Islamic Prudential Banking Concept to Reduce Non Performing Financing

This paper aims to develop the concept of prudential banking based on principles to minimize non-performing financing in Indonesia. This desk research was based on many relevant studies advanced in the literature. The review was particularly focus on Sharia Banking Law, Indonesian Banking Regulations, and Financial Services Authority Regulations. A secondary data published by the Indonesian Central Bank on Shariah Banking Statistics for 2014-2018 was used to sharpen the analysis. In addition, many previous studies on Sharia Banking conducted in other countries (e.g. Malaysia, Pakistan and other European countries) were discussed in order to widen the importance of shariah banking in those countries. The findings of this study include as follows. First, the development of the concept of Islamic prudential banking in the operations of Islamic banks need to give attention towards business risk and the certainty of the implementation of Islamic principles. Second, the operational of Islamic banks need to consider the important of sharia human resources, sharia product, shariah process (marketing, management, and standard operational procedure (SOP)) as well. The Practical implication is that Islamic prudential banking should be implemented in accordance with the Islamic concept in its operations so that it is truly able to minimize non performing financing. This study can also be used for policy instruments to improve Islamic Prudential Banking in Indonesia which is not yet available.Also, it can be implemented by other stakeholders of Islamic Banking. The social implication of this study to increase work motivation and raises honesty in work, in accordance with the objectives of


INTRODUCTION
Islamic banking in maintaining its activities requires a trustworthy attitude.
The concept of trust in Islam is the implementation of duties while still paying attention to Islamic rules and norms for human life. The norm and rules of human life in Islam are identical with Rahman and Rahimah Allah. The norm and rules are expected to provide safety and falah as an implementation of faith in God. (Mamadolimova, Ambiah and Lukose, 2011;Kheirabadi, 2004;Barus, 2016) The rapid economic mobility has triggered Islamic banks to take on the role of advancing the economy through shariah-based financing. Shariah principles according to Jan (2018) include istihsan (looking for easy ones that are shariah compliant), benefit, raf al haraj (eliminating difficulties),

daruriyat.
Management of customer funds in several Islamic banks has experienced difficulties. Funds funding managed by existing experiencing congestion.
Even though the shariah principle with its mandate is expected to realize the stability of Islamic banks. (Hafnida and Maamor, 2016)  Paper Mais and Sari (2015), which evaluates the soundness of shariah banks in Indonesia and Malaysia, produces that good corporate governance factors are considered "healthy", meaning that the company has implemented good governance. Profit factor or profitability Return on Assets (ROA) "Fairly Healthy" with Return On Assets below 1.25%. In this condition the role of prudential management in financing management is needed so as to increase profits.
The low profit of Islamic banks is due to non performing financing.
Non performing financing is that Islamic banks are required to set aside year to be backed up so that profits are reduced, and even to minus.
Non performing financing in Islamic banks as a result of not managing Islamic prudential banking. Prudential the banking presence is separate from compliance (shariah compliance). This is evident in theprovisions prudential Commercial banking banking includes: "Core capital, Minimum Capital Adequacy Requirement (KPMM), Capital Adequacy Ratio taking into account market risk, Net Open Position (NOP), Legal Lending Limit (LLL), Asset Quality, Asset Allowance, Reset Structure Financing, Statutory Reserves (GWM), the application of the principle of knowing customers, transparency to bank finance, transparency of bank product information and the use of personal data of customers, the principle of prudence in capital investment activities of commercial banks, the principle of prudence in asset securitization activities for commercial banks ". (Rivai, Veithzal and Idroes 2017). Islamic principles in practice are emphasized in the Shariah Supervisory Board (DPS). The task of the DPS according to the Islamic banking law is "to provide advice and advice to the directors and to oversee the activities of the bank in accordance with shariah principles" (Article 32 paragraph 3 of Law Islamic banks are encouraged to transfer risk. These various backgrounds emphasize that shariah prudence and compliance are equally important so that shariah compliance should really be inherent in business risk.
Departing from the various explanations above, there is the potential for the operation of Islamic banks to be not optimal and the emergence

Islamic Prudential
Banking Concept

LITERATURE REVIEW
Prudential banking is defined by the Hulters and Montes Negret (2015) as a framework that encourages banks to operate in a safe and wise manner. The aim of the microprudential (prudential) rule is to maintain the security and health of Islamic banking, reducing the risk of systemic financial instability that affects other banks. The microprudential regulation according to Wall (2015) is intended to maintain the security and health of each institution and is an appropriate response to the threat of failure so as to create financial stability. Valascas and Kassey (2012) argue that in order to maintain the strength of banking stability, it is necessary to limit size and reduce risk.
Whereas according to William (2014) bank risk will be low if the role of the government is of high quality. That is, the government has a role to maintain monetary stability that is directly related to Islamic banking.
Prudence in Islamic banking is built on the reality of the economy and the belief in future conditions. According to Welfens (2008) prudence in banking is built on the basis of: First, competition and private ownership in the field of Islamic banking, which causes the need for product innovation.

Second, collateral for deposits of customer money. A big danger in managing
public money is if aoccurs bank runs . Massive withdrawals of money are anticipated by creating a sense of security for the customer's money by providing guarantee protection to the relevant parties. Third, Profit as a bank buffer, it needs to be conveyed to customers in the form of financial report publications. Fourth, the central bank has the authority to provide the last loan to meet bank liquidity. Fifth; all actors; compliance supervisors, the Central Bank and the government must be cooperative in handling the crisis. and credit monitoring processes. This is what has been done by Islamic banks in conducting business. Things that concern monitoring are a little weak because they are monitored after non performing financing occurs. Shariah that is carried out concerns the products being distributed. While the process input and output are not a push point, no rules can be found.

RESEARCH METHOD
This paper is written based on a descriptive approach and a type of qualitative  there is fictitious financing, the role of DPS is not optimal, dps competencies are only related to shariah without accounting capabilities, the existence of a-simmetric information between banks and customers and so on.
The development offer in this case is that the prudential rules of Islamic banks include shariah in their operational processes, from prudential banking to Islamic prudential banking. The rules of prudence in shariah 180 IQTISHADIA 12,2 banking make shariah an operational process. Shariah does not only run when new products are launched, but all management is based on shariah.
Input, process and output must be based on shariah and set forth in the rules.
Islamic banks are proposed to have a function of shariah bank governance, a separate shariah compliance function that is separate from conventional so that rules can be ascertained to be shariah-compliant and easily implemented into the operational standards of shariah bank procedures.

Chart 1 Islamic Prudential Banking Solution
Impact on non-massive prudential rules contributing to the emergence of NPF. With shariah principles, ensuring the NPF will be reduced, due to the awareness that arises for every banking agent and customer the profits So that what happens in recording in the right contract that the financing for the purchase of goods, but the certainty of goods purchased and all funding funds used in accordance with the contract not delivered. So that it distorts that Islamic finance is tantamount to credit at conventional banks.
While conventional banks benefit from cheaper loans. So the selling value of financing in Islamic banks has no meaning before customers. Customers easily choose credit at conventional banks. Shariah principles should be emphasized that shariah commercial banks and Shariah Business Units must ensure that all banking operations comply with and implement products, marketing, management, and business processes carried out using shariah principles. Shariah becomes the operational spirit of the business, not just a product so that business awareness is guided and accounted for in addition to the supervisor (Directors) but in front of the creator, Allah SWT.
According to Khann and Bhatti (2008)  Shariah commercial banks in Indonesia receive funds funding with shariah principles (ie wadiah and Mudharabah) offers funding large often require fixed profits each month. In this situation the manager must be brave to refuse. Courage does not appear in financial ratios, but the process of financial ratios is formed from the profits promised by Islamic banks to customers. In working capital financing, the contract used is acontract mudharabah. With acontract mudharabah, the profits obtained by shariah commercial banks are equal to the profit sharing ratio agreed upon by the Islamic bank and the customer obtained from the customer's business income. However, shariah commercial banks often project that the profit sharing ratio is equivalent to conventional bank interest, so Islamic banks set a certain profit target for customers, which under this target contract must be met. In such conditions, Islamic banks must consistently receive fluctuating profits from the income obtained by the customer. If Islamic banks want customer profits to be linear and increase continuously, then the process of monitoring customer business

