COLLATERAL IN ISLAMIC BANKING: EVIDENCE FROM PARTNERSHIP-BASED FINANCING PRACTICES IN INDONESIA AND MALAYSIA
COLLATERAL IN ISLAMIC BANKING: EVIDENCE FROM PARTNERSHIP-BASED FINANCING PRACTICES IN INDONESIA AND MALAYSIA

Summary/Abstract: This paper discusses the importance of revisiting Sharia principles collateral to partnership-based financing in Islamic banking in Indonesia and Malaysia. This paper aims to show how banks often abuse collateral practices in partnership-based financing. Furthermore, this paper specifically aims to provide recommendations for redefining the meaning of collateral in the Indonesian legal system. To achieve this aim, this paper focuses on identifying current legal regulations, reviewing partnership-based financing practices, and assessing the experiences of several countries in adapting to developments in the banking world, particularly those related to partnership-based financing. This study used a juridical normative method with a conceptual and regulatory approach. The results indicate that Indonesia faces a mismatch between national law collateral requirements and Sharia principles in the context of partnership-based financing in banking. Currently, Indonesia does not have strict Sharia provisions prohibiting the use of collateral to generate profits, although authorized institutions have legitimized it. This contrasts with European practice, which has developed a partnership-based financing model that emphasizes contractual consensus among the parties rather than rigid legal regulation. Malaysia strictly prohibits the use of collateral for capital recovery or profit. The findings of this study could serve as a starting point for Sharia-compliant collateral law reform in Indonesia.

• Details
• Contents