ISLAMIC BANKING PLUS SOCIAL BANKING

In: Banking: Services, Opportunities and Risks ISBN: 978-1-53612-837-6 Editor: Kazik Jerzy © 2017 Nova Science Publishers, Inc.

Chapter 2

ISLAMIC BANKING PLUS SOCIAL BANKING EQUALS ISLAMIC SOCIAL BANKING: AN EQUATION IN THE MAKING M. Luthfi Hamidi1 and Andrew C. Worthington2,* 1

Department of Accounting, Finance and Economics, Griffith University, Brisbane, Australia Sekolah Tinggi Ekonomi Islam SEBI, Jawa Barat, Indonesia 2 Department of Accounting, Finance and Economics, Griffith University, Brisbane, Australia

ABSTRACT This chapter discusses Islamic social banking (ISB), its quadruple bottom-line principles, and the possible paths to its establishment. We first critically discuss the social objectives of Islamic banking (IB) and its apparent failure through comparison with the generally positive contribution of social banking (SB) to create a synthesis in the form of ISB. Theoretically, we find IB and SB share similar 3P principles (Profit, Planet, and People) in their operations. We extend these principles to * Corresponding Author Email: [email protected].

Complimentary Contributor Copy

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M. Luthfi Hamidi and Andrew C. Worthington another P (for Prophet) to include the thoughts and guidance of Islam as ethical guidance for ISB. We conclude the chapter by briefly proposing four possible scenarios for the extension of ISB in the Indonesian context. These are: (i) incorporating SB values in existing IB practice, (ii) establishing a new ISB institution, (iii) creating an Islamic Waqf (religious endowment) bank, and lastly, (4) incorporating ISB in Islamic microfinance.

Keywords: Islamic banking, social banking, Islamic social banking, quadruple bottom-line principles

INTRODUCTION Islamic banking (IB) has developed globally and rapidly over the last three decades, despite major economic and political uncertainty in key regions worldwide. While affected adversely by the global financial crisis, IB has been arguably more resilient than are its conventional counterparts to financial shocks (Hasan and Dridi, 2011; Kasim and Majid, 2010). Furthermore, IB has been apparently better able to control its costs, and is thus considered more efficient than conventional banking (Rahman and Rosman, 2013), while there are suggestions it offers more effective intermediation and displays better asset quality (Beck et al., 2013). However, despite strong growth and several attractive features in product and service delivery, some argue that Islamic banks have failed in delivering tangible social outcomes (Asutay, 2007, 2012; Nor, 2016; Nor et al., 2016; Sairally, 2007), suggesting its reinvention through adopting social banking (SB) practices as a means to enhance its oft-desired but seldom delivered social ends. Otherwise, IB is likely to mimic the practices of conventional banks, with profit as its primary priority and neglecting the social dimension. This chapter discusses the social objectives of IB and the principals and practice of SB as a means of examining the possibility of incorporating selected elements into a new form of banking known as Islamic social banking (ISB). The chapter proposes quadruple bottom-line principles as a


Islamic Banking Plus Social Banking Equals …

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solid basis for ISB and several possible scenarios for its future establishment. Because of space limitations, there is no detailed discussion of the potential products and services offered by ISB within this framework. Nevertheless, as a means of providing context, we examine the case for ISB in Indonesia. The structure of the remainder of the chapter is as follows. The second section discusses the social objectives of IB, from both a theological and a legislative perspective. The third section examines SB, including its definition and principles. The fourth section formulates ISB, introducing its quadruple bottom-line principles and possible paths to establishment. The final section provides some brief concluding remarks.

