RECENT DEVELOPMENT OF ISLAMIC BANKING IN INDONESIA By: Dr. Mulya E. Siregar Directorate of Islamic Banking - Bank Indonesia Islamic Finance News Roadshow Jakarta, 22nd March 2011

Presentation Agenda Islamic Banking System in Indonesia. Government Commitment. Islamic Banking Main Indicators. Islamic Banking Performance. Engine of Growth of Islamic Banking. Blue Print of Islamic Banking Development. Islamic Banking Expansion. IB Campaign Stages 2011-2013. Branding: Beyond Banking.

Islamic Banking System in Indonesia Regulatory Based : Central Bank Act No. 23 of 1999 (amended by Act No. 3 of 2004). Banking Act No 7 of 1992 (amended by Act No. 10 of 1998). Deposit Insurance Act No. 24 of 2004 Islamic Banking Act No. 21 of 2008. Islamic Sovereign Bond (Sukuk) Act No. 19 of 2008. Bank Types: Conventional Banks: Commercial Banks and Rural Banks. Islamic Banks: Islamic Commercial Banks (BUS), Islamic Banking Units (UUS)and Islamic Rural Banks (BPRS).

Islamic Banking System in Indonesia International Standard adoption (with national condition adjustment): IFSB (CAR, GCG, Risk Management, Transparency and Market Discipline, Shariah Governance). AAOIFI (Islamic Banking Accounting Standard, Islamic Banking Accounting Guidance). Islamic Financial Markets Infrastructures: Islamic Interbank Money Market (PUAS). Bank Indonesia Sharia Certificate (SBIS). Islamic Government Securities (SBSN). Deposit Insurance Insitution: Indonesia Deposit Insurance Corporation (LPS). Deposits in Islamic banks are guaranteed by LPS (max IDR 2 billion).

Institutions Related to Islamic Banking Activities National Sharia Board Sharia Economic Community (MES) Indonesian Accounting Association Islamic Banking Activities Indonesian Expert in Islamic Economics (IAEI) Indonesian Sharia Banks Association (ASBISINDO) Sharia National Arbitrage Institutions (BASYARNAS)

Government Commitment “Indonesia has opportunity to be a focal point of Islamic finance within the region even in the world, by which we could have a wider opportunity for tapping source of financing from the global Islamic finance to support national development program. In line with this, I request all related ministers and other national institutions to perform concerted efforts to develop national Islamic finance industry and put up the development of Islamic finance industry as a national agenda”. (President Susilo Bambang Yudoyono, at the opening speech of the Indonesian Islamic Economic Expo, 16 January 2008) Islamic Banking should stand in the first line because it does not affected by the global economic crisis. (President Susilo Bambang Yudoyono, at the opening speech of the World Islamic Economic Forum (WIEF), 2 March 2009)

Islamic Banking Main Indicators Islamic Comm Banks Islamic Banking Units Islamic Rural Banks Number of Offices Total Assets Total Deposits Total Financing Deposit Accounts 2 3 81 96 2.7 T 1.8 T 2.0 T 328.115 5 27 131 951 51.3 T 36.8 T 38.2 T 3.766.067 6 25 139 1.223 68.2 T 52.27 T 46.8 T 4.537.565 11 23 150 1.763 100.8 T 76.0 T 68.18 T 6.053.658 2001 2008 2009 2010

Islamic Banking Performance   2009 2010 Islamic Banks BUS 6 11 UUS 25 23 BPRS 139 150 BUS & UUS Offices 1.223 1.763 Offices Growth 19,5% 44,5% Office Channeling of Islamic Bank (2005-2007) Marketing & Promotion Grand Strategy (2008) Islamic Bond (Sukuk) Act (2008) Islamic Banking Act (2008) Tax Neutrality Act (2009) The growth of Islamic banks is higher than conventional banks!!

Islamic Banking Performance Consistent Growth in the Market Share of Islamic Banking Increasing Trend of Financing, particularly the Equity based Financing.

