Implementation of Corporate Governance and

Prevention of Fraud in Islamic Banking

Siti Inayatul Faizah, Dian Filianti, and Irham Zaki

Faculty of Economics and Business, Airlangga University, Indonesia

irham-z@feb.unair.ac.id

Abstract. The purpose of this article is to analyze the implementation of

Bank Indonesia regulations on corporate governance for Islamic banking

so as to avoid fraud. The research method in this article is a qualitative

research method. The data sources of this article are primary data and

secondary data. Primary data was obtained from field research on several

Islamic banks, the Financial Services Authority (OJK), and the

Corruption Eradication Commission of the Republic of Indonesia (KPK)

who were respondents. The secondary data in the form of legislation

regarding corporate governance and those related to sharia banking

corporate governance, also data on research results from international

journals, as well as other relevant literature. The results of the study show

that the regulations issued by Bank Indonesia regarding corporate

governance for Islamic banking are not in accordance with the provisions

of positive law and Islamic law, and there are provisions that allow fraud.

Because there is no philosophical basis, there are weaknesses in some

juridical aspects, and contain sociological weaknesses.

Keywords: Fraud∙Good Corporate Governance∙Bank Indonesia∙Islamic

Banking

1 Introduction

The research results of Malek Lasghari (2004), states that company executives have

deviated from the sole purpose of maximizing the welfare of shareholders. As for Leora

F. Klapper and Inessa Love (2004), consider good corporate governance significant

influence on performance and market value. Likewise, Ronald W. Masulis, Cong Wang

and Fei Xie (2007) support the opinion of Mitchell and Lehn (1990) that it is important

to provide the right incentives to managers to maximize shareholder value. Some of

these researchers, agreed to conclude the purpose of corporate governance is to

maximize shareholder value, or in other words: the better the score of the results of a

corporate governance assessment the more the maximum shareholder value.

Against the above studies, researchers disagree. The researcher is of the opinion that

as a preliminary conclusion that will subsequently become the framework in the study

that in the regulations issued by Bank Indonesia on corporate governance for Islamic

banking are not in accordance with the provisions of positive law and Islamic law, and

there are provisions containing fraud. As a consequence of the research, it is necessary

866

Faizah, S., Filianti, D. and Zaki, I.

Implementation of Corporate Governance and Prevention of Fraud in Islamic Banking.

DOI: 10.5220/0010599200002900

In Proceedings of the 20th Malaysia Indonesia International Conference on Economics, Management and Accounting (MIICEMA 2019), pages 866-880

ISBN: 978-989-758-582-1; ISSN: 2655-9064

to improve these regulations by the regulator, so that they become better and more

suitable sharia corporate governance for sharia banking. In other words, the better the

corporate governance regulations for Islamic banking the more narrow the

opportunities for illicit acts and fraud in Islamic banking.

Corporate governance researchers, including Anant K. Sundaram and Andrew C.

Inkpen (2004), revealed the stock market was in an uproar with the company scandals

of 2001 and 2002, which has caused debate about the company's goal of maximizing

shareholder value. Sean Liu (2005) suggests his theory that many problems are typical

of the failure of the system to protect the interests of shareholders. Subsequent research

by John S Liu and Chyan Yang (2008) on Corporate Governance Reform in Taiwan

suggests that the independent director system is not necessarily effective in reforming

corporate governance in Taiwan. Another study conducted by Luca Enriques and Paolo

Volpin (2007), regarding corporate governance reform in Europe revealed that reform

efforts in Europe need to be continued to effectively address the problems posed by

dominant shareholders.

Corporate governance in Indonesia was only known after the global monetary crisis

that also hit Indonesia. Even though actually corporate governance has strong roots in

the Indonesian governance system, which is sourced from the constitution of the

Indonesian State. The State of Indonesia, according to the 1945 Constitution Article 1

paragraph (3): The State of Indonesia is a state of law. As for Chapter III Article 4

paragraph (1) states: The President of the Republic of Indonesia holds governmental

authority according to the Basic Law. Paragraph (2): In carrying out its obligations the

President is assisted by one Vice President. What is outlined by the 1945 Constitution

hereinafter abbreviated as the 1945 Constitution shows that the state of Indonesia is a

state of law, that is, the implementation of the state is based on legal rules, covering

various aspects of state management in the sense of overall governance with control of

governmental power held by the President and assisted by the Vice President.

