Introduction

The Indonesian Financial Services Authority (OJK) is issuing new guidelines in October 2024 aimed at strengthening the country's sharia banking sector and increasing regulatory consistency.
The guidelines aim to clarify the characteristics of Sharia banking and differentiate it from conventional banking services.
The target is:

• " Mudarabah Financing Product (MFP)"
• "Sharia Restricted Investment Account with Akad Mudharabah Muaqayyadah (SRIA)"
• " Cash Waqf Linked Deposit (CWLD)"

These are the three main products.
These guidelines provide more specific and detailed operational guidance for Sharia banking products which were previously regulated within a general legal framework.
Each one will be explained below.

MFP

First, MFP is a profit-sharing lending product based on Mudaraba, a Shariah contract.
Under this agreement, the bank, as a fund provider, provides the client with funds for business activities, and the client shares the profits earned from investing the funds with the bank in a pre-agreed ratio.
What makes this product unique is that dividends are based on actual profits earned, rather than a fixed interest rate.
Although banks are not involved in the day-to-day running of a business, they do have a role in overseeing the business activities of their clients and providing guidance where necessary.
In addition, the contract must clearly define the use of funds and the profit-distribution mechanism, and operations must be conducted strictly in accordance with Shariah principles, such as by not allowing distribution based on fixed profit rates or revenue forecasts.

SRIA

Secondly, SRIA is an investment product based on “Mudarabah Muqayyada”, a type of mudaraba contract.
In this arrangement, the customer, as an investor, provides funds to the bank, and the bank manages the funds and shares in the profits.
The distinctive feature of SRIA is that the investment risk is borne by the customer and the bank does not guarantee the principal.
In addition, the assets that can be invested in must comply with Shariah principles, and there are strict restrictions on the types of transactions and assets that can be invested.
In addition, banks are required to properly disclose information about their managed assets and risks in order to protect their customers.
This includes providing clients with detailed reports on investment performance and asset structure.

CWLD

Finally, CWLD is a product that applies the Sharia waqf (endowment) system.
With this product, customers deposit cash with the bank, which then puts the funds to work for charitable purposes.
Specifically, profits derived from funds donated by customers are distributed in a way that benefits religious or public interests.
To offer this product, banks must obtain a Cash Waqf Entities ( Lembaga Keuangan Syariah Penerima Wakaf Uang (LKS-PWU)) license and be required to operate strictly in accordance with Shariah principles.

summary

The OJK’s new guidelines will not only increase transparency and consistency in the operation of these Sharia banking products, but also bring increased credibility for both banks and customers.
The guidelines also align with policies such as Law Number 4 of 2023 on the Development and Strengthening of the Financial Sector and The Roadmap for Sharia Banking ( RP3SI ) 2023-2027, aiming to further develop Indonesia's sharia financial sector.
Specifically, it is expected that financial products based on Shariah principles will demonstrate a competitive advantage over traditional banking products, thereby attracting interest from domestic and international investors and customers.

This new regulatory framework will enable Indonesia's sharia banking sector to operate in line with global Islamic finance best practices and become more internationally competitive.
These initiatives are expected to position Indonesia as a hub for Sharia finance and serve as a foundation to attract more investors and customers.
Islamic finance is also said to be compatible with ESG, and I would like to write a separate post on this point.