Indonesian banking law defines a Sharia principle as an agreement between a bank and other parties to maintain funds or financing for business activities based on Islamic laws, such as mudharabah (financing pursuant to profit sharing), musharakah (financing pursuant to capital participation), murabahah (sale and purchase of goods for profit), ijarah (financing of capital goods pursuant to the leasing principle) or ijarah wa iqtina (transfer of ownership over leased goods from a bank to other parties).
Indonesia's new Deposit Insurance Agency (DIA) will cover Sharia banks, as emphasized under Government Regulation 39 2005 regarding deposit insurance for Sharia bank customers, effective as of October 12 2005. The following types of saving based on Sharia principles will be guaranteed by the DIA:
- clearing accounts (giro) pursuant to the wadiah principle;
- savings pursuant to the wadiah principle.
- savings pursuant to the mudharabah muthlaqah principle or mudharabah muqayyadah principle, where the bank bears the risk;
- deposits pursuant to the mudharabah muthlaqah principle or mudharabah muqayyadah principle, where the bank bears the risk; and
- savings pursuant to other Sharia principles, as determined by DIA after consideration by the banking supervisory agency (LPP).
The wadiah principle is an agreement between a bank and its customer that allows the bank to take an advantage of a fund it maintains, provided that all profits and losses resulting from use of the fund is the responsibility or property of the bank. The bank may provide incentives in the form of bonuses to the customer, provided that the amount is not agreed in advance and is granted voluntarily (athaya).
The mudharabah principle is defined as an agreement between a bank (as fund manager) and its customer which provides that the bank will manage the fund. According to this principle, the customer determines the amount of profit sharing in advance and the details are agreed when opening the account.
The mudharabah muthlaqah principle is an agreement in which the owner of the account or fund (the customer) does not limit the management of its fund in any way. The bank is given full power to manage the fund without limitations such as the period of time, types of business, business place or types of services.
The mudharabah muqayyadah principle is an agreement whereby the owner of the account or fund limits the management of its fund. The bank is only allowed to manage the fund within certain limitations as to time, types of business, business place or types of services. Regarding risk, this principle can be divided into two types:
- where the bank bears the risk and the administration record is performed on balance sheet; and
- where the owner of the fund bears the risk, and the administration record is performed off balance sheet (channelling).