Analysis of Political Economy in developing the Islamic Banking in Indonesia

PROPOSAL PENELITIAN
KLUSTER PENGEMBANGAN ILMU PENGETAHUAN
(SAINS)
ANALYSIS OF POLITICAL ECONOMY IN DEVELOPING THE ISLAMIC BANKING IN
INDONESIA
Submitted by
Yoghi Citra Pratama, M.Si
: Ketua
Muhammad Azmi Nurkarim : Anggota
Dimas Rachman Taufiq
: Anggota
PUSAT PENELITIAN DAN PENERBITAN (PUSLITPEN)
LP2M UIN SYARIF HIDAYATULLAH JAKARTA
2017
ANALYSIS OF POLITICAL ECONOMY IN DEVELOPING THE ISLAMIC
BANKING IN INDONESIA
Abstract
The study aims to measure how much political economy of Indonesia encourage the
development of Islamic banking and investigate things that hinder the development of Islamic
banking in Indonesia. In order to achieve the aforementioned aims and objectives and answer
the research questions, this research adopts mixed method, both from a qualitative and a
quantitative research methodology that defines the main research frame and process. An
inductive strategy is followed with mixed design approach of both exploratory and descriptive
tools to examine and explore the current practices of political economy for developing the
Islamic banking in Indonesia, and test them against the collected data to identify and
construct a model of political economy in Indonesia. In collecting and analysing the data, a
mixed method is utilised in the form of econometric method, as a quantitative method, and
review of the literature, as a qualitative method.
Keyword : Political economy, Islamic Banking
1. Background
Indonesia is the country with the largest Muslim population in the world, and a country
with abundant natural resources. This country is the largest economy in Southeast Asia and a
member of the G-20 major economies. It is the sixteenth largest economy in the world by
nominal Gross Domestic Product (GDP) and the eighth largest in terms of Purchasing Power
Parity (PPP). Indonesia is also the third largest democracy country in the world after India and
United States. According to that, Indonesia has great potential to be a center of Islamic
finance and economic. Many of research and data remarked that Islamic finance is an
alternative system that can provide solution for the economy problem this time. The evidence
can be seen from the report of the Islamic Finance and Global Stability (2010), where amid
the crisis, Islamic banks as a tools of Islamic economic witnessed 38,2 per cent asset growth
rate and 20,1 per cent profit growth rate compared to 16,3 per cent and -6,1 per-cent,
respectively, for their conventional counterparts, as of 2007-8. Research carried out
previously by Ahmed, Asutay, and Wilson, (2014) mentioned that Islamic financial
Institutions are more resilient and stable in facing the crisis rather than conventional financial
institutions due to engaging in shariah compliant activities.
The objective of Islamic economic is to develop a prosperous economic and egalitarian
social structure where all members of an Islamic society must be given the same opportunities
to advance, maximize their intellectual capacity, preserve and promote their health, and
actively contribute to the economic and social development of society (Rehman and Askari,
2010) including same access to the natural resources provided by God. Furthermore,
development in Islamic perspective is to achieve a comprehensive and holistic welfare both in
the world and hereafter (akheerah) accordance to Quran and Sunnah. Islam provides the
framework containing the doctrine, value-judgement and ethics for the functioning of an
Islamic economy, where the usual economic and financial are made (Asutay,2007). Therefore,
as a largest moslem country, Indonesia should implement the Islamic financial system and
values in carrying out activities of the economy for the better economy and welfare of their
society, and moreover, our national principles (Pancasila) accord with the Islamic principles.
2. Research Problem
The development of Islamic finance in Indonesia have yet developed as expected, the
latest data from Bank Indonesia stated that the market share of Islamic banking in Indonesia,
only about 5%, compared to conventional banking. The development of Islamic banking in
Indonesia a more bottom-up means that the growth was driven by public demand for Islamic
banking services.
Source : Authority of Financial Services (2017)
From that graph it is clear that the development of Islamic Banking in Indonesia has increased
gradually since 2008 to 2014 but it is lower than we expected and it is not more that 5%
market share compared to conventional banks, in 2014 the asset of Islamic banking reach
about 300 Trillion rupiah, and it is far from their counterparts in conventional banks.
The economic development of a country can not be separated from the political aspect,
because of the active role of the government as policy makers are very influential in the
direction and course of the economy. Chapra (1992: 118) mentioned that “political factor is
one the most important factors responsible for the failure of the Muslim countries to
implement the Islamic strategy for development with justice”. Political economy determine
policy and influence the way of the development of Islamic banking in the country.
3. Aims and Significance
The Political economy measure is arguably of the highest importance in the political
economy field, because ultimately choices, policies, and actions will judged on how they
affect the welfare of an Individual or society. Judging from the development of economic and
finance in Indonesia, the policy made by the government have not yet provided optimal
results in the perspective of Islamic economics principle, therefore, this study aims to measure
how much political economy of Indonesia encouraging the development of Islamic banking
and finance in Indonesia and investigate things that hinder the development of Islamic
banking and finance in Indonesia.
The Islamic financial industry is at a critical stage of its development. While it has been
growing steadily over the years, the continuation of this growth is becoming more challenging
as the industry moves towards maturity. Innovation and new product development in all
aspect of economy play an important role in driving the growth and formulate the strategy to
answer the problem of economy. Hence, what the authority economy really needs at this stage
is to setup specific guidelines, enhance the methodology and formulate the strategy used by
policy makers, but there is an evident lack of research in the critical area of political economy.
