Wealth, Income Distribution, and the Role of Institution:
Concept and Practice of Syariah Banking in
Several Countries

Amalia, Restu1, Baroto, Wishnu Agung1,2

1 DG Tax, Indonesia
2 Alumni, Ritsumeikan Asia Pacific University; Founder, Digital forensic.id; Contributor, Kognisi.org

シャリーア（イスラム法）では寄付行為が制度化されているが、現実のイスラム金融で富の再分配がどのように担保されているか。インドネシアやアラブ首長国連邦、英国などの例で検証した。

Abstract

The economic system is continuously developing in the era of globalization. The development is not merely related
to the difference between market economies and planned economies, but also recognition of the role of institutions,environment, and social responsibility. One of the economic systems that have vast development is Islamic economics or Syariah economics. Particularly in the practice of Syariah banking, the vast emerging occurs in Middle Easterncountries, Southeast Asian countries, and Europe. This paper elaborates on a comparative study among Syariahbanking practices in Indonesia, Malaysia, Bangladesh, the Uni Arab Emirate, and the United Kingdom. The reason
for selecting those countries as research objects is that they become representative of their continent and consider
their rapid development in Syariah banking.
A descriptive analysis then follows the historical approach analysis to depict Islamic economics’s insight: property rights, equality, uncertainty, and usury, to overview the differences between conventional and Syariah.
Furthermore, we analyze the institution and international organization’s role in cultivating the practice of Syariah
Banking. The comparison of countries also provides evidence of the Syariah finance practice, using SWOT analysis,
and we describe its advantages and disadvantages. The result shows that Syariah banking is more stable thanconventional banking because it encourages equality and decreases uncertainty. Moreover, Syariah economics also
promotes zakat as a tool of income distribution, property ownership that encourages social responsibility andencourages the role of the institution as proposed by institutional economics theory.
Keywords

Institution, Islamic finance, Syariah, income distribution, globalization, wealth

Introduction

Along with the development of the economy in globalization, the world’s economic system has also developed. In several countries, Islamic economics has
become an option and has received a respectable welcome in the community besides the conventional economy. It starts to be chosen by the Muslim and non- Muslim
communities because the transactions are fair andmutually beneficial. One of the sectors in the Islamic
Economy that is most developed and can influence othersectors’ development in Islamic Finance, where this

sector has six sub-sectors, namely Sukuk Arrangers,
Banks, Takaful Operators Islamic Fund, Crowd Funding,and Islamic Finance Education.
The Islamic financial industry, especially banking, is
experiencing rapid growth and has outstanding potential and prospects for further development. Even Islamicbanking has become an essential part of the world financial industry with its presence in various countries.
One of the essential features of Islamic banking is
the implementation of Islamic values in the operational.
Thus, there will be no concept of interest as part of the141

Amalia, Restu, et al.

lending procedure because it is strictly prohibited to
impose usury, maysir, gharar, dzalim, and haram.
Therefore, many countries, especially countries in
the Middle East, try to implement a Syariah economic
system. It is flourishing in Middle Eastern countries andseveral Southeast Asian countries since the establishment of Islamic Development Bank (IDB) in Jeddah.
There are several international institutions as regulators and policy-making related to Islamic finance: IDB(Islamic Development Bank), AAOIFI (Accounting and
Auditing Organizations for Islamic Financial Institutions),
IFSB (Islamic Financial Service Board), and IILM
(International Islamic Liquidity Management). However,
several countries have their regulations regarding
Syariah finance, some of which are Indonesia, Malaysia,
Bangladesh, and the United Arab Emirates (UAE).
The role of institutions in shaping economic behavior
is part of the subject in institutional economics. The earlyinstitutional economics focus on collective rather than
individual action, prefer an ‘evolutionary’ rather than amechanistic approach to the economy, and emphasize
empirical observation over deductive reasoning (Ismail
and Nor, 2011). The new institutional economics (NIE)
was initially represented by Williamson in 1975, whichinterested social, economic, and political institutions.
Islamic values in economics and institution economics have similarities in social justice and the existing
institution to govern economics. Therefore, this study
explores the concept of Syariah economics in contrast
with the Institutional Economics concepts. The objectives of this study are:
1.	Compare and contrast standard features of Syariah
Economics concepts and Institutional Economics.
2.	Compare the role of the institution in current Syariahbanking practices.

