Do Credit Analysts of Islamic Rural Banks Consider Moral in Assessing Credit Applications? Evidence from Indonesia
One of the distinctive characteristics of Islamic finance is its emphasis on moral laden. Hence financial institutions operating on Islamic principles should also consider moral in conducting business. Research relevant to this study (e.g. Haniffa & Hudaib, 2007; Maali, Casson, & Napier, 2006; Zaki, Sholihin, & Barokah, 2014) argue that Islamic banks should put ethical issues as their ideal identity. Haniffa & Hudaib (2007), for example, state that Islamic banks should show their ethical identity on vision and mision statement; BOD and top management; product; Zakah, charity and benevolent loans; employees; debtors; community; and Shari’ah Supervisory Board (SSB). This current study focuses on Islamic rural banks as it is one type of Islamic financial institution to have an important role in Indonesian small medium enterprises. Conducting business directly to the Indonesian citizens which are dominated by Moslems, this type of financial institution increases its financing activity of around 28% yearly as they are operating in almost every district within the country (The Indonesian Central Bank, 2013). While the aforementioned studies have advanced our understanding on the importance of moral issue of Islamic financial institutions, the important question on whether Islamic rural banks in Indonesia consider moral in credit analysis remain unanswered. We fill in this gap.
This study aims to contribute both for the literature on Islamic finance and Islamic bank practices. From a practical perspective, this study will provide a clear picture on how Islamic rural banks decide credit application approval. Meanwhile, this study will enrich finance literature by bridging the gap on research mostly dominated by the role of 5C in credit analysis. Previous studies (e.g. Coffman, 2001) discuss the credit scoring for small and medium enterprises from conventional perspective, this study, to the best of our knowledge, is the first empirical study employing Islamic banks particularly Islamic rural banks.
2. Research questions
The aims of this study are reached through answering the following research questions:
- What factors do Islamic rural banks credit analysist consider on credit application assessment?
- How do Islamic rural banks credit analysist consider moral in credit analysis?
- How important are moral issues considered in credit application assessment by Islamic rural banks?
3. Methodology
This study has employed several methods including focus group discussion (FGD), interview, and questionnaire survey. FGD and interview are conducted as they can generate a more descriptive story and provide a narrative to the topic being studied (Tracy, 2013). On the other hand, the questionnaire survey is utilised to attempt to generalise the findings (Bryman & Bell 2003). With those reasons in mind, these methods will generate findings on whether moral is considered in credit application assessment as well as whether the findings can be generalised in a wider population. Accordingly, data gathered from FGD and interview are analysed through thematic analysis. While data gathered from the questionnaire are analysed using descriptive analyses and factor analysis as the study is an exploratory type.
4. Results and Discussions
This study finds there are 50 items considered on credit application assessment by Islamic rural banks. Out of these items, 9 items are related to moral aspects (relationship with society; reputation to keep promise to customers; reputation to keep promise to suppliers; reputation to keep promise to neighbours; Islamic character (akhlaq); society views to applicant; applicant guarantor; relationship with local elders; and participation in the community). This result reveals how Islamic rural banks consider the importance of moral to be a part of their assessment in credit application. The importance of morality as an aspect of credit application assessment is further emphasised with the notion that failure to meet the criteria of moral factors will automatically result in the application being denied, regardless of other factors being fully met.
The results of this study is in line with the four principles required by The Islamic Financial Services Board (IFSB) in the credit risk assessment for Islamic financial institutions. These four principles require the existence of a strategy, due diligence review, appropriate method to measure and report credit risk, and the concept of credit risk mitigation that is appropriate with sharia principles in each model of financial transaction. In particular, the emergence of the moral related criteria emphasises how the mitigation concept which is widely used in a credit process is in line with the purpose of Islamic rural banks.