04 Jan 2025
OJK Releases New Guidelines for the Implementation of Sharia-Based Products

Indonesia’s Financial Services Authority (“OJK”) has taken a major step towards advancing regulation and consistency of the country’s sharia banking sector with the introduction of new guidelines for sharia-based banking products. Issued in October 2024, these guidelines are designed to reinforce the distinctive characteristics of sharia banking and highlight its unique competitive advantages, distinguishing it from conventional banking services. The new guidelines cover three key forms of product: (i) Mudarabah Financing Product (“MFP”), (ii) Sharia Restricted Investment Account (“SRIA”) with Akad Mudharabah Muaqayyadah, and (iii) Cash Waqf Linked Deposit (“CWLD”).

These guidelines aim to align perspectives and practices among industry stakeholders by providing clear, detailed instructions for implementing these products. Previously, sharia banking products were regulated under the broad remit of general laws,leading to potential uncertainty and variation in their interpretation and application. 

In this ABNR Legal Update, we present an overview of each guideline and examine the implications of these changes.   

1. MFP Guideline

An MFP is a profit-sharing-based financing product based on Akad Mudarabah, which is a cooperation agreement related to a business venture between a fund provider (shahibul mal) and a fund manager (mudarib), where profits generated from the business are shared in accordance with an agreed profit-sharing ratio. This distinctive profit-sharing feature makes MFPs an alternative option to traditional banking products for business owners who are looking to acquire working capital financing from a third-party financier. 

Key characteristics of Akad Mudarabah governing an MFP as set out in the MFP Guideline comprise the following: 

• Parties of Akad Mudabarah  
  There are two parties in an Akad Mudabarah, namely the bank acting as fund provider (shahibul mal) and the customer as fund manager (mudarib).  Under an MFP, the customer may use the fund provided by the bank to engage in various agreed-upon business activities that align with Sharia principles. Meanwhile, the bank does not take part in day-to-day management of the business but is entitled to offer guidance and oversight.   
   
• Object under Akad Mudabarah   
  The objects (ma’qud ‘alaih) of an Akad Mudabarah are the (i) working capital provided by the bank; and (ii) the corresponding business of the customer (’amal).   
  
  Banks may provide capital in the form of cash, assets, or a combination of both. The customer may not use the capital for purposes other than the designated business, nor lend the capital or assign profits to other parties without bank approval.  
   
• Profit Sharing under Akad Mudabarah  
  The Akad Mudabarah must clearly establish the mechanisms governing profit sharing between the customer and the bank.  MFPs recognize two primary mechanisms: 

1. profit sharing - whereby the profit to be distributed between the bank and the customer is calculated based on the revenue generated by the customer, after deducting working capital and indirect costs; and
2. net revenue/gross profit sharing - whereby the profit to be distributed between the bank and the customer is calculated based on the revenue generated by the customer, after deducting only working capital.  
   
   The calculation method agreed by the parties must be based on actual profit generated by the business and must not undermine the fundamental "partnership in profits" (al-isytirak fil arbah) principle of the MFP. For example, distribution of profits based on a fixed percentage of the capital, or a projection of profit are not acceptable.   

• Offer (Ijab) and Acceptance (Kabul)  
  In sharia-based contracts such as Akad Mudabarah, the parties must stipulate the offer (ijab) and acceptance (kabul) in a clear and explicit form that is understood by all parties. The Akad Mudabarah must stipulate the ijab and kabul in accordance with its internal standard operating procedure, as based on the fatwa issued by the National Sharia Board of the Indonesian Ulema Council (Dewan Syariah Nasional – Majelis Ulama Indonesia or “DSN-MUI”) and the opinions of the Sharia Supervisory Board. 

In addition to the above, the MFP Guideline also provides direction relating to collateral, compensation, sanctions, cancellation and termination, calculation of profit-sharing realization ratios for financing quality assessments, restructuring of financing, accelerated repayment, settlement of problematic financing, and bookkeeping and documentation of business profits. Other matters not covered by the MFP Guideline are governed by applicable regulations and the relevant bank’s standard operating procedures.

2. SRIA with Akad Mudharabah Muqayyadah Implementation Guideline (“SRIA Guideline”)

An SRIA is a sharia compliant investment product based on Akad Mudharabah Muqayyadah, a cooperation agreement that allows investors (malik/shalib al-mal) to provide funds to be managed by a fund manager (amil/nudharib) with a profit-sharing mechanism agreed upon by both parties.   The scope of investment under Akad Mudharabah Muqayyadah is generally limited to those compliant with the sharia principles.

