Islamic Wealth Management: Indonesian Case Study Ujang Sumarwan, PhD Professor of Consumer Behavior, Dean of Faculty of Human Ecology, Bogor Agricultural University, Indonesia sumarwan@apps.ipb.ac.id. +628121104989 Laily Dwi Arsyianti Lecturer, Department of Islamic Economics, Bogor Agricultural University, Indonesia Irfan Syauqi Beik, PhD Director, Center for Islamic Business and Economics Studies (CIBEST), Bogor Agricultural University, Indonesia Paper presented at 5TH MFPC International Conference on Islamic Wealth Management & Financial Planning Organized by MALAYSIAN FINANCIAL PLANNING COUNCIL (MFPC), Securities Commission of Malaysia (SC) Conference Hall, Kuala Lumpur, Tuesday 10 April 2018 Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 1
Background Every human in the world faces the common universal financial problem of scant resources (Miller and Stafford, 2001). We cannot afford anything we want. Islamic Perspectives on resources: owned by Almighty ALLAH SWT every human is accountable in managing money, both in earning and spending. As a servant and a leader for himself, every Muslim should be responsible on how do they earn every penny of their wealth and how do they spend them because one day it will be forgotten (Sahih al-bukhari, 34: 13). Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 2
Al Jauzi s five period of human life for a baseline of financial decisions. Children, 0-15 years old. Young people 15-35 years old Adult, 35-50 years old Old, 50-70 years old Senior citizen should be those who older than 70 years old. Setting goal is necessary before making decisions. Human are social beings (Miller and Stafford, 2004). One s decision affects other people. We can set goal for ourselves as well as for others. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 3
Financial Goals Setting goal is necessary before making decisions. Human are social beings (Miller and Stafford, 2004). One s decision affects other people. We can set goal for ourselves as well as for others. In their early stage, for example our children because they could not set any goal. What we want for our children could influence our financial decisions, Regardless what our children want later in the future, the goal that we set in their early stage affects our financial plan. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 4
Principles of Islamic Wealth Management Another consideration is future spending. Although future economic condition can be predicted through empirical analyses, still, the actual condition may appear in different way. Health and accidental events are some of unpredictable proceedings in our lives. Thus, current decision should be wisely made for future considerations (Arsyianti and Kassim, 2016). In the event of all considerations, Islam offers some concepts that can be applied for financial planning. This paper will discuss five concepts in managing our wealth: wealth creation, wealth generation, wealth preservation, wealth distribution, and wealth purification. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 5
A. Wealth Creation Creating wealth is the first decision one should step on, Islamic rules on Wealth Creation: work as entrepreuneur or working for others by avoiding riba, maysir, gharar, and haram goods and services involvement. A man would have never been burdened beyond their capacity as humanbeing to complete his obligation (al-qur an, 2: 233; 65: 6). Wealth creation is also about transferring ownership: such as sale and purchase, or, give and take. the five Islamic basic principles of Wealth Creation all economic and financial transactions are permitted with the exceptions of no riba, no maysir, no gharar, and no haram goods and services involvement. There are only a few haram things in this world. The rest of majority things are halal. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 6
B. Wealth Generation Islamic Princiles: Wealth owned can not be kept alone, we have to share with others with sharing principles and method Conventionally, after creating wealth, one would accumulate it to gain the value. However, instead of accumulation, Islam suggests that wealth should be generated. Transforming wealth from one form to another becomes the biggest issue in this concept. The principle of this concept is accumulating barakah, not only the material value. Islam encourages sharing mechanism that eventually the benefit would not be a certain group privilege. A Muslim should make decisions that could give benefit to others, instead of oneself. Muslim should understand that the ultimate owner of all is The Greatest, the One and Only God. There is no point to accumulate as much as wealth as possible, while once Allah requested it all to back to Him, nothing was left. Ultimately, if the wealth was kept for oneself only, it would be meaningless. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 7
C. Wealth Preservation Islamic principles is to generate wealth as well as to preserve the wealth at least for the next generation. Muslims should leave strong offspring, who would not fear on their account (al-qur an, 4: 9). Therefore, there should be investment products and services which comply Islamic law and values to accommodate customers demand on Islamic banking and financial services. Encouraging Islamic financial services in Indonesia has been supported by Bank Indonesia since its establishment. The first Islamic Bank in Indonesia, Bank Muamalat, has been a pioneer and inspiring many investors to establish other full-pledged Islamic banks. Other than Islamic banks, there are also Islamic insurances, Islamic pawn-broking, Islamic mutual funds, sukuk, and Islamic mutual funds. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 8
C1. Islamic Bank Since its support to Islamic banking and finance industry, Bank Indonesia has launched many programs including Islamic finance education, evaluate Islamic banking and services, and promote foreign investment in Islamic financial instruments. However, the Islamic banking asset market share is still 5.2%. Another problem is non-performing financing (NPF) of Islamic banks and rural banks has always been higher than its conventional counterpart. Market share problem could be occurred when Islamic financial education is still not optimally done by all relevant parties. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 9
C2. Problems of non-performing financing (NPF) of Islamic banks and rural banks The lack of Islamic financial education leads to low of financial literacy rate, which is 32%, as researched by Klapper, Lusardi, & Van Oudheusden (2015). Later, in 2017, Bank Indonesia has a new grand design to increase public involvement and support for Islamic Banking and Finance industry. Meanwhile, the later problem, that is high NPF, may be suffered due to lack of Islamic belief. Financial exclusion due to religious reasons is also reported by Er & Mutlu (2017). The basic principles of Islamic finance are the prohibition of riba, maysir, gharar, and forbidden products and services or any deception attitude involvement in a transaction. In the case of having no intention to repay the debt, even though creditor has the money, it would lead to high rate of NPF. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 10
Encouraging Moslem Debtors to repay debty Similarly, the consecutive debt-taking behaviour of the creditor would impact their ability in repaying the debt if they did not have the willingness to pay, or in the context of their intention to take another debt is to pay their current debt. Muslim who has this kind of behaviour is supposed having a lack of Islamic belief. Islamic teaching encourages Muslim to have a strong intention to repay debt regardless how little the amount is. As studied by Arsyianti, Kassim, and Adeyemi (2017), intention significantly affects the behaviour regarding consecutive debt-taking among lowincome households in Indonesia. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 11
D. Wealth Distribution Through Islamic Banking, Islamic Windows in some conventional Banks, rural Islamic Banks Indonesia's Financial Services Authority (OJK) as of March 2015 released a data that there are 12 commercial full-pledged Islamic banks in Indonesia, that operate a total of 2,138 branches. Islamic windows are also introduced as units in major conventional banks offer their products that comply with shariah principles. 22 Islamic windows are available through 325 offices nationwide. Moreover, 162 rural Islamic banks that cater banking needs in their respective localities are also presented in 471 offices. Considering all options, in financial decision, a Muslim, should at least understands basic principles explained in the prior section. Thus, Muslims can choose the best fit among all products and services offered by financial institutions. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 12
D1. Financial Products offered by Islamic Banking Some investment products and services offered by Islamic Banking and Finance in Indonesia are including deposits, sukuk, stocks, and mutual funds. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 13
D2. Deposits: Wadiah Deposits Deposits consist of time deposits, savings deposits and investment deposits. Mainly, two Islamic contracts are offered to accommodate customers who prefer to save their money in banks. They are wadiah and mudaraba. Wadiah contract is a custody of goods or money between the owner and the entrusted party with the obligation of the entrusted party to return the goods or money at any time (Bank Indonesia, 2008). Wadiah is widely used for time deposits, whereby customers can withdraw money at any time. As consequence, its rate of return is the lowest among all Islamic banking instruments. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 14
Bank receive money from customer the fund may be withdrawn at any time Bank may not make promise of any bonus Bank shall guarantee the return of fund Bank may charge administration fee Figure 1. Deposits by Wadiah contract Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 15
D3 Deposits: Mudaraba Mudaraba is a partnership between the fund owner (sahibul maal) and fund manager (mudarib) by sharing the profit according to the agreed rate stipulated in contract (Bank Indonesia, 2008). Mudaraba has two types of investment according to investor s preference. If investors had no preference towards investment products, their money would be distributed to any investments. This is called unrestricted mudaraba or mudaraba mutlaqa. If investor had specific preference, the money should be invested in that specified products. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 16
Bank as fund manager (mudarib) and customer as fund owner (sahibul mal) Bank shall not reduce the rate of profit sharing without prior approval from customer Profit sharing rate is agreed in advance according to mudarib profit Bank may charge administration fee Figure 2. Deposits by Mudaraba contract 17
D4. Sukuk Sukuk is a product offered in Islamic capital market. Majority of sukuk in Indonesia are offered through ijara contract, and only a few using mudaraba contract. Ijara is leasing agreement on a specified goods and/or service between the owner of leased object and the lessee, including the right of use on leased object, in order to earn fee on the object leased. Financial inclusion in Islamic capital market is only 0.01%, compares with the conventional counterparts which is also as low as 1.25%. Up to 2014, 65 sukuk issuance have been offered with total value of 12294,4 billion rupiah. There are still 33 outstanding sukuk, with total value of 6958 billion rupiah. Indonesia government sukuk market is 25.67% of total government sukuk in the world. Government sukuk is dominated for infrastructure allocation. Other than sukuk, there are stocks, mutual funds and takaful offered by non-bank institutions. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 18
D5. Stocks Among 562 stocks available in Indonesia capital market, 359 of them (63.88%) comply with Islamic law. Therefore, they can be included in Islamic capital market (PEBS, 2017). Indonesia Sharia Stock Index (ISSI) is a list of filtered stocks that comply with Islamic law. Meanwhile, Jakarta Islamic Index (JII) is a list of 30 stocks which have the biggest market capitalization and the most liquid stocks in trade. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 19
Mutual Funds Islamic mutual funds market is 5.07% of the total net assets value. Meanwhile, only 9.82% of total mutual funds available in Indonesia comply with Islamic law. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 20
E. Wealth Purification Islam has a unique wealth distribution program that is an obligation for a Muslim to pay it. Zakat is a type of philanthropy which is compulsory for a Muslim who has achieve specified requirements. Zakat means to purify, specifically to purify Muslim s wealth. To purify does not mean to clean all dirty money, rather it encourages a Muslim to earn money from a halal sources as well as halal materials. Also, it encourages a Muslim to distribute money to halal products and services. Thus, a Muslim s wealth can be the object of zakat due to its purification. Zakat in Indonesia has been collected as much as 5,017.29 billion rupiahs in 2017 (BAZNAS, 2018). It grows 37.34% from the previous year. Its average growth rate is 35.84%. Other than zakat, there are infaq and waqf which are voluntary. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 21
References Al-Bukhari. Sahih al-bukhari 2059. https://sunnah.com/bukhari/34/13 Er, B., & Mutlu, M. (2017). Financial Inclusion and Islamic Finance: A Survey of Islamic Financial Literacy Index. Uluslararası İslam Ekonomisi ve Finansı Araştırmaları Dergisi, 3(2). Klapper, L., Lusardi, A., & Van Oudheusden, P. (2015). Financial literacy around the world. Standard & Poor s Ratings Services Global Financial Literacy Survey., Access mode: http://media. mhfi. com/documents/2015- Finlit_paper_17_F3_SINGLES. pdf. Bank Indonesia. (2008). Investment Guide to Islamic Banking in Indonesia. https://www.bi.go.id/en/perbankan/syariah/documents/investmentguideenglishversion.pdf https://www.bi.go.id/en/perbankan/syariah/documents/codificationofislamicbankingproducts.pdf https://www.bi.go.id/en/perbankan/syariah/documents/grand_strategy_of_islamic_banking_market_devel opme.pdf https://www.bi.go.id/en/perbankan/syariah/documents/uun0212008.pdf Arsyianti, L.D., Kassim, S.K., & Adeyemi, A. A. (2017). Debt-Taking and Charity-Giving among Low-Income Households: Strengthening Resilience in Islamic Perspective. Paper presented in the 3 rd IIMEFC / JIMF BI C Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 22
Biodata Prof Ujang Sumarwan Prof. Ujang Sumarwan is a Professor of consumer behavior in the Department of Family and Consumer Sciences, College of Human Ecology at Bogor Agricultural University (IPB), Indonesia. He also teaches in the Master and Doctoral Program of Management and Business, School of Business, Bogor Agricultural University. He teaches Consumer Behavior and Family Economics in the Undergraduate Program, and teaches Marketing and Business Research in the Graduate Program of Management School of Business. Prof. Sumarwan was also appointed the Chair of Panelist in Developing Index of Consumer Empowerment by the Minister of Trade, Republic of Indonesia. He has done an intensive research in the areas of food consumption and food security in relation with the household social and economic welfare. His research areas include consumption behavior, consumer finances and family economics and well being, and strategic marketing and social marketing. He had published his first text book titled Consumer Behavior: Theory and Applications in 2003 which was used as one of the teaching materials in many universities in Indonesia. Prof. Sumarwan was awarded his Ph.D. in consumer studies in 1993 and his M.S. in family economics in 1990 from the College of Family and Consumer Sciences, Iowa State University, USA. His B.Sc. in Socio Economic was obtained in 1985 from Bogor Agricultural University, Indonesia. He was Deputy Director for Academic and Student Affair from 2000-2005 Master Program of Agribusiness IPB, Deputy Director for Planning and Resources from 2005-2008 Graduate Program of Management and Business IPB, Deputy Director for Academic Affairs and Students from 2008-2013 Graduate Program of Management and Business IPB. He was appointed as Department Head of Family and Consumer Sciences, Faculty of Human Ecology IPB 2013-2017. He is currently the Dean Faculty of Human Ecology Bogor Agricultural University, IPB 2018-2023. Ujang Sumarwan, Islamic Wealth Management: Indonesian Case Study 23