (CAR), Non Performing Financing (NPF), Financing to
Deposit Ratio (FDR) and Biaya Operational Pendapatan Operational (BOPO)
simultaneously effect to Return on Asset (ROA). Based on the test results of the t
statistic was concluded that the Capital Adequacy Ratio (CAR), Non Performing
Financing (NPF) and the Financing to Deposit Ratio (FDR) partially no significant
effect to Return on Asset (ROA), while Biaya Operational Pendapatan Operational
(BOPO) partially significant effect to Return on Asset (ROA).
62
5. The title of this previous research is about “Analysis of Financial Allocation
and Its Impact on The Profitability of Islamic Banking In Indonesia” was
researched by Yogi Afrianto and Imam Subaweh in 2010 year.
The aim of this research is to analyze the indicator that determines the
successful of a bank is from the profitability of its bank. This research is analysing
the factors that determining the profitability of Sharia’s banking which proxy by
ROA (return on assets).This research is using 3 sample of Sharia’s bank in period of
2006-2009 and using multiple regression analysis in order to examine where the
Sharia’s banks must allocate their fund to enhance their profitability. The result is the
deposit in Bank Indonesia, placement in other banks, and financing on small and
medium enterprise don’t have any positive and significant influence to the
profitability of Sharia bank while the investment in securities, financing on non-small
and medium enterprise have a negative and significant to the profitability of Sharia
bank.
6. The title of this previous research is about “The Internal Factors of
Indonesian Sharia Banking to Predict The Mudharabah Deposits” was researched
by Agung Yulianto and Badingatus Solikhah in 2013 year.
The aim of this research is to analyze the influence of Financing to Deposit
Ratio (FDR) and Non Performing Financing (NPF) on Mudharabah Deposits of
Indonesian Islamic Banking in the period from 2010 to 2013. The sample of this
study was 11 Islamic Commercial Banks and 23 Islamic Business Units of
Conventional Bank in Indonesia. Secondary data was collected from the Islamic
Banking Statistics of Bank Indonesia official website. The data analysis technique
used in this study was multiple regression analysis. Based on statistical analysis, it is
concluded that Non Performing Financing (NPF) effect on Mudharabah Deposits.
Meanwhile, Financing to Deposit Ratio (FDR) has no effect on the Mudharabah
Deposits. The results indicate that the customers’ motivation to save their money in
the bank is to invest in Islamic financial instruments in accordance with Islamic
63
principles, so that customers do not pay much attention to factors such as the level of
Financing to Deposit Ratio (FDR).
7. The title of this previous research is about “A Design for Islamic Banking
Rating System: An Integrated Approach” was researched by Dadang Muljawan in
2005 year.
The aim of this research is to analyse an alternative tool to assess the
operational soundness of the Islamic banks. The tool accommodate the salient
features of the Islamic banks so that it is capable of being used as an effective
supervisory tool not only for assessing the operational quality but also directing the
Islamic banking authority when formulating the supervisory actions based on the
supervisory review. Basically, the tool designed can still use the CAMELS rating
system but with some adjustments on financial ratios and managerial assessment.
Operationally, Islamic banking could use the CAMELS rating system when assessing
the soundness of the Islamic banks.
The difference would be on several aspects like: (1) the agency role in the
capital assessment, (2) value added distribution, (3) identification of risks which do
not appear in the conventional banks, and (4) the incorporation of the Islamic values
and norms which particularly emphasis professionalism, competence to promote
conducive and friendly atmosphere in the organization and other Islamic values like
environment orientation besides transitionally sharia compliance. Islamic bank rating
system is expected to benefit the supervisory process as it could reflect the
operational soundness more objectively. The rating system would then be used as a
base to formulate supervisory actions. Therefore, the rating system designed should
be able to locate the problems occurred in the bank more precisely.
8. The title of this previous research is about “Depositors’ Withdrawal
Behavior in Indonesian Islamic Banks” was researched by Rifki Ismal and
Muhamad Abduh in 2012 year.
The aim of this research is to investigate factors determining depositors’
withdrawal behaviour based on the empirical survey of the Indonesian Islamic
64
banking industry. This paper conducts a direct survey towards Islamic banking
depositors in Indonesia. Particularly, it uses a combination of open and close
questions assessing information about depositors’ withdrawal behaviour under
different circumstances. Then, it analyses such primary data with statistical tool to
find information and factors determining depositors’ withdrawal behaviour. Firstly,
the paper finds the general factors causing depositors to take their money which is if
the Islamic banks do not comply with Sharia. Secondly, it finds the specific factors,
which are: (i) the willingness to adjust the tenor of deposits, (ii) the need of funds for
transactions and, (iii) less payment of return sharing on deposits than the previous
period. Further, it is also found that depositors tend to deposit funds in Islamic banks
rather than Islamic windows and most of them have income of less than Rp5 million
per month. Meanwhile, with regard to interaction with the sources of information,
news in the newspapers and news on the TV are the dominant ones influencing the
depositors banking behaviour. However, in the daily life, they interact intensively
with internet. As such, this paper recommends Islamic banks to keep complying with
Sharia and maintaining the robust performance in order to be able to pay positive and
competitive return sharing on deposits. Further, they need to intensify internet
banking facilities to conduct intensive communication with depositors, facilitate the
depositors’ transactions and monitor their schedule of withdrawals to manage deposit
withdrawals.
Table 2.7:
Overview of Previous Researches Survey
No Researchers AnalysisModel
DependentVariables
IndependentVariables
Result
1 CollaborativeResearcher’sGroup of BI
(2010)
AnalyticNetwork
Model
Causesproblem of lack
PLS in IBsystem
Effects problem oflack PLS
inIB system
The results show that Internalproblems have shifted from humanresources (lack of quality andquantity; risk averse) to technicalaspects (IT and SOP) as well asupper management (commitment),while external problems haveexpanded slightly from theGovernment (lack of supportiveregulations; incentives) to theGovernment (lack of commitment;lack of support) and society (lack oftrust; lack of perception).
65
2
M. AriefMufraini(2012)
EngineeringResearch
Model
Variable ofInvestor
Confidence
Variable ofFinancialStrategy
The study results showed thatthere were positive impactbetween investor confidenceand operational stability, andthere positive and significantimpacts between investorconfidence and operationalstability toward financingstrategy. The findings in thisstudy by the hypotheses ofconcentrated stability andstabilized competition, whereasthe conventional banks andsharia banks have not fullycomplied with the sharia laws.
3Hariandy Hasbi
andTendi Haruman
(2011 )
MultipleRegression
Model
CAMELfactors
DepositorFunds
In general, Islamic Bankingduring 2007-2009 have an averageCAR of 11.42%, ROA at 1.66%,NPF at 4.16%, OEOI of 80.89%and FDR of 97.70% and 38.657billion Depositor funds. Althoughratios ROA, NPF and FDR had nosignificant effect on depositorfunds, but all variables includingCAR and OEOI provide a positiveinfluence on the depositor funds inIslamic banking in Indonesia.
4Erika Amelia
(2015 )
MultipleRegression
Model
CAMELfactors
Profitabilityratio bank
It is important to make an optimalasset management throughfinancing or business expansion.So, there are no idle funds thatcould result settles unproductiveasset. The application of theprecautionary principle in themanagement of the financingconducted to minimize the risk offinancing so as to improveprofitability and can manage fundsraised from the public and thenredistributed in the form offinancing
5
Yogi Afriantoand
Imam Subaweh(2010 )
MultipleRegression
Model
Return on assets(ROA)
DepositIn
Islamic Bank
Based on the research and analysishas been done in the previouschapter, can be concluded thatDeposit in Bank Indonesia has noinfluence against ROA. This duedeposit on Bank Indonesia is not toget income. Placement in Otherbanks has no influence againstROA. The result is the deposit inBank Indonesia, placement in otherbanks, and financing on small andmedium enterprise don’t have anypositive and significant influence tothe profitability of Sharia bankwhile the investment in securities,financing on non-small and mediumenterprise have a negative andsignificant to the profitability ofSharia bank.
66
6
Agung Yuliantoand
BadingatusSolikhah(2013 )
MultipleRegression
Model
Financingto
Deposit Ratio
MudharabahDeposits of
Islamic bank
The results of this research indicatethat the variable Financing toDeposit Ratio (FDR) did notsignificantly influence the amountof Mudharabah Deposits ofIndonesia Islamic banking in theperiod of 2010-2013.While variable Non Performing
Financing (NPF) significantlyaffects the amount of MudharabahDeposits of Indonesia Islamicbanking in the period of 2010-2013.
