Despite Interest Rate Fluctuation, Islamic Bank Customer Remain Religiously Devout

Since its inception in Indonesia in 1992, the Islamic banking industry has experienced rapid growth. According to the Otoritas Jasa Keuangan (National Financial Services Authority) report in 2019, the number of Islamic bank customers in Indonesia reached 30 million.

Religious value has become one of the driving forces behind the increasing number of customers in the Islamic banking sector in Indonesia. This is due to Islamic law prohibiting the practice of riba (interest). Typically, conventional banks that follow interest rate policies are the ones that are involved in riba (interest) practices.

Recently, lecturers from Islamic Economic Law Fauzul Hanif Noor Athief, L.c., M.Sc., and Aminudin Ma'ruf, BIRKH., M.Sc., conducted research on the possible factors of the increase in benchmark interest rates that may affect the religiosity motivation of Islamic bank depositors. Their research, titled "Tracing the asymmetry of religiosity-based loyalty of Islamic bank depositors," explores how customers of Islamic banks in Indonesia respond to Bank Indonesia's policies regarding national banking interest rates.

Islamic banking is a banking system that operates based on Islamic principles (Shariah). It employs a profit-sharing system derived from financing businesses that adhere to Islamic and halal practices. This sets Islamic banks apart from conventional banks as they do not follow the base rates determined by the Central Bank of Indonesia.

"Shariah banks operate on a different mechanism compared to conventional banks. When the base rates rise, conventional banks will also raise their interest rates. However, this is not the case in Shariah banks," stated Fauzul during our interview at his office on Friday (7/7).

The growing prominence of Islamic banking industry has gained the public's attention, thanks to the government's backing. The government is keen on developing a banking industry based on the profit-sharing system and Shariah law.  This is evident from the enactment of Law No. 7 of 1992 on Banking, Later refined through Law No. 21 of 2008 on Islamic Banking.

Fauzul’s research explores the link between interest rates and religious values of Shariah bank depositors. The objective is to examine whether an increase in interest rates could potentially sway their beliefs,  opening up possibilities to shift their savings to conventional banks.

“We aim to investigate whether there is a shift of customers from Islamic banks to conventional banks when the interest rate goes up. On the other hand, if the interest rates decline, we want to explore if customers return to Islamic banks.'" said Fauzul

He explained that the research took six months for data analysis and another six months for revision and publication. Moreover, Fauzul added that the research was based on the customer saving data issued by Bank Indonesia and OJk.

"The reason we want to examine the savings data is its credibility. Our goal is to make the research more objective by analyzing customer savings data, as relying on customers' religious activities could introduce subjectivity to the findings," he added

This research has revealed that the dynamics of base interest rates issued by Bank Indonesia do not have an impact on customers of Islamic banks in Indonesia. Fauzul noted that no customers transferred their savings to conventional banks during the period of increasing interest rates.

"It is astonishing that customers of Islamic banks in Indonesia are actually motivated by religious values. In this case, there are prohibitions on the practice of interest, which are commonly found in conventional banks,” explained Fauzul.

Fauzul also stated that the research does not solely focus on individual clients but also extends to several other institutions,  including government bodies and private corporations. Nevertheless, this diversification is intended to simplify the data collection and analysis procedures.

“We categorize our customers into three segments. Firstly, the government sector which includes government bodies and state-owned enterprises. The second segment is the private sector and the last segment is the individual sector,” he added.

He believes that this classification is essential due to the varying interest of each segment, each segment possesses distinct interests, including diverse savings objectives, motivations for saving, and other factors.

"For the government, the most important aspect is security. They can easily withdraw funds whenever required. The private sector operates differently as they prioritize profit. As for individual customers, they are generally driven by their love for Islamic banking or religious values," he explained.

Fauzul and Aminudin also highlight that despite customers' loyalty toward Islamic banks remains solid, the market share is still relatively small. This is mainly because there are no purely profit-oriented customers who see Islamic banks as a viable option for profit generation or influencing other institutions.

“In general, the customers of Islamic banks are still motivated by religious beliefs. Furthermore, the market share of Islamic banks in Indonesia is still relatively small."

Aminudin emphasized the need for government initiatives to improve public awareness of Islamic banks. He elaborated that such support could involve simplifying the concept of riba. Additionally, He highlighted the importance of inter-institutional synergy with the involvement of Muhammadiyah and Nahdlatul Ulama (NU).

“In Indonesia, people tend to follow the rules of social and community organizations like Muhammadiyah and NU. These two organizations need to be involved in introducing Islamic banks due to their significant influence." Aminudin added.

He pointed out that saving in Islamic banks goes beyond the scope of halal and haram; it also involves the impact that these savings create. He believes it is essential for the government to introduce this concept to the public, allowing them to gain a different perspective on Islamic banks

“The Shariah aspect goes beyond halal and haram, but also it also involves how customers' deposits or savings in Islamic banks contribute to society. This means that the investments should be directed towards companies that are halal, Shariah-compliant, or contributing to the advancement of Islam," he explained.

The research which is published in the prestigious international journal Banks and Bank Systems (Scopus Q1) provides valuable information that is beneficial for designing policies for the development of the Islamic financial industry in Indonesia. Aminudin stressed that the financial aspect of Islamic banking is connected to the contributions of the public towards the halal industry in Indonesia, leading to a positive impact that ultimately benefits the society.

"Since it naturally begins with that foundation, investments must be in line with Islamic principles. Moreover, any efforts to support or promote infrastructure or related initiatives should also be in accordance with Islamic principles," he added.

It is understood that the Shariah deposit interest rate has a unique impact on the dynamics of Islamic bank deposits. However, the moderating effect of this variable cannot be incorporated into the current NARDL method used. Therefore, Fauzul and Aminudin propose further studies to consider other variables.

"There are possibilities for future research, but it will focus on exploring other variables, different motivations, or even alternative methods. In this current study, Fauzul and I used the NARDL method, which is relatively new compared to other methods, as it was developed in 2014," said Aminudin.

Furthermore, Fauzul mentioned the potential use of a method more advanced than the NARDL, namely the Asymmetric Panel ARDL method. By using this method, researchers can obtain data from specific Islamic banks, determining which banks' data to include instead of aggregating them at the national level, as done in this current research.

"There is much to be explored in the context of the Shariah financial industry. Certainly, this can serve as a platform to spread our message, as the knowledge it encompasses is not solely about being profit-oriented or concerned with gains and losses, but also about how we think of economic advancements," Aminudin concluded.

Writer: Gede Arga Adrian

Editor: Genis Dwi Gustati

Translator: Farizal Luqman Majid