Transparency of Transaction at Islamic Bank Muamalat

TEMPO.CO, Jakarta - It is no secret that Islamic Bank Muamalat has been hit by a number of troubles. Since its establishment, Indonesia`s first sharia bank has ignored the principles of good corporate governance and has operated without proper oversight.

This poor oversight was the result of the large number of shareholders in the bank’s early days. This meant there was no majority shareholder to ensure the business was properly run. Practical management was under the control of the shareholders, which allowed collusion and negligence to flourish.

The establishment of the Islamic Bank Muamalat in 1991 was an inseparable part of the political context at the time. More than simply ‘promoting the sharia banking industry in Indonesia’, the presence of Muamalat as a public company was an accommodation of the Islamists’ aspirations. With the support of the Association of Muslim Intellectuals and a number of Muslim businessmen, the Indonesian Council of Ulamas sponsored the establishment of the bank. Members of the public also invested capital. The ownership structure with no majority shareholder weakened the oversight.

This state of affairs was influenced by a management not skilled in monitoring developments and analyzing risk. The sharia bank competed to offer corporate credit, especially to mining companies. At one point, the corporate financing sector was almost 80 percent of the bank’s business.

When the price of coal fell, problem loans in the mining sector caused a corresponding rise in the bank’s non-performing loans. At the end of 2015, Muamalat’s ratio of non-performing loans reached 7.1 percent, before improving to 4.8 percent at the end of last year. But bad loans in the mining sector are not the only reason why Muamalat needs fresh capital.

The problems at Muamalat have been deep-rooted for many years, long before the Islamic Development Bank, Atwil Limited and the Bank of Kuwait became shareholders. Although it is under the oversight of the Financial Services Authority (OJK), it has been difficult to prevent the problems afflicting Muamalat because there is no majority owner to scrutinize the performance of the bank’s management.

Now, with the plan by Minna Padi Investama Sekuritas to buy a 51 percent equity stake in Muamalat, the OJK must ensure that the transaction is accountable and transparent, not simply a way to manipulate the share price that benefits a few speculators. The rumors buzzing around the capital markets since the end of July have caused the Minna Padi share price to soar by 370.59 percent as of last Wednesday, even though its plans to buy Muamalat shares was only announced at the end of September. 

Bank Muamalat and Minna Padi should name their financial backers. Financial Services Authority Regulation No. 27/2016 obliges banks to report planned business structure changes-including legal entities owning banks to ultimate shareholders-at least one month before any changes are made. The funds set aside to ‘rescue’ Muamalat total Rp4.5 trillion. 

The poor state of Bank Muamalat is proof of the failure of corporations established on the basis of affirmative action in the name of religion. The policy of providing special treatment to a particular group will not be efficient and is at odds with the market mechanism in the financial sector. 

The government must learn from the serious problems afflicting the Islamic Bank Muamalat. In the future, no financial institution should be established based on affirmative action in the name of primordial factors. This type of sentiment is prone to create moral hazard in the banking industry.