7Dadang
Muljawan(2005 )
QuantitativeAnalysis
CAMELSAssessment
FactorsOperation
Performance
Operationally, Islamic bankingcould use the CAMELS ratingsystem when assessing thesoundness of the Islamic banks. Thedifference would be on severalaspects like: (1) the agency role inthe capital assessment, (2) valueadded distribution, (3) identificationof risks which do not appear in theconventional banks, and (4) theincorporation of the Islamic valuesand norms
8
Rifki Ismal andMuhamad
Abduh(2012 )
EmpiricalResearch
DepositorBehavior
Factors ofInfluence toDepositors
Findings – Firstly, the paperfinds the general factors causingdepositors to take their moneywhich is if the Islamic banks do notcomply with Sharia. Secondly, itfinds the specific factors, which are:(i) the willingness to adjust thetenor of deposits, (ii) the need offunds for transactions and, (iii) lesspayment of return sharing ondeposits than the previous period.
Further, it is also found thatdepositors tend to deposit funds inIslamic banks rather than Islamicwindows and most of them haveincome of less than Rp5 million permonth. Meanwhile, with regard tointeraction with the sources ofinformation, news in thenewspapers and news on the TV arethe dominant ones influencing thedepositors banking behaviour.
However, in the daily life,they interact intensively withinternet. As such, this paperrecommends Islamic banks to keepcomplying with Sharia andmaintaining the robust performancein order to be able to pay positiveand competitive return sharing ondeposits. Further, they need tointensify internet banking facilitiesto conduct intensive communicationwith depositors, facilitate thedepositors’ transactions and monitortheir schedule of withdrawals tomanage deposit withdrawals.
67
G. Theoretical Framework
Based on the theoretical framework of model research, study shows that in the
operations of Islamic banks how the performance of Depositor Funds can be analyzed
and otherwise it’s perform does significantly influence in using CAMELS Model
factors for increasing profitability of business banking transactions. Operationally, in
Islamic banking sector CAMELS rating system currently is assessing to analyze the
soundness of the Islamic banks productivity. The main of differences factors this
model would be applied on several approaches: (1) the agency role in the capital
assessment, (2) value added distribution, (3) identification of risks which do not
appear in the conventional banks, and (4) the incorporation of the Islamic values and
norms which particularly emphasis professionalism, competence to promote
conducive and friendly atmosphere in the organization and other Islamic values like
environment orientation besides transactional shariah compliance. Islamic bank rating
system is expected to benefit the supervisory process as it could reflect the
operational soundness more objectively (Muljawan, 2005).
Practically, in Indonesia Islamic banks mostly in their operations for Depositor
Funds provides various products such as Mudharabah contract in two types Time
Deposit and Saving Deposit and also Wadhiah contract for demand deposits (Annual
Repost: 2010-2014). Therefore, analysis and discussion this study is based on
CAMELS Models with fives financial ratios factors, namely CAR, ROA, NPF,
OEOI, and FDR for analyzing the performance of Depositor Funds. The ratios would
compared with Depositor Funds as a reflect level of public trust for Islamic banking
industry in Indonesia. If the ratios indicate a good performance, it sign that the bank
can manage all of the aspect well and supposed to increase depositor funds in Islamic
bank. Those variables will be subsequently changed into the indicators that will be
formed based on the using Multiple Regression Method and the data of Islamic banks
in Indonesia belongs to capital ratio of bank gets start from Depositor Funds, based
on the profit-sharing will be given to the founders and customers over the invested
funds to bank and otherwise Islamic banking transactions.
68
Figure: 2.3:
Conceptual Thinking
AN ANALYSIS THE PERFORMANCE OF DEPOSITOR FUNDS IN THE OPERATIONOF INDONESIAN ISLAMIC BANKING SYSTEM 2010-2014
Islamic Bank in Indonesia provides in its operation products forDepositor Funds based on Mudharabah and Wadhiah contracts
CAR(X1)
ROA(X2)
NPF(X3)
OEOI(X4)
FDR(X5)
Depositor Funds(Y)
T-Test
Data Analysis Techniques
F-Test
Classic Assumption Tests
Multiple RegressionAnalysis
Descriptive Statistic
MulticollinerityHeteroscedasticity
Autocorrelation
Normality Test
69
K. Hypothesis of Research
Based on the background of study the Hypothesis of Research following as:
1. Ho 1: Capital Adequacy Ratio (CAR) does not significantly influence
towards Depositor Fund.
Ha 1: Capital Adequacy Ratio (CAR) significantly influences towards
Depositor Fund.
2. Ho 2: Return on Assets (ROA) does not significantly influence towards
Depositor Fund.
Ha 2: Return on Assets (ROA) significantly influences to towards Depositor
Fund.
3. Ho 3: Non-Performing Financing (NPF) does not significantly influence
towards Depositor Fund.
Ha 3: Non-Performing Financing (NPF) significantly influences towards
Depositor Fund.
4. Ho 4: Operating Expense to Operating Income (OEOI) does not
significantly influence towards Depositor Fund.
Ha 4: Operating Expense to Operating Income (OEOI) significantly influences
towards Depositor Fund.
5. Ho 5: Financing to Deposit Ratio (FDR) does not significantly influence
towards Depositor Fund.
Ha 5: Financing to Deposit Ratio (FDR) significantly influences towards
Depositor Fund.
6. Ho 6: Capital Adequacy Ratio (CAR), Return on Assets (ROA), Non-
Performing Financing (NPF), and Operating Expense to Operating Income (OEOI),
and Financing to Deposit Ratio (FDR) does not significantly influence towards
Depositor Fund.
Ha 6: Capital Adequacy Ratio, Return on Assets, Non-Performing Financing,
and Operating Expense to Operating Income, and Financing to Deposit Ratio
significantly influences towards Depositor Fund.
70
CHAPTER III
RESEARCH METHODOLOGY
A. Scope of Research
The chapter presents methodology research of study. Accordingly, research is a
process of steps used to collect and analyze information to increase researcher
understanding of an issue (Kasim, 2010). The scope of research in this study is a
scientific quantitative method for analysis the performance of Depositor Fund in the
operation of Indonesian Islamic banking system based on the Regression Analysis
Model which is definitely in statistical modeling and a process of estimating the
relationships among independent and dependent variables. It includes many
techniques for modeling and analyzing several variables, when the focus is on the
relationship between a dependent variable and one or more independent variables.
Therefore based in the above evidence this research approach is to determine the
performance of Islamic Banking based on Bank Indonesia Act No.9/1/PBI/2007 with
the using of CAMEL rating method in banking system with five financial ratios as
independent variables; CAR, ROA, NPF, OEOI, FDR how influence toward
dependent variable is called Depositor Fund. The ratios would compared with
Depositor Funds as a reflect level of public trust for Islamic banking practice in
Indonesia, if the ratios indicate a good performance, it sign that the bank can manage
all of the aspect well and supposed to increase depositor funds in Islamic banks. And
also using descriptive method to describe Islamic banking data, where the description
and explanation of these data as a reference to see the characteristics that ended with
a draw and determine that the positive or negative performance Islamic banking
experience results in financial sector.
B. Sampling Method
Sampling technique in this research is nonprobability sampling. Mainly,
in statistics, sampling method is the process of selecting participants from the
population and there are two major categories in sampling: probability and non-
probability sampling (Saul, 2014). But this study focuses on sampling method which
71
relates to non-probability samples are limited with regard to generalization. Because
they do not truly represent a population, researchers cannot make valid inferences
about the larger group from which they are drawn. A core characteristic of non-
probability sampling techniques is that samples are selected based on the subjective
judgment of the researcher, rather than random selection (i.e., probabilistic methods),
which is the cornerstone of probability sampling techniques. And also on the other
hand, there are five types of non-probability sampling technique that researcher may
use when doing a research: quota sampling, convenience sampling, purposive
sampling, self-selection sampling and snowball sampling. Therefore, in this study is
used purposive sampling which is known as judgmental, selective or subjective
sampling, reflects a group of sampling techniques that rely on the judgments of the
researcher when it comes to selecting the units (e.g., people, cases/organizations,
events, pieces of data) that are to be studied. Purposive Sampling Method is sampling
technique with particular consideration (Sugiyono, 2011). Therefore, based on the
above criteria’s that defined in this research to determine research sample, there are
sample which contain the 36 Islamic bank units (BUS/UUS) what is practiced in the
Indonesia, and criteria for Islamic Banks are sampled and banks as observation units
presents data financial ratio for the period 2010-2014 based on the CAMELS rating
method in the annual financial reports of Islamic Banks.
