The Dual Banking System

GROUP 4

1. Ety Herawati H 3. Ramadhiniyah W

2. Alivia Chesa Y 4. Syifa Nur Fauziyah

 DEFINITION OF DUAL BANKING
1
SYSTEM

2 HISTORY OF DUAL BANKING SYSTEM

IN INDONESIA

Table of 3 THE REASON WHY INDONESIA APPLIED DUAL

BANKING SYSTEM AS OUR BANKING SYSTEM

Contents
4 CONVENTIONAL BANK

5 SYARIAH BANK

6 DUAL BANKING SYSTEM IN MALAYSIA

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Let’s Begin Now!

PLEASE PAY ATENTTION

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 Dual Banking System is a system that
implements two different systems, with
different banking principles and
1 implementations with each other. Enforcement
of this system shows the existence of "dualism"
in the national banking system, which is the
national legal system and the system of
DEFINITION OF
syariah (Sjahdeini, 2014).
DUAL BANKING
SYSTEM
 Dual Banking
System

Conventional
Syaria’ Bank
Bank

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Dual Banking System Rules
The position of dual banking system in Indonesian legal system in accordance with the
1945 Constitution and Pancasila has been formulated in various types of Banking Law
both conventionally and Sharia.

Starting from Law Number 13 of 1968 concerning Bank Indonesia, then amended by
Law no. 23 of 1999 Concerning Bank Indonesia, Law no. 7 of 1992 concerning
Banking as amended by Act no. 10 of 1998, including Law no. 21 of 2008 concerning
Sharia Banking.

In various secondary law sources, that is book discussing banking states that the
regulation of dual banking system is regulated in Law no. 23 of 1999 on Bank
Indonesia authorizing Bank Indonesia to allow conventional branch offices to open a
Sharia business unit even convert from conventional banks to sharia commercial
banks. As in Bank Rakyat Indonesia opened a Sharia business unit to become BRI
Syariah, Bank Tabungan Negara opened a sharia business unit to become BTN
Syariah, and others.
2

History of
Dual Banking
System
 Dual Banking System’s Timeline (in Indonesia)

1988 1992

Turning point of Fisrt Law About

Indonesian banking Syaria’ Banking
regulation
System

First Syaria’ Act no. 10 year 1998 saying

Bank in Indonesia there are two banking system
in Indonesia
1991 1998

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 On October 27, 1988, the Government issued the
October Government Policy Package (PAKTO) containing
the banking liberalization that enabled the establishment
of new banks other than existing banks

The Then in 1991, Bank Mualamat Indonesia was established

as the first Islamic bank in Indonesia and started full
History operation a year later.
of Dual
Banking In this period, the Government issued Law no. 7 of 1992
concerning Banking which introduced the profit-sharing banking
System system. This provision marked the beginning of the era of dual
banking system in Indonesia. Then reinforced by the Law no. 10
of 1998 on Banking as a substitute of Law No.7 of 1992.

In Act Number 10 of 1998 on Banking explicitly

explained that in Indonesia there are two banking
systems (Dual Banking System), namely conventional
banking and sharia banking. 10
3

Factors
The Reason Why External Factor
Indonesia Applied
Dual Banking System
as Our Banking
Internal Factor
System
 The main reason why Indonesia applied dual
banking system as our banking system is the
assumption that syariah banking system in
Indonesia has the ability and resilience in facing
the economic crisis in 1997 until 1998. Form that,
the recognition for syaria system was shown by
Indonesian Government by issuing Law No. 10 on
1998 on the Amendment of Law No. 7 on 1992 in
Banking (hereinafter referred to as the Banking Law).

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 External Factors

Religious Factor

As many as 210 million people in Indonesia, 80% of them are Muslims. For them are
obliged to comply with all Islamic law that comes from the holy book of Al-Quran and
Hadith. In the Qur'an has many verses that explain about the prohibition of usury that
is identical to the principles and operating systems in conventional banks.

