Sinta Damayanti and Daniel Aryo Radityo of Hermawan Juniarto in Jakarta look at issues in Islamic finance


In Indonesia nowadays, the existence of sharia financial institution specifically sharia bank has successfully drawn the significant public attention. The establishment of sharia banks based on the relevant sharia banking regulation is essentially adopting the Islamic principles, which although sourced from Qur’an applied not only for Muslims. Sharia principle reminds human being, that the purpose of business should not be solely to achieve profit and money satisfaction and self-interest, but also to achieve spiritual satisfaction. One of the essential pillars of sharia financing is the prohibition of “riba” or in financial terms - interest. Therefore, sharia financing provides an alternative financial scheme which is essentially different from the financing scheme under conventional banks. The main understanding is that the bank is not a traditional lender who solely provides a loan, but instead, banks offer themselves to be a business partner/investor of their customer by using two main schemes: (i) sale and purchase scheme; and (ii) cooperation scheme.

Although sharia finance is becoming more prevalent by the day and the growth of sharia banking has been welcomed widely in Indonesia, a substantial issue remains as sharia models of financing are somehow not yet recognisable as much as the conventional financing models in general. For example, the banks need to carry out several activities which under the conventional model of banking that they normally do not perform, such as calculation of profit-and-loss-sharing ratios as well as auditing of financed project to ensure proper governance and valuation. Another problem is the absence of ‘standard’ documentation related to the contract and how to anticipate the continuous validity of security documents in the case of sharia financing restructuring.

The validity on sharia agreement (Rukun Akad)

There are some requirements in sharia agreements that must be met for the contract to be legally binding:

(i) the Parties (Aqidan) are buyer and the seller;

(ii) the Object (Mahal al-aqd) of the contract such as services or valuable objects that are not prohibited by Islamic principles;

(iii) the Agreement/Handover (Ijab-Qabul) is the statement of both parties to each other, conducted by willingness in the handover of goods. The handover is done either through words (lafad) or by writing which should be in compliant with Ijab-Qabul. A party must clearly state the offer and the other party must be clearly accepted the offer, so the “Qabul” must be immediately pronounced after consent is spoken.

Any sharia agreement made with absence of either of Aqidan, Mahal al-aqd or Ijab-Qabul will be void by law.

Agreements with sharia banks

In sharia banking, there are two types of agreements; there is an agreement namely Waad and Akad or contract. Waad is a master agreement containing general terms and conditions of all types of transactions under sharia financing, while Akad essentially is the schedule to the Waad. Akad contains terms and conditions of each type of the transaction. Unlike the appendix in a conventional scheme, the Akad must be signed by the parties to fufill the Rukun Akad. There are several types of Akad under sharia financing, among which the most basic are as follows:

Murabahah (sale at a mark-up)

It is the most common instruments in sharia financing. On contrary to the interest-bearing loan in the conventional bank, the bank does not provide the customer with money, but first acquires the goods from supplier at the original price, and thereafter the bank sells the goods to the customer at a mark-up price. The customer buys the goods from the bank with a deferred payment of the purchase (plus a profit margin for the benefit of the bank).

Ijarah (operating lease)

The bank will acquire the goods from the supplier at the original price, and then rent the goods to the customer. Ijarah is comparable to a typical leasing transaction and, as a reward for granting the use of the object, the bank received an agreed fee. As the future rents cannot be accelerated under sharia financing principle, ijarah is not suitable for long tenor projects. In practice, time period of ijarah is on average 2-3 years on which bank shall have the right to review the contract (Akad) including accelerating the rental price/agreed fee.

Ijarah Muntahiya Bittamlik (financial lease)

This transaction is similar to ijarah, however the contract usually provides for an option for the lesee to purchase the asset at the end of the lease period at a nominal price.

Security documents in sharia financing

In accordance with the regulation/fatwa of the Indonesia National Sharia Board Number 4/ 2000 and Number 6/ 2000, the security required in sharia sale and purchase scheme financing has a purpose that the customer shall pay the purchase price (comparable to non-sharia financing repay the loan) in orderly, in accordance with the agreed payment or repayment schedule. The goods that might be used as collateral is in the form of saleable goods and assets which are basically regulated under Indonesia collateral positive law such as mortgaged (hak tanggungan and also hypothec), fiducia and pledge. While in a cooperation scheme, the purpose of a security requirement is to secure any potential loss in the future due to willful misconduct or gross negligence of the customer as the fund handler. The collateral may be seized or liquidated/executed if the fund handler/mudharib is proved in committing breach or infringement of the terms and conditions mutually agreed in the Waad and/or Akad.

As the Indonesia security document is the accessoir of the master agreement, in sharia financing, it is very crucial that the security documents must be referred to the Waad instead of Akad. The reason is that if somehow certain Akad being restructured, the nature of transaction would be altered into different kind of transaction which would cause the original transaction to be terminated. The termination of original Akad would lead to termination of the security documents.


Sinta Damayanti
Hermawan Juniarto

Daniel Aryo Radityo
Junior Associate
Hermawan Juniarto

About the authors

Sinta Damayanti graduated from the Faculty of Law at University of Indonesia in 1996, and joined the firm in 2015. She is an Indonesian banking and finance legal counsel. Her practice covers various transactional matters and corporate in Indonesia. She has strong capabilities in the area of banking, finance and project.

She has Indonesian banking and finance capabilities, including conventional corporate loans, syndication, club-deal and sharia. She has advised as in-house legal counsel and risk management of prominent banks and financing institutions, including Citibank N.A., Jakarta Branch, Indonesia Bank Restructuring Agency, PT Bank Sahabat Sampoerna, PT Bank UOB Indonesia and PT Bank Artha Graha International Tbk.

Daniel graduated from the Faculty of Law at University of Indonesia in 2016, and joined the firm in the same year. Prior to joining with Hermawan Juniarto, he worked for a prominent law firm in Jakarta at Oil and Gas practice group while he was student. Since joining Hermawan Juniarto, Daniel has been involved in many projects especially in Banking and Project Finance sector.