SOCIAL OBJECTIVES OF ISLAMIC BANKING Social Objectives of Business The apparent “social failure” of IB discussed earlier suggests that there is a failure in the management of social issues in IB. To understand this better, it is important to know more about the objectives of Islamic banking, particularly its social role. The primary objective of business, according to Friedman (1970) is to secure profit. However, this view is becoming increasingly inappropriate given most businesses operate in both the economy and society by maximizing scarce resources. For this reason, it is increasingly the case that businesses will only maximize their profit by doing more in terms of securing social benefits and caring for sustainability. Accordingly, we can extend the modern objectives of business from purely economic objectives to include social objectives. For instance, Tulsian and Pandey (2008) classify business objectives into four categories: economic objectives, social objectives, human objectives, and national objectives. They further assert that the major social objectives include: (1) the supply of the desired quality of products; (2) avoidance of antisocial and unfair trade practices; (3) the generation of employment; (4) provision for the welfare of employees; (5) the avoidance of slums and


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M. Luthfi Hamidi and Andrew C. Worthington

pollution; and (6) contributing to the general welfare of society. Serving social objectives, rather than only maximizing profits, is also desirable in the banking industry. In particular, if commercial banks fail to promote social welfare, some may see that regulation, including state-owned enterprises, are an alternative way to address market failure and to contribute to economic development and general societal welfare (Stiglitz, 1993).

Theological Perspective In relation to social objectives, supporters of IB evaluate its effectiveness from two perspectives. First, IB encompasses financial institutions with a clear objective to generate profits as well as social benefits. Second, IB includes financial institutions like other conventional financial institution, with social objectives remaining the domain of other entities, including government. The first of these models mostly reflects the majority view of Islamic scholars. From a theological viewpoint, Islam broadly encourages an economic system aimed at promoting a just, fair, and balanced society (Ahmad, 2000; Naqvi, 2016; Siddiqui, 2001). In this way, economic interaction in society is to “…increase the sum of public happiness, whilst reinforcing social solidarities and strengthening their values” (Tripp, 2006, p. 119). In a more narrow sense, socioeconomic outcomes have long been part of the larger debate in Islamic economics (Al-Sadr, 1968; Chapra, 1970; Kahf, 1973; Maududi, 1967). Siddiqi (1981, p. 202), for example, concluded that besides economic wellbeing as emphasized by many Islamic scholars, a “socially desired result” relates to noneconomic goals that are expected to be achieved by a morally oriented individual. Similarly, Al-Zuhayli (2003, p. 250) stated “…the primary goal of Islamic financial institutions is not profit-making, but the endorsement of social goals of socioeconomic development and the alleviation of poverty.” To realize these values, IB institutions should include these tenets in their daily activities, and not place an emphasis solely on financial profit,



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but also distributive justice (Taqi-Usmani, 2002). Furthermore, Hasan (2005) contends IBs should be “…structurally enabled to fulfil their societal obligations,” and because of this “…expected to be more socially responsible than other business entities” (Haniffa and Hudaib, 2007). In other words, “…being ethical and socially oriented is not an option for (Islamic banking), but rather it is essentialized within the ontological framework of (Islamic moral economy)” (Asutay and Harningtyas, 2015). Elsewhere, Dusuki (2008) explores the social objectives of Islamic bank from the perspective of stakeholders, including customers, depositors, local communities, employees, managers, regulators, and Syari’ah advisors. He finds that the social objectives of IB include: (i) alleviating poverty; (ii) contributing to social welfare; (iii) promoting sustainable development projects; and (iv) promoting Islamic values and the way of life to staff, clients, and the public. Because of this, all services and products should also favor national long-term developmental goals. Kamel (1997) argues that IB goals should include goals economic development, the creation of value-added, more exports and fewer imports, job creation, the rehabilitation of the incapacitated, and the training of others. In practice, however, IB arguably favors financial commercialization by only banning riba and adhering to basic Syari’ah compliance, and paying mere lip service to any social aspects (Asutay, 2008).

