2011 12 wp persistence of low pls financing in ib ind ppt

8/13/2019 2011 12 WP Persistence of Low PLS Financing in IB IND PPT

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WORKING PAPER

Jakarta December 23 2011

The Persistence of Low Profit‐and‐Loss Sharing

s c a r y a s c a r y [email protected]



Contents

Background / Objective / Methodology / Benefit

Why PLS? / Previous Studies

Methodology

Model Construction / Model Quantification / Synthesis & Analysis

Geometric Mean

Rater

A reement

Results and Analysis

2



Introduction

51.9% 53.0%52.3%

Assets Deposits Financing gAssets gDeposits gFinancing

48.8%47.6% 47.8%

41.8%

45.5%45.4%

98

36.2% 36.7%35.6%

33.4%35.5%

34.2%

36.7% 36.7%

3752

7628.0%

31.4% .

31.6%.

3 4 8 15 21 27 37 50 66 98 1232 3 6 12 16 212 3 6 11 15 20 28 38 47 68 9322.8%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* n t ere were s am c an s an s am c ranc es w t on y o ces

and 0.2% market share (Rp.1.8 trillion). In September 2011 there were 11

Islamic Banks and 23 Islamic Branches with 1683 offices 1277 O ice 3

Channeling, and

3.7%

market

share

(Rp.123.4

trillion),

with

FDR

95.7%.



Introduction

8.4 12.0 8.6 4.5 4.7 7.0 5.0 5.5 7.8 10.9

Mudharabah Musharakah Murabahah Others

66.5 62.3 61.7 59.2 58.9 55.9 55.0

.

12.5 11.4 15.8 19.4 22.2

.70.9 . .

19.6 15.2 14.4 18.0 20.5 19.9 20.0 16.2 14.1 12.7 10.7

.

1.8 5.5

. . 18.6

Nevertheless, the portfolio of financing comprised of 29.3% PLS (musharakah 18.6%

and mudharabah 10.7%)

and

70.7%

non

‐PLS

(murabahah 54.1%

and

others

16.6%).

PLS financing is not only the essence of Islamic finance but also is more appropriate

modes of financing to stimulate the real sector, to stabilize financial system and to curb

4

,

entrepreneur.



Introduction

Objective

Indonesia Islamic banking industry and to find alternative solutions and

policy strategies

to

improve

it.

Methodology

This study will apply ANP methodology in three steps: 1) questioner and in‐

depth

interview

to

develop

ANP

network;

2)

Pair‐

wise

comparison

using

in‐

depth interview; and 3) ANP synthesis and analysis.

The results of this study can be used as inputs and feedbacks by related

,

,

,

Indonesia, and the government to take appropriate policy actions to deal

with the current problems and attain the expected goals.

5



Why Profit and Loss Sharing?

Hinder Ec. Interest S stem

Money Creation

&

Growth

Real Sector

on rac on

PLS System Accelerate Ec.

Wealth

&

Income

Productivity

&

Real Sector

6

Source:

Sakti

(2007)

row



Why Profit and Loss Sharing?Interest PLS

ReturnEconom c

Growth

G1 r1 e1

0 0G0

InvInvInvI0 I0’I1’I1 I0’ I1’0 0 0

• Interest (riba) system has negative relationship with the economy and causes money turn over

instability in the economy. Interest (riba) system can impede investment and economic growth.

Thus, it is difficult to synchronize monetary sector and real sector, since the two sides have

.

• PLS system has positive relationship with the economy and causes money turn over becomes

effective and efficient at macro and micro levels that subsequently will cause stability in the

7

. . . ,

real sector,

since

the

two

sides

have

similar

interests

and

objectives

in

the

economy.



Why Profit and Loss Sharing?

90%

100%

90%

100%

50%

60%

70% XINF

LNADM

LNVF

LNEXC 50%

60%

70% XINF

LNADM

LNVF

20%

30%

40% INT

LNFRB

LNFM

LNINF 20%

30%

40%RS

LNIM

LNINF

0%

10%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

0%

10%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

• Main source of inflation under conventional perspective (lnFM fiat money 0.9% ,

lnFRB fractional

reserve

banking

2.4%

,

INT interest

rate

54.7%,

and

lnEXC exchange

ra e . g ve . s are o n a o n n n ones a, w e we rep ace ese ree

systems according to Islamic perspective (lnIM just money supply 1.7%, RS PLS return

2.9%, and lnGOLD single global currency 0.5%) will give only 5.1% share to inflation

8

in Indonesia.

