Maqasid Mastery: Unveiling Islamic Banks’ Performance in Indonesia

Maqasid Shariah Performance Index

Maqasid Shariah is Allah SWT greatest purpose in creating Islamic law (Antonio et al., 2020). In Islamic economics, Maqasid Shariah can be interpreted by understanding Shariah values (Abdul Rasool et al., 2020; Hasan & Siti Nabiha, 2012). Shariah is Allah's legal teachings to His followers (Mokhtar, 2016). Scholars hold varying perspectives regarding the categorization of Shariah goals. In the realm of Islamic economics, it is commonly acknowledged that Islamic law encompasses three fundamental objectives in education, equitable society, and welfare and public interest (Zahrah, 1997). By splitting Maqasid Shariah into four purposes and eight components, Abdul Majid Najjar's philosophy is larger and more effective.

The Maqasid Shariah Performance Index (MSPI) serves as a comprehensive framework employed for evaluating Islamic financial institutions, emphasizing Islamic banks. Its primary purpose is to assess the extent to which these institutions adhere to the objectives of Shariah or Maqasid Shariah. The MSPI has been gaining attention among scholars, regulators, and practitioners in recent years, as it provides a comprehensive approach to evaluating the Islamic Banks performance. The earliest framework on the MSPI was by Omar Mohammed et al. (2008), who proposed a comprehensive framework for evaluating the efficiency of Islamic banks based on Maqasid Shariah.

Asutay and Harningtyas (2015) developed an analytical framework for evaluating the Islamic Banks efficiency based on the MSPI. The framework included four dimensions, namely Shariah compliance, social responsibility, financial performance, and innovation, and incorporated a set of indicators for each dimension. Aliyu and Hassan (2020) provided a conceptual framework for assessing Islamic bank performance using the MSPI. The framework included three dimensions, namely Shariah compliance, social responsibility, and financial performance, and incorporated a set of indicators for each dimension. Tarique et al. (2021) developed a mechanism to evaluate Islamic banks' financial and social and ethical performance. The method provides a more holistic picture of Islamic bank by combining the frameworks of Zahrah and Ghazali and adding additional maslahah variables, such as protection of faith, life, intellect, posterity, prosperity, and complements and adornment. Including these variables highlights the importance of Islamic values and principles in the operations of Islamic banks and emphasizes the need for them to fulfil their obligations to society beyond financial performance. The mechanism also underscores the importance of integrating these principles into Islamic banks' governance structures to ensure that they are accountable and transparent in their operations.

The Objectives of Islamic Banks Based on Maqasid Shariah

Al-Ghazali, a famous Muslim thinker, classified the Maqasid into five categories: religion, human self, intellect, posterity, and money. Maqasid Shariah's five principles should guide an Islamic financial institution's management and governance (Mohammed et al., 2015; Shinkafi & Ali, 2017). Hudaefi and Noordin (2019) suggest measuring Islamic banks differently for two reasons. First, conventional measurements ignore Shariah and only measure finances. Second, Islamic banks' financial and religious characteristics may have been appropriately assessed. Tarique et al. (2021) stated that Maqasid Shariah uses Zahrah's structures or Ghazali's five objectives. Tarique et al. (2021) found there are no studies on complements and embellishments. Tarique et al. (2021) used Zahrah and Ghazali's frameworks and maslahah criteria to evaluate Islamic banks' performance. This study suggests combining these two models to better depict Islamic banks' Maqasid-based performance. This Tarique et al. (2021) paradigm emphasizes education, justice, Maslahah, and its sub-dimensions. The framework also examined essentials through its five protections—religion, life, intelligence, progeny, and riches.

Verification of Performance Measures

The Islamic Banks performance measure developed from Shariah framework as seen in Table 1, measure and evaluated the performance of 14 Islamic banks in Indonesia in ten years of study from 2011 – 2020.

Source: Tarique et al. (2021)

Evaluation of the Maqasid Shariah Performance Index

The particular goals of Islamic banks may thus be assessed statistically in the following manner:

The PI (O1) represents the first.

$\begin{array}{c}\mathrm{P}\mathrm{I}\left(\mathrm{O}1\right)=W_1^1\times {E_1}^1\times {R_1}^1+{W_1}^1\mathrm{x}{E_1}^2\times {R_1}^2+{W_1}^1\mathrm{x}{E_1}^3\times {R_1}^3+{W_1}^1\mathrm{x}{E_1}^4\mathrm{x}\\ R_1^4+W_1^1\times E_1^5\times {R_1}^5\\ \text{OR}{W}_1^1\left(E_1^1\mathrm{x}{R}_1^1+E_1^2\mathrm{x}{R}_1^2+E_1^3\times R_1^3+E_1^4\times R_1^4+E_1^5\times R_1^5\right)\\ \end{array}$(1)

Where,

(O1): The first shariah objectives education

₁ ¹ : amount of weight given to the 1^st Objective

₁ ¹ : represents the amount of weight given to the first element of the 1^st Objective

₁ ¹: represents the performance ratio assessments related to the first element of the 1^st objectives

Similar procedure is adopted for elements two until fifth.

Furthermore, $\mathrm{P}\mathrm{I}\left(\mathrm{O}\mathrm{1}\right)=\mathrm{P}\mathrm{I}\mathrm{11}+\mathrm{P}\mathrm{I}\mathrm{21}+\mathrm{P}\mathrm{I}\mathrm{31}+\mathrm{P}\mathrm{I}\mathrm{41}+\mathrm{P}\mathrm{I}\mathrm{51}$

Where,

$\begin{array}{c}\text{PI11}={W_1}^1\times {E_1}^1\times {R_1}^1\\ \text{PI21}={W_1}^1\times {E_1}^2\times {R_1}^2\\ \text{PI31}={W_1}^1\times {E_1}^3\times {R_1}^3\\ \text{PI41}={W_1}^1\times {E_1}^4\times {R_1}^4\\ \text{PI51}={W_1}^1\times {E_1}^5\times {R_1}^5\end{array}$(2)

Objective 2, PI (O2), represents the second Shariah objective of Justice. PI (O2) employs a methodology similar to objective 1 in addressing the components of the second Shariah objective. The same methodology is employed for attaining objective 3, PI (O3), of the components of the third shariah objective of Maslahah.

Hence, the Maqasid Shariah Performance Index (MSPI) of every bank encompasses a comprehensive set of performance indicators that align with the three fundamental objectives of Shariah. Hence, the Maqasid Shariah Performance Index (MSPI) can be defined as the aggregate of its Shariah performance indicators of Objective 1, Objective 2, and Objective 3.

MSPI = PI(O1) + O2 + O3 (3)

Performance Ratios

Islamic bank performance evaluation demands a thorough understanding of Shariah's goals and principles. The Maqasid Shariah Performance Index evaluates Islamic banks based on Shariah objectives. This index helps Islamic banks comply with Shariah by identifying and addressing performance discrepancies. Table 2 indicates the Maqasid Shariah Performance Index and its ranking.

Ranking of Maqasid Shariah Performance Index

The ranking of Bank Panin Syariah, Bank Muamalat, Bank Aceh Syariah, BNI Syariah, and Bank Mega Syariah highly in the Shariah Performance Index is reflects how committed they are to adhering to the tenets of Shariah in every facet of their undertakings. These banks have demonstrated their ability to align their business activities with the Shariah by prioritizing social responsibility and ethical practices while delivering competitive financial products and services. Islamic banks that score high on the Shariah Performance Index support the advancement of the Islamic finance sector in Indonesia and play a vital role in promoting financial inclusion, sustainable development, and social welfare. They serve as role models for other Islamic banks to follow, encouraging them to adopt best practices and adhere to the principles of Shariah in their operations.