Indonesia's top Islamic body yesterday issued an edict calling on the country's Muslims to use only Islamic financial products and abandon standard banks, insurance companies and investments in the stock market.
The Koran forbids Muslims from paying or receiving interest. But since the 1970s an increasing number of financial institutions have begun catering to Muslims, with international banks such as Citigroup, HSBC and Standard Chartered offering specific banking products.
Indonesia is seen as an important market for such services because it is the world's biggest Muslim nation. But while the Islamic finance sector has grown significantly, it has yet to make a real dent in the banking sector as a whole.
According to central bank figures, the assets held by Islamic banks in Indonesia grew from Rp1,790bn ($211m) - or 0.2 per cent of total assets - in 2000 to Rp6,500bn - 0.5 per cent of total assets - in October 2003. That compares with a total market for Islamic finance worldwide estimated by experts at more than $200bn.
The fatwa, issued by the Indonesian Ulamas Council at its national convention in Jakarta yesterday, declares the receiving of interest from any financial institution "forbidden", though it is conditional on the availability of an Islamic alternative.
"Dealing with a financial institution which uses an interest rate system in a region which already has shariah [Islamic law] financial institutions is not allowed," the Ulamas said.
"But in a region which doesn't have a shariah financial institution, the use of conventional financial institutions, based on emergency principles, is still allowed."
One of the most popular products Islamic banks offer allows the bank to buy an asset such as a house and sell it back to the customer in instalments that include a fixed and agreed profit for the bank.
Some Muslims argue that Islamic finance offers only a dodge around an antiquated and impractical rule.
Nahdlatul Ulama, Indonesia's biggest moderate Islamic group with more than 40m members, does not object to its members using banks that pay or charge interest.
There are also questions over just what constitutes a Koran-friendly financial product.
A Pakistani bank recently launched the country's first Islamic mutual fund, prompting debate on whether its investments in companies that deal with standard commercial banks are allowed.