CRITICAL REVIEW ON INDONESIAN ISLAMIC BANK CORPORATE GOVERNANCE REGULATIONS
4. CRITICAL REVIEW ON INDONESIAN ISLAMIC BANK CORPORATE GOVERNANCE REGULATIONS
JURNAL EkonomiKa
Indonesia: Does Regulatory Framework Matter ?
Even though a number of regulations have enacted by the government and monetary and financial authorities in Indonesia contribute to improving Islamic bank corporate governance performance, some critical reviews can be proposed, i.e.:
? Preparation of regulations does not accommodate the unique characteristics of Islamic banks corporate governance appropriately. It could result in a potential for distorted in setting up the structure, mechanisms and implementation of best practices of corporate governance in Islamic banks. In other words, corporate governance regulation of Islamic banks should include all aspects of corporate governance dimensions since the stakeholders of Islamic bank will consider their preference in dealing with Islamic bank with this reason.
? It seems that “the legitimacy theory” approach in preparing principles and guidelines for corporate governance practices of Islamic banks is dominant in which the implementation of Islamic banks corporate governance solely equal to that practiced by conventional banks. This approach will result in the unavailability of a fit instrument that can measure accurately Islamic bank corporate governance performance comprehensively.
? Preparation of regulations yet to integrate and harmonize the regulations with the Islamic bank’s global corporate governance guidelines and regulations which have been published by AAOIFI and IFSB. This would make the regulations issued for Indonesia’s Islamic banks cannot spur to the international level of regulatory and practices harmonization of Islamic bank corporate governance implementation. In addition, this weakness of accommodative stance will have an impact on the slow acceleration of the creation of best practices and lessons learned in the Islamic banking industry.
? Regulations issued for Islamic banks in Indonesia has not been prepared and adjusted to the approach of macro-prudential policy and micro-prudential supervision approach by the monetary and financial authorities. This will result in goals and instruments of regulation and oversight conducted on Islamic banks are not in line with the existing implementation of Islamic banks corporate governance.
However, we note that the preparation of corporate governance regulation of Islamic banks in Indonesia have been on the right track. In this sense, banking regulator has has avoided to consider a dichotomy in the preparation of a regulation on the basis of Shariah compliance objective and best practice implementation approach. Instead, the banking regulator tends to set up a comprehensive approach to achieve the main aim of good corporate governance principles in order to protect all stakeholders’ interests (especially IAH / Investment Account Holders) and ensure that compliance with Sharia principles fulfilled (IFSB, 2005).
Thus, in realized that the Islamic bank is a business institution with a must to adhere in Islamic economics principles, the need for good corporate governance regulation in accordance with the distinctive character of Islamic bank is indispensable. This is to ensure that the regulation has important implications for Islamic banks as it will be a reference in achieving its business objective and protection for a whole stakeholders of Islamic bank.
In addition, it is worth to concern that facing ahead which triggered by the recent global
JURNAL EkonomiKa
Indonesia: Does Regulatory Framework Matter ?
financial crises, monetary and financial authorities around the world have put in place to strengthen macro-prudential policy and micro-prudential supervision in the banking sector in
order to address risks to financial stability and enhance the resilience of financial system. In this regard, since the impact of internalization forcing on the financial industry, it
is beneficial to borrow Suzuki (2011)’s approach in describing monitoring and supervisory framework in Anglo-American banking and financial system (see Figure 1). This pertaining system, in simply with characteristics (1) existence of tight regulations on commercial banking operation and competitive business environment, (2) important role competitive securities market as result of greater flow and better allocation of saving mobilization, and (3) financial
intermediary is relying on specialization and division of labor under functions of credit risk screening and monitoring.
This paper intends to presume that facing ahead which are triggered by the recent global financial crises, monetary and financial authorities around the world have put in place
strengthening macro-prudential policy and micro-prudential supervision in the banking sector in order to address risks to financial stability and enhance the resilience of financial system.
Hence, this paper depicts the monitoring and supervisory framework in the banking sector as a proposed model in Figure 1 below:
This model aims to integrate the objectives of macro-prudential policy and micro- prudential supervision in congruence with the fundamental objective of corporate governance of Islamic banks.
FIGURE 1. Proposed Strengthening Monitoring and Supervisory Framework in Islamic Bank
Adapted from : Suzuki (2011)
JURNAL EkonomiKa
Indonesia: Does Regulatory Framework Matter ?
In this relation, the expected strategic outcomes in this regulatory and supervisory regime are realization of (1) ability of Islamic banks to mitigate systemic risk in creating financial stability landscape, (2) realizing the market discipline mechanism which will establish efficient Islamic banking market, and (3) presenting transparency that will prevent information
asymmetry and moral hazard. Hence, strengthening macro-prudential policy and micro-prudential supervision in the
banking sector alongside in conformance of Islamic bank corporate governance regulation will become a necessary condition in order to address systemic risks and present sound business in Islamic bank industry.