Source:

Ascarya

(2009)



Why Profit and Loss Sharing?Response

of

Conventional

FSI Response

of

Islamic

FSI

0.4

LN_FSI_SYH LN_ER INFLASI SBI SBIS LN_GDPR

0.4

LN_FSI_KONV LN_ER INFLASI SBI SBIS LN_GDPR

0.3 0.3

0.1

.

0.1

.

‐0.11 6 11 16 21 26 31 36 41 46 51 56

‐0.11 6 11 16 21 26 31 36 41 46 51 56

‐0.2 ‐0.2

• Schocks of macro‐economic variables to Conventional FSI tend to be large and

.

• Meanwhile, schocks of macro‐economic variables to Islamic FSI tend to be

small and do not harm financial stability [INFLASI(‐) dan GDP(‐)].

9

Source:

Ascarya

and

Yumanita

(2009)



Previous Studies

Problems of

Low

PLS

Financing

Khan 1995 : aversion to risk of Islamic bankers, moral hazard, as mmetric

information.

Sarker (1999):

MACRO;

No

uniform

Shariah

opinions,

Lack

of

skilled

and

expert HR, Fierce competition, Lack of uniform SOP. MICRO; Cost of

information, Not ready for higher risk, Lack of Shariah manual, Lack of

Chapra (2000):

Unable

to take

higher

risk,

Risk

averse

depositors,

Low

demand, Adverse selection, Moral hazard, Unfair tax treatment, Lack of

supporting institutions, Lack of Islamic financial market, Lack of support from

monetary authority.

ar an res ey : gency pro em, roper y r g s, m e ro e o

Investor, Unfair tax treatment, No secondary market, Unbalanced

management rights and control.

10



Previous Studies

Problems of

Low

PLS

Financing

Algoud and Lewis (2001): Less applicable for W capital, Small business, Long‐term

project; Agency problem, Asymmetric information, Adverse selection, Moral hazard.

Mulyawan (2001): Less flexible fund utilization, risk averse, agency problem.

, ,

hazard, Lack of incentive structure, Agency problem, High monitoring cost.

Al Jarhi (2002) and Parinduri (2003): Moral hazard, adverse selection.

IFSB

(2005):

Credit

risk,

Equity

Investment

Risk,

Market

risk,

Liquidity

risk,

RoR

risk,

Operational risk.

Greuning and Iqbal (2007): Inherent risks, low apetite for risk, monitoring cost, lack of

transparency, depositors’ risk aversion, asymmetric information.

Febianto and Kasri (2007): lack of risk management.

moral hazard type I (disincentive), and moral hazard type II (falsification); b) profit function

and utility function of capital owner and entrepreneur, c) willingness to pay; d) reservation

utilit e incentive com atibilit and f artici ation. Other determinants include risk

11

aversion, financial constraint, length of contract, performance standard, and signal.



Previous Studies

ASPECTS 2005 STUDY 2009 STUDY1st 2nd 1st 2nd

Internal

Problems

Lack of Quality &

Quantity of Human

Resource

Averse to Risk Technical: No

Management

tools; Higher

Risk

Top Management: Lack

of Commitment;

Business Oriented

Solutions

Improvement

SOP

Commitment

External Regulation: Lack of

Supportive

Government:

Lack of Support

Authority: Lack of

Commitment;

Society: Lack of Trust;

Lack of Perception

Regulations Lack of Support

External

Solutions

Supportive

Regulations

Incentive Authority:

Commitment

Society:

Communication;

’

