The banking system has an important role in the economy. Nowadays, most people are somehow connected with a financial institution. Banking activities have continued to evolve in line with the development of society. Banks have, in fact, come to greatly affect the development of the public economy, at the national and even global level.

In this regard, as the country with the largest Muslim population in the world '€” around 205 million people or 88.1 percent of its 2010 total population '€” Indonesia has naturally seen a rapid development of thought concerning sharia banking that is in accordance with the principles of Islam. There is momentum for the development of an Islamic-based economy in Indonesia, beginning with Bank Muamalat Indonesia founded in 1992, and then Bank Syariah Mandiri (BSM) in 1999.

For more than 20 years, the Muslim community, ranging from academia, government, banking and non-bank financial, political and socio-economic institutions, has worked hard to see the establishment of a sharia economy in Indonesia. Law No. 21 in 2008 implanted sharia banking into the national life of Indonesia. This act covers Islamic banks and sharia business units (UUS) that are working units of conventional commercial banks conducting business based on sharia principles.

Thus a banking system was created that avoids riba (interest), maysir (gambling), gharar (uncertainty) and other practices that are not in accordance with sharia principles. The activities of sharia banks refer to sharia law and they neither charge nor pay interest to customers. Any reward received from or paid to a customer depends on the contract or agreement entered into by the bank and customer in question. This agreement (known as akad) is subject to the terms of an akad as stipulated by sharia law.

Islamic banking is set to gradually take the lead as the main banking sector in top Islamic finance jurisdictions such as Saudi Arabia (where it currently represents 52 percent of the domestic system'€™s banking assets), Malaysia (26 percent) and Kuwait (45 percent).

Meanwhile, the sharia financial industry in Indonesia today has huge potential for growth, despite its relatively small current market share compared to that of the conventional financial industry. This market share stands at 4.8 percent for sharia banking.

By country, Malaysia continued to dominate the sukuk market, accounting for a 64.6 percent share of total issuances, with Saudi Arabia (10.3 percent), Indonesia (5.4 percent), the UAE (5 percent) and Turkey (3.6 percent) rounding out the top five markets.

The eventual goal of an Islamic-based economy is Al Falah, which refers to the success, happiness and well-being attained in this world and the hereafter. In line with this, the emergence of sharia banking has increasingly been driven by a desire to maximize the public interest (stakeholder value) rather than by mainstream economic theory which places more emphasis on the principle of maximizing investor profits (shareholder value).

At the end of December 2014, the sharia banking industry in Indonesia was composed of 12 sharia commercial banks, 22 sharia business units owned by conventional commercial banks and 163 sharia rural banks (BPRS) with total assets of Rp 272.34 trillion. However, the growth in sharia banking assets has recently been slower.

In 2014, for example, assets growth stood at only 12.4 percent, much lower than the 49 percent and 34 percent posted in 2011 and 2012 respectively. When compared with conventional banks, sharia banks still need to improve their performance quality in several respects.

Loan growth of sharia banks in 2014 was relatively small, at below 10 percent. This was because the non-performing loan (NPL) ratio for sharia banks was greater than that of conventional banks, meaning that the former had to be cautious in lending. The NPL ratio of sharia banks in 2014 reached as high as 4.33 percent, not far from the maximum limit specified by BI of 5 percent.

In terms of magnitude of sharia financial assets, Indonesia was in ninth place, with assets amounting to US$35.6 billion. However, this is still much lower than Malaysia, which tops the list with assets of $423.3 billion.

The sharia financial industry in Indonesia has developed differently with different characteristics to those in other countries, such as Malaysia and the Gulf Cooperation Council (GCC) countries which have focused more on investment banking and sharia financial markets and instruments. In contrast, sharia banking and finance in Indonesia has greater complexity in that it covers more types of financial services industries and is more oriented towards the retail segment.

Some of the obstacles encountered in the development of sharia banking include capitalization, banking regulations, human resources, understanding, monetary devices, development of a branch networks and service.

Competition between banks is a crucial factor in their level of success, in terms of both the rates/margins and services provided. Sharia banks are no different with respect to the importance of service quality and therefore always need to pay attention to and constantly improve in this area.

The main agenda on developing the sharia financial industry in Indonesia is to improve public knowledge and understanding of the principles of sharia economics and finance.

Raising public understanding is the shared responsibility of the Financial Services Authority (OJK) and all sharia economics and finance stakeholders. The OJK has formulated s sharia Indonesian banking roadmap for 2015 to 2019. These policy directions are as follows:

- Strengthen policy synergy between the government, relevant authorities and other stakeholders
- Boost capitalization and scale of operations and improve efficiency
- Improve the structure of funds to support the expansion of the financing segment
- Enhance the quality of services and products
- Improve the quantity and quality of human resources (HR), information technology (IT) and other
  infrastructure
- Enhance public literacy and preferences
- Strengthen and harmonize regulation and supervision

The roadmap presents strategic issues and fundamental problems that still exist in the sharia banking industry. This roadmap is expected to act as a reference for sharia banking stakeholders in the development of the sharia banking industry, so that this industry is able to enhance its role in supporting the national economy and stabilizing the financial system, while also making Indonesia a more prosperous and equitable society.
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The writer is a junior economist at the office of the chief economist of PT Bank Mandiri.

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