The Dominance of Debt-Based Financing in Islamic Banking:

Legal Challenges and Implications in Indonesia

Hamsir

Nila Sastrawaty

Zainuddin

 

Abstract: One of the fundamental principles of Islamic banking is equity-based financing, such as muḍārabah and mushārakah. However, debt-based financing, such as murābaha and ijārah, and istisnā, has evolved as a preferred mode of financing. Indeed, debt-based financing has dominated financing practices in Islamic banking in Indonesia. This trend is due to the fact that banks prefer contracts that minimise moral hazard and offer minimal risk compared to debt-based financing. The return on equity-based financing reflects the principles of partnership, which also involve sharing the risk of loss. It therefore supports transparency and a Sharīʿah-compliant investment ethic. This is not the case with debt-based financing, which requires fixed returns regardless of business results. This article argues that equity-based financing should be promoted in Islamic banking, which aims to generate profit while also helping communities and consumers thrive, in accordance with Sharīʿah rules that prohibit gharār, maysīr, and ribā.