Policies Directed Market

Driven

Directed Market

Driven

Professionalism

‐‐ ‐‐ Service

Socialization

&

Strategies Improvement Communication

Program

12



PreviousModel 1

13



Previous Model 2

15



Current Model

Lack of

PLS

Financing

B.O.C./B.O.D. SocietyConventional

Dominantionac o n e s an ng

Business Oriented

Averse to Risk

Lack of Commitment

ve s y

Lack/Lost of Trust

Lack of Perception

Lack of Knowledge

Politics

oug eo ogy

Economy

Social

AuthorityHuman Resource

Lack of Knowledge & Skill Lack of Understanding

Unsupportive Environment

Value

CustomerTechnical

Averse to EffortLack of SupportLack of Incentive

Averse to Risk

Conventional Competition

Infrastructure

Rule

Less Applicable

Higher Risk

Lack of Knowledge

Low DemandMore ComplicatedAverse to Risk

Institution

Product

Instrument

16

ac o anagement oo s Floating Majorityerv ce



Current Model

I n t e r n a l E x t e r n a lS y s t e m

Commitment

CommunicationUnion & Cooperation

Protocol &

Grand

Strategy

B.O.C./B.O.D. Society

Fit & Proper

Da’wah

Conventional Dominantion

Selection CommitmentSupport

Law & Regulation

Human Resource

Improvement

Authority

Unsupportive Environment

Infrastructure

Simplification Education

ncen ve

Technical

Innovation

Customer

Promotion

erna ve s am c ys em

Conventional CompetitionIncrease Share

Improve Standard

Directed Mkt

Driven Shariah Com liance

IT & SOP IncentiveDiversification

Fair Treatment

Gradual & Sustainable Professionalism

S t r a t e g i e sNew Image Program

New Market Ma in

Product Development

Pro ram

17

erv ce Improvement

Program

Socialization &

Communication Program



CurrentModel

18



Steps of Research

Literature Review Questionnaire

Indepth Interview

ANP Model

Construction

PHASE 1

Model

Construction

ANP Model Validation

‐

Pair‐wise Questionnaire TestingRESEARCHER EXPERTS

iBANKERSPHASE

2Model

Quantification

a r‐w se urvey

Data Synthesis & AnalysisPHASE

3

Results Validation

Results Interpretation

Results

Analysis

19



Steps of Research

1. Model

Construction

Questionnaires

Literature Reviews

(THEORY) ANP EXPERTS

Literature Reviews

Network

iBANKERS

(EMPIRICAL) InDepth

Interviews Open questionnaires are sent via email to 20 practitioners (Islamic bankers) from various

20

consulting

firms.



Steps of Research

2. Model

Quantification

External ASPECTS – POLICIESComparisons with respect to “External” node in “ POLICIES” cluster

With respect to “External ASPECTS” compare these five “ POLICIES” in

POLICIESSCALE

1 2 3 4 5 6 7 8 9

Directed Marketing

Driven x

Fair Treatment X

Gradual & Sustainable X

Shariah Compliance x

To quantify and measure the ANP model or network in phase 2, pair‐wise questionnaires

are drawn based on final ANP network designed in phase 1, which has been

21

automatically formed in SUPERDECISIONS software.



Steps of Research

3. Synthesis

and

Analysis

Individual ANP Pairwise

(7iB + 7Ex)

n v uaOUTPUTS

(7iB + 7Ex)

Agreement

ANP Pairwise uestionnaires RESULTS

‐ m e t r i c

e a n

uper ec s ons (7iB + 7Ex)

‐ Overall

G

e

. ANP Pairwise

(iB, Ex, Tot) .

OUTPUTS (iB, Ex, Tot)

To quantify and measure the ANP model or network in phase 2, pair‐wise questionnaires

are drawn based on final ANP network designed in phase 1, which has been

22

automatically formed in SUPERDECISIONS software.



Steps of Research

Geometric Mean

eome r c mean s a ype o mean or average n ma ema cs, w c n ca es e

central tendency or typical value of a set of numbers. To calculate geometric mean, the

numbers are

multiplied

and

then

the

nth root

of

the

resulting

product

is

taken

(n

is

the

count of numbers in the set).

Rater Agreement

total rank: mean

value

of

total

ranks: sum

of

squared

deviations: Kendall's

W :

Kendall’s coefficient of concordance or Kendall’s W is a non‐parametric statistic, which

measures and assesses the level of agreement among raters or respondents. Kendall’s W

is a normalization of the statistic of the Friedman test which ran es from 0 no

23

agreement) to 1 (complete agreement).



Results

,

low rater agreement (We = 0.036). Meanwhile, Islamic bankers view that Internal is the

most

important

aspect,

with

high

rater

agreement

(Wi =

0.39).

The

overall

results,

which

resem e Is amic an ers view, s ows t at t e most important issues o ow

implementation of PLS financing lies within Internal aspect of Islamic banking, followed

by Existing System and External Environment aspects, with low rater agreement (Wt =

24

0.162).



Results

0.030

0.040

0.050

0.000

0.010

0.020

The most crucial and primary problems of low implementation of PLS financing are: 1)

Authority

(External);

2)

Top

Management

(Internal);

3)

Customer

(External);

4)

Unsupportive Environment (System); and 5) Conventional Domination (System). It seems

that root causes of the problems lie in people who involve in the implementation of PLS

financing, including authority of Islamic banking, Islamic bank’s top management as well

25

as customer of Islamic banking.



Results

The most crucial problems of low implementation of PLS are: a) lack of knowledge

(customer ‐ external); b) lack of commitment (authority ‐ external); c) existing value

system (unsupportive environment ‐ system); d) too much emphasis on business or profit

26

oriented (top management ‐ internal); and e) lack of support (authority ‐ external).



Results

The most urgent solutions to the problems of low implementation of PLS are: a) Education

offered to customers and potential customers regarding PLS financing (customer ‐ external); b)

management ‐ internal); c) Protocol and grand strategy (conventional domination ‐ system); d)

supportive regulations to foster IEFB and PLS‐based financing (authority ‐ external); and e)

27

,

PLS financing (authority – external).



Results

T o t a l POLICIES

Wi = 0.177

We = 0.081 T o t a l

STRATEGIESWi = 0.441

We = 0.134

E x p

e r t s

Shariah Com liance

Wt = 0.099

x p

e r t s

Sos.Comm.Pro ram

= .

a n k e r s

Professionalism

Gradual&Sustain

Fair Treatment a n k e r s

Service Improve

Product Dev

0 0.1 0.2 0.3

i

Directed

Mkt

Driven0 0.1 0.2 0.3

i

Mkt Mapping

Policies and grand strategies that should be implemented to stimulate PLS financing are:

a Pro uct eve opment gran strateg es ; Fa r treatment po c es ; c Serv ce

improvement (grand strategies); d) Market mapping (grand strategies); and e)

Professionalism (policies). A combination of grand strategy and effective policies are

28

expected to be able to stimulate PLS financing.



Results

0.0200.0250.0300.035

0.000

0.0050.010

.

Policies and grand strategies that should be implemented to stimulate PLS financing are:

a Pro uct eve opment gran strateg es ; Fa r treatment po c es ; c Serv ce

improvement (grand strategies); d) Market mapping (grand strategies); and e)

Professionalism (policies). A combination of grand strategy and effective policies are

29

expected to be able to stimulate PLS financing.



AnalysisASPECTS PREVIOUS

STUDY

(2009) CURRENT

STUDY1. No Management Tools (Technical ‐ Internal)

2. Lack of Commitment (Authority ‐ External)

1. Lack of knowledge (Customer ‐ External)

2. Lack of commitment (Authority ‐ External)

Problems

. –

4. Lack Commitment (Top Management –

Internal)

5. Lack of

Knowledge

&

Skill

(Human

Resource

–

. ‐

4. Business or profit oriented (Top Management ‐ Internal)

5. Lack of support (Authority ‐ External)

Internal)

1. IT & SOP (Technical – Internal)

2. Commitment (Authority – External)

1. Education on PLS financing (Customer ‐ External)

2. Management commitment to apply PLS financing (Top

‐

Solutions

. . –

4. Internal Commitment

(Top

Management

–

Internal)

5. Education (Customer – External)

3. Protocol

and

grand

strategy

(Conventional

Domination ‐

System)

4. Supportive regulations (Authority ‐ External)

5. Political commitment, political will and political courage

(Authority – External)

1. Service

Improvement

(Strategies) 1. Product

development

(Strategies)

Policies/

Strategies

2. Socialization & Communication Programs

(Strategies)

3. Professionalism (Policies)

2. Fair treatment (Policies)

3. Service improvement (Strategies)

4. Market mapping (Strategies)

30

.

5. Shariah Compliance (Policies)

.



Recommendations

PLS financing should become the main and dominant mode of finance in Islamic

banking, since it provides greater macro‐economic benefits to the economy and

society as a whole in terms of reducing inflation, stabilizing the economy, catalyzing

real sector growth, reducing unemployment, promoting justice and equality, as well

as improving

the

welfare

of

society

in

general.

The authority (the Government and Bank Indonesia) should take this problem

seriously in order to optimize the benefits of PLS‐based finance in the nationwide

. ‐

mode of

financing

in

Islamic

banking,

but

also

in

the

entire

Islamic

financial

system

and Islamic monetary system.

31



Recommendations

• CREATE SUPPLY

nnova on o compe ve ‐ ase pro uc s an

services• CREATE DEMAND

, ,

marketing

• SUPPORT

• Government su orts in all areas sectors • PLS‐based Sovereign Sukuks

32

‐



Only od Knows

Center for Central Bankin Education and Studies

2011 12 wp persistence of low pls financing in ib ind ppt

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