C. Data Collection
For any type of research data collection is an important aspect. Data is the
source from where researchers can get relevant information to answer the research
questions. To gather applicable information researchers use primary and secondary
data as a sources. Primary data is collected or perceived straight from the first time
experience, and on the other hand secondary data is published and the data collected
by someone else in the past. Therefore, the data collection in this study is used the
secondary data that is collected from Annual Report of Islamic banks from Central
Bank of Indonesia. The framework of the study that is based upon secondary data
Using monthly data over the 5 financial periods of 2010 to 2014 consists of 60
72
months. The types of Islamic banking which this subject of this research are Islamic
Commercial Bank (BUS) Islamic Business Unit (UUS). Findings of our research are
complex in nature but our secondary data will help us to achieve this objective. The
electronic search engine is the main source in this study is used from University
electronic library, Google search, electronic books, journals, and also from other
academic materials.
D. Data Analysis Techniques
1. Normality Test
In statistics, normality tests are used to determine if a data set is well-modeled
by a normal distribution and to compute how likely it is for a random variable
underlying the data set to be normally distributed. Tests of unilabiate normality
include D'Agostino's K-squared test, the Jacque - Bera test, the Anderson–Darling
test, the Cramer - von Mises criterion, the Lilliefors test for normality (itself an
adaptation of the Kolmogorov–Smirnov test), the Shapiro - Wilk test and the
Pearson's chi-squared test (Razali, and Bee, 2011: 21-33). The tests mentioned above
compare the scores in the sample to a normally distributed set of scores with the same
mean and standard deviation; the null hypothesis is that “sample distribution is
normal.” If the test is significant, the distribution is non-normal. For small sample
sizes, normality tests have little power to reject the null hypothesis and therefore
small samples most often pass normality tests (Oztuna and Tuccar, 2006: 6).
Normality data test in this research will be done by using Kolmogorov – Smirnov.
Kolmogorov-Smirnow test is used to test-goodness of fit between sample distribution
and other distributions. This test compares a set of data on sample toward normal
distribution a set of value with same mean and standard deviation. The hypotheses in
one sample Kolmogorov-Semirnov test are:
b. Null hypothesis (Ho) : Data is normally distributed.
c. Alternative hypothesis (Ha) : Data is not normally distributed.
With the criteria as follows:
1) If Significant value (Asym Sig 2 tailed) > 0.05, data is normally distributed.
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2) If significant value (Asym Sig 2 tailed) < 0.05, data is not normally
distributed.
2. Classic Assumptions Test
a. Multicollinerity Test
In statistics, Multicollinerity (also collinearity) is a phenomenon in which two
or more predictor variables in a multiple regression model are highly correlated,
meaning that one can be linearly predicted from the others with a substantial degree
of accuracy. In this situation the coefficient estimates of the multiple regressions may
change erratically in response to small changes in the model or the data. Some of the
common methods used for detecting Multicollinerity include:
1. The analysis exhibits the signs of Multicollinerity — such as, estimates of the
coefficients vary from model to model.
2. The t-tests for each of the individual slopes are non-significant (P > 0.05), but
the overall F-test for testing all of the slopes are simultaneously 0 is
significant (P < 0.05).
3. The correlations among pairs of predictor variables are large.
Looking at correlations only among pairs of predictors, however, is limiting. It
is possible that the pairwise correlations are small, and yet a linear dependence exists
among three or even more variables, for example, if X3 = 2X1 + 5X2 + error, say.
That's why many regression analysts often rely on what are called variance inflation
factors (VIF) to help detect Multicollinerity.
b. Heteroscedasticity Test
Heteroscedasticity is a condition where there is variance dissimilarity from
residual of all observations in regression model. A good regression model is when
Heteroscedasticity does not occur. One of the methods that usually are used for
Heteroscedasticity is regression graphic, which then will be used in this research.
Graphic method conducted by seeing the point’s pattern in scatterplot regression. If
the points spread with no clear pattern, below and above value 0 in Y axis, thus
Heteroscedasticity does not occur. Hence, if there is certain pattern such points create
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regular pattern (wavy, widened, and then narrowed), thus Heteroscedasticity occurs.
The existence of Heteroscedasticity is a major concern in the application of
regression analysis, including the analysis of variance, as it can invalidate statistical
tests of significance that assume that the modeling errors are uncorrelated and
uniform-hence that their variances do not vary with the effects being modeled.
c. Autocorrelation Test
Autocorrelation, also known as serial correlation or cross-autocorrelation
(Kmenta, Jan 1986: 298–334) is the cross-correlation of a signal with itself at
different points in time (that is what the cross stands for). Informally, it is the
similarity between observations as a function of the time lag between them. A key
assumption in regression is that the error terms are independent of each other. A good
regression model does not have autocorrelation problem. Testing method that usually
used is by using Durbin-Watson Test (DW test) with testing criteria as follows:
1. Du < dw < 4 - du, thus Ho is accepted, autocorrelation does not occur.
2. dw < dl or dw > 4 - dl, thus Ho is rejected, autocorrelation occurs.
3. Dl < dw < du or 4 – du < dw < 4 – dl, uncertainty occurs.
2. Hypothesis Test
a. t-Test
A statistical hypothesis is a hypothesis that is testable on the basis of observing
a process that is modeled via a set of random variables (Stuart A., Ord K., and Arnold
S. 1999: 2). In statistic hypothesis test is a method of statistical inference. Commonly,
two statistical data sets are compared, or a data set obtained by sampling is compared
against a synthetic data set from an idealized model. A hypothesis is proposed for the
statistical relationship between the two data sets, and this is compared as an
alternative to an idealized null hypothesis that proposes no relationship between two
data sets. An alternative framework for statistical hypothesis testing is to specify a set
of statistical models, one for each candidate hypothesis, and then use model selection
techniques to choose the most appropriate model (Burnham and Anderson, 2002: 47).
1) H0: βi = 0
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It means the independent variables are not significant explanatory toward
dependent variable.
2) Ha: βi ≠ 0
It means the independent variables are significant explanatory toward
dependent variable. Testing criteria which is used in this test is by comparing
significance value reached by level significance defined that is 0.05. If the
significance value < 0.05, thus the independent variables can influence dependent
variable significantly. In other words, the hypothesis is accepted.
b. F-Test
An F-test is any statistical test in which the test statistic has an F-distribution
under the null hypothesis. It is most often used when comparing statistical models
that have been fitted to a data set, in order to identify the model that best fits the
population from which the data were sampled. Exact "F-tests" mainly arise when the
models have been fitted to the data using least squares. The name was coined
by George W. Seducer, in honor of Sir Ronald A. Fisher. Fisher initially developed
the statistic as the variance ratio in the 1920s (Lomax, 2007:10). The F-test
is sensitive to non-normality (Murkowski, and Edward, 322–326). In the analysis of
variance (ANOVA), alternative tests include Levine’s test, Bartlett's test, and
the Brown - Forsythe test Overall F-test used to determine whether there is a
significant relationship between the dependent variable and the entire set of
independent variables (the overall multiple regression). Since there is more than one
independent variable, this test uses the following null and alternative hypothesis
(Sawilowsky, 2002: 461- 472).
1) Ho: β1 = β2 = ……. = β7 = 0
There is no linear relationship between the dependent variable and the
independent variables. It means all independent variables are not significant
explanatory toward dependent variable.
2) Ha: At least one β1 ≠ 0, j = 1, 2… k
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There is linear relationship between the dependent variable and at least one of
the independent variables. It means all independent variables are simultaneously
significant explanatory toward dependent variable.
3. Multiple Regression Method
Model regression analysis is a statistical process for estimating the
relationships among variables. It includes many techniques for modeling and
analyzing several variables, when the focus is on the relationship between dependent
variable one or more independent variables. In restricted circumstances, regression
analysis can be used to infer causal relationships between the independent and
dependent variables. However this can lead to illusions or false relationships, so
caution is advisable for example, correlation does not imply causation (Armstrong,
2012: 67). Regression analysis is also used to understand which among the
independent variables are related to the dependent variable, and to explore the forms
of these relationships. In restricted circumstances, regression analysis can be used to
infer causal relationships between the independent and dependent variables.
Regression models for prediction are often useful even when the assumptions are
moderately violated, although they may not perform optimally. However, in many
applications, especially with small effects or questions of causality based on
observational data, regression methods can give misleading results (Freedman, 2005:
4). The performance of regression analysis methods in practice depends on the form
of the data generating process, and how it relates to the regression approach being
used. Analysis method in this research is regression model that is considered to use
CAMEL method with five financial ratios as tools, namely CAR, ROA, NPF, OEOI,
and FDR. The equations of multiple regressions are follows as:
Y (Depositor Fund) = a + β1 CAR + β2 ROA + β3 NPF + β4 OEOI + β5 FDR + e
Where;
Y = Depositor Funds
a = Constanta
X1 = CAR
77
X2 = ROA
X3 = NPF
X4 = OEOI
X5 = FDR
β1 β5 = Regression coefficient
e = error.