Perspective of Legislation Besides a theological perspective, the social objectives of IB are also legislated in some countries. As a case, in Indonesia, the Undang-undang Republik Indonesia Nomor 21 Tahun 2008 tentang Perbankan Syariah (Islamic Banking Acts) require Islamic banks as well as Islamic banking ‘windows’ to perform a social function. As described in Article 4, Paragraph 2, this is a commitment to establish a baitul mal (treasure house) to gather social funds from Zakat (alms), Infaq (gifts for a certain purpose), Shadaqah (gifts to obtain a blessing from Allah) and other funds (such as


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ta’zir or a penalty for late payment) to be disbursed through a Zakat management institution. This provision also includes social funds in the form of waqf (endowment) money and channeling though third parties appointed by the waqif (those who pay waqf money). Similar provisions are elsewhere, including Law No. 28 for the Year 2000 Banking Law in Jordan. Under its Article 50, Paragraph A(3), it states that besides providing banking services, financing, and investment, Islamic banks should be “…providing services aiming at reviving social solidarity organized on the basis of mutual benefits.” Furthermore, in Article 54, Paragraph C, it states that these should focus on “…strengthening the bonds of cohesion and mutual compassion among groups and individuals, including the provision of Qardh al-Hasan (interest-free loans) for productive purposes in any field.”

ISLAMIC BANKING SOCIAL OBJECTIVES IN PRACTICE

Figure 1. Relation between IB Social Objectives and Outcomes.



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The question naturally arises whether these social objectives in IB are evident in actual practice. Fortunately, some unique indicators are available to illustrate the close relation between IB and these social goals. First, Islamic banks have an option to deliver Qardh al-Hasan (benevolent loans) in their transactions. Second, individually (employees) or as organizations (management), Islamic banks expend funds on Zakat as well as shadaqah, which if directed into Shariah-compliant projects, may be reflected in national GDP. Third, because of their promotion of social justice, Islamic banks need policy favoring their customers in loan terms, penalties for late payment, and in case of insolvency (Maali et al., 2006). These may also be evident in public information. Finally, the expectation is that Islamic banks do not finance projects that cause harm to the environment and society, as illustrated in Figure 1. Using these approaches, most studies have revealed that most Islamic banks do not provide significant social outcomes and have only limited contributions to their stated environmental responsibilities (Asutay, 2007, 2012; Maali et al., 2006; Nor et al., 2016; Raimi et al., 2014; Zubairu et al., 2012). In terms of other findings, Islamic banks that collect Zakat within an organization tend to have better social disclosure. However, the clear divergence between the ideal and the reality in IB practice seems to evidence that Islamic banks seem to focus on profit-oriented entities rather than being committed to a balance between economic motives and social objectives as dictated by Syari’ah.

SOCIAL BANKING Moving to Alternative Banks Banks as financial intermediaries are deposit-taking and loan-making institutions (Allen and Santomero, 2001). In doing so, the bank will disburse depositor funds across many different investments and projects, which results in many different risks arising that the bank must manage. This creates an inherent tension in that the bank will encounter asymmetric


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information about the ability of borrowers to repay their loan and the amount of charged interest. As a result, banks may charge higher interest rates to riskier projects or exclude some potential borrowers who are unlikely to repay their loans. From the borrowers’ perspective, this act may be unjust or unethical because the bank uses depositors’ money. For this reason, it should not only secure its own interest, but is supposed to support, not exclude, the access of the poor to bank credit (Leyshon and Thrift, 1995). Furthermore, Dymski (2003) points out, at least in the US, that banks tend to cater to the well off, leaving the needs of the poor unaddressed. Even if credit and other financial products are available, banks will still tend to charge poorer customers higher prices (Refiner, 2001). Moreover, Buttle (2007) argues that banks can become predatory by exploiting borrowers with unfair terms. In addition, as bank increasingly prioritize financial benefits it may withdraw from funding projects linked to any social or environmental mission. For example, empirical research conducted in 1990 revealed that (European) banks paid little attention to their own environmental circumstance or that of their clients (Bouma et al., 2001). Consequently, when the US enacted the Comprehensive Environmental Response, Compensation, and Liability (CERCL) Act in 1980, banks began to take more account of issues pertaining to ecology and the environment. Otherwise, they were to pay a remedial cost if their clients incurred environmental pollution (Bouma et al., 2001). Hence, those desiring prudential banking seek an alternative that still preserves their money but creates sustainable finance.

