SHARIA GOVERNANCE IN ISLAMIC BANKS
Introduction
The national banking industry is part of the support of the national real sector, which
has an obligation to implement good corporate governance (GCG). At this time the
implementation of good corporate governance is a necessity as a barometer of the
accountability of a company. The weak implementation of corporate governance is
suspected to be one of the triggers for various financial scandals in the company's business.
The implementation of good corporate governance is considered to be able to improve the
company's bad image, protect stakeholders and increase compliance with applicable laws
and regulations and general ethics in the business world. Company with good corporate
governance (GCG) practices will be able to increase company value for shareholders
because the company's vision, mission and strategy are clearly stated, corporate values and
code of ethics are prepared to ensure compliance with all levels of the company, there are
policies to avoid conflicts of interest and transactions with inappropriate third parties, and
company risks are well managed and there is a good control and monitoring system.1
According to the National Committee for Corporate Governance Policy (KNKCG),
corporate governance is a process and structure used by company organs to provide added
value to the company on an ongoing basis in the long term for shareholders while taking into
account the interests of other stakeholders based on applicable laws and norms.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
Important Pillars of Good Corporate Governance (GCG)
The Islamic financial system is part of a broad concept of Islamic economics which
aims to impose a system of Islamic values and ethics in the economic environment. The
development of Islamic banking is increasing and fast, but one thing that needs to be
observed is the aspect of Good Corporate Governance (GCG) because it is related to various
kinds of risks of loss if it is not considered, it will damage the image of Islamic banks.
Good Corporate Governance is an important pillar created to realize a superior Islamic
bank. The implementation of Good Corporate Governance (GCG) is increasingly important,
because the concept of Islamic banks uses risk sharing. The implementation of good
corporate governance in the Islamic banking industry must be based on five basic
principles. First, transparency, namely openness in disclosing material and relevant
information and openness in the decision-making process. Second, accountability, namely
the clarity of functions and the implementation of the responsibility of bank organs so that
management runs effectively. Third, responsibility, namely the suitability of bank
management and applicable laws and regulations and the principles of sound bank
management. Fourth, professional (professional), namely having competence, being able to
act objectively and free from influence / pressure from any party (independent) as well as
has a high commitment to developing Islamic banks. Fifth, fairness, which is justice and
equality in fulfilling the rights of stakeholders based on applicable laws and regulations.
The implementation of the Good corporate governance system in Islamic banking is
expected to increase added value for all interested parties (stakeholders) through the
following objectives: 1) Improve the efficiency, effectiveness, and sustainability of an
organization that contributes to the welfare of shareholders, employees and other
stakeholders and is an elegant solution in facing future organizational challenges; 2) Increase
the legitimacy of an organization that is managed openly, fairly, and accountably; 3)
Recognize and protect the rights and obligations of stakeholders; 4) An integrated approach
based on the principles of democracy, management and organizational participation in a
legitimate manner; 5) Control conflicts of interest that may arise between the principal and
the agent; 6) Minimize the cost of capital by providing positive signals to capital providers.
Increasing the value of the company resulting from a lower cost of capital, improving
financial performance and a better perception of stakeholders of the company's future
performance.
Islamic banks are currently not yet followed by market share, so a strategy is needed to
increase the market share of Islamic banks by implementing shariah governance which is a
combination of universal good corporate governance (GCG) with universal good corporate
governance (GCG) implementation of sharia principles (shariah compliance) in order to
improve the reputation and trust of Islamic bank customers.4 The compliance and suitability
of banks to sharia principles are often questioned by customers. It implicitly shows that
Islamic banking practices pay less attention to sharia principles, one of the causes of the low
is the reputation of Islamic banks. Reputation plays an important role in establishing a
cooperative relationship between Islamic banks and customers, in the long term.