Bank Indonesia Act No.9/1/PBI/2007 on assessment system for performance
level to Commercial Banks based on Islamic Principles which consists of the aspects:
capital, assets, management, earning, and liquidity which called CAMEL.
4. Determinant Coefficient Analysis (Adjusted R2)
Adjusted R2 is a test used to know accuracy level of predicting in regression
analysis. The coefficient of determination, R 2, is useful because it gives the
proportion of the variance (fluctuation) of one variable that is predictable from the
other variable. It is a measure that allows us to determine how certain one can be in
making predictions from a certain model/graph.
1. The coefficient of determination is the ratio of the explained variation to the
total variation.
2. The coefficient of determination is such that 0 < r 2 < 1, and denotes the
strength of the linear association between x and y.
3. The coefficient of determination represents the percent of the data that is the
closest to the line of best fit.
The coefficient of determination is a measure of how well the regression line
represents the data. If the regression line passes exactly through every point on the
scatter plot, it would be able to explain all of the variation. The further the line is
away from the points, the less it is able to explain. It is a statistic used in the context
of statistical model whose main purpose is either the prediction future outcomes or
the testing of hypothesis on the basis of other related information. It provides a
measure of how well observed outcomes are replicated by the model, based on the
proportion of total variation of outcomes explained by the model.
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E. Operational Research Variables
1. Independent variables
The models investigate how the former depend on the latter. The dependent
variables represent the output or outcome whose variation is being studied. The
independent variables represent inputs or causes, i.e. potential reasons for variation.
Models test or explain the effects that the independent variables have on the
dependent variables. Sometimes, independent variables may be included for other
reasons, such as for their potential confounding effect, without a wish to test their
effect directly. An independent variable is one that influences the dependent variable
in either a positive or negative way. There are five independent variables in the
research: 1. Capital Adequacy Ratio (CAR). 2. Return on Assets (ROA). 3. Non-
Performing Financing (NPF). 4. Operating Expense to Operating Income (OEOI). 5.
Financing to Deposit Ratio (FDR) which those can be seen at the (Table 3.1.) of
Operational Research Variables.
Table: 3.1:Operational Research Variables
Independent variables
Variables Indicators Scale
1 X1 Capital Adequacy Ratio (CAR) EquityRWA Ratio
2 X2 Return on Assets (ROA) Net IncomeTotal Asset Ratio
3 X3 Non-Performing Financing (NPF) Total NPFTotal Financing Ratio
4 X4Operating Expense to Operating Income (OEOI) Operating Expense
Operating IncomeRatio
5 X5 Financing to Deposit Ratio (FDR) Total FinancingTotal Deposits Ratio
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2. Dependent variable
A dependent variable is the variable of primary interest to researcher. The
researcher‘s goal is to understand and describe the dependent variable, or to explain
its variability, or predict it. Dependent variables in this research are the Depositor
Funds of Islamic Banks (Figure: 3.1).
Figure: 3.1:
Analysis Multiple Regression Model Structure
The ratios would compared with Depositor Funds as a reflect level of public
trust for Islamic banking industry in Indonesia. If the ratios indicate a good
performance, it sign that the bank can manage all of the aspect well and supposed to
increase depositor funds in Islamic bank. The output is determined as:
CAR = Equity (1)RWA
Equation (1) is Capital Adequacy Ratio (CAR), the ability of banks offset a
decline in assets due to losses on bank assets using its own capital. The greater this
ratio, it means the better bank's capital adequacy ratio.
ROA = Net Income (2)Total Asset
CAR
ROA
NPF
OEOI
FDR
Depositor Funds
IndependentVariable (X)
DependentVariable (Y)
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Equation (2) is Return on Assets (ROA), which measures the effectiveness of
the company in utilizing all resources in order to measure the ability to generate
profits. The higher this ratio, it means the more effective use of assets to obtain
income and the better performance of the bank.
NPF = Total NPL (3)Total Financing
Equation (3) is Non-Performing Financing (NPF), which measures the level of
bad debt that had to be reserved. The smaller this ratio, it means that the better
performance of the bank.
OEOI = Operating Expense (4)Operating Income
Equation (4) is Operating Expense to Operating Income (OEOI), which
measures the level of efficiency and distribution of the bank in conducting its
operations. The smaller this ratio, it means that the better performance of the bank.
FDR = Total Financing (5)Total Deposits
Equation (5) is the Financing to Deposit Ratio (FDR), ability to repay the bank
withdrawals by customers with relying on loans as a source of liquidity.
The results of these equations will show a financial model to reflex the
performance of wellness Islamic banking industry in Indonesia as follows: Y =
(Depositor Funds) +B1 CAR + B2 ROA +B3 NPF + B4 OEOI +B5 FDR + e then, to find
out whether the good performance of Islamic banking using the CAMEL method with
CAR, ROA, NPF, OEOI, FDR ratios will actually increase the Depositor Funds.
In order to maintain public confidence, the banks must maintain financial
performance. The bank’s financial performance can be assessed by several indicators.
Based on the financial statements will be calculated a number of financial ratios
commonly used as the basis of assessment of the bank (Riyadh, 2006). Recognizing
the importance of health of a bank for the establishment of confidence in the banking
world as well as to implement the precautionary principle (prudential banking) in the
banking sector, Bank Indonesia felt the need to apply the rules on the health of banks.
(Santoso and Triandaru, 2006).
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CHAPTER IV
FINDING AND ANALYSIS
A. General Description of Research Object
1. Brief History of Islamic Banking in Indonesia
The same as most of the Moslem countries, Indonesia has progressive Islamic
banking industry which relies on the performance of the real sector. Historical
progress of Islamic banking in Indonesia according to Raise, S. formally began with
the Workshop MUI on banking in 1990, which was subsequently followed by the
issuance of Banking Act No.7/1992 about banking which accommodate banks
activities with profit-sharing principle (Raise, 2002: 2). In 2008 the Government
issued Islamic Banking Law No.21/2008, that expected to provide a more solid legal
basis and greater opportunities in the development of Islamic Banking in Indonesia so
that equal and parallel to the conventional banks (Hasbi and Haruman, 2011: 61). In
Indonesia, the development of Islamic banking is based on two considerations.
Firstly, there is a large niche market in Indonesia, which refuses to be serviced and
catered by conventional banks, and secondly, the Islamic banking is an alternative
system, which could be implemented as one of the banking-restructuring programs
initiated by the Indonesian government (Mulya and Nasirwan, 2011:4). Practically,
the development of the Indonesian Islamic banking industry is conducted under the
dual banking system (conventional and Islamic banking systems) in the micro and
macro framework, namely the Architecture of the Indonesian banking (AIB) and the
Architecture of the Indonesian Financial System (AIFS) (Rifki, 2009:96).
2. Islamic banking Rating System Principles
The health of banks is the result of qualitative assessments of various aspects
affecting the condition or performance of a bank through the assessment of financial,
asset quality, management, earnings, liquidity and sensitivity to the market risk The
rules about the health of Islamic banks have been set by Bank Indonesia Regulation
(PBI) No. 9/1 / PBI / 2007 concerning the Rating System for General Banks Based on
Sharia Principles subject and according to Bank Indonesia Circular Letter No. 9/24/
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October 30, 2007 regarding the rating system for commercial banks based on Islamic
principles following as; First, an assessment of the capital factor includes assessment
of the following components: adequacy, projected (future trend) capital and the
ability of capital to cover risks; and; the ability to meet the need for additional capital
from earnings, capital plan to support business growth, access to sources of capital
and financial performance of shareholders. Second, an assessment of the asset quality
factor includes assessment of the following components: The quality of productive
assets, the development of the quality of earning assets, concentrations of risk
exposure, and risk exposure core customers; The adequacy of policies and
procedures, review systems (review) internal, system of documentation and handling
performance earning assets. Third, an assessment of the management factors include
assessment of the following components: The quality of general management,
application of risk management, primarily on the understanding management on the
risk of Bank or UUS; Obedience of Bank or UUS on applicable provisions, a
commitment to Bank Indonesia or other parties, and adherence to Islamic principles,
including educating the public execution of a social function. Fourth, an assessment
of the earnings factor includes assessment of the following components: Ability to
produce profits, earnings capacity to support the expansion and risk cover, as well as
the level of efficiency; Diversification of revenue, including the ability of banks to
earn fee-based income, and diversification of investment of funds, and also
application of accounting principles in the recognition of income and expenses. Fifth,
assessments of the liquidity factors include assessment of the following components:
the ability to fulfil short-term obligations, the potential maturity mismatch, and the
concentration of funding sources; the adequacy of liquidity management policies,
access to funding sources, and funding stability. Sixth, assessment of sensitivity to
market risk factors includes assessment of the following components: the ability of
the Bank or Sharia capital covering potential losses as a result of fluctuations (adverse
movement) exchange rates; the adequacy of the implementation of market risk
management.