Definition and Principles These problems of conventional banks promote an alternative banking model, one where the financial institution is not just profit-oriented. Nowadays, most banks aspire to be more socially and environmentally responsible. These strategies lead many to calibrate their operations with



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their corporate social responsibilities (CSR). Yet other banks focus on social objectives, usually in the form of a bank with a social mission or socalled social banking (SB) (Burgess and Pande, 2004; Buttle, 2007; Cornée and Szafarz, 2014; Guene and Mayo, 2001; Platschorre and Bulte, 2011). Table 1. Major differences between social/green/ethical/sustainable/ alternative and conventional banking Social/green/ethical/sustainable/alternative Profit-making business model, but parallel optimization of social added value Focus on banking basics as saving collection and credit distribution Credit policy based on triple bottom line analysis (environmental, social and financial) Transparency in saving-borrowing. Lending policies as well as the loans granted published

Local outreach. Growth resulting from enhancing regional development, fostering cooperation and supporting endogenous progress Emphasis on decentralization, autonomy, limited size, and local scope of risk management

Conventional Purely profit-maximizing oriented business model (focus on shareholder value) Complex investing banking activities, especially in the global financial market Credit policy based on single bottom line screening (primarily financial performance) Depositors-borrowers kept separate Details of loans granted remain secret (commercial confidentiality) Global outreach. Growth resulting from opportunities created due to the international competition between territories. Emphasis on mergers, concentration, economies of scale, and international scope of risk management

Source: Paulet et al. (2015).

Guene and Mayo (2001, p. 1) define “Social banking as where the supplier of financial services take a positive interest in the social outcomes and effects of their activities.” Alternatively, Cornée and Szafarz (2014, p.


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361) simply contend that SB is “…financial intermediaries paying attention to noneconomic (i.e., social, ethical, and environmental) criteria.” Yet other researchers prefer the term “green banking” instead of SB (Biswas, 2016; Biswas, 2011; Kaur, 2016), while others use it interchangeably with “ethical banking” (Chew et al., 2016; Paulet et al., 2015; San-Jose et al., 2011), “sustainable banking” (Korslund and Spengler, 2012) or “alternative banking” (Butzbach and von Mettenheim, 2015). Although SB is associated with different names, it embraces the principle of a triple-bottom line in its daily activities, i.e., three criteria, being profit (securing profit to keep the bank sustainable), people (serving communities as social mission), and planet (paying attention to the environment and its sustainability for future use) (Benedikter, 2011; De Clerck, 2009; Weber, 2014). As part of this triple-bottom line, SB also displays a number of other principles. First, it has considerably more transparency than other forms of banking, allowing its stakeholders to observe details such as to where the collected funds are distributed and in what kind of investment. Accordingly, its customers have knowledge about whether their money is invested in the most appropriate manner, either financially, socially, or environmentally (Benedikter, 2011; San-Jose et al., 2011). Second, it promotes ‘human development’ through engaging and emancipating communities (Benedikter, 2011; San-Jose et al., 2011). This qualification negates traditional banking shareholder’s rights as a broader set of stakeholders control and supervise SB management (Butzbach and von Mettenheim, 2015). Table 1 summarizes some of the other key differences between social and conventional banks.

SB Performance Several indicators are available to assess whether SB delivers its promises, as detailed in Table 2. To start, does SB help the poor and disadvantaged? The answer to this may differ depending on context. In India, for instance, SB focuses on delivering bank services to the unbanked



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poor, although according to Burgess and Pande (2005), the Indian government’s policies in this regard have not reduced the number of poor, but opening new traditional bank branches in “unbanked locations” have. Table 2. Conventional vs. social bank promises No. 1

2

Promises

Conventional

Objective

Profit for shareholders is utmost priority

Response to financial crisis

3 Transparency

4

Guarantee

More prone to financial and banking shock No detailed information about clients. Taking care of the privacy of the debtors Certain collateral guarantee

Social Gaining financial as well as social and environmental results (Benedikter, 2011; De Clerck, 2009; Weber, 2014) More resilient to financial meltdown (Korslund and Spengler, 2012) More transparent as they provide detailed information as to where the collected fund is distribute to clients (Benedikter, 2011; SanJose et al., 2011) Developing alternative guarantee system (San-Jose et al., 2011).