The government mandated by the 1945 Constitution above, is a government with

the President as the holder of government power, as the highest state organizer

governing or managing state institutions and society in general, known as governance,

and the conception of good governance is later known as Good Public Governance.

In the context of the constitutional state mandated by the 1945 Constitution, in the

implementation of government to regulate and manage state institutions and social life,

many laws and regulations have been arranged in stages, known later as the hierarchy

of legislation, which sequentially consist of: a. 1945 Constitution; b. MPR Decree; c.

Law / Perpu; d. Government regulations; e. Presidential decree; f. Provincial Regional

Regulations; and g. Regency/City Regulations.

Good Public Governance (GPG) is a system or rules of behavior related to the

management of authority by state administrators in carrying out their duties responsibly

and accountably. The GPG basically regulates the pattern of relations between state

administrators and the public and between state administrators and state institutions as

well as between state institutions. Implementation of GPG has a very big influence on

the realization of Good Corporate Governance by the business world and state

administrators. With the construction of this national understanding, it is clear that good

corporate governance is an inseparable part of good public governance.

As is well known, that in the world there was a monetary crisis in 1997-1998

including in Indonesia. The monetary crisis in Indonesia worsened the condition of the

national economy, so that the international financial institution namely the IMF was

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asked for help by the Government at that time. IMF assistance to Indonesia requires

improvements in governance, both public governance and corporate governance,

because poor governance is considered a cause of the monetary crisis in Indonesia.

Akhmad Syakhroza (2005) agrees with Lukviarman who revealed that the conception

of governance began to strengthen in Indonesia after the economic crisis in the latter

half of 1997 marked by the signing of a Letter of Intents (LOI) between the Government

of Indonesia and the donor, namely the International Monetary Fund (IMF), This IMF

requires improvements in governance (public and corporate) as a condition of

assistance provided in line with the conditions of the IMF. Moh. Wahyudin Zarkasyi

(2008), believes that since the 1997 economic crisis the implementation of good

corporate governance, or better known as Good Corporate Governance (GCG) has

become a prominent issue in Indonesia. As a result of poor governance and companies

in Indonesia at that time, causing the Indonesian economy to plummet.

Still in the context of the implementation of the mandate of the 1945 Constitution,

as is known, the pioneers of Islamic banks in Indonesia are Bank Muamalat which was

established on November 1, 1991, followed by the presence of other Islamic Banks in

1999 and the era of the 2000s. The development of the Indonesian banking world in

recent years has been enlivened by the rise of sharia banks. This Islamic bank generally

relies on the name of the existing national bank as its founder. For example, Mandiri

Sharia banks were established by Mandiri banks; BNI Sharia Bank was established by

BNI Bank and others.

The development of Islamic banks in Indonesia has attracted the attention of the

government, including the issuance of banking regulations that include general and

Islamic banking, namely Banking Law No. 7 of 1992 amended by Law No. 10 of 1998;

then special regulations governing Islamic banking, namely Law No.21 of 2008

concerning Islamic Banking. As the main consideration, the need for this Sharia

Banking Law in consideration of the letter b. and c. mentioned the needs of the

Indonesian people for sharia banking services are increasing; and Islamic banking has

specificity compared to conventional banking.

In order to encourage the implementation of Good Corporate Governance of Islamic

banking, Bank Indonesia issued Bank Indonesia Regulation number 11/33/PBI/ 2009

concerning Implementation of Good Corporate Governance for Sharia Commercial

Banks and Sharia Business Units. In the considerations to consider the letter a. The

Bank Indonesia Regulation states: that in order to develop a healthy and resilient sharia

banking industry, it is necessary to implement Good Corporate Governance for

effective sharia banks and sharia business units.

Regulations on Good Corporate Governance in the banking environment, only in

2006 Bank Indonesia issued Bank Indonesia Regulation No.8/4/PBI/2006 concerning

the Implementation of Good Corporate Governance for Commercial Banks on January

30, 2006 and was amended by PBI No.8/14/PBI/2006 dated October 5, 2006, followed

by BI Circular Letter No.9/12/DPNP dated May 30, 2007 concerning the

implementation of Good Corporate Governance for Commercial Banks. Then only 3

(three) years later Bank Indonesia issued Bank Indonesia Regulation

No.11/33/PBI/2009 concerning Implementation of Good Corporate Governance for

Sharia Commercial Banks and Sharia Business Units.