Islamic banks have also not been able to implement Islamic values and laws (maqashid
shariah) due to the weakness of the performance measurement system6 . Measurements can
be made using financial measurements and non-financial measurements. Financial
measurements are usually for conventional bank companies. Islamic banks and Islamic
Business Units usually use non-financial measurements. Measurements based on Islamic
values show a higher level compared to measurements made by conventional banks which
aim solely to maximize shareholder value7 Mehmet Asutay and Astrid Fionna Harningtyas
in their research explain the existence of empirical evidence that not all operational activities
of the Islamic finance and banking industry are fully implemented using Islamic law and
values8 The results of performance measurement are very important for all parties who have
an interest because the correct implementation of Good Syariah Governance is a way that is
believed by previous research to ensure that management acts in the interests of
stakeholders. As company information which is a form of transparency and accountability of
company management to stakeholders.
Information disclosure from the company can be used as a consideration for
stakeholders in decision making,9 A more in-depth examination produces a link between the
implementation of Good Syariah Governance and the information disclosed by
management10 . The performance measurement system through good sharia governance is
not only for Islamic banks but also for conventional banks. Islamic banks can benefit from
this system both at the level of Islamic commercial banks and Islamic business units. Other
interested parties such as depositors will benefit in their decisions in placing their funds and
debtors can benefit in seeking business funding while the government will benefit for
regulatory purposes. The performance assessment system through good governance of
Islamic Banks will be linked to the strategic objectives of Islamic Banks, namely to find a
system that is more relevant to Islamic values.
Sharia Banking business activities that use sharia principles, namely the aspect of
responsibility to ensure stakeholders that products and operational activities are carried out
transparently and can be accounted for according to sharia principles where every economic
transaction does not contain elements that are prohibited such as usury (bank interest),
maysir (gambling), gharar (uncertainty), haram objects and sharia causing injustice. Along
with the development of Islamic Banking in Indonesia, which is not as fast as other Muslim
countries, there have been cases of irregularities in operational activities that are not sharia,
namely derivative transactions (gharar) in the Syariah Business Unit of Bank Danamon
Tbk15 . Derivative transactions containing speculative elements in Islamic banking are
products that are forbidden in sharia principles. Fictitious credit that occurred in the Syariah
Business Unit of Bank Kaltim and Bank Jateng which was carried out by the Branch Head
and his staff in the two Syariah Business Units.16 Other irregularities may occur in the field
due to missed supervision from the banking authority, namely the Financial Services
Authority (OJK), whose transactions are not recorded in the bank or outside OJK control
such as the contract process, type of investment and distribution of financing.
What is important for the development of Islamic banking or financial institutions is
the implementation of Good Corporate Governance in the body of Islamic institutions. By
carrying the name of Islamic banking, or Islamic financial institutions, does it automatically
guarantee that they have been able to implement Good Corporate Governance in their
institutions. Research studies on the implementation of Corporate Governance conducted by
IRTI in Islamic banking in various countries show that the implementation of Good
Corporate Governance has not been implemented properly. The implementation of Good
Corporate Governance is proven in several Islamic financial institutions in the Muslim
world to increase trust people to Islamic banks but if the failure in the application of sharia
principles will make customers move to other banks.
Shariah governance emerged in the midst of the rise of the Islamic economy, the Islamic
economy rose when there was an economic crisis in early 1997 where conventional banks
and financial institutions almost all collapsed and liquidated, except for Islamic Banks and
Islamic Business Units. Islamic banks and Islamic Business Units grew rapidly and since
1998, the Islamic economy is characterized by the Islamic banking system. The Islamic
banking system is based on sharia, which is a system based on the Qur'an and Hadith. Al
Qur'an letter Al-Baqoroh verse 22 that Allah SWT mandates to be honest in doing business,
and several other letters in the Qur'an that talk about doing sharia business, namely QS. Al-
Baqarah: 275, QS. At-Taubah: 24, QS. An-Nur: 37, QS. Fathir : 29, QS. Ash-Shaff : 10 and
QS. Al-Jumu'ah : 11 and the words of Rosululloh Prophet Muhammad SAW, among others
he said: "It is not allowed for a Muslim to sell a sale that has a defect, unless he explains the
defect" (H.R. Al-Quzwani). "Whoever cheats us, then he is not our group" (H.R. Muslim).
Shariah governance is a unique and specialized governance concept for companies or
financial institutions that offer products and services in accordance with sharia principles.
Shariah governance is essentially complementary to the existing good corporate
governance system whose main function is to review the sharia compliance of all company
activities both before the transaction (ex-ante) and after the transaction (ex-post). To perform
this function, the shariah governance system must have three main components, namely the
sharia council (DPS), sharia compliance opinion and sharia review process.18 . The Islamic
business transaction system consists of mudharabah (profit sharing), qardh (loan),
musyarakah (partnership), salam contract (order goods), rahn (pawn), kafalah (guarantee),
and wadiah (deposit). While the principle of sharia is the aspect of responsibility to convince
stakeholders that products and operational activities are carried out transparently and can be
accounted for according to sharia principles where every economic transaction does not
contain elements that are prohibited such as usury (bank interest), maysir (gambling), gharar
(uncertainty), haram objects and cause injustice.
Chapra & Ahmad's research explains, where a number of 288 customers (62%)
respondents from 463 customers involved in the survey of governance (GCG) he conducted
(coming from 14 Islamic banks in Bahrain, Bangladesh and Sudan) answered that they
would move their funds to other Islamic banks if there were suspected "sharia violations" in
the operations of Islamic banks.19 This shows that the aspect of compliance with sharia
principles is very significant in influencing customer behavior in choosing Islamic banks.
Therefore, the implementation of shariah governance of Islamic banks is a must and this is
expected to improve the reputation and public trust in Islamic banks.
Until now, the definition of Corporate Governance cannot be claimed by individuals
because each person is different in defining it. Among those who define Good Corporate
Governance are different from one another with others OECD, ADB and Cadbury
Committee. Basically, Good Corporate Governance has at least 3 (three) elements. First,
there is a Board of Commissioners, Directors, Shareholders and stakeholders; second, there
is internal control and third, there is transparency in determining company goals, and
measuring company performance. The principles of Good Corporate Governance are
Transparency, Independency, Accountability, Responsibility, and Fairness.
Measurements based on Islamic values show a higher level compared to measurements
made by conventional banks that aim solely to maximize shareholder value.21 There are
several methods of measuring the performance of Islamic banks, including the maqashid
sharia index and the sharia balance scorecard. Maqashid syariah adapted from the
formulation of maqasid syariah by Abu Zahrah classifies the concept of maqasid syariah
into: 1) Educating the individual, 2) Upholding justice, and 3) Maintaining the public good22
.
Good governance in Islamic banking is much more important than in conventional
banking because depositors/investors face higher risks in profit sharing contracts23 . The
ratification of Law No.21 of 2008 concerning Islamic Banking shows the seriousness of
regulating Islamic banking operational activities, among others in article 34 with the
obligation of Islamic Banks to implement Good Governance, then the issuance of Bank
Indonesia Regulation No.11/33/PBI/2009 dated December 7, 2009 and Bank Indonesia
Circular Letter No.12/13/DPbS dated April 30, 2010 on the Implementation of Good
Corporate Governance for Sharia Commercial Banks and Sharia Business Units. Both
regulations govern the compliance of Islamic banks with sharia. Good Governance of
Islamic Banks and Implementation of Good Corporate Governance of Islamic Commercial
Banks (BUS) and Islamic Business Units (UUS) to increase public trust by applying the
principles of transparency, accountability, responsibility, professionalism and fairness in
carrying out the operational activities of Islamic banks.
The implementation of Good Corporate Governance (GCG) in Islamic banks must
refer to the principles and values of Islamic economics and business in accordance with the
Qur'an and Hadith. Deviation of Islamic bank operations from Islamic economic and
business values means deviation from the Islamic creed. The Qur'an and Hadith not only
regulate economic and business values but also regulate ideal human morals as actors of
economic and business activities in Islamic banking.
Conclusion
Indonesia is the country with the largest Muslim population in the world, but the
development of Islamic business is not as big as compared to Muslim countries that are
smaller than Indonesia. Islamic banking business activities that use sharia principles must
emphasize aspects of responsibility in accordance with sharia principles where every sharia
bank transaction does not contain elements that are prohibited. The implementation of the
good corporate governance system in Islamic banking is expected to increase added value
for all interested parties or stakeholders.