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B. Result and Discussion
1. Descriptive Statistic Analysis
In statistical research modelling, descriptive statistics are used to describe the
basic features of the data collection and analysis. Therefore, in this research method
based on the descriptive analysis techniques provide a simple summaries about the
non-probabilistic sample as an observation units has been made for research, and it
can be seen in the Appendixes of this study how the data is collected and analyzed
empirically. And also in descriptive statistic include several location parameters that
consists of three measurement for data collection and analysis which are the mean,
median, and mode parameters that is very important for normality test distribution,
and in this study is clearly shown and explained that it can be seen at the (Table 4.1:
The Result of Normality Test). Before going to emphasize the normality test result,
researcher preferred to explains the definitions of location parameters descriptive
analysis that are appeared in the normality test is analysed and interpreted. The first,
mean is the average of the numbers and add up all the numbers, then divide by how
many numbers there are. The median is the "middle" of a sorted list of numbers. The
second, to find the median, place the numbers in value order and find the middle. And
the third, to find the mode, or modal value, first put the numbers in order, then count
how many of each number. A number that appears most often is the mode. For
example, the location parameter of descriptive statistic such as the mean, the median,
and the mode can be seen in this study on Table 4.1: how these parameters based on
the data collection and analysis are distributed belong to descriptive statistic.
a. Normality Test
In statistics, normality tests are used to determine if a data set is well-modeled
by a normal distribution and to compute how likely it is for a random variable
underlying the data set to be normally distributed. Normality test is done in order to
see the level of normality of data used, whether it is normal distributed or not.
Normal distributions are important in statistics and are often used in the natural and
social sciences to represent real-valued random variables whose distributions are not
84
known. The level of normality of data is highly crutial because if data is normally
distributed, it means the data can represent the population. Normality data test aims to
test whether the dependent variable and independent variables both have a normal
distribution or not in the regression model. The result of normality data test using the
descriptive statistic frequently is shown in the following table:
Table 4.1:The Result of Normality Test
Statistics
CAR ROE NPF OEOI FDR Y
N Valid 60 60 60 60 60 60
Missing 0 0 0 0 0 0
Mean .3889 .1284 .1840 .8858 .9864 298.0218
Median .3907 .1349 .1803 .8829 .9908 312.4854
Mode .38a .13 .17a .88 .99 94.81a
Std. Deviation .02262 .02445 .01936 .02272 .02294 92.18052
Variance .001 .001 .000 .001 .001 8497.248
Skewness -.100 -2.293 .305 1.312 -.496 -.391
Std. Error of Skewness .309 .309 .309 .309 .309 .309
Kurtosis 1.627 6.545 -1.156 3.373 -.482 -.384
Std. Error of Kurtosis .608 .608 .608 .608 .608 .608
Sum 23.34 7.70 11.04 53.15 59.18 17881.31
a. Multiple modes exist. The smallest value is shownSource: Primary Data Processed
The Table 4.1: reports the descriptive variables of Normality test based on the
distribution data which is analyzed and the result of test shows that value of
Skewness (-.391) is divided to the value of Standard Error of Skewness (0.309) is
equal to 1.26, and also the value of Kurtosis (-.384) is divided to the value of
Standard. Error of Kurtosis (0.608) is equal to 0, 63. Based on the assessment
analyses of distribution variables in the Normality Test which are dependent variable
and independent variables both have a normal distribution and therefore in can be
concluded that the result of test is free of problem in normality distribution.
85
3. Classic Assumption Test
As a condition of use of regression analysis, hence beforehand is done Classic
Assumption Tests, what covers Multicollinerity Test, Heteroscedasticity Test, and
Autocorrelation Test.
a. Multicollinerity Test
Multicollinerity test aims to test whether in regression model is found a
correlation among independent variables. In statistics, Multicollinerity (also
collinearity) is a phenomenon in which two or more predictor variables in a multiple
regression model are highly correlated, meaning that one can be linearly predicted
from the others with a substantial degree of accuracy. The way to know either there is
symptom of Multicollinerity or not is by seeing the value of Variance Inflation Factor
(VIF) and tolerance, if the value of VIF is less than 10 and value of tolerance is more
than 0.1, thus, it is stated that Multicollinerity does not occur. The Multicollinerity
test can be seen in the following table:
Table 4.2:
The Result of Multicollinerity Test
Collinearity Statistics
Variable Tolerance VIF Conclusion
CAR 8.34 1.199 No Multicollinerity
ROA 5.87 1.703 No Multicollinerity
NPF 6.73 1.486 No Multicollinerity
OEOI 6.07 1.647 No Multicollinerity
FDR 7.98 1.253 No Multicollinerity
Source: Primary Data Processed
Based on the result Table 4.2: the value of VIF for CAR is 1.199, the value of
VIF for ROA is 1.703, the value of VIF for NPF is 1.486, the value of VIF for OEOI
is 1.647, and the value of VIF for FDR is 1.253. It can be seen that the value of
Variance Inflation Factor for all independent variables is less than 10. The value of
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Tolerance for CAR is 8.34, the value of Tolerance for ROA is 5.87, and the value of
Tolerance for NPF is 6.73, the value of Tolerance for OEOI is 6.07, and the value of
Tolerance for FDR is 7.98. The value of Tolerance for all independent variables is
also bigger than 0, 1. Therefore, it can be concluded that the Multicollinerity does not
occur on CAR, ROA, NPF, OEOI, and FDR independent variables.
b. Heteroscedasticity Test
Heteroscedasticity test is used to indicate in a regression model whether there is
variance inequality of residual on one observation to other observations.
Heteroscedasticity can be indicated by seeing the resulted scatterplot. The existence
of Heteroscedasticity is a major concern in the application of regression analysis,
including the analysis of variance, as it can invalidate statistical tests of significance
that assume that the modelling errors are uncorrelated and uniform—hence that their
variances do not vary with the effects being modeled. The result of Heteroscedasticity
test can be seen in the following graph:
Figure 4.1:
The Result of Heteroscedasticity Test
Source: Primary Data Processed
87
From the scatterplot Graphs 4.1: above, it is appeared that the data points are
spread out, not only gather above or below Y axis. Then the distribution does not
form a wavy pattern. Then, glejser test can also be used for ensuring the
Heteroscedasticity does not occur. Accordingly, if the significance value among
independent variables with residual is more than 0, 05, then, Heteroscedasticity does
not occur.
c. Autocorrelation Test
Autocorrelation test is used to detect the internal correlation among the groups
of a series observation arrange in a series of place and time. Autocorrelation, also
known as serial correlation or cross-autocorrelation is the cross-correlation of
a signal with itself at different points and the problematic autocorrelation of the
errors, which themselves are unobserved, can generally be detected because it
produces autocorrelation in the observable residuals. A good regression model does
not have autocorrelation problem. The basic of decision making in this test are based
on Durbin-Watson Test and Run Test, which can be seen in the table below:
Table 4.5:The Result of Autocorrelation Test
Model Summary b
Model R
R
Square
Adjust
ed R Square
Std. Error
of the Estimate Durbin-Watson
1 .428a .183 .107 87.10382 1.613
a. Predictors: (Constant), FDR, ROE, CAR, NPF, OEOI
b. Dependent Variable: Y
Source: Primary Data Processed
Testing method that usually used is by using Durbin-Watson Test (DW test)
with testing criteria as follows:
1. Du < dw < 4 - du, thus Ho is accepted, autocorrelation does not occur.
2. dw < dl or dw > 4 - dl, thus Ho is rejected, autocorrelation occurs.
3. Dl < dw < du or 4 – du < dw < 4 – dl, uncertainty occurs.
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Based on the Table 4.5: it can be seen that the significance value of DW is
1.613 and the value of d count is placed between Du formula and 1.7 – (Du < Dw < 4
- Du), which is Ho is accepted, and therefore, it can be concluded that in the result of
test autocorrelation does not occur and free from problem.
2. Hypothesis Test
In statistic hypothesis test is a method of statistical inference. A t-test is most
commonly applied when the test statistic would follow a normal distribution if the
value of a scaling term in the test statistic were known. Commonly, two statistical
data sets are compared, or a data set obtained by sampling is compared against a
synthetic data set from an idealized model. A hypothesis is proposed for the statistical
relationship between the two data sets, and this is compared as an alternative to an
idealized null hypothesis that proposes no relationship between two data sets.
a. t-Test
This test is used to know whether independent variables partially influence
towards dependent variable, or not, by assuming other independent variables are
constant.