In 1977, India’s central bank carried out so-called 1:4 regulation. This policy forced banks to open four new branches in unbanked locations (rural areas) for every new branch opened in a banked (urban area) location. As a result, up until 1990 about 30,000 new branches opened in unbanked locations. In terms of further impact, while traditional banks only disbursed 3% of rural household credit in 1971, this drastically increased to 29% in 1991. This suggests that opening a traditional rural branch in an unbanked location decreased rural poverty by 4.18 percentage points (Burgess and Pande, 2005). The promise that SB also services targeted disadvantaged group is likely irrelevant too. Burgess and Pande (2005) further argue that financially disadvantaged women were more likely to receive bank loans when traditional branches were serving the community.


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Examining a similar case, Platschorre and Bulte (2011) find a contradictory conclusion. They use another measurement to address the impact of SB, namely, the poverty gap. They found that while opening new bank branches in unbanked locations might drive some people out of poverty, it might also add depth to the poverty of others. This suggests that while the role of SB, at least in India, was to reduce poverty, while it did improve the access of the rural poor to credit, “the impact was not as great as envisaged” (Joshi, 2006, p. 126). A different account comes from SB in the UK where Chew et al. (2016) use a qualitative survey of data collected from UK Cooperative Banks to suggest that the bank has adhered to sustainable principles. The bank has won numerous awards as the “World’s Most Sustainable Bank” from 2010 to 2012. The bank is also community friendly as it won the “Community and Environmental Responsibility Award” in “Management Today’s Most Admired Companies Survey 2012” (Chew et al. 2016). Another question is whether SB is more resilient during crisis. Here, Korslund and Spengler (2012) compare the financial ratios of 13 social banks to Global Systemically Important Financial Institutions (GSIFIs) after the 2008 global financial crisis. The results indicated that average return on assets (ROA) for SB in 2009 and 2010 was 0.21% and 0.61% respectively, and for GSIFIs 0.14% and 0.46%, respectively. There was a similar pattern observed for the return on equity (ROE) (5.31% for SB and 2.17% for GSIFIs). A third question is whether SB is more transparent than conventional banking. Using a Radical Affinity Index, San-Jose et al. (2011) demonstrated that SB adheres to most of its principles. Using a sample of 114 credit institution from 10 countries (Denmark, France, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, Germany and the UK), they prove that traditional banks do not have high transparency in their credit allocation, especially as no commercial bank provided enough information on asset placement. In contrast, most social banks provided details about companies and individuals financed by the bank. Lastly, a question is whether SB demands no guarantees with its funding. To address this, San-Jose et al. (2011) created a valuation measure, finding



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that conventional banks employed a traditional guarantee system as a prerequisite of funding. In contrast, SB disbursed funding without the provision of guarantees. Overall, the empirical evidence would seem to suggest that social banking worldwide has had considerable success in meeting its social objectives.

ISLAMIC SOCIAL BANKING Despite fairly positive performance overall, some researchers claim that IB has not yet fulfilled its expected objectives of socioeconomic justice characterized by a balance between financial and social outcomes, with the possible exception of charity and Zakat (Asutay, 2012; Nor, 2016; Sairally, 2007). Accordingly, all IB stakeholders need to commit themselves to putting IB bank on the right track. While it is undeniable that social outcomes may incur costs, society as a whole will enjoy benefits derived from greater emphasis on social outcomes. In addition, some are convinced that delivering social dimensions in IB will also secure stockholder interest, create a positive image and maintain the financial bottom line of companies, and create a pool of loyal consumers (Carroll and Shabana, 2010; Davis, 1973; Mohr et al., 2001). In other words, there is critical need to reform IB as individual banks and as an industry. This is possible through various efforts. First, by incorporating CSR within IB. The main purpose of CSR is to overcome problems faced by corporations pertaining to social issues such as poverty, unemployment, gender bias, and discrimination. From an Islamic perspective, Dusuki (2008, p. 22) asserts that “Islam…envisages business firms as stewards or caretakers, not just of shareholder’s financial resources, but also for the benefit of society as a whole and ultimately attaining the blessing of God.” Dusuki (2008) further emphasizes that the implementation of CSR will have a significant impact on Islamic banks in dealing with projects that pay attention to environment impact and the creation of social benefits.