Social Factor
Public confidence in the banking system that uses Sharia principles is considered
dynamic towards the development of Syariah banking. Assessment of the community
regarding the implementation of sharia system is a step to improve the banking
system towards the better because it is more profitable using Sharia principles.
 Economic Factor

The trend of economic development towards the direction that is increasingly

integrated with regional and international economies can be an opportunity
and challenge for the banking industry. The banking sector that has a
strategic position as an intermediary institution and supporting the payment
system is a crucial factor in the adjustment process. Therefore, the national
banking industry should be more responsive in adjusting to economic
changes and developments by opening access while improving its
performance so as not to be left behind by the increasingly drastic economic
development.

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 Internal Factors
Internal factor is a factor that comes from within and concerns the operational system. This
includes the philosophical factors, legislative factors of Law no. 10 Year 1998 About Banking,
and Law No. 21 Year 2008 About Sharia Bank.

Philosophical Factors, Pancasila.

It is known that in the fourth pancasila which reads "Justice and civilized humanity" and the
fifth pancasila "Social Justice for all Indonesian People" is similar to the concept and
objective of Islamic Economics namely justice in Islamic Economics (al-is), which states
that all business activities conducted by every individual or government based on the
consideration of the allocation and distribution of wealth and a fair and equitable opinion for
the welfare of the people. Economic disparities in people's lives are always happening,
where the measure of how to obtain between individuals is different. Not only the fifth
Pancasila which has a philosophical meaning in relation to this, but refers to the third
pancasila that is the unity of Indonesia also has the same principle of Islamic economic
system that is the principle of musawamah which means unity and equality.
4 According to Kasmir (2003), conventional
banks are financial institutions whose main
activities are collecting funds from the
community and channeling funds back into
the community. As well as providing other
Conventional banks services
Bank
 Conventional
Bank
Supervision

Bank
OJK
Indonesia
 Otoritas Jasa Keuangan

Juridically, OJK as the Financial Services Supervisory Agency was

born from the mandate of Law Number 3 of 2004 concerning the
Amendment to Law Number 23 of 1999 concerning Bank Indonesia
(hereinafter referred to as the BI Law), which mandates that the
supervisory authority of the bank from BI as the sector supervisor
banks are transferred to independent financial services sector
supervisory bodies, and established by law. This oversight body may
issue a provision relating to the performance of the Bank's
supervisory duties in coordination with BI and request an explanation
from BI regarding the macro data and necessary information.

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To carry out regulatory and supervisory tasks in the banking sector OJK has the
authority:
i. Regulation and supervision on bank institution which covers: licensing for establishment of
bank, opening of bank office, articles of association, work plan, ownership, management
and human resources, merger, consolidation and acquisition of bank, and revocation of
business license of bank; and business activities of banks, including sources of funds,
provision of funds, hybridation products, and activities in services;
ii. Regulation and supervision on bank health including: liquidity, earnings, solvency, asset
quality, minimum capital adequacy ratio, maximum crediting limit, loan to deposit ratio, and
bank reserve;
iii. Bank statements related to the health and performance of banks
iv. The debtor information system
v. Credit testing; and
vi. Bank accounting standards
 Bank Indonesia

In Indonesia, efforts to monitor and maintain financial system stability

have been undertaken by Bank Indonesia since mid-2003 by developing
various methods of prudential macro analysis that evaluate the health,
strengths and weaknesses of the national financial system. Prudential
macro analyzes undertaken so far published in a periodic Financial
Stability Review have assisted in analyzing and presenting information on
the resilience of the banking system and the impact on the financial
system in the event of shocks.
 Definition of Syariah Banks Based on Law
No. 21 of 2008, Syariah Bank is a bank that
runs its business based on syariah
5 principles. Bank Syariah are divided into
two, namely Syariah Commercial Banks
and Syariah Rural Banks.