Islamic Banking Performance Active involvement of Islamic Banks in SBIS Moderate Activities in Islamic Money Market (PUAS)

Sukuk Market Various Issuances of Tradable Fixed Rate Government Sukuks (SBSN) Various Issuances of Non Tradable Government Sukuks (SBSN)

Engine of Growth Moslem Population: 237 million people (National Survey 2010). 88% are Moslem. Economic Performance: GDP = Rp6,422 trillion or USD700 billion (the 18th highest GDP in the world – world bank report 2009). A single digit inflation in the last 2 years. A stable Rp exchange rate in Rp9,000-Rp10,000/USD. Islamic Banking Performance: A high growth of Islamic banking industry: 37.9% (the last 5 Y) A high Financing to Deposit Ratio (FDR): 89.67% (Dec 2010). A low Non Performing Financing (FDR): 3.02 (Dec 2010). Investment based financing is 34% while trade based financing is only 55% of the total financing. Islamic banking offices are available in all provinces.

Blueprint of Islamic Banking Development Development Strategies Current Strategies Proposed Strategies Equal regulatory framework with fair treatment - Providing facilities and incentives - No incentives 2010 – 2015

Policy Directions Human capital investment; Supporting the development of human resources which have capability, competency and good moral. Expansive and prudent; Preparing the conducive regulatory which supports the development and complies with Sharia and prudential regulations and supervisions. Innovative, educative and comprehensive; Giving comprehensive banking services to all people with product development and proper public education; Internationally qualified and domestic oriented; Focusing on obtaining the domestic markets with the international quality in operation; Beneficial Investors; Supporting economic development by inviting both international and domestic investors while still maintaining equality principles.

ISLAMIC BANKING EXPANSION! Government commitment: The development of Islamic finance industry as a national agenda”. Proposed Development Strategies: Providing facilities and incentives Regulatory Framework : Central Bank Act of 2004 Banking Act of 1998 Islamic Banking Act of 2008 Sukuk Act of 2008 Deposit Insurance Act of 2004 ISLAMIC BANKING EXPANSION! Conducive Environment International Standard adoption (with national condition adjustment): IFSB and AAOIFI Lenient Regulation iB Campaign: Expansion Target 2010 Agressive Promotion & Dev. under iB Campaign Program Tax neutrality: Amended by Tax Law no. 42 of 2009. Future Current

Attraction Strategy for Expansion To attract international investors and players in the Islamic Banking industry, Bank Indonesia has commitment to create: Conducive Environment Lenient Regulation Agressive Promotion & Dev. under iB Campign Program EXPANSION! Creating a conducive environment to attract new players, promoting strategic alliance with other institutions to improve reach and outreach of Islamic Banking services, both domestic and international. Simplifying licensing procedures for a new banks while maintaining prudent measures and systemic stability concern. Maintaining sustainable growth of supply (bank) and demand (i.e. promoting and dissemination of Islamic mode of finance to address needs of business/ community).

Promotion & Dev. under iB Campign Program Priority Agenda Bringing Islamic banking & finance development as a national agenda to support a strong and sound economic system. Strengthening Human Resource on Islamic banking industry and its supporting institutions. Need tax Incentive for Islamic Banking Industry Conducive Environment Lenient Regulation Regulating Islamic banking products which fit with prudential aspects, customer needs and sharia principles. Strengthening Islamic banking structure and developing efficient services delivery channels. Research based regulation and risk based supervision implementation. Agressive Promotion & Dev. under iB Campign Program Intensify public awareness and education – incl. familiarization program on Islamic banking. Developing high competitive advantage of Islamic banking products

The iB Campaign Stages: 2011-20013 2012 2013 Pairing and Distinctiveness Showing that the products, facilities and services of Islamic banks are complete and modern. Product distinctive: gold pownshop, IMBT KPR iB, etc. Universalities, inclusive, Logo iB Variety and Character Beyond banking: Varieties of products and financing schemes. Beyond banking: care of people, planet, ethical as Brand Character Beyond Banking: Varieties of products and financing schemes.

Branding: Beyond Banking POSITIONING DIFFERENTIATION Content: Varieties in Products and Schemes Context: Transparant to be equal to both parties. People: Competent in Finance & Ethical. Technology: Up dated IT system & user friendly Facility: Expert in investment, finance and sharia “Banking which benefits both parties” BRAND LEBIH DARI SEKEDAR BANK (BEYOND BANKING)

Thank You © 2010, Directorate of Islamic Banking, Bank Indonesia MH Thamrin Street #. 2 Building ’A’ 21-22 Floor, Jakarta 10110 Phone : (021) 3817513/7774 Fax. (021) 350 1989 / 1990 E-mail : dbps@bi.go.id