Islamic Prudential
Banking Concept must be carried out, so that customers do not experience a decline in profits, and Islamic banks are not affected.
Compliance with shariah principles does not become an operational risk, because shariah compliance only appears in the issuance of new products. In existing regulations, it does not bring up the financing process to be a part that must be examined by its shariah element. This condition also occurs in Bangladesh. According to Ullah (2014) that the status of shariah compliance from Islamic banks in Bangladesh is in a vulnerable condition, the status of shariah compliance varies greatly among Islamic banks, and Shariah violations are high in investment activities due to lack of knowledge, lack of sincerity in fulfilling Shariah, poor attention in the Shariah audit and Shariah research as well as the lack of a strong shariah supervisory board consisting of full-time skilled members. Compliance with the prudence in providing financing in the form of 5 C according to Abubakar and Handayani (2017) is to ensure that banks fulfill their obligations to pay their obligations. In various banks, the culture of risk compliance according to Carretta, Farina and Schwizer (2017) still has a distance, because every decision made by banks is full of risks. In this case shariah principles must be a part of prudence that can be implemented in providing financing.
Carefully managed risks, shariah becomes a written rule and is implemented, it will have a positive impact on healthy banks, problematic financing is reduced. The fragility of banking institutions because one of the intermediary functions does not run optimally. As in financing, Mathur (2002) that financing will be guaranteed smoothly if there is no a-simmetric information between the customer and the bank. Caution over this is the management role in managing information so that both parties are open, so that business certainty can be accepted by both customers and banks. The thing that is needed by banks and customers in services is trust.
Prudence in shariah commercial bank relates to compliance with shariah principles. This compliance according to Ashraf, Robson and Sekhon (2015) contains elements of trust in both individuals and institutions and beliefs influence the decision to choose Islamic banks in Pakistan. Good trust in a person is related to interpersonal relationships, while trust in the institution concerns its relationship with the bank. Trust and confidence are part of a unity in upholding the universal principles of Islam. Prudence in compliance with shariah principles according to Mamadolimova, Ambiah and Lukose (2011) is carried out by applying a transaction model that is in accordance with the contract. The contract is in accordance with the DPS fatwa and the rules stipulated by the Financial Services Authority.

12,2
Ullah, Harwood and Jamali (2016) mention the main role of managers and scholars (National Shariah Council) is very dominant in achieving compliance with shariah principles. However, often the control authority is not played maximally by managers or scholars. This means that because it pursues a profit target, compliance with shariah principles is less enforced.
In Alsaadi, Ebrahim and Jaafar (2017) research, compliance with shariah principles will increase profits. Compliance with shariah principles means the institution complies with Islamic ethics in managing its company.
The spirit of prudence carried out by banks is expected to be able to connect between banks and stakeholders. As in the Signaling theory, it is expected that prudential banking and compliance with shariah principles can describe (signal) to customers and shareholders. With a mandate signal built by Islamic banks, the customer will be trustworthy on the funding he receives. Kabir et al. (2015) which examines credit risk in Islamic banks and conventional banks. The results show that Islamic banks have lower financing than conventional banks. It has a background that the use of accounting reports alone to assess financing is very misleading. So with shariah that is understood by the customer, it will make the customer appear aware of returning the funds on time. does not ensure that every shariah financial institution implements shariah compliance so it requires a solution. According to Nicolo, Gamba and Lucchett (2014) bank regulations regarding microprudential loans give rise to an inverse relationship between bank loans, welfare, and capital requirements, liquidity requirements clearly reduce loans, efficiency, and welfare, and resolution policies that depend on observed capital. On that basis, as revealed by Abozaid (2016), Islamic finance faces internal challenges, namely shariah governance and shariah audit. It is anticipated that Islamic banks do not lose their Islamic spirit so that they remain unique and choices in choosing Islamic banks.

CONCLUSION
The risk of shariah bank financing is non performing financing. The high level of non performing financing is due to the rules of prudence that have not yet been specific to shariah. The function of shariah bank governance, the shariah compliance function is in the conventional rules, so it is general.

Islamic Prudential
Banking Concept This is supported by shariah compliance implementers not ensuring shariah as an operational basis and emphasizing the soundness of Islamic banks in terms of risk. Shariah compliance is supervised by the DPS which in its implementation is only limited to advice on supervision carried out. The function of implementing shariah compliance is needed on managerial elements. DPS competency is to have Islamic competence and business so that it can support product innovation in accordance with shariah. The solution to this is Islamic prudential banking,banking which is that prudence based on shariah principles must be available. Islamic banks must be ensured to have rules for the functions of Islamic bank governance, shariah compliance functions that are separate from conventional banks. These rules must ensure the existence of Shariah Human Resources, Operations are carried out according to Islamic management and Islamic marketing. According to Rahmawaty and Rokhman (2018) that shariah marketing has a positive and signifcant influence on customer satisfaction. Thus Islamic Prudential Banking can be ascertained to be comprehensive both input -process and output in accordance with sharia principles contained in the rules. The noble goal of implementing prudence based on shariah principles is to raise awareness for managers and customers for the funds channeled. This can reduce problem financing and towards shariah and healthy Islamic banks.