Methodology

This paper conducts qualitative descriptive analysis
on both Syariah Economics and Institutional Economics
from literature and documentation. Then, we gather secondary data of Syariah banking’s practice as a proxy of
Syariah Economics in Indonesia, Malaysia, Bangladesh,the United Kingdom, and the Uni Arab Emirate. We

142exclude the Kingdom of Saudi Arabia and Egypt as they
are the early adopters of Islamic banking in the world.
The comparison of the practice is then analyzed to findsimilarities in influencing factors of Syariah banking
implementation. Lastly, we analyze the practice with theInstitutional Economics model.

Literature Review

The main objectives of this study are a comparison
between Syariah Economics and the Institutional
Economics Theory. In this section, we describe the concept of both theories.
Syariah Economics
The main principle in Syariah Economics is Islamic
law which is sourced from the Al-Quran and Hadith.
Any activities of Islamic banking should obey the commands and prohibitions in the holy book. Several principles should be followed:
a. The Divine Principles
It is always assumed that the goal of every action(including economic transaction) is to obey the orderof God. Since no one could escape from God’s provision, people should be responsible not only for themselves but also to other parties, society, and God.
b. The Freedom Principle (Al-Hurriyah)
Any agreement between two or more parties is
accepted. The form and engagement determined by
the parties are binding to all parties in terms of rights
and obligations. However, the freedom principle
should follow the Syariah law.
c. The Principle of Equality (Al-Musawah)
The purpose of an economic transaction is to fulfill
human needs. Any interaction made should regard
any rights and obligations based on this principle ofequality.
d. The Principle of Justice (Al-`Adalah)
Justice is a balance between various individuals,
both moral and material, between individuals andsociety, or between one society and another based on
Islamic Syariah. In this principle, the parties must
fulfill the agreements they have made and fulfill all
the obligations.

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e. The Principle of Willingness (Al-Ridha)
All transactions must be based on consensual or
willingness between each party. It means that there
should be no pressure, coercion, fraud, and misstatements. This voluntary element shows the sincerity
and goodwill of the parties.
f. The Principle of Honesty and Truth (Ash-Shidiq)
Failure to conduct an agreement with honesty meansthat the legality of the engagement is imperfect andis subject to disputes between the parties.
g. The Written Principle (Al-Kitabah)
It is recommended that any agreement should bedone in writing and attended by witnesses. Any
agreement which is not carried out in cash should bebacked by collateral.
Based on these principles, a contract in Syariah
Economics is a must and should not violate the otherprinciples. There must be no aspects of harm or fraud inthe contract. Usury, maysir, and gharar are prohibitedand should be avoided.
- Usury
Excessive interest in the transaction from an economic transaction or debt agreement.
- Maysir or speculation
It means that every economic transaction creates awinner and loser; thus, the winner takes all the transaction advantages.
- Gharar or uncertain
It is a contract that contains an element of fraud because
there is no certainty in the object of the contract, theamount, or the ability to perform the contract.

The New Institutional Economics illustrates the existence of asymmetric information and transaction costs.
The imperfect information creates a barrier for economic actors to enter the market. Thus, it has consequences in transaction costs. The presence of asymmetric
information reflects higher the transaction costs incurredby economic actors. In the NIE’s view, efforts are needed
to minimize transaction costs.
Hodgson (1998) explains the relationship between
information, decision making, behavior, and institution.
Then, Williamson (2000) explores the role of the institution by suggesting a model of the institution in economics in four-level:a. Level I – Social Theory
The informal rules embedded in society include traditions, religions, norms, customs, and conventions.
This level changed gradually and was influenced byeconomic history and social sciences.
b. Level II – Institutional Environment
Emphasize the economics of property rights, law,politics, and governments. This level can be called thelevel of the rules of the game of rights and obligation.
c. Level III – Governance
Governance that highlights the contracts and transaction cost. Although property rights remain essential, the legal system defines contract law andcontract protection. This level is usually called thelevel at which the rules of the game of rights andobligations are played.
d. Level IV – Efficiency
Emphasizes resource efficiency and the incentive
structure, which like the neoclassical framework.

Institutional Economics
Veblen (1899) criticizes capitalism because it creates
consumptive behavior and promotes personal rationality and self-interest. He believes that humans are rational and emotional, which influences how humans makeeconomic decisions. Economics is not solely about themarket but also technology application, environment,
history, social, and institution. Coase (1937, 1960),
North (1993), Williamson (2005), and Ostrom (2009)
believes the influence of institution in economics.

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(McShane, 2017 adapted from Williamson, 2000)

Figure 1:	F our levels of Social Analysis

Discussion

The Islamic Development Bank (IDB) is a Syariahbased financial institution that aims to be the institutionthat helps the economic development, social development, and international cooperation among Muslim
countries using Syariah principles. Members of IDB
must fund the economic and social development programs in Muslim countries. All the members will automatically become members of the Organization of theIslamic Conference (OIC).
The growth of Islamic banking began with establishing the Mit Ghamr Bank in Egypt in 1963 (Ghozali etal., 2019). Moreover, the first commercial bank was
established in 1975 by the establishment of Dubai
Islamic Bank. In Southeast Asia, the first Islamic banking is Bank Islam Malaysia Berhad, founded in Malaysia
in 1983 (Ketell, 2011).
1. Indonesia
The first Islamic bank was Bank Muamalat Indonesia(BMI) which officially began operating in 1992.
After the amendment of Law Number 7 of 1992 to
Law Number 10 of 1998, which provides a clear operational basis for Islamic banking, Syariah’s economic

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development in Indonesia began to emerge, especially after the financial and monetary crises provethat Islamic more superior over conventional banks.
In 1998, Bank Muamalat did not need an injection offunds when conventional banks need assistance fromthe Central Bank due to the negative spread.
Until now, Indonesia’s banking system is a dual
system, where conventional banks and Islamic banks
can operate simultaneously. Commercial banks ofthe conventional system can operate based on Islamic
Syariah principles by establishing a Syariah Business
Unit (SBU). Based on the 2019 Islamic Finance
Development Indicator (IFDI), Indonesia’s ranking
jumped six steps to fourth from 10th place in 2018
after Malaysia, Bahrain, and the United Arab Emirates.
Recently, Indonesia has merged three Syariah
Commercial Banks into one Syariah Bank, namely
the Indonesian Syariah Bank. Islamic banks are still
relatively superior to conventional banks in terms ofgrowth in assets and third-party funds that can growdespite the Covid-19 pandemic conditions.
2. Malaysia
Malaysia officially introduced the Syariah Banking
Act of 1983 (IBA 1983) and the Takaful Act of 1984.
Bank Islam Berhad was the first bank to be established on March 1, 1983 (Basalamah & Rizal, 2018),
which fully offers Islamic banking products andservices.
The 1983 IBA Law has given great authority to
Bank Negara Malaysia (BNM) to supervise and regulate Islamic banks. The law also regulates Islamicbanks’ financial requirements and duties, ownershipand control of Islamic banks, the limitations ofIslamic banks, and the power of supervision andcontrol of Islamic banks (IBA, 1983).
Furthermore, Bank Negara Malaysia (BNM)
introduced a form of interest-free banking scheme.
The policy is often referred to as an “Islamic
Window,” which allows commercial banks andfinancial companies to offer Islamic banking products
and services. The policy is remarkably successful
because more Muslims and non-Muslims participate
in Islamic banking (Thani et al., 2010).

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3. The United Kingdom
The United Kingdom has designated its country as
the center of Islamic finance. The UK has five banks
which are entirely Syariah. Al Rayan Bank is theoldest and largest Islamic bank in the UK. Foundedin 2004, the bank is authorized by the Prudential
Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation
Authority and is a member of the FSCS. (Firdaus,2019). Al Rayan Bank is an open and inclusive bankthat welcomes Muslim and non- Muslim customers.
The bank currently estimates that more than a quarter of its customers are not Muslim. However, in specific banking products, the composition is higher.
For example, more than 80 percent of all-time deposit
customers are believed to be non-Muslim.
Islamic banks can only invest in activities supported by tangible assets; in other words, speculative
investments are not permitted in transactions with
Islamic banks. The non- speculative process makes
the public more confident in Islamic banking compared to conventional banking. Hence the fact thatinvestment can only be made in activities under
Islamic ethical values attracts people of all religions.
4. Bangladesh
Bangladesh is one of the largest Muslim countries in
the world. In 1974, Bangladesh signed the Islamic
Development Bank (IDB) charter and committed todeveloping its economy and financial system under
the Syariah. Moreover, in 1983, Islamic Bank
Bangladesh Limited was established, which was
accompanied by IDB. Syariah banks in Bangladesh
have demonstrated that these banks have met the relevant requirements and regulations that apply in thatcountry then many conventional banks have started
to open branches in the field of Syariah.
Based on data from IFSB in the Islamic Financial
Services Industry Stability Report (2020), at the endof 2019, there are eight banks that fully- fledged the
Syariah system and 17 conventional banks that havebranches of Islamic banks. It counted as a quarter ofthe entire banking industry in Bangladesh.
To ensure the Islamic banking practices in

Bangladesh, the Bangladesh Bank issued a“Guidelines for Implementing Islamic Banking” in2009. Moreover, the Bangladesh bank has a dedicateddepartment for the on-site supervision of Islamic
service providers. This department is entrusted withthe responsibility of supervising and monitoring theperformance of Islamic banks in Bangladesh.
5. United Arab Emirates (UAE)The UAE is a Muslim country; thus, the Islamicbanking system is more needed than conventionalbanking, which causes numerous Islamic banks in
the UAE is established (Osmanovica, 2020).
Dubai Center for Statistics believes that Islamic economic institutions contributed around 8.3% of GDP
in the UAE in 2018, with growth in total financial
assets of Islamic banks is 7% higher than conventional banks (4-4.5%).
The success factor of the Islamic economy’s
development is the suitability of the Islamic law’s
economic principle. Therefore, more than half of the
UAE population (55%) has at least one Islamic financial product. Al-Malkawi and Pillai (2018) believethat UAE, Malaysia, and Bahrain have been recognized as the most developed market. Moreover, UAE
is the leader in terms of total assets.

AnalysisFirst, we conduct a Strengths, Weaknesses,
Opportunities, and Threats (SWOT) analysis to capture
Syariah banking practice in researched countries.
a. Strengths- The amount of Muslim in certain countries- The establishment of Islamic financial institutions-	Encourage justice and takaful between the banks
and customers- Independent without interestb. Weaknesses-	Prejudice to all customers (vulnerable to those
who have bad intentions)- A profit-sharing system requires complex
calculations-	
Requires more professional staff to assess thecustomer’s projects

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c. Opportunities-	The Islamic window system or dual system inconventional bank
- Non-Muslim customers increased. Threats-	The conventional bank provides greater returns
than Syariah bank
- A non-halal businessIn the 2020 IFD Report, the estimation of Islamic
financial assets in 2024 is US$3.69 trillion with a 14%
increase year-on-year. The top five countries in Islamic
Finance are Malaysia, Indonesia, Bahrain, United ArabEmirates, and Saudi Arabia. Moody’s vice president
also believes that the Islamic banking system would
lead to global growth in the financing industry. The
main feature of an Islamic bank, risk-sharing, is themost attractive feature for the Muslim community andnon-Muslim community. Moreover, Islamic banking
provides a more secure process and procedures in investors’ view (Mateev and Poutzioris, 2019).
Institutional Theory and Syariah Economics
Using the Williamson model on social analysis, we
explain the features of Islamic banking, policies, andinstitution that exist in the model.
1. Level I
The main principle of Islamic banking is the divine
principle which is supported by the other six principles. Religion guides economic transactions.
Therefore, God’s rule is the main direction and isinherent or embedded in human behavior, including
in economics. It is inferred that the principles ofSyariah Economics form a social norm in human life.
2. Level II
Syariah Economics supports property rights andasset ownership if the assets are utilized following
Islamic principles. Therefore, any exploitation ofassets should consider justice, the environment, andblessings. Thus, the need for a professional institution is a must.
3. Level III
Syariah Economics reflects not only people’s

