Islamic Financial Services Industry Development: Framework and Future Direction Indonesia Experience Dr. Muliaman D. Hadad Chairman of Board of Commissioner Indonesia Financial Service Authority The IDB Group 9Th Global Forum on Islamic Finance Jeddah, Saudi Arabia - 24 June 2014

Content Global Islamic Finance and Indonesia’s Position 1 Global Islamic Finance and Indonesia’s Position 2 Indonesia’s Islamic Finance Sector Recent Development 3 Policy Direction

Islamic Banking Global Growth and Indonesia Position There’s decreasing trend of Islamic banking (iB) global growth (asset in 2012 < 24%) while in Indonesian iB in 2012 reach ± 34% (yoy) Indonesian iB growth of financing in 2012 (± 44%, yoy) Indonesia iB growth of deposits in 2012 (± 28%, yoy) However in Dec 2013, there’s decreasing in Indonesia’s iB’s growth only reach ±24% (still higher than conventional bank & global Islamic bank)  rebalancing .. Islamic Banking Global Average Growth Trends Financing Growth Trend by Country Deposit Growth Trend by Country Source: IFSB Islamic Financial Services Industry Stability Report, 2014

Indonesia’s Islamic Finance Sector Recent Development

Milestone of Indonesia’s Islamic Finance Islamic Bank Takaful Islamic Capital Market 1992 1997 2000 2004 2006 2008 2010 2012 2013 2014 1st Syariah Mutual Fund Danareksa Syariah Berimbang 1st Bank Syariah Bank Muamalat 1st Syariah Insurance Takaful Keluarga 1st Islamic Banking Accounting Standard (2002) Syariah Office Channeling Syariah List of Share (DES) Multifinance 1st Reinsurance Syariah ReINDO Syariah Regulation Syariah Capital Matket ETF Syariah Syariah Premier ETF JII 1st Finance Syariah Amanah Finance 1st Corporate Sukuk Mudharabah Indosat Jakarta Islamic Index (JII) 1994 1999 2002 2005 2007 2009 2011 Regulation related to Down Payment of Sharia Finance Islamic banking act Act No.21 year 2008 Regulation related to Insurance & Reinsurance Syariah Act of Sovereign Sukuk (SBSN) Act No.19 year 2008 Indonesia Sharia Share Index (ISSI) Sharia Online Trading IPOT Syariah 1st Sovereign Sukuk IFR0001 & IFR0002 Syariah Interbank Money Market Shariah Bank Reserve Requirement Syariah Delivery Channel Sharia Bank XBRL report Syariah LOLR (2003) Islamic Bank Blue Print (2002) Act No.10 year 1998/Banking Act Islamic business unit (UUS) Cover by Deposit Insurance (LPS) Masterplan Capital Market & NBFI (2005) Act No.3 year 2006 Religius Court Act No.42 year 2009 VAT (neutrality) Other

Development of Islamic Banking (BUS+UUS) Indicator 2009 2010 2011 2012 2013 Islamic Commercial Bank (BUS) 6 11 Islamic Business Division (UUS) 25 23 24 Islamic Rural Bank (BPRS) 138 150 155 158 163 Offices 998 1,477 1,737 2,262 2,588 Total Asset (IDR Trillion) 66.1 97.2 145.47 195.02 242.28 Growth of Asset (yoy) 33% 48% 49% 34% 24% Market Share 2.61% 3.24% 3.98% 4,58% 4.89% Deposit 52.3 76.04 115.41 147.51 183.53 Financing 46.9 68.18 102.66 184.12 CAR 10.77% 16.25% 16.63% 14.13% 14.44% FDR 89.7% 89.67% 88.94% 100.0% 100.32% NPF (gross) 4.01% 3.02% 2.52% 2.22% 2.62% ROA 1.48% 1.67% 1.79% 2.14% 2.00% ROE 25.81% 17.58% 15.73% 24.06% 17.24% ± 98% asset of Indonesian Islamic banking dominated by Islamic Commercial Bank (BUS) and Islamic business unit of Conventional Bank (UUS)

Islamic (syariah) Capital Market Development Islamic Mutual Fund (reksa dana) Corporate Sukuk Sovereign Sukuk (SBSN)

Islamic (Syariah) Non Bank Financial Industries (IKNB) Development of Entity and Asset of Islamic IKNB Asuransi = Insurance Pembiayaan = Multifinance companies Development of Islamic Multifinance and Venture Capital Growth of Asset and Receivable (Piutang) of Islamic Multifinance (Pembiayaan) 2009 2010 2011 2012 2013 Full Pledge Finance Sharia 2 Islamic Business Unit Finance Companies 5 9 12 32 42 Full pledge Venture Capital - 4 Total 7 11 14 34 48

Policy Direction

Indonesia’s Islamic Finance Architecture : Future Direction Urgency of Integrated and comprehensive Islamic finance Masterplan : Indonesia FSA ’s mandate & authority to regulate and supervise Islamic finance industry in an integrated approach The need of comprehensive framework of Islamic finance industry’s regulation and supporting infrastructure , which is better if it’s integrated in national policy agenda Integrated supervision need harmonization of each masterplan/blue print Reference : i.e. IDB-IFSB 10 yrs Masterplan of IFSI : Enablement : i.e. Policy Stakeholders Forum, IT support Performance : i.e. efficient & competitive Reach : i.e. broaden acces and financial inclusive Challenge : External  i.e. financial sector integration in ASEAN, global arrangement Internal  i.e. priority economic sector financing, limited domestic support capital Capital Market & Non Bank FI Masterplan 5 years (MoF) Islamic banking blue print 10 years (BI) Indonesia’s Islamic Finance Architecture (cooperation with IDB and Govt. of Indonesia) Bigger role in supporting economic development particularly for priority economic sector Integrated development  i.e. forum of policy authority in making policy and implementation More efficient and competitive including strengthened capital and synergi Broaden access and Financial inclusion Impact to national plan of medium term development

Maintaining Indonesia’s Islamic Bank Growth Steps Forward Muslim population Innovation of genuine sharia Products and services : support the people need ,more broaden customer base and more productive activities Strategic alliance and strong infrastructure support : i.e. Government support, Optimization synergy with iB’s holding/Grup companies. More professionals & qualified HRD Intensified Education and Promotion This strategy will attract more broaden customers to use services from islamic banks, and in the end this will have an impact to strong growth

THE END THANK YOU TERIMA KASIH