On November 22, 2011 the government issued Law of the Republic of Indonesia

Number 21 of 2011 concerning the Financial Services Authority. Regarding the

Financial Services Authority as prescribed by Considering Considering letter b. and

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Article 1 paragraph 1 of the Law: The Financial Services Authority is an institution that

is independent and free from interference from other parties, which has the functions,

duties and authority to regulate, supervise, examine and investigate the activities of the

financial services sector.

In addition to the above corporate governance regulations, it is important to look at

the development of corporate governance into a national issue that does not stand alone,

but is as a result of the economic crisis that hit the world including Indonesia, as

revealed by Edy Suandi Hamid (2009), the Indonesian economic crisis has demanded

government participation to overcome it by channeling funds to save the national

economy. The government's action at that time was to provide banks with Bank

Indonesia Liquidity Assistance which ended up as the biggest financial scandal in

Indonesia, and were not yet fully revealed.

Then also noted the causes of the crisis carried out both by local companies in

Indonesia and world-class companies. Rizal Ramli (2010), argues that the Government

and Bank Indonesia use the excuse that the Century Bank bail out must be done because

it has systemic risk. The reason is just an alibi to smooth the "robbery" of Century Bank.

As for Edy Suandi Hamid (2009), revealed the financial disaster struck after bad credit

occurred and paralyzed a number of financial giants who backed it up. Starting from

the bankruptcy of the giant bank Lehman Brothers and the giant financial company

Bear Stearns. Moments earlier, the US government was also forced to take over the

largest mortgage companies in America: Freddie Mac and Fannie Mae. While Merrill

Lynch experienced conditions that were not much different that had to be acquired by

Bank of America. Finally the largest insurance company AIG (American International

Group) shows the same critical symptoms.

The cause of the crisis is in accordance with the facts above by the big companies

in the world that have implemented corporate governance, but in fact there was even a

financial scandal that shook the world economy. Whereas in Indonesia, the IMF said

among the reasons was the absence of good governance, so that since the IMF lent

funds to Indonesia with conditions for improving governance since then the issue of

implementing good governance including corporate governance received special

attention by the government (Akhmad Syakhroja, 2001).

In recent years we have seen the phenomenon of the rapid growth and development

of Islamic banking not only in the country but in Asia, the Middle East, even in Europe

and America; Along with the presence of Islamic banks or Islamic banks has also

developed various research results around Islamic banking, and there are also other

phenomena in the country that is the occurrence of acts of fraud committed in various

Islamic banks, and the facts show that the Islamic banks are banks who have also

implemented corporate governance. This makes a compelling compelling reason to

conduct a legal review of sharia banking corporate governance regulations and fraud,

and explore ideally corporate governance in sharia banking, in the context of absorbing

Islamic teachings and at the same time as an effort to prevent the recurrence of fraud in

Islamic banking.

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2 Method

The study was conducted using qualitative methods, starting with library legal research

followed by descriptive qualitative field legal research, obtaining data through

interviews and document studies of research objects on several Islamic banks, the

Financial Services Authority, and the Corruption Eradication Commission. Qualitative

research practice according to Sugiyono (2011) because it is more descriptive and has

a general character, flexible, developing, and appears in the research process. Data

collection techniques are carried out by examining library materials and corporate

governance regulations. The data source, obtained from primary data sources and

secondary data. Primary data from field research in the form of interviews and

supporting official documents, while secondary data obtained through library materials.

Primary legal library materials in the form of laws and regulations; secondary legal

library materials in the form of legal literature, journals resulting from legal research,

the work of legal scholars, and company documents; tertiary legal materials in the form

of legal dictionaries, language dictionaries, and non-legal materials from other

disciplines related to the study of this research (Soerjono Soekanto, 2006). In this study

researchers conducted a multi-disciplinary approach. The data analysis is done

qualitatively and content analysis. Using qualitative analysis in the form of

interpretation that is prevalent in legal research such as grammar, systematic, authentic,

and teleological as well as comparative analysis of the results of interviews, legal

documents and company documents. Presentation of the results of the study was carried

out with a systematic narrative descriptive (Zainuddin Ali, 2011).