Table 4.6:The Result of t-Test
Coefficients a
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig.
Collinearity
Statistics
B Std. Error Beta Tolerance VIF
(Constant) -364.205 1038.979 -.351 .727
CAR 83.164 548.882 .020 .152 .880 .834 1.199
ROE -997.628 605.263 -.265 -1.648 .105 .587 1.703
NPF -696.500 714.087 -.146 -.975 .334 .673 1.486
OEOI -344.095 640.599 -.085 -.537 .593 .607 1.647
FDR 1207.384 553.404 .300 2.182 .034 .798 1.253
a. Dependent Variable: YSource: Primary Data Processed
Based on the table of coefficient above, it can be acquired that the variable of
CAR (X1) has not significance value of 8.80 which is greater than 0, 05 (8.80 > 0, 05)
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and also has t count of 1.52 which is less than t table of 1, 688 (1.52 < 1,688). Thus,
it means H0 is not rejected and Ha is not accepted because of t count is less than t
table and the value of significance is greater than α (0, 05), it can be concluded that
the variable of CAR partially doesn’t influence towards Depositor Fund. The cause of
the insignificant impact of Islamic banking depositor funds in Indonesia is not usually
maintain financial liquidity, apart from Bank Indonesia to follow the reference to the
amount of the provisions of CAR, as well as an decrease in public confidence in the
Islamic banking to increased capital of the company and followed the principles of
good risk management.
The variable of ROA (X2) has not significance value of 10. 5 which is greater
than 0, 05 (10. 5 > 0, 05) and also has t count of -1.648 which is less than t table of 1,
688 (-1.648 < 1,688). Thus, it means H0 is not rejected and Ha is not accepted
because of t count is less than t table and the value of significance is greater than α (0,
05), it can be concluded that the variable of ROA partially doesn’t influence towards
Depositor Fund. The cause of the lack of significant effect at ROA of Islamic banking
of depositor funs may be due to income earned is not optimal because Islamic
banking is still in the stage of expansion and expanding office network, the affect the
profits that are used to reproduce a form of property assets, information systems, HR
training etc.
The variable of NPF (X3) has not significance value of 33.4 which is greater
than 0, 05 (33.4 > 0, 05) and also has t count of -9.75 which is greater than t table of
1, 688 (-9.75 > 1,688). Thus, it means H0 is not rejected and Ha is not accepted
because of t count is less than t table and the value of significance is greater than α (0,
05), it can be concluded that the variable of NPF partially doesn’t influence towards
Depositor Fund. The cause of insignificant non-performing financing to depositor
funds ratio of Islamic banking may be the reason that all procedures and regulations
in the management of credit is not doing well and the funds does not provided to the
customer actually selected with strict quality.
90
The variable of OEOI (X4) has not significance value of 59.3 which is greater
than 0, 05 (59.3 > 0, 05) and also has t count of -5.37 which is greater than t table of
1, 688 (-.537 > 1,688). Thus, it means H0 is not rejected and Ha is not accepted
because of t count is less than t table and the value of significance is greater than α (0,
05), it can be concluded that the variable of OEOI partially doesn’t influence towards
Depositor Fund. This could be because the low motivation management and
stakeholder to manage its operations efficiently, this cannot be done because the size
of Islamic banking company that is still relatively small so that all operational
activities of banking can be monitored well and they although cannot identify
potential inefficiencies quickly and directly carried out repairs.
The variable of FDR (X5) has significance value of 03.4 which is less than 0, 05
(03.4 > 0, 05) and also has t count of 2.182 which is less than t table of 1, 688 (2.182
> 1,688). Thus, it means H0 is rejected and Ha is accepted because of t count is
greater than t table and the value of significance is greater than α (0, 05), it can be
concluded that the variable of FDR partially influence towards Depositor Fund.
Cause of significant effect to depositor funds may be due to the bank tries to maintain
liquidity and stability of the banking healthiness from the effect of external factors
that potentially interfere to Islamic banking operations.
b. F-Test
F- Test is done in order to know the influence of independent variables towards
dependent variable simultaneously.
Table 4.7:
The Result of F-Test
ANOVA a
Model Sum of Squares Df Mean Square F Sig.
1 Regression 91635.544 5 18327.109 2.416 .048b
Residual 409702.077 54 7587.075
Total 501337.621 59
a. Dependent Variable: Y
b. Predictors: CAR (X1), ROA (X2), NPF (X3), OEOI (X4), and FDR (X5)
Source: Primary Data Processed
91
Based on the Table 4.7: above, it is known that the value of level significance is
0,048 which is less than significance level of 0, 05 (0,048 < 0, 05) and otherwise the
score of F count is 2.416 which is greater than F table of 2, 16 (2.416 > 2, 16).
Finally, the result test showed that the independent variables such as CAR (X1), ROA
(X2), NPF (X3), OEOI (X4), and FDR (X5) simultaneously influence towards
Depositor Fund.
3. Multiple Regression Analysis
a. Regression Equation
Technique of analysis that has been used in this research is the multiple linier
regressions. Analysis of multiple linier regressions is used as the analysis tools of
statistics because this research has been designed to research the variables which have
influence among independent variables and dependent variable. Regression equation
can be determined by seeing the table below as:
Table 4.8:
The Result of Multiple Linier Regressions
Coefficients a
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
Collinearity Statistics
B Std. Error Beta Tolerance VIF
(Constant) -364.205 1038.979 -.351 .727
CAR 83.164 548.882 .020 .152 .880 .834 1.199
ROE -997.628 605.263 -.265 -1.648 .105 .587 1.703
NPF -696.500 714.087 -.146 -.975 .334 .673 1.486
OEOI -344.095 640.599 -.085 -.537 .593 .607 1.647
FDR 1207.384 553.404 .300 2.182 .034 .798 1.253
a. Dependent Variable: Y
Source: Primary Data Processed
From Table 4.8: of coefficients above, thus the regression model reached is as
follows: Y (Depositor Fund) = - 364.205 + β1 83.164 CAR + β2 - 997.628 ROA + β3 -
696.500 NPF + β4 -344.095 OEOI + β5 1207.384 FDR + e
92
Where;
Y = Depositor Funds
a = Constanta
X1 = CAR
X2 = ROA
X3 = NPF
X4 = OEOI
X5 = FDR
β1 β5 = Regression coefficient
e = error
The regression equations show that the Constanta of Depositor Funds amount
of - 364.205 is negative. It means if independent variables such as CAR, ROA, NPF,
OEOI and FDR assumed to be constant inexistence of independent variables such the
variables of CAR, ROA, NPF, OEOI, and FDR. Then, the dependent variable which
is assumed that the Islamic banking Depositor Fund tends to decrease.
The regression equality shows that the regression coefficient of variable
Capital Adequacy Ratio (CAR) is negative. The ratios would compared with
Depositor Funds as a reflect level of public trust for Islamic banking industry in
Indonesia. If the ratios indicate a good performance, it sign that the bank can manage
all of the aspect well and supposed to increase depositor funds in Islamic bank. The
output is determined as Capital Adequacy Ratio (CAR), the ability of banks offset a
decline in assets due to losses on bank assets using its own capital. The greater this
ratio, it means the better bank's capital adequacy ratio.
The regression equality shows that the regression coefficient of variable Return
on Assets (ROA) is negative. The Return on Assets (ROA), which measures the
effectiveness of the company in utilizing all resources in order to measure the ability
to generate profits. The higher this ratio, it means the more effective use of assets to
obtain income and the better performance of the bank.
93
The regression equality shows that the regression coefficient of variable Non-
Performing Financing (NPF) is negative. The Non-Performing Financing (NPF),
which measures the level of bad debt that had to be reserved. The smaller this ratio, it
means that the better performance of the bank.
The regression equality shows that the regression coefficient of variable
Operating Expense to Operating Income (OEOI) is negative. The Operating Expense
to Operating Income (OEOI), which measures the level of efficiency and distribution
of the bank in conducting its operations. The smaller this ratio, it means that the
better performance of the bank. The regression equality shows that the regression
coefficient of variable Operating Expense to Operating Income (OEOI) is positive.