Syaria’
Bank
 Sharia Bank Supervision

Bank Indonesia as the current banking authority regard the importance of supervision and
arrangement to the Sharia Bank so that the interest of the community can be protected
and fulfilled, so the Law of the Republic of Indonesia Number 10 Year 1998 concerning
Banking which stipulated on syariah banking is enforced as a refinement of Law Number 7
of 1992.
Sharia bank supervision conducted by internal
management and external parties is not much
Sharia DPS different in the practice of conventional banks.
However, the point of difference is the existence of
Bank
Sharia supervision conducted by a supervisory
Supervision
DSN agency that specifically focuses itself to see and
guard the products and activities of Islamic banks
are always running according to sharia.
Dewan Pengawas Syariah (DPS)

Dewan Pengawas Syariah (DPS) is an independent corporation placed by

National Sharia Board (DSN) at every syariah bank. Members of DPS should
consist of experts in the field of sharia muamalah who also has general knowledge
of banking. In performing its duties DPS shall follow fatwa of DSN which is the
highest authority in issuing fatwas regarding the suitability of bank products and
services in order to avoid deviation.
 DPS has functions in the organization of Syariah
Banks as:

i. As an advisor and adviser to the board of directors, head of Sharia Business Unit and
head of sharia branch office regarding matters related to sharia aspect.
ii. As mediator between bank and DSN in communicating proposal and suggestion of
product and service development from bank giving study and fatwa from National
Sharia Council.
iii. As the representative of the National Sharia Council placed in the bank. The Sharia
Supervisory Board is required to report on the business activities as well as the
development of the syariah bank that is supervised to the Sharia National Board at
least once a year.

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Dewan Syariah Nasional (DSN)

Dewan Syariah Nasional (DSN) is part of the Majelis Ulama Indonesia (MUI) which is
tasked with developing the implementation of Syariah values ​in economic activities in
general and the financial sector in particular, including banks, insurance and mutual
funds. DSN is the only corporation that has the authority to issue a fatwa on the types of
activities, products, and services of Islamic finance and oversee the application of fatwa
referred by syariah financial institutions in Indonesia.
 DSN has the authority to:

i. Provide or revoke the recommendation of names that will sit as members of the Sharia
Supervisory Board in a syariah financial institution,
ii. Issuing a fatwa binding on the Sharia Supervisory Board in each syariah financial
institution and the basis of legal action related parties,
iii. Issuing a fatwa which forms the basis for provisions issued by authorized agencies,
such as Bank Indonesia and BAPEPAM.
iv. Give warning to sharia financial institution to stop deviation from fatwa which has been
issued by National Sharia Council.
v. Propose to the authorities to take action if the warning is ignored.

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 Syariah Bank’s Operational Foundation:

1) Avoid usury, because it usury contains injustice and can damage the principle of partnership
2) Treating money only as a medium of exchange and not as a commodity traded
3) Financing is only done to economic activities and other customers' needs in addition to
bankable, nor is it contrary to syariah
4) No justify speculative transactions (masyir), buying and selling of an item that has not been
owned (garar) and conditional sale and purchase (contains elements of usury)
5) In interacting with customers, syariah banks position themselves as partners of investors
and traders, not in lender & borrower relationships as applicable to conventional banks.
6) The agreed transaction agreement with the customer does not change until the expiration,
although for example there is monetary fluctuation.
Differences Between Syariah Bank and Conventional Bank

National Sharia Arbitration National Arbitration Board

Board (BASYARNAS) (BANI)
6

Dual Banking
System in
Malaysia
They claimed that Malaysia was the first country in the world who
created duality system in banking and the success of it became
evident. The reason why Malaysia need a dual banking system is
because their country have a multi cultural citizen, they have a multi
religious and also a multi ethnic soriety with a plural legal structure.

Islamic banking was formally incepted to the country in 1983 with the
introduction of Islamic Banking Act 1983 and the opening of the first
Islamic bank of the country, Bank Islam Malaysia Berhad.

In 2009, with the introduction of the new Central Bank of Malaysia Act
2009, the country legally recognised the existence of dual financial
systems in the country.

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 Dual Banking System Supervision in Malaysia

Bank Negara Malaysia (BNM) has broad powers of supervision and control over
banking institutions licensed under the Financial Services Act (FSA), and the
Islamic Financial Services Act or IFSA. From this statement, it is understood that In
Malaysia, the highest authority body to regulate and supervise banking institutions is
Bank Negara Malaysia (BNM), when it says “banking institutions” it means both
conventional and Islamic banks are under the power of BNM.