3 Results and Discussions

3.1 Understanding the Concept of Sharia Corporate Governance

The results of research and author's writings show that there are directives on sharia

corporate governance outlined by the Islamic Finance Services Board or IFSB of which

Bank Indonesia is a member, in May 2006 having a draft presented at the IDB Lectures

Series delivered by Madzlan Mohamad Hussain (2006 ) has formulated the definition

of corporate governance, which is a set of relationships between company management,

the board of directors, shareholders and other stakeholders that provides a structure in

which: (i) company goals are set; and (ii) how to achieve these objectives and

monitoring performance is determined. In the context of Islamic financial services,

good corporate governance must also include: (i) a set of organizational arrangements

in which the actions of managing Islamic financial institutions are aligned as far as

possible, with the interests of the stakeholders; (ii) providing appropriate incentives for

corporate organs such as directors, sharia supervisory boards and management to

achieve objectives that are in the interests of stakeholders and facilitate effective

monitoring, thereby encouraging Islamic financial institutions to use resources more

efficiently; and (iii) in accordance with Islamic sharia rules and principles.

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In addition, Madzlan Mohamad Hussain had previously delivered in 2005 on the

occasion of a presentation at the MENA-OECD Initiative on Governance and

Investigation Working Group 5 forum in Amman Jordan, including stating the reasons

for the importance of corporate governance namely (i) the concept of accountability to

God and others and the ethics of Islamic financial services are stipulated in the contract

but in the end is accountability to God, (ii) among the ethical guidelines in the Koran

are: Honesty fulfilling each contract; prohibition of betraying whatever is entrusted;

prohibition of income from fraud, dishonesty or fraud; prohibition of bribery for an

unfair advantage; prohibition of hiding evidence for example in order to manipulate

prices, (iii) Islamic financial services must fulfill obligations to stakeholders within

sharia-justified limits.

Then in December 2006 the IFSB delivered the guiding principles of corporate

governance by dividing it into 4 (four) parts, namely: first, the approach to governance

of Islamic financial institutions in general; second, the rights of investment account

holders; third, adherence to sharia rules and Islamic principles; and fourth, transparency

of financial reporting (The Islamic Financial Services Board, 2006). The IFSB

definition of corporate governance is the same as that presented in the IDB Lectures

Series by Madzlan Mohamad Hussain as mentioned above. The latest development in

December 2009 IFSB published the Guiding Principles on Sharia Governance Systems

for Institutions offering Islamic Financial Services. Here is given the definition of

Sharia Governance Systems namely: refers to a series of institutional and organizational

arrangements through which an Islamic financial institution that there is an effective

independent oversight of sharia compliance over each structure and process includes:

first, the issuance of relevant sharia statements / resolutions; second, the dissemination

of information on the statement / resolution of the sharia to operating personnel of

financial institutions that monitor day-to-day compliance at all operational and

transaction levels; third, review or internal audit of sharia compliance to verify that

sharia compliance is satisfactory; fourth, annual compliance audit of sharia to verify

that the internal audit is appropriate and findings have been recorded by the sharia

supervisory board (The Islamic Financial Services Board, 2006).

Please note that this Sharia Governance System includes Islamic financial service

institutions, Islamic collective investment scheme institutions, and takaful insurance

institutions. It can be seen from the performance of IFSB that corporate governance in

an Islamic perspective is intensely receiving serious attention, evidenced by the

concepts that continue to improve and develop from year to year, and it seems to be

still rolling so that it will reach a standard that is applied to all Islamic financial

institutions in world. After seeing the understanding of corporate governance by IFSB

above, it is clearly different from what was formulated by Zulkifli Hasan (2009) saying,

the understanding of corporate governance is understood by Islam combining elements

of Tawhid, Shura (deliberation), Shariah rules and maintaining personal goals without

ignoring the task of social welfare responsibility .

The difference between these two definitions can be explained, that the IFSB places

more emphasis on: first the relationship between company organs, shareholders,

management; the second emphasizes the existence of company goals and the

mechanism of achieving goals; third alignment of various internal and external interests

of the company must be in accordance with sharia rules and principles. Whereas Zukifli

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Hasan's formula simply emphasizes: first the foundation of company management is a

combination of tawhid, shura (deliberation), and shariah rules (hablu min Allah);

secondly achieving personal goals without forgetting social responsibility (hablu min

al-nas). So it appears that the definition by the IFSB is general in nature, whereas what

Zulkifli Hasan has stated is special as is Dato Shahran, but all of it when combined will

make a better formula between shareholders and stakeholders.

