This thesis is premised on the proposition that Islamic financial fatwa institutions in Indonesia require a properly functioning Sharia Governance Framework in order to improve the performance and reputation of the Islamic finance industry. Although good efforts have been made to strengthen corporate governance in all Sharia financial institutions in Indonesia, this thesis argues that these efforts are insufficient, and reform is required. It is argued that both internal and external institutional weaknesses exist within the governance framework of the National Sharia Board of the Indonesian Ulama Council (DSN-MUI) and that these weaknesses undermine confidence in the Islamic finance industry in Indonesia. Internally, the DSN-MUI lacks transparency, has poor governance, and lacks accountability in its operations and decision-making, leading to confusion and inconsistency in Sharia compliance among Islamic Financial Institutions (IFIs). The thesis identifies weaknesses in the processes of recruitment and dismissal of DSN committee members, the quality and function of Sharia Supervisory Boards (SSBs), and conflicts of interest between the DSN and SSBs. Externally, the DSN is vulnerable to political interference by the ruling government due to the informal relationships between politicians, the DSN members, and MUI members. Added to this, public awareness and literacy about Islamic economics in Indonesia is relatively low, making it difficult to properly inform the public about Sharia-compliant financial practices. Further, uncoordinated regulations regarding Islamic finance in Indonesia also lead to confusion and potential conflicts between regulators, IFIs, and the general public. In exploring reform options, the thesis examines both centralised and decentralised models of fatwa institutional governance in the various countries. It is concluded that although there is no universal ‘ideal’ model, elements of each model can be beneficially adopted and adapted to the specificities of the Indonesian context. Using this comparative-adaptive approach, and with the existing institutional weaknesses of the current system firmly in mind, the thesis proposes a substantive reform to the institutional arrangements governing economic and financial fatwa implementation and supervision in Indonesia. Such an approach seeks a ‘middle way’ between centralised and decentralised models, preserving what is beneficial in each of them. The thesis proposes a ‘National Sharia Economic and Finance Fatwa Agency’ (‘Badan Nasional Fatwa Ekonomi dan Keuangan Syariah’ or ‘BNFEKS’) as an independent state institution, operating at the national level. Its principal task would be to determine economic and financial fatwas and oversee the implementation of Sharia principles in the development of Islamic finance, business, and the economy in Indonesia. As the authorized fatwa-issuing institution in the field of Islamic economics, BNFEKS would operate with explicit transparency, accountability, and professional safeguards to maintain public trust in Shariacompliant business institutions in Indonesia. Establishing BNFEKS would be a step toward developing a fully-fledged ecosystem that is conducive to the long-term growth and stability of the Islamic financial industry, and in this way, could play a crucial role in positively shaping the future direction of Islamic economics and finance in Indonesia.
Reforming economic and financial fatwa governance with special reference to the Islamic banking industry in Indonesia
Mahfudz, S. (Author). 2023
Western Sydney University thesis: Doctoral thesis