The Financing to Deposit Ratio (FDR), ability to repay the bank withdrawals by
customers with relying on loans as a source of liquidity.
b. Determinant Coefficient (Adjusted R2)
Coefficient of determination (R2) is basically used to measure regarding how
far the ability of model can define variance of dependent variable. Therefore, many
researchers suggest to use the value of Adjusted R2. Then, the result of determinant
coefficient can be seen, as follows:
Table 4.9:The Result of Determinant Coefficient
Model Summary b
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate Durbin-Watson
1 .428a .183 .107 87.10382 1.613
a. Predictors: (Constant), FDR, ROE, CAR, NPF, OEOI
b. Dependent Variable: YSource: Primary Data Processed
Based on the Table of 4.9: above, it shows that Adj. R2 is .428a or 42.8%. This
means that 42.8% as the value of dependent variable which is Depositor Fund how is
influenced by independent variables such as CAR, ROA, NPF, OEOI, and FDR
based on the Classical Assumption Test and Regression Analysis Model which are
analysed.
94
CHAPTER V
CONCLUSION
Summary of the Research
Based on the research analysis has done in this study, can be concluded that
Islamic banking in Indonesia as an alternative banking sector in contrast conventional
banking, its capital ratio get starts from Depositor Fund. Practically, Islamic bank in
its operation provides Depositor Fund products based on the Mudharabah and
Wadiah transactions for saving and investing money of depositors such as; Term
Deposit, Saving Deposit, and Current Deposit. Similar to conventional banking
sector, Islamic bank also depend on depositors money as a major source of fund and
for that reason, deposits are even more important in Islamic banks for wealth creation.
And otherwise, despite of growth Islamic banking in Indonesia, the system face
challenges, especially in Mudharabah deposit transactions which are saved or
invested, it is similar conventional banking deposit transaction. Accordingly, this
kind of product in Islamic bank operations which is provided has a high benefits of
value for growing national economy in terms of reducing inflation, stabilizing the
economy, catalyzing real sector development, reducing unemployment, promoting
justice and social equality, as well as improving the social-welfare and therefore this
transaction should be relevant to the sharia compliance requirements.
On the other hand, the regression analysis of research result showed that data
were collected and analysed, the factors of performance Depositor Fund in operation
Islamic Banks are based on financial ratio principles that consist of Capital Adequacy
Ratio (CAR), the ability of banks offset a decline in assets due to losses on bank
assets using its own capital, Return on Assets (ROA), which measures the
effectiveness of the company in utilizing all resources in order to measure the ability
to generate profits, Non-Performing Financing (NPF), which measures the level of
bad debt that had to be reserved, Operating Expense to Operating Income (OEOI),
which measures the level of efficiency and distribution of the bank in conducting its
operations, and the Financing to Deposit Ratio (FDR), ability to repay the bank
95
withdrawals by customers with relying on loans as a source of liquidity based on the
CAMEL Model assessment. Based on the above evidences for the study can be
summarized that Islamic Banks in Indonesia during 2010-2014 have an average CAR
of 16, 10%, ROA of 0, 80%, NPF at 4, 33%, OEOI of 93.5% and FDR of 91, 50%
and 217.858 billion Depositor Fund that get starts its capital from Mudharabah
transactions. Simultaneous hypothesis states that some of independent variables are
represented such as CAR, ROA, NPF, OEOI do not significantly influence Depositor
Fund except of FDR variable, this means that the variables used in this study
positively are not affect the Depositor Fund of Islamic banks, where the uninfluenced
of the variables CAR, ROA, NPF, OEOI and FDR used for the analysis of
performance Depositor Fund.
Based on the partial test results can be seen that the variables that are used,
there is no significant effect on the Islamic banking depositor funds, these variables
include CAR, ROA, NPF and FDR, while the variable that significant influence on
the depositor funds is FDR. Although ratios CAR, ROA, ROA NPF and OEOI had no
significant effect on depositor funds, but all variables including CAR and OEOI
provide a positive influence on the depositor funds in Islamic banking in Indonesia.
In general, the efficiency of Islamic banking in Indonesia began to revive and orderly
return from 2010 to reflect on the experience in 2014 mainly on the aspects of credit
management and risk management of Islamic banking and it does mean the Islamic
banking sector in providing profit and loss of financing has negative performance
which is weakness based on the financial ratio factors are considered.
B. Implication of the Research
Firstly, the implication of study can be inferred from the research results
following as the implication study in Islamic banking models which is the
fundamental of system and how does it work in operating Islamic banking product
and services. Specifically, the study implicated on Islamic Commercial Banking
(BUS) and Business Unit Banking (UUS) which is Islamic Banking System is
classified into three models: Shari’ah Commercial Bank (BUS), Shari’ah Business
96
Unit (UUS), and Sharia Rural Bank (SRB). The second of implication study is the
differences of product Islamic bank that provides on performance Depositor Fund.
Practically, in Indonesia Islamic banks 0n their operations provide three kinds of
products such as: financial, commercial and social, but this research is implicated in
financial product that mainly called Mudharabah contract in performing Depositor
Fund efficiency. In the process of research is determined that Islamic bank provides
the Mudharabah transactions mostly for deposit than for investment in asset side
financial statement. And the third of implication study is implemented in Depositor
Fund of Islamic banks based on the Mudharabah contract in various transactions such
as: Time Deposit, Saving Deposit, and Investment Deposit. Practically, Depositor
Fund of Islamic Banks get starts from these kinds’ product such as Wadiah and
Mudharabah deposits.
C. Recommendation for the further of Research
Based on the above evidences and results of study in comparison with previous
researchers that were analyzed, and found that, currently there are several issues in
Islamic banking system, therefore, as a researcher would like to suggest that it must
be researched in the future and find out the alternatives solution for development
Islamic Banking System in Indonesia following as:
1. Further research in Information Technology Innovation for development
Islamic Banking System of Indonesia has more strategically values, due to IT
industry currently are getting more sophisticated. They have given banks a potential
they could only dream about and have given bank customers high expectations. The
changes that new technologies have brought to banking are enormous in their impact
on officers, employees, and customers of banks. Advances in technology are allowing
for delivery of banking products and services more conveniently and effectively than
ever before - thus creating new bases of competition. Rapid access to critical
information and the ability to act quickly and effectively will distinguish the
successful banks of the future. The bank gains a vital competitive advantage by
having a direct marketing and accountable customer service environment and new,
97
streamlined business processes. Consistent management and decision support systems
provide the bank that competitive edge to forge ahead in the banking marketplace.
The 21st century will bring about an all-embracing convergence of computing,
communications, information and knowledge.
This will radically change the way we live, work, and think. The growth of high
speed networks, coupled with the falling cost of computing power, is making possible
applications undreamed of in the past. Voice, data, images, and video may now be
transferred around the world in micro-seconds. This explosion of technology is
changing the banking industry from paper and branch banks to' digitized and
networked banking services. It has already changed the internal accounting and
management systems of banks. It is now fundamentally changing the delivery
systems banks use to interact with their customers. All over the world, banks are still
struggling to find a technological solution to meet the challenges of a rapidly-
changing environment. It is clear that this new technology is changing the banking
industry forever. Banks with the ability to invest and integrate information
technology will become dominate in the highly competitive global market.
Technological innovations have enabled the industry to open up efficient
delivery channels. IT has helped the banking industry to deal with the challenges the
new economy poses. Technology is also changing the supervisory and regulatory
landscape. It is creating new tools for supervisors and new supervisory challenges.
Technology-driven issues such as privacy and the nature of electronic
communications have reached the forefront of the policy agenda. And the line
between electronic banking and electronic commerce is becoming more difficult to
define clearly. More than most other industries, financial institutions rely on
gathering, processing, analyzing, and providing information in order to meet the
needs of customers. Given the importance of information in banking, it is not
surprising that banks were among the earliest adopters of automated information
processing technology.
98
2. Risk management in Islamic banking sector is potentially more important, do
to, one of the serious problem in this sector is a high risk of transactions banking that
Islamic banks face in their operations for increasing productivity of developing high
ratio of capital asset and return to investment, especially in positive performance of
depositor fund. Thus, Islamic bankers in being sponsorship of project applied
research for authorities of growing Islamic banking productivity in risk taking instead
of risk avoiding have more professional responsibilities. Practice already showed that
many depositor Muslims are unwilling to save their money for long term saving and
investment deposits in Islamic bank. Therefore, to find the alternative solution for
these problem scholars need in enthusiastic position to run professionally research
and innovation in Islamic finance institutions and to find the advantages of high risk
taking and sharing values in long-term trustee financing transaction in mutual
corporation for development Islamic banking system in Indonesia.
3. Further research of Human Resource Management in development Islamic
banking in Indonesia has more strategically values. Because of, the one of currently
problem Islamic banks face to this challenges is the issue of Human Capita
Development. Therefore in solving this problem it should be recovered by scholars
for improvement Innovation Human Resource Management Model as an important
function to maximize employee performance efficiency and quality of services staff
for development Islamic banking industry.