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Second, CSR alone might not effectively enhance IB in meeting significant social ends. Instead, Raimi et al. (2014) suggests combining CSR with the Waqf and Zakat systems. Others propose a radical restructure of ISB or at least incorporating SB practices as a response for situations where IB fails in delivering social outcomes. This attempt to establish ISB is important. According to Reifner (1992), alternative banking (including those with a religious motive) is just another part of the SB family. In other words, IB is by default another kind of SB. The reasoning behind this claim is that both banking models share a common goal: securing a financially, socially, and environmentally sustainable business. Nevertheless, even after incorporating CSR, some Islamic banks will still not have attained significant social ends. Lastly, although the idea of combining CSR with the Zakat and Waqf systems seems feasible, it is presently only theoretical, and there is no empirical evidence that substantiates this.

Quadruple Bottom Lines (QBL) The purpose of this section is to provide a basic framework for the establishment of an ISB. Nor (2016) suggests ISB principles could be set in place by adopting nine characteristics of SB developed by Relaño (2011) appropriately fitted with suitable Islamic values. As discussed, SB is mainly characterized by the triple bottom lines of “Prosperity” (sustainable profit), “Planet” (environmentally sound), and “People” (socially oriented). In fact, all these principles to certain degree appear in IB, but with a different emphasis. For instance, SB aims to secure financial profit as well social outcomes. In IB, both financial and social benefits are targets, although but the financial matters prevail (Hassan & Bashir, 2003; Hassoune, 2002). Problematically, unlike conventional banks, IB includes unique features such as Zakat and Qardul Hasan. In reality, the funds used for these are trivial, but in the case of Islamic micro finance, both schemes have the potential to empower the poor (Widiyanto et al., 2011). This provide yet further evidence that IB aligns with “People.”



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Figure 2. Quadruple bottom line principles of ISB.

In regards to environment, the Qur’an (30:41) declares that “Corruption has appeared throughout the land and sea by [reason of] what the hands of people have earned so He may let them taste part of [the consequence of] what they have done that perhaps they will return [to righteousness].” Therefore, Islam clearly advocates protecting and preserving nature (Islam, 2004). Environmental crisis also closely links with the hunger of spiritual crisis (Murad, 2012). As a result, Islam suggests, “modern humanity may make peace with the environment, itself, and most importantly, God.” Nonetheless, we believe ISB should have 3P principles with one additional P for “Prophet.” The latter exclusively reflects all things relating to Syari’ah law. As depicted in Figure 2, we thus refer to the ISB model as encompassing Quadruple Bottom Line Principles.


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Possible Scenarios We envisage four possible routes to establish ISB. These are: (i) incorporating SB values in existing IB practice, (ii) establishing a new ISB institution, (iii) creating an Islamic Waqf bank, and (iv) establishing ISB within Islamic micro finance. Nor et al. (2016) investigate the possibility of the first route in 17 Malaysian Islamic banks and found that few respondents even conceded that IB had failed in this regard. Instead, they believed that Islamic banks are still in their infancy, but nonetheless contribute to social justice through CSR. We would expect a similar situation would hold in Indonesia. While the second route is theoretically possible, in the case of Indonesia it may not be affordable. For instance, establishing a new ISB institution in Indonesia would, according to the Financial Services Authority of Indonesia (2016), requires fresh capital of no less than IDR 1 trillion (around USD 75 million). If this is the case, investors might be reluctant to invest their money without particular assistance from the financial authority or other social agents. Regarding the third option, Mohammad (2011) argues that cash waqf could serve as capital for the Islamic social bank, and this would solve the common problem of waqf institutions with illiquidity. In the case of Indonesia, from 2007-11, seven Islamic banks accumulated cash waqf amounting to IDR 2.9 billion (around USD 217 thousand). Previously, other studies have explored the possibility of using cash Waqf for other uses, including broad social outcomes and poverty alleviation (Çizakça, 2011; Mohsin, 2013). The last option is likely the most suitable choice. In the case of Indonesia, establishing an Islamic microfinance institution such as Baitul Mal wat Tamwil (BMT) is much more affordable. For example, according to Aziz (2006), the early capital invested in BMT was only IDR20–30 million (approximately USD 1,497–2,246 thousands). In addition, BMT already addresses two of the roles for ISB in that as a Baitul Mal (treasure house), it serves a social mission by collecting zakat, infaq, and shadaqah, while as a Baitul Tamwil (house of wealth management) it provides



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financial intermediation. The provision of the first of these could be through Qardul Hasan, while the latter would aim to facilitate access to financial services such as saving and financing (Hadisumarto and Ismail, 2010). Hence, BMT by default aims to boost and empower the financially excluded and the needy. Table 3. Target markets for social banking Market Low-income consumers, consumer credit Small business finance Microenterprises for individuals and families Third-system social enterprise Ecological enterprise

Examples of need Saving mechanism, payment service Development finance Start-up/working capital, business skills Project finance, working capital, facility finance Development finance

Source: Guene and Mayo (2001, p. 4).

Moreover, the establishment of ISB following the lead of BMT in Indonesia is less complicated. Unlike IB, which operates under the Financial Services Authority of Indonesia, BMT employs a cooperative scheme regulated by the Ministry of Cooperatives and Small-Medium Enterprises. Finally, BMT is designed to assist micro enterprises in various business sectors such as trading, agriculture, and home industries (Hadisumarto and Ismail, 2010). This is roughly similar to the target market for ISB, which is to provide loans for low-income consumers, as well as small and micro enterprises, as shown in Table 3.

CONCLUSION Over the last three decades, IB has grown rapidly. However, despite its rapid growth and apparent strong performance, some argue that IB is yet to


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fulfil its less well-known objective of socioeconomic justice as characterized by the balance between its financial and social outcomes. At the same time, SB is able to cater to both economic and noneconomic criteria. Its principles rely on three bottom lines, being profit (financial and social outcomes), planet (the securing of environmental soundness), people (engaging people to participate and emancipate, especially those excluded from access to conventional banking). Some of the options available to address the failure of IB in terms of its social mission include incorporating CSR and combining CSR with the Waqf and Zakat systems. Another option is to alter and solve the problem by establishing ISB. We argue that this is a more plausible option given the many similarities between IB and SB, particularly in addressing social outcomes. Hence, with some modifications we could adapt the positive side of SB to suit a new type of Islamic bank. We suggest ISB be run under quadruple bottom line principles, which are profit, planet, people, and prophet. Finally, there are at least four routes available to establish ISB: (i) incorporating SB values in existing IB practice; (i) establishing a new ISB institution; (i) creating an Islamic Waqf bank; and lastly, (4) incorporating or establishing ISB in Islamic micro finance. In the context of Indonesia, we believe the last option would be easiest to establish given the strong similarities with the BMT.

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BIOGRAPHICAL SKETCHES M. Luthfi Hamidi is a doctoral candidate in the Department of Accounting, Finance, and Economics at Griffith University undertaking his thesis titled “A Proposed Framework for Islamic Social Banking” under the supervision of his co-author, Andrew C. Worthington. He hold a master’s degree from Loughborough University and bachelor degrees from



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Diponegoro University and Walisongo State Islamic University and is currently a lecturer in the School of Islamic Economics SEBI University. Andrew Worthington is Professor of Finance in the Department of Accounting, Finance, and Economics at Griffith University. He holds master’s degrees from the University of New South Wales and the University of New England, and obtained his doctorate from the University of Queensland. His previous career appointments comprise the University of New England, the Queensland University of Technology, and the University of Wollongong and his current teaching interests encompass corporate finance and financial markets. His published research includes financial and commodity markets, alternative investments, financial mutuals, and household finance, while his research into Islamic finance covers banking and managed funds. He is the editor of the contributed volume “Contemporary Issues in Islamic Finance: Principles, Progress, and Prospects” published in 2014.