In general, the SRIA Guideline outlines the: (a) product structure, (b) risk management and internal control, (c) market conduct, as well as (d) transparency and disclosure obligations related to the implementation of the SRIA. 

• Product structure
  Similarly to typical investment products, the customer of an SRIA bears the associated investment risks, and the bank may not have an obligation to fully return the principal investment to the customer. The underlying assets of an SRIA must comply with sharia principles. Pursuant to the SRIA Guideline, these assets may originate from profit-sharing transactions, leasing transactions, ongoing sales transactions, and acquisition of loans from conventional financial institutions. However, it is prohibited to use the acquisition of Sharia-Based Debt Assets (Aset Syariah Berbentuk Dain) from other sharia financial institutions as underlying assets.
  
  When offering SRIA, the bank must clearly explain the purpose of the SRIA investment fund, including identifying the types of underlying assets. 
   
• Risk management and internal control
  For internal control purposes, the bank must establish effective governance and risk management policies and procedures to control the risks associated with SRIA. The bank must ensure that the operations of SRIA comply with sharia provisions. If the SRIA constitutes a significant proportion of the total assets of the bank, the bank must also establish a transparency function. 
   
• Market conduct
  The SRIA Guideline requires the bank to conduct assessments on the underlying assets based on risk acceptance criteria of the bank. The bank must also assess the suitability of the prospective customer by conducting Know Your Investor (KYI) principles, analyzing the risk profile and knowledge of prospective customers. 
   
• Transparency and disclosure 
  To ensure adequate transparency and disclosure, the SRIA Guideline mandates that banks must have policies and internal procedures on disclosure of information to customers, particularly relating to the marketing, offering, and operation of SRIAs. The SRIA Guideline provides a list of information that may or may not be included in the product information sheet and the agreement between the bank and the customer. In addition, the bank must submit performance reports to customers and OJK throughout the operational period of the SRIA.

3. CWLD Implementation Guideline (“CWLD Guideline”)

A waqf is a sharia-based endowment whereby an individual donates his or her assets to be utilized for charitable purposes, such as worship and/or public welfare, either permanently or for a determined period. A CWLD is a specific type of waqf which operates for an agreed duration, where the donor’s (waqif) cash deposit acts as the donated asset that is the object of the waqf. The profits generated from these deposits are then distributed directly to the beneficiaries of the waqf (mauquf alaih). 

The function of the introduction of CWLD is to allow sharia banks to implement their role as a Sharia Financial Institution Recipient of Cash Waqf (Lembaga Keuangan Syariah Penerima Wakaf Uang or “LKS-PWU”), for which they must also obtain an LKS-PWU license. 

ABNR Commentary

The OJK's new guidelines mark a significant step towards reinforcing the distinct identity of Indonesia’s sharia banking sector, aligning with broader goals as outlined in Law Number 4 of 2023 on the Development and Strengthening of the Financial Sector (UU P2SK) and the Roadmap for Sharia Banking (RP3SI) 2023-2027. These guidelines focus on creating sharia-based banking products that hold unique values rooted in Islamic principles, offering an alternative to conventional banking practices. To support this system, the OJK provides practical examples and specifies bookkeeping methods applicable to each sharia banking product. 

The new guidelines address gaps in the previous system, where Indonesian sharia banking products were governed by high-level regulations that did not adequately address specific sharia requirements. This comprehensive regulatory approach enables sharia banks to more effectively distinguish their offerings and highlight unique benefits of sharia-based financial products. The guidelines also provide greater transparency and assurance for both banks and customers in the interpretation and implementation of such products. The initiative not only positions Indonesia’s sharia banking sector for expansion but also aligns it with global best practices in Islamic finance. By adopting consistent standards and a unified approach to sharia banking, Indonesia stands to strengthen its reputation as a hub for sharia-compliant finance and attract greater interest from both domestic and international markets.

By partners Mr. Ayik C. Gunadi (agunadi@abnrlaw.com), Ms. Yanny M. Suryaretina (ysuryaretina@abnrlaw.com), senior associate Mr. Novario Hutagalung (nhutagalung@abnrlaw.com), and associate Mr. Kenny Poltak (kadrianus@abnrlaw.com)

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.