4. The one of reason for slow market share growth Islamic banking system in
Indonesia affected is the lack of understanding quality product Islamic bank, poor
education and training customers, and the low of demand costumers. Therefore in
further research, researchers have to focus in this issue for Strategic Marketing
Management in Islamic Banking product and services that following as: customer
creation value, brand evolution and awareness, real customer needs analysis, and
creating benefits of product and services for public trust should be the reasons of
development Islamic banking industry in contrast of conventional banking system.
99
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APPENDIXES
Appendix A: Sample of Data Collection
FACTORS CAR ROA NPF IEOI FDR DepositorFund
Period No Month Bank X1 X2 X3 X4 X5 Y
201020102010201020102010201020102010201020102010201120112011201120112011201120112011201120112011201220122012201220122012201220122012201220122012201320132013201320132013201320132013201320132013201420142014201420142014201420142014201420142014
123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960
JanuaryFebruary
MarchAprilMayJuneJuly
AugustSeptember
OctoberNovemberDecember
JanuaryFebruary
MarchAprilMayJuneJuly
AugustSeptember
OctoberNovemberDecember
JanuaryFebruary
MarchAprilMayJuneJuly
AugustSeptember
OctoberNovemberDecember
JanuaryFebruary
MarchAprilMayJuneJuly
AugustSeptember
OctoberNovemberDecember
JanuaryFebruary
MarchAprilMayJuneJuly
AugustSeptember
OctoberNovemberDecember
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11.26%11.43%11.07%12.12%12.31%12.89%14.66%14.23%14.58%15.74%15.40%16.25%20.23%15.17%16.57%19.86%19.58%15.92%15.92%15.83%16.18%15.30%14.88%16.63%16.27%15.91%15.33%14.97%13.40%16.12%16.12%15.63%14.98%14.54%14.82%14.13%15,29%15,20%14,30%14,72%14,28%14,30%15,28%14,71%14,19%14,19%12,23%14,42%16,76%16,71%16,20%16,68%16,85%16,21%15,62%14,73%14,54%15,25%15.66%16,10%
1.65%1.76%2.13%2.06%1.25%1.66%1.67%1.63%1.77%1.79%1.83%1.67%2.26%1.81%1.97%1.90%1.84%1.84%1.86%1.81%1.80%1.75%1.78%1.79%1.36%1.79%1.83%1.79%1.99%2.05%2.05%2.04%2.07%2.11%2.09%2.14%2,52%2,29%2,39%2,29%2,07%2,10%2,02%2,01%2,04%1,94%1,96%2,00%0,08%0,13%1,16%1,09%1,13%1,12%1,05%0,93%0,97%0,92%0,87%0,80%
4.36%4.75%4.53%4.47%4.77%3.89%4.14%4.10%3.95%3.95%3.99%3.02%3.28%3.66%3.60%3.79%3.76%3.55%3.75%3.53%3.50%3.11%2.74%2.52%2.68%2.82%2.76%2.85%2.93%2.88%2.92%2.78%2.74%2.58%2.50%2.22%2,49%2,72%2,75%2,85%2,92%2,64%2,75%3,01%2,80%2,96%3,08%2,62%3,01%3,53%3,22%3,48%4,02%3,90%4,31%4,58%4,67%4,58%4,86%4,33%
84.87%79.73%76.27%77.15%85.79%79.99%79.77%80.36%79.10%78.94%77.70%80.54%75.75%79.56%77.63%78.78%79.05%78.13%77.13%77.65%77.54%78.03%77.92%78.41%86.22%78.39%77.77%77.77%76.24%75.74%75.87%75.89%75.44%75.04%75.29%74.75%70,43%72,06%72,95%73,95%76,87%76,18%76,13%77,87%77,98%79,06%78,59%78,21%80,05%83,77%91,90%84,50%76,49%71,76%79,80%81,20%82,39%75,61%93.50%
0,792784
88.67%90.96%95.07%95.57%96.65%96.08%95.32%98.86%95.40%94.76%95.45%89.67%91.97%95.16%93.22%95.17%94.88%94.93%94.18%98.39%94.97%95.24%94.40%88.94%87.27%90.49%87.13%95.39%97.95%98.59%99.91%101.03%102.10%100.84%101.19%100.00%100,63%102,17%102,62%103,08%102,08%104,43%104,83%102,53%103,27%103,03%102,58%100,32%100,07%102,03%102,22%95,50%99,43%100,80%99,89%98,99%99,71%98,99%94,62%91,50%
45.55945.11345.04546.09244.79545.49347.70651.17753.84756.48457.16263.64263.40163.68967.21168.04870.70873.60175.81278.49682.93985.87189.8998.01498.7498.295
101.13596.55797.281
100.354101.347104.088105.235112.323117.274122.355124.598128.147135.01
134.496239.905139.487140.524144.437146.645148.577150.006154.271151.965152.557156.47
160.802163.389163.18164.96
168.201168.404179.169181.156186.649
106
Appendix B: The Result of Normality Test Analysis
Normality Test
Statistics
CAR ROE NPF OEOI FDR Y
N Valid 60 60 60 60 60 60
Missing 0 0 0 0 0 0
Mean .3889 .1284 .1840 .8858 .9864 298.0218
Median .3907 .1349 .1803 .8829 .9908 312.4854
Mode .38a .13 .17a .88 .99 94.81a
Std. Deviation .02262 .02445 .01936 .02272 .02294 92.18052
Variance .001 .001 .000 .001 .001 8497.248
Skewness -.100 -2.293 .305 1.312 -.496 -.391
Std. Error of Skewness .309 .309 .309 .309 .309 .309
Kurtosis 1.627 6.545 -1.156 3.373 -.482 -.384
Std. Error of Kurtosis .608 .608 .608 .608 .608 .608
Sum 23.34 7.70 11.04 53.15 59.18 17881.31
a. Multiple modes exist. The smallest value is shown
Histogram Charts
107
108
109
Appendix C: The Result of Classic Assumption Tests
1. Multicollinerity Test
Coefficients a
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig.
Collinearity
Statistics
B Std. Error Beta Tolerance VIF
(Constant) -364.205 1038.979 -.351 .727
CAR 83.164 548.882 .020 .152 .880 .834 1.199
ROE -997.628 605.263 -.265 -1.648 .105 .587 1.703
NPF -696.500 714.087 -.146 -.975 .334 .673 1.486
OEOI -344.095 640.599 -.085 -.537 .593 .607 1.647
FDR 1207.384 553.404 .300 2.182 .034 .798 1.253
a. Dependent Variable: Y2. Autocorrelation Test
Model Summary b
Model R R SquareAdjusted R
SquareStd. Error of the
Estimate Durbin-Watson
1 .428a .183 .107 87.10382 1.613
a. Predictors: (Constant), FDR, ROE, CAR, NPF, OEOI
b. Dependent Variable: Y
3. Heteroscedasticity Test
110
Appendix D: The Result of Hypothesis Tests
Hypothesis Test
a) T-Test
Coefficients a
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig.
Collinearity Statistics
B Std. Error Beta Tolerance VIF
(Constant) -364.205 1038.979 -.351 .727
CAR 83.164 548.882 .020 .152 .880 .834 1.199
ROE -997.628 605.263 -.265 -1.648 .105 .587 1.703
NPF -696.500 714.087 -.146 -.975 .334 .673 1.486
OEOI -344.095 640.599 -.085 -.537 .593 .607 1.647
FDR 1207.384 553.404 .300 2.182 .034 .798 1.253
a. Dependent Variable: Y
b) F-Test
ANOVA a
Model Sum of Squares df Mean Square F Sig.
1 Regressio
n91635.544 5 18327.109 2.416 .048b
Residual 409702.077 54 7587.075
Total 501337.621 59
a. Dependent Variable: Y
b. Predictors: CAR (X1), ROA (X2), NPF (X3), OEOI (X4), and FDR (X5)
111
Appendix E: The Result of Multiple Regression Analysis
1. Multiple Regression method
Coefficients a
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig.
Collinearity
Statistics
B Std. Error Beta
Toleran
ce VIF
(Constant) -364.205 1038.979 -.351 .727
CAR 83.164 548.882 .020 .152 .880 .834 1.199
ROE -997.628 605.263 -.265 -1.648 .105 .587 1.703
NPF -696.500 714.087 -.146 -.975 .334 .673 1.486
OEOI -344.095 640.599 -.085 -.537 .593 .607 1.647
FDR 1207.384 553.404 .300 2.182 .034 .798 1.253
a. Dependent Variable: Y
2. Determinant Coefficient (Adjusted R2)
Model Summary b
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate Durbin-Watson
1.428a .183 .107 87.10382 1.613
a. Predictors: (Constant), FDR, ROE, CAR, NPF, OEOI
b. Dependent Variable: Y