BNM was established and operated in 26 January 1959, it has been 59 years since the
establishment. The current governor and chairman is Tan Sri Dato' Sri Dr. Zeti Akhtar
Aziz, she will be replaced by new governor in the end of April 2016 due to the end of
contract.
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 List of Licensed Commercial Banks in Malaysia
No. Name 14 India International Bank (Malaysia) Berhad

1 Affin Bank Berhad 15 Industrial and Commercial Bank of China (Malaysia) B

2 Alliance Bank Malaysia Berhad 16 J.P. Morgan Chase Bank Berhad

3 AmBank (M) Berhad 17 Malayan Banking Berhad

4 BNP Paribas Malaysia Berhad 18 Mizuho Bank (Malaysia) Berhad

5 Bangkok Bank Berhad 19 National Bank of Abu Dhabi Malaysia Berhad

6 Bank of America Malaysia Berhad 20 OCBC Bank (Malaysia) Berhad

7 Bank of China (Malaysia) Berhad 21 Public Bank Berhad

8 Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad 22 RHB Bank Berhad

9 CIMB Bank Berhad 23 Standard Chartered Bank Malaysia Berhad

10 Citibank Berhad 24 Sumitomo Mitsui Banking Corporation Malaysia Berhad

11 Deutsche Bank (Malaysia) Berhad 25 The Bank of Nova Scotia Berhad

12 HSBC Bank Malaysia Berhad 26 The Royal Bank of Scotland Berhad

13 Hong Leong Bank Berhad 27 United Overseas Bank (Malaysia) Bhd.

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 List of Islamic Banks in Malaysia
No. Name
1 Affin Islamic Bank Berhad
2 Al Rajhi Banking & Investment Corporation (Malaysia) Berhad
3 Alliance Islamic Bank Berhad
4 AmIslamic Bank Berhad
5 Asian Finance Bank Berhad
6 Bank Islam Malaysia Berhad
7 Bank Muamalat Malaysia Berhad
8 CIMB Islamic Bank Berhad
9 HSBC Amanah Malaysia Berhad
10 Hong Leong Islamic Bank Berhad
11 Kuwait Finance House (Malaysia) Berhad
12 Maybank Islamic Berhad
13 OCBC Al-Amin Bank Berhad
14 Public Islamic Bank Berhad
15 RHB Islamic Bank Berhad 33
Thank You!
Any Questions?

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Relationship Between DSN and DPS in Syariah Bank
Operations:
The Purpose of Why Indonesia Applied Dual Banking System as
Our Banking Systems

to create risk diversification which in turn will reduce systemic risk problems in the
event of a financial crisis. With these advantages, the monetary authority must
increase the significance of the role of syariah banks in supporting the stability of the
national financial system, together synergistically with conventional banks within the
framework of Dual Banking System (API double banking).
Future Sharia Banking Prospects
With the profit-sharing banking system of Islamic banking is relatively able to maintain the performance of Islamic banks and
not eroded by interest rates soaring savings so that the operational expenses are lower than conventional banks.
The effectiveness of sharia banking intermediary function that is maintained as the growth of collected funds and financing
are relatively high when compared with the national banking, as well as the provision of increased access network and reach
the needs of the wider community is a factor that causes the financial performance of sharia banking is increasing.
In the future, the prospect of sharia banking in Indonesia is predicted to increase rapidly. But we can not deny in the process
there are still some obstacles in the development of sharia banking. The obstacles faced in the development of sharia
banking, namely:
a) The limited network of sharia bank offices that will greatly affect the ability of sharia bank services to the community who
want the services of Islamic banks.
b) There is still limited understanding and information for the community regarding the business activities of sharia banks,
resulting in a misperception in the community about the operational of Islamic banks.
c) The incomplete provisions concerning business activities of sharia banks, such as accounting standards, prudential
principles, standard of Islamic Bank product fatwa, and other supporting provisions.
d) Limited human resources with sharia bank technical skills.
 The main reason why Indonesia applied dual banking system as our banking system is
the assumption that syariah banking system in Indonesia has the ability and resilience in
facing the economic crisis in 1997 until 1998. Form that, the recognition for syaria system
was shown by Indonesian Government by issuing Law No. 10 on 1998 on the
Amendment of Law No. 7 on 1992 in Banking (hereinafter referred to as the Banking
Law).