Many researches previously only discussed Islamic economic without linking it with
Islamic politics, or conducted a research about Islamic political economy in terms of
constructing the framework of Islamic Political Economy such as Rosdi (2016), Chudory
(1994, 2015), Ghosh (1995) Harahap (2006), Asutay (2007), etc. In this time, this research
examines that framework for constructing a model of Political Economy in Indonesia related
their roles to the development of Islamic banking with both approach which are qualitative
and quantitative. With a large social capital, it should Islamic banking and finance in
Indonesia grow faster and bigger rather than conventional finance. The results of this study
will provide a comprehensive overview about the role of political economy of Indonesia in
developing the Islamic banking.
4. Literature review
In terms of science, Bascom (2009:12) elaborates political economy according to social
sciences involving community development from the economic and political aspects. He said
that “political economy is the science of wealth” and “science of value”. Deliarnov (2006:10)
defines political economy as a direction towards issues related to social theories that arise
from studies of the connection between economic and political sciences. Caporaso & Levine
(1993:45) have said that political economy refers to a method of expressing an opinion
regarding issues around the management of economy to the administrators and rulers of a
country. It is also stated as below;
“Political economy referred to the management of
economy affairs of the state”. (Syakir & Mohd, 2015).
Meanwhile, the study of religion and economic behaviour emerges and provides
insights into economic theory on several levels: generating information about a neglected area
of non-market behaviour; showing how economic models can be modified to address question
about belief, norms, and values; and exploring how religion (and by extension,, morals and
culture) affect economic attitudes and activities of individuals, groups and societies (Berman
and Laitin, 2007). Furthermore, as part of it, the Islamic economics paradigm aimed at the
creation of an Islamic system of economics with its distinct values, norms, rules and
institutions with a politically oriented systemic understanding as ordained in Islamic order. In
other words, Islamic economics aims at determine the framework of the economic value
system, the operational dimension of the economy and the economic and financial behavioral
norms of the individual muslims and society (Haqqi,2015).
Ibn Khaldun (15th century) remarked on his paper that is known as dynamic model of an
Islamic socio economic system about the relations between political,economics and religion
with comprehensive linkages. He stated that (Asutay,2007):
“The strengh of the sovereign (al-mulk) does not become consumed expect by
implementation of the Shari‟ah; the Shari‟ah cannot be implemented except by a sovereign
(al-mulk); the sovereign cannot gain strenght except through the people (al-rijal); the
people cannot be sustained except by wealth (al-mal); wealth cannot be acquired except
through development (al-„imarah); development cannot be attained except through justice
(al-adl); justice is the criterion (almizan) by which God will evaluate mankind; and the
sovereign is charged with the responsibility of actualising justice”.
The previous research on measurement political economy have been done by Banaian,
Podemska, Roberts (2008) with their title research The Challenges of Measurement in
Political Economy, they described the varies of the method of measuring political economy
indicator in statistical analysis. Angikand (2008), et.al in his political economy research look
at specific measures in diffrent categories, including diffrent measures of political instability,
veto players, and measures of wining coalitions and the size of selectorate. Causality behind
the measures and what they are meant to indicate are reviewed. Okabe and Kam (2016),
attempt to evaluate how much politics would have distorted agents‟ welfare and regional
growth In American states, were regional economies given the opportunity to live under an
efficient social planner‟s allocation system. They build a political economy model of
endogenous growth. In their model political factors affect regional productivity as a
consequnce of politic-economic equilibrium. They discipline their regional growth accounting
exercises by calibrating/estimating each model to American state-level economic and
political-survey data. In another previous research Rehman and Askari (2010), attempted to
meassure and claim empirically that Islam deters or enhances economic performance using
113 variables as proxies for Islamic teachings with quantitave approach. They linked the
goverment interference in the market place (policy), economic indicator, social measurment
(standart of living), impact the degree of religiosity to productivity, etc, to measure which
country is most Islamic according to Islamic economic principles.
5. Methodology and Design
In order to achieve the aforementioned aims and objectives and answer the research
questions, this research adopts mixed method, both from a qualitative and a quantitative
research methodology that defines the main research frame and process. An inductive strategy
is followed with mixed design approach of both exploratory and descriptive tools to examine
and explore the current practices of political economy for developing the Islamic Finance in
Indonesia, and test them against the collected data to identify and construct a model of
political economy in Indonesia. In collecting and analysing the data, a mixed method is
utilised in the form of econometric method, as a quantitative method, and review of the
literature, as a qualitative method.
6. Communication of Results
This research is planned to be published in international journals indexed by Thompson
Reuters, namely the International Journal of Social Economics and The Journal of Political
Economy indexed by scopus.
7. Budget
ANGGARAN PENELITIAN
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50,075,000
BELANJABARANG
18,975,000
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1
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1,000,000
15,500,000
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10,500,000
Dokumentasi
1
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1,000,000
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1,000,000
Bahan-bahan riset
1
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1,975,000
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1,975,000
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Paket
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3,500,000
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3,500,000
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10,800,000
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80,000
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3,000,000
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2,500,000
2,500,000
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