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rationality but also emotional consideration.
Therefore, bounded rationality and opportunistic
behavior, which caused an unclear contract relationship and resulted in increased economic transaction
costs, is minimized by the role of the institution as
the governing party.
4. Level IV
Managing resources’ economic efficiency will beestablished if norms, rules, and institutions can beappropriately managed.
Income Distribution
Besides the principle of justice and equality, Syariah
Economics also implements the redistribution of wealthcalled zakat. The mechanism is especially crucial as it ismentioned in several verses of the holy book and usuallyplaced in the equivalent with prayer. Therefore, Muslim
is bound to fulfill their religious obligations simultaneously with socio-economic purpose. Zakat also managed
in Islamic institutions to distribute to entitled parties.
In general, zakat is taken from the holder of wealth(the rich) due to non-productive assets ownership. Eighttypes of wealth which subject to be distributed are:- Wealth from trading activity
Every asset possesses from trading, including merchandise, cash, and liquid receivables. The amountof zakat 2.5 percent is issued after deducting debt
and losses and has reached the nisab (85 grams ofgold) in one year of possession.
- Wealth from agricultural products and fruits
Agricultural products are also obliged to be zoned.
The nisab of zakat is 653 kg which subjects to bezoned 5 or 10 percent depends on the agriculturalprocess.
- Wealth from livestock
Livestock owners must also pay zakat, and theamount of zakat is depended on the number of livestock ownership.
- Wealth from rikaz or treasure
Every discovery of treasure that no one acknowledges as the property owner is obliged to pay 20% of
the zakat.
- Wealth form profession

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-

-

-

Professional income also subjects to be zoned if itreaches a particular value of money equivalent to
522 kg of rice. The percentage of zakat is 2.5%.
Wealth from investment
Any assets obtained from investment returns subject
to zakat of 5 to 10 percent depends on the income.
Gold and Silver
Gold or silver, which owned for more than one year
and its value equivalent to 85 grams of gold, isobliged to pay zakat as much as 2.5 percent.
SavingSaved money on hand or in banks as long as it isowned for more than one year and exceeds the limit,
it is treated the same as gold and silver.

The institution also regulates who eligible to receive
zakat. They are the poor people whose income is insufficient to fulfill daily needs or only sufficient to fulfill
daily needs at a minimum level. Other people who eligible to receive zakat are (1) the institution or individual
who manage zakat, (2) people who have just converted toIslam, (3) to free someone from slavery, (4) to free person
in debt, (5) people who work for the sake of God, and (6)people who need supplies in their journey to the good.
If it is well regulated and professionally managed,
the Syariah principle and zakat will have a significant
impact on the social role to overcome poverty anddevelop society.

WealthThis study suggests a resemblance of Institutional
Economics Theory and Syariah Economics in terms of
institution’s role to promotes efficiency. Syariah
Economics which is mainly dominated by Islamic banking is expected to continue to expand even in a non-dominant Muslim country because it promotes fairness andjustice. Another significant feature in Syariah is theincome distribution managed by a particular institution
to promote wealth creation and wealth distribution.

Further Study

This study uses exploratory documents and regulations. We suggest profound research using empirical
data to provide more empirical evidence on this research.

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Figure 2: The Process of Wealth Creation in Syariah
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