In the various definitions of corporate governance above, there are always sentences

of relationship between various parties that are possible including: between

shareholders, especially majority and minority, shareholders with directors,

shareholders with commissioners, shareholders with stakeholders, directors with

commissioners, between directors, directors with management, directors or

commissioners with companies, directors and commissioners with general meeting of

shareholders, and stakeholders with companies in the context of procedures and

mechanism structures. The relationship between these various parties shows the

company's organs with the company's stakeholders in a state of movement, this is what

is characteristic of a corporate governance.

Looking at some of the definitions and developments of sharia corporate

governance presented above, it can be stated that the need for sharia corporate

governance is because: first, the Koran and Hadith as a foundation of governance, as

well as Islamic teachings are very relevant and significant as the basic foothold of sharia

business; second, sharia business is based on observing the spiritual principles and

operational ethics as a form of upholding the faith and piety in maintaining the goal of

benefit in totality; third, the goal of maximizing shareholder value must be balanced by

safeguarding the interests of affiliated parties and stakeholders; fourth, sharia corporate

governance is a controlled mechanism between the organ and organizational structure

of the company and interaction with stakeholders; fifth, zero tolerance violates sharia

and zero tolerance fraud must be seen as a way to achieve the objectives of sharia

corporate governance to support the achievement of company goals, but the teachings

of Islam recognize human nature of the tendency to do wrong besides doing the right

thing so that strict guidelines are needed.

Corporate governance based on Islamic values appears to be needed and

strengthened, when looking at the reality and phenomenon of regulations issued by

Bank Indonesia regarding corporate governance for Sharia Commercial Banks and

Sharia Business Units (PBI 11/33/PBI/2009 and SE-BI 12/13/DPbS-2010) in no way

shows identity as a specific corporate governance for Islamic banking, because the

Bank Indonesia regulation is a copy paste of Bank Indonesia regulations on corporate

governance for conventional banks with a small revision, namely SE-BI No.9/12/DPNP

dated May 30, 2007. As a fundamental reason the need for Islamic values to enter into

sharia corporate governance for sharia banking, based on the description and results of

the author's research are as follows: a) Islamic banks were born due to the increasing

need of Muslims for products & services that do not damage the faith; b) Islamic banks

as sharia-based legal business entities in the fields of economy and trade and social life

are the application of muamalah as a form of practice of Islamic teachings; c) Islamic

banks as a means of protecting and protecting the Islamic ummah so as not to be

damaged or fall into usury, maysir, gharar, wrongdoing and haram, or other acts of sin

by obeying and implementing sharia principles in their operations; d) Islamic banks in

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the face of global competition must be able to develop by displaying Islamic identity,

culture, and personality with strong confidence for the continuity of sharia business in

an effort to broadcast the Islamic economy and trade.

3.2 Fraud on Islamic Banking

Understanding the term criminal acts in Islamic banking has a very broad understanding

because indeed the term academic crime refers to the material criminal law that contains

various criminal acts both ordinary and specific criminal acts. Crime in banking by

many parties calls it fraud in banking, but this is also unsatisfactory because the term

fraud or freely translated as fraud itself is actually unknown in the national criminal law

system. Bank Indonesia in Circular Letter No.13/28/DPNP dated 9 December 2011

formulated the term fraud by: What is meant by Fraud in this provision is an act of

deviation or omission intentionally carried out to trick, cheat, or manipulate Banks,

customers, or other parties , which occurs within the Bank and / or uses Bank facilities

to cause the Bank, customers, or other parties to suffer losses and / or Fraud actors

obtain financial benefits, directly or indirectly. The types of acts that are classified as

Fraud are fraud, fraud, embezzlement of assets, information leakage, banking crime

(tipibank), and other actions that can be likened to it.

Actually, Indonesian criminal law does not recognize what is called a fraud, and

apparently the term fraud that we know from the west has a variety of meanings in the

legal world there, the term fraud according to the Black Laws Dictionary, fraud is very

broadly translated, starting from its understanding, kinds - kinds of fraud and fraud

classification; Among its meanings are stated: A false representation of facts, whether

by words or actions, with false or misleading accusations, or with concealment that

should be disclosed, which is deceptive and intended to deceive others so that he must

act to harm the law. Whatever is counted for deception, whether by a single act or

combination, or by suppressing the truth, or suggestions about what is wrong, whether

it is by direct falsehood or innuendo, by speech or silence, word or mouth, or looking

or gesturing. "Bad faith" and "fraud" are identical, and also other synonyms are

dishonesty, infidelity, infidelity, betrayal, injustice, etc.

Fraud is widely popularized by companies, especially SOE companies (State-

Owned Enterprises) and banking companies in Indonesia, which eventually became

known and popular in the business world in general this country, but still if asked what

is meant by fraud not one can answer correctly according to an academic view. The

Indonesian state already knows what is said to be an act of corruption, along with the

existence of the Anti-Corruption Law which was followed later by the birth of the

Corruption Eradication Commission. Even so it is not quite right if corruption also

directly touches the banking sector, because banking companies in Indonesia consist of

state-owned companies and private companies, private companies are more familiar

with fraud. But for BUMN companies corruption is considered still debatable, because

in general corruption always connotes that there are state financial losses and what is

still not final among academics and law enforcement is the financial legal status of

BUMN companies, whether they are state finance or not state finance. Even though

according to law a BUMN is a private company subject to the Limited Liability

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Company Law, for legal experts the BUMN assets come from separated State assets,

because they have been separated from their origin, the State's shares become the assets

of a BUMN limited company, no longer a State asset.

From the data that the authors encountered in the media coverage, a lot of fraud has

occurred in Islamic banking circles, as an illustration some of them are:

a. The suspects embezzled BNI Syariah Lubuk Linggau customer funds valued at

Rp 8.1 Billion, the suspects have been detained since October 13, 2012;

b. Bank Danamon has sold its derivative products to Bank Danamon Syariah

(UUS) customers;

c. Bank Danamon Syariah customers feel cheated, gold investment;

d. Bank Officials Allegedly Carrying Customer Gold Runaway Approved Value

of Rp 4.6 Billion;

e. Alleged Fraud of DKI Sharia Bank Immediately Delegated to Court, related to

the granting of Rp100 billion in credit for the purchase of aircraft by DKI Sharia

Bank to PT Energy Spectrum (ES);

f. Case of Wrong Type of Bank Mega Syariah Admits Copy-Paste Without Paying

Attention to Original Names, as a result, heirs are in doubt getting land

collateral, which is pledged to obtain a credit agreement through sharia

principles (murabaha contract) at Mega Mitra Sei Sikambing Medan bank

office;

g. BSM Bogor Bribery Case, 3 Officials Bribed Rp9.3 Billion, in the case of

embezzlement of funds under the guise of fictitious loans worth Rp102 billion

involving Notaries. 106 BSM Fictitious Loans Terendus since 2012, 3

Employees Already Fired;

h. Bank employees broke 75 billion rupiah to buy houses and luxury cars. Bank

Syariah Mandiri (BSM) Jalan Gatot Subroto Branch, Jakarta, conceding funds

reached Rp 75 billion. The police have arrested four burglary suspects;

i. Bukopin Syariah Loss Rp 1.3 Billion, Maradona Hutasoit & Fahri Tried Medan

District Court. As from November 2012 to April 2014, Bank Bukopin Syariah

Medan Branch suffered a loss of Rp 1.3 billion by 2 former employees who

manipulated debit transactions;

j. Former BSM Branch Head Detained by Central Java Regional Police, Suspect

initials ABS (43) former head of local auxiliary branch in 2011-2012 Central

Java Regional Police revealed the criminal practice of breaking into Bank

Syariah Mandiri (BSM) in Brebes. ABS allegedly proposed financing

engineering from 260 debtors. That was done with the help of suspect YAN, a

former marketing supporter of PT BSM Brebes. PT BSM suffered a loss of

around Rp50 billion.

Of the various case phenomena for the period of 2012 to the beginning of 2015

above, it shows that the number of cases at Bank Syariah Mandiri ranks first, followed

by Bank Danamon Syariah then other Islamic banks. But that does not mean that

Islamic banks which are not published by the media have no cases. Presumably with

the above data, it is enough for us to think of the right way to eradicate fraud in Islamic

banking. But before reaching that goal, of course the question is why fraud can occur

in Islamic banks, is there something wrong ?. According to the KPK, in banking a fraud

is carried out in stages depending on the level starting from the lower level, which

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continues to be small up to the top management of a large-scale; the smallest is the

crime committed by the employee together with the customer, the middle manager is

related to giving credit, but the top management is bigger in scale because it involves

policy. Then why fraud can occur? We must distinguish fraud by need or fraud by the

system, if by need is usually due to personal needs, if by the system then all of them

have been fraud together where the rules are made already fraud, the intention is already

fraud.

4 Solution to Dealing with Fraud

Based on the description and explanation of the paragraphs above the author assesses

the need for early prevention and is carried out in a structured and consistent manner

against fraud in Islamic banking, due to the weak regulatory phenomenon and the

phenomenon of fraud in several Islamic banks throughout Indonesia, which is the main

basis for the acceleration of fraud prevention in the Islamic banking environment. The

author strongly supports the presence of Bank Indonesia Circular Letter

No.13/28/DPNP dated December 9, 2011 concerning: The Implementation of Anti-

Fraud Strategies for Commercial Banks, and by Islamic banking in general has

addressed them by creating an anti-fraud task force. Besides that, it is necessary to look

at law enforcement itself, for example the Corruption Eradication Commission has

upheld its determination to eradicate Fraud by emphasizing the following policy

formula: Fraud control itself will be built nationally which includes three aspects,

namely preventive, detection and repressive.

In the preventive aspect, it is in the form of encouragement to organizations or

institutions implementing a good control system, in the form of an Internal Monitoring

System (SPI) or the Government Internal Control System (SPIP), conducting a Fraud

Risk Assessment and implementing a Fraud Control Plan or Fraud Control System. As

for the detection aspect, a comprehensive early warning system will be made, by

integrating LHKPN/LHK and gratuity/gift reports that reach all civil servants, the

Whistle Blower System, and other elements of the integrity system. Thus, the aspect of

enforcement against fraud can be done more effectively because it has been integrated

and the creation of a good legal order. On the other hand, the KPK will have a more

active role in monitoring the effectiveness of integrity enforcement so that a good legal

order is maintained.139 What has been outlined by Bank Indonesia Circular Letter

No.13 / 28 / DPNP dated 9 December 2011 concerning: Application of Anti-Fraud

Strategy for Commercial banks and also the KPK's policy in handling fraud, even

though they are public, they need to be appreciated. But for Islamic banking based on

the results of this study, the authors argue that to overcome or prevent fraud, high

awareness of both regulators and Islamic banking industry players is needed, in order

to systematically take the following actions:

1. Preventive Measures

Regulators should review the regulations that have been made to support

corporate governance or operational interests of Islamic banking so that

regulations are clean and do not contain things that are not in accordance with

sharia principles, especially not containing elements: usury, maisir, gharar,

haram and wrongdoing, as mandated by the Sharia Banking Law. As a follow

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up, the regulator must be willing to: a. Strengthening Juridical, namely the

improvement and improvement of some weak regulatory provisions, as well as

making new rules that are needed in the sense of: 1) Revoke all the provisions

that create fraud by the system such as the provisions that justify fraud under

100 million rupiah which is considered insignificant; 2) Improve provisions that

have the potential for a conflict of interest, namely to reinforce the provision

that all shareholders are prohibited from holding positions as directors or

commissioners, to prevent conflicts of interest; 3) Improve all provisions that

have the potential for fraud by the system and the potential for conflict of

interest, namely to reinforce the provision that all directors and commissioners

must be an independent party to shareholders, to prevent shareholder

intervention and fraud either by the directors themselves or in collaboration with

shareholders; 4) Improve all provisions that have the potential to conflict of

interest and potentially harm the company both materially and immaterially,

namely to reinforce the dual prohibition of positions for directors,

commissioners, and sharia supervisory boards, especially dual positions that can

cause conflict of interest and harm the company in matters: internal

confidentiality, product confidentiality, internal strategy, financial systems &

procedures, accounting systems & procedures, information technology, and

other strategic matters of the company; 5) With the awareness that acts of fraud

that have the potential to cause large losses to the company are conducted by

middle and upper level officials and certain related parties, regulators need to

specifically make anti-fraud regulations for shareholders, anti-fraud regulations

for directors, anti-fraud regulations for commissioners, regulations anti-fraud

for sharia supervisory boards, anti-fraud regulations for internal auditors, anti-

fraud regulations for external auditors, anti-fraud regulations for information

technology service providers working for companies, and anti-fraud regulations

for key persons or other managers. b. Need to require Islamic Banking to carry

out anti-fraud education programs and create an anti-fraud culture, which should

be included in the anti-fraud program regulations issued by the Financial

Services Authority.

2. Continuous Detection Steps

Regulators need to establish the following sustainable detection steps: a)

Require Islamic banking to continue implementing the Whistle Blowing System

program, with emphasis on the company's top management steps: first, create a

limited special team that is known to be honest, clean and firm; secondly,

provide guarantees to the reporter: that the identity of the reporter is kept

confidential, the report material is kept confidential, as well as provide

protection against the reporter from retaliation in various forms and modes by

the reported party against the reporter and if necessary protect his family, and

give commensurate appreciation to the reporter if the report is proven as a

reward system; b) Require Islamic banking to make high security on the use of

information technology to prevent various acts of fraud originating from

information technology systems, starting from the determination of the

requirements of information technology service providers, selection of service

provider selection, design and implementation of hardware and software

installations, confidentiality guarantee contracts during and after service

rendering, full service provider responsibility for damage and repair after

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completion of service delivery; c) Requiring Islamic banking to make optimal

security in the use of information technology, such as restricted server rooms

that have direct or indirect access; as well as certain workspaces or operational

controls that use information technology, access must be limited; for computer

use in general, it must be periodically required to change the password and must

be kept confidential by the operator concerned; d) Sharia banking should also

be required to conduct periodic reviews of budget and expenditure items that are

vulnerable to fraud, especially those carried out by directors and company

organs and other key persons; and a review of transactions that have the potential

to contain conflicts of interest and fraud; e) Regulators should also require

Islamic banking to collaborate with the Financial Transaction Reports and

Analysis Center or PPATK; and requires shareholders, directors,

commissioners, sharia supervisors, and other key management to submit the

relevant account numbers and families to PPATK; and request PPATK to report

periodically to the regulator and the bank concerned regarding the results of its

work.

3. Repressive Steps

This step generally consists of two types, namely: a) Handling internally on the

basis of the employee and bank relations concerned; or b) Handling is handed

over to the authorities, in addition to not reducing the internal handling

obligations of the bank concerned. In these two models of handling repressive

measures, regulators are still required to play a strict role in determining internal

authority limits and limits that a case must be submitted to the authorities

without reducing the obligation of banks to act internally. Why are regulators

still needed? This is for uniformity in the regulation of repressive actions or

actions of banks which clearly stipulates the rules for banks are determined by

the regulator. or in the language stated by the KPK before that is effective and

integrated.

5 Conclusions

From the results of research and data analysis, it can be concluded that: first, from a

positive legal perspective corporate governance regulations for Islamic banking issued

by Bank Indonesia, have not yet met the legal juridical standards for the preparation of

laws and regulations, because they do not have a philosophical basis there are

weaknesses in the legal basis less appropriate sociological foundation for operational

practices in the community. Second, from the standpoint of Islamic teachings and

values corporate governance regulations for Islamic banking, have not shown

conformity with Islamic teachings and values optimally. Third, research has found that

there are provisions that contain fraud and several provisions that have the potential to

cause fraud. In other words, it was found that the corporate governance regulations for

Islamic banking that were made philosophically by Bank Indonesia were not yet based

on juridical norms and Islamic teachings; legally there are some things that are not in

accordance with positive law and Islamic law, besides there are rules that are fraud and

potential fraud; sociologically there are irrational and inaccurate weaknesses in the

operational practices of Islamic banking. The regulation needs to be refined to turn into

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a Sharia Corporate Governance that is in accordance with positive law, the Koran and

Hadith, and fatwas that are indeed required by Islamic banking. In other words,

scientific corporate governance regulations for existing Islamic banking. The steps to

improve and refine Bank Indonesia's rules to become Sharia corporate governance will

show: the better and Islamic the regulations of corporate governance the more narrow

the opportunities for illicit acts and fraud in Islamic banking.

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Short biographical note about the contributors at the end of the article:

Siti Inayatul Faizah is a lecturer associated in Islamic economic and business, Airlangga

University, Indonesia. Her research area interest is on Political Economics, entrepreneurship,

financial reporting, Islamic economic and business.

ORCID ID: https://orcid.org/0000-0003-4092-1069

Dian Filianti is a lecturer associated in Islamic economic department, Airlangga University,

Indonesia. Her research area interest is on political economics, management, accounting,

developing of Islamic economic and business.

Irham Zaki serves as a lecturer associated in Islamic economic department, Airlangga University,

Indonesia. His area of research interest and focus is Islamic finance, ethic, regulation, Islamic

Economic, Islamic entrepreneurship and Business.

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