1. Seoul, 26 February 2014 Jakarta, 8 April 2014 The Role of Authorities in Promoting Financial Inclusion through Islamic Finance Mulya E. Siregar Deputy Commissioner of Banking Supervision Indonesian Financial Services Authority Islamic Financial Services Board Seminar on Financial Inclusion Jakarta, 31 March 2015 Ahmad Buchori Seminar on Islamic Microfinance for Poverty Alleviation in OIC Member Countries Bogor, 14-15 May 2016

2. Agenda: #1#1 #1#1 Financial Inclusion: a Global Agenda #3#3 #3#3 Enhancing ‘Inclusion’ through Islamic Finance #2#2 #2#2 Financial Inclusion as National Agenda: Indonesian case

3. Financial Inclusion: a Global Agenda Financial inclusion has attracted significant concern among policy makers and various stakeholders as recession spread in the aftermath of 2008 financial crisis, which increase economic inequality. The level of financial inclusion varies between regions, but generally a universal financial inclusion means bringing the 2.5 billion people currently excluded, into formal financial system, and filling the USD2 trillion financing gap to SMEs in emerging and developing economies. The poor, women, youth, and rural residents tend to face greater barriers to access financial services. As for firms, younger and smaller firms are likely to confront more binding constraints to finance (35% of SMEs in developing economies perceived access to finance as major obstacle to their operations) In 2010, the G20 established Global Partnership for Financial Inclusion and has since use it as platform to extend leadership in making national and collective commitments for financial inclusion. 3

4. G20: 10 Action Areas 1.Accelerate & replicate successful policy reforms that facilitate the expansion of financial services to SMEs 2.Establish the SME Finance Forum as global center for good practice knowledge exchange & promotion 3.Improve financial access through the SME Finance Compact, SME Finance initiative & key development achievements 4.Mainstream financial inclusion in the work of the standard setting bodies and other relevant global bodies & increase understanding of the interdependence of financial inclusion, stability, integrity & consumer protection 5.Encourage effective & consistent incorporation of financial inclusion in financial sector assessment 6.Improve the capacity of public authorities & other relevant stakeholders to develop & implement financial literacy & consumer protection measures 7.Promote consumer protection and financial education good practices for digitally delivered financial products & services 8.Help to analize & consider ways to address the MTO bank account closure issue 9.Reduce the cost of sending remittances 10.Expand opportunities for innovative technologies to grow responsible financial inclusion SMEs Finance Regulators/Standar d setters Financial literacy & consumer protection Market & payment systems 4

5. Agenda: #1#1 #1#1 Financial Inclusion: a Global Agenda #3#3 #3#3 Enhancing ‘Inclusion’ through Islamic Finance #2#2 #2#2 Financial Inclusion as National Agenda: Indonesian case

6. Access to financing Source : Improving Access to Financial Services in Indonesia, The World Bank & Bank Indonesia, 2010 Large portion of population still financially excluded to formal financial services. 6 Facts on Financial Inclusion: Indonesian Case  The informal sector plays a significant role in serving Indonesians on the lending side.  Only 17% borrow from banks.  Creditworthiness is the most significant reason why people do not borrