The Islamicity of Sharia Rural Banks in Indonesia

This paper is aimed to evaluate the Islamic Performance of Sharia Rural Banks (SRBs) in Indonesia by using the Islamicity Performance Index (IPI). The data are taken from SRBs from 2014 to 2016 (those include PF and Profit), as well as the liquidation of SRBs in those years. The sample is taken using a purposive sampling technique. Then, there are 82 SRBs samples and observing 246 pcs data. The data are obtained by evaluating their financial reports through the websites of Central Bank of Indonesia or Financial Services Authority (Otoritas Jasa Keuangan-OJK) as well as the SRBs websites. The data are analyzed by non-statistic quantitative and descriptive qualitative techniques. The results are gained from each indicator of their average Islamic Performance Index. The result shows that the Islamic Performance Index of Sharia Rural Banks is unsatisfied. Henceforth, this study has several limitations that may be observed in the next research. Moreover, this research excludes the welfare indicators of the directoremployee and AAOIFI index.


INTRODUCTION
According to the statistical data of quantity, assets, the return of an asset, and thirdparty funds, the development of Sharia Rural Banks (SRBs) in Indonesia is quite promising.
However, the performances of SRBs' profit and Non-Performing Financing (NPF) aspects seem tough. As the result, SRB profits decline quite significantly. The declining profits from 2016 to 2017 are affected by NPF, which easily inclined around 2.13% compared to the previous year. Indonesia has set up the NPF safety limit at 5% (Bank Indonesia, 2011). It means that if the NPF of SRBs meets twice as its limit, the SRB management system should be fixed. Maulana (Kompasiana, May 24, 2017) states that SRBs are seen insolvency. Eight conventional and Sharia Rural Banks are liquidated by the Financial Services Authority (OJK) from 2015 to April 2016. Two of them are SRB Hidayah Jakarta and SRB Al Hidayah Pasuruan, East Java.
The reason for the liquidation is; first, there is a fraud, and the second is mismanagement.
Based on the above table, if we examine the funding aspect (third-party funds), we can conclude that people's trust in SRBs is on the increase. Compare to the last two years, people's trust in the maintenance performance of SRBs is to descend. It shows from the fact that NPF increases while SRBs are liquidated. Keeping people's trust shall be the main priority of Sharia Rural Banks. Furthermore, the addition of the word "sharia" becomes Sharia Rural Banks, shall perform more in Islamic aspects. Then how to measure the Islamic Performance of these Rural Banks? The question would be answered by analyzing 167 SRBs in Indonesia through Islamicity Performance Index (IPI) analysis. Islamicity Performance Index is initiated by Hameed and Alrazi (2004). Their main idea of Islamicity is how to evaluate sharia bank performance, not only in terms of financial aspects but also in the principles of justice, lawfulness, and purification. There are seven ratios of Islamicity Performance Index (IPI), namely profit sharing ratio, zakat performance ratio, equitable distribution ratio, directoremployee welfare ratio, Islamic investment vs. non-Islamic investment ratio, Islamic income vs.
This research only elaborates five ratios out of seven ratios, which left the directoremployee welfare ratio and AAOIFI Index. Hence, the director-employee welfare ratio is formulated by the total welfare of the board directors compared to the income earned by the employees. This ratio excludes from this research due to the limited access to the directors' salary.

Stakeholder Theory and Sharia Enterprise Theory
According to Guthrie, Petty, and Ricceri (2006), the financial report is the most efficient way for an organization to communicate with stakeholder groups, which have an interest in controlling specific organizational strategic aspects (referring to the stakeholder theory). The primary purpose of the stakeholder theory is that to corporate accountability, and it does not limit its pure economic or financial performance. This means that organizations should voluntarily disclose information about their intellectual, social, and environmental achievements to perceive stakeholder expectations.
However, compare to Sharia Enterprise Theory, Islamic performance reports, which include in Islamic Performance Index, highlight the trust to both stakeholders and God, the Supreme Giver of Mandate. The sharia enterprise theory is a corporate theory that is internalized with the value of Godhead. The most important axiom of this theory is God as the Creator and the Owner of all existing resources in the world. The human being is only temporarily in this world, so that the company ought to use resources as God's commands (Meutia, 2010).
The sharia enterprise theory has an idea that the distribution of wealth or other valuable goods not only directly applies to the evolved participants or those who contribute to company operations, such as shareholders, creditors, employees, and the government; but also other parties that are not directly related to the business conducted by the company, or those who do not contribute financially or skillfully. The scope of accounting of sharia enterprise theory is not limited to events that are reciprocal between the direct-involved parties and other indirect-uninvolved parties. This concept certainly brings the essential changes in the terminology of the enterprise theory, which lays down its premise to distribute wealth based on the contributions of the participants, i.e., participants who contribute financially or skillfully .

Islamic Performance Index
Islamic Performance Index (IPI) is a method used to describe the operational performance of Sharia Banks (Islamicity) and to find out whether the performance has met the set principles of sharia or not (Hameed & Alrazi, 2004). There are seven indicators of the Islamic Performance Index which describe the performance of sharia banks. The first is the Profit-Sharing Ratio (PSR). The typical characteristic of the Sharia Bank, which is differentiated from the conventional banks, is the principle of profit/loss sharing. Sharia Banks' have the principle of mudharabah and musharakah schemes. Mudharabah and musharakah are two forms of products with sharing-based contracts that are widely mentioned in fiqh (Islamic Jurisprudence) literature. These equity-based products are unique and superior to conventional banking for ethical and efficiency reasons. These products are considered to be the recent concept of Islamic banking based on the idea that Islam disallows riba, but allows trade arrangements along with the distribution of profits and losses (Febianto, 2017).
The second is the Zakat Performance Ratio (ZPR). The Sharia Bank performance, according to Hameed and Alrazi (2004), should be conducted more precisely based on the zakat payment. The Zakat Performance Ratio is the ratio of the financial performance of Islamic banks that measures how much zakat is issued by a bank and how the bank compares it to Net Assets (Aisjah & Hadianto, 2013). Assets of banks, which are commonly emphasized by conventional banks, must be based on their net assets rather than net profit. Therefore, when net assets are higher than the zakat payment, so it will be higher as well. Net assets are calculated from the total assets deducted by the total liabilities as denominators for this Zakat Performance Ratio. If generated ZPR value is small, it means that the charity is still low as compared to the total of net assets.
The third is the Equitable-Distribution Ratio (EDR). The primary purpose of Islamic accounting is to ensure the equitable distribution of all parties' income. In addition to profitsharing activities between banks and customers, income distribution to various stakeholders is also an important issue . EDR indicator is used to determine the income distribution of sharia banks to their stakeholders. In this case, the stakeholders are employees, investors, communities, and corporates. The income has been deducted by zakat and tax . Fourth, the 128 Imanda Firmantyas Putri Pertiwi, Indriyana Puspitosari dan Fitri Laela Wijayati, The Islamicity of Sharia...
Director-Employee Welfare Ratio (DER). The director-employee welfare ratio indicates the total amount of money which is spent on the directors' salaries and facilities compared to the total amount of money on the employees' welfare. This is due to the director's remuneration issues, revealing that the director is paid more than what he did, while the employees are paid less than what they deserve . This ratio is used to compare the welfare earned by the board of directors to the employees (Hameed & Alrazi, 2004) The fifth is the Islamic Investment vs. Non-Islamic Investment (INIv). The place to invest funds of Islamic banks is required only in the halal sector, and by considering the sources of revenues obtained from investments based on either wadiah, mudharabah-mutlaqah, or mudharabah-muqayyadah as well as government programs (Lutfiandari & Septiarini, 2016

Sharia Rural Banks (SRBs) in Indonesia
Islamic banking has a strategic role in improving the welfare of the community through the intermediation process of collecting and distributing funds as well as providing other financial services based on sharia principles. There are many forms of Islamic banking in This case becomes an interesting phenomenon to be investigated and evaluated.

METHOD Population and Sample
The

Data Analysis Techniques
The data in this research are analyzed by quantitative non-statistical and descriptive qualitative techniques. Non-statistical quantitative method is a method for analyzing data in the form of numbers without testing them statistically. The descriptive qualitative method is a method of analyzing data by providing explanations with words or sentences to explain the quantitative data to conclude (Sugiyono, 2008).
The results from each indicator of determining the Islamic performance index are the average of all Indonesian sharia rural banks. Subsequently, they are compared to find the trend from 2014 up to 2016. According to Aisjah and Hadianto (in Meilani, et al, 2014) to obtain the average value, the analysis should be done by the following steps :

RESULTS AND DISCUSSION
This research uses Indonesian SRBs samples from 2014 to 2016. By using purposive sampling techniques, the final samples are 82 SRBs. The observed data in this study are 82 x 3 years = 246 pcs of data. The selectional process is done based on the following criteria, as figured out in Table 3 below.

Profit-Sharing Ratio (PSR)
Profit-Sharing Ratio (PSR) is used to compare the profit between the financing profitsharing and the total financing. This action becomes a successful standard in practicing the profit-sharing principles, which are fundamental principles of sharia banking (Meilani et al., 2014). This ratio is urgent to be evaluated because of profit-share financing, as listed in musharakah and mudharabah agreement as to the typical characteristics of sharia banks and sharia rural banks, which differentiate from conventional banks. Profit share financing includes in the uncertain contract, i.e., financing agreement without fixed profits and depending on the business partner's conditions. So, the profit share funding portion increases from 2015 to 2016.

Zakat Performance Ratio (ZPR)
The Zakat Performance Ratio (ZPR) constitutes a ratio measuring the amount of zakat paid by SRBs when scaled by the net assets. This is, of course, inappropriate with tazkiyah (purification) principle, i.e., the higher net assets are gained, the more zakat should be paid. This phenomenon creates a further question of whether SRBs failed to pay their zakat for their business operations, or they merely ignore it as part of reporting the assets. This case would be examined in the next research.

Equitable Distribution Ratio (EDR)
The Equitable Distribution Ratio constitutes a ratio to determine the percentage of the distributed revenue to various stakeholders; in this case, the expenses for qardh (loan) and donation, employees, and others. Each element of the ratio is calculated by determining the distributed amount (to society, employees, investors, and company), and then divided by total income and reduced by zakat and tax payment. The results of the analysis on SRB financial reports indicate that all 82 SRBs do not assert the amount of income in which they have to distribute to the stakeholders in the forms of qardh (loan) and donation in the period 2014 to 2016. This means that SRBs do not optimally pay attention to several social aspects because the rate of distributed income of qardh and donation, which reflected SRB social responsibility, is still zero. Based on the research, it is noted that the amount of income distributed for SRB employees is quite small (less than 1%). Furthermore, the distribution of income for the employees is rising every year. At least SRBs still provide information on the distribution of income to the employees on their financial reports, unlike EDR (qardh and donation), which are unreported. This finding notices that SRB's distribution of income for its employees is low, but it is hoped that the rate would grow. This is based on the fact that the distributed income interestingly increases from 2014 to 2016.  the most significant attention of their distributed income is their net profits.

Islamic vs. Non-Islamic Investment (INIv)
Islamic Investment vs. non-Islamic Investment ratio represents the lawfulness aspect and the success of the basic SRBs principle, i.e., free of riba (Meilani, et al., 2014). The ratio could be measured by comparing the lawful investment to the total investment carried out by SRBs (lawful and non-lawful included).

Islamic vs. Non-Islamic Income (INIc).
Islamic vs. Non-Islamic Income (INIc) ratio is a comparison between the lawful income and the overall income earned by SRBs (lawful and non-lawful).

Islamicity Performance Index
Based on the above SRB performance measurement along with the subjective assessments, and Islamic Performance Index, the performance of Indonesian's SRBs are unsatisfying. The Islamic Performance Index could be seen in the table below: Moreover, further interviews with several SRBs are included as research subjects, it was noted that they actually had implemented several requirements of Islamic Performance Index, but they have not declared and reported as well.

LIMITATIONS AND SUGGESTIONS
The implementation of the performance assessment based on the Islamic Performance Index is expected to be applied by SRBs to analyze their performances. Therefore, SRBs are hopefully concerned about improving their better performance. Out of five ratios that are included in the Islamic Performance Index, some of them get 0 (zero points). This is because SRBs fail to provide the information regarding the elements in which used to measure the ratios, namely: loan and donation, dividend, lawful vs. non-lawful investments, and lawful vs. Nonlawful income.
These data show the fact of unsatisfied results of the assessment on Equitable Distribution Ratio, Islamic vs. Non-Islamic Investment, and Islamic vs. Non-Islamic Income.
Regarding the importance of complying with sharia principles, SRB is expected to improve its Islamic performance reports. The zakat performance ratio, as reflected by the zakat performance index for SRBs, is considered low. This point needs to be improved as well. The number of zakat expenses should be higher than before so that it can increase the community's welfare.
Then, further interviews with several SRBs are included as research subjects, it was noted that they actually had implemented several requirements of Islamic Performance Index, but they have not declared and reported as well. It is suggested that SRBs may improve their reports' activities in detail, especially in dealing with financial or non-financial transactions.
Therefore, analyzing the performance of shariah financial institutions, further research is expected to expand the scope of the study, not only to focus on SRBs but also to examine other forms of shariah financial institutions like Baitul Maal wat Tamwil (BMT). Then, to analyze SRB is better to apply some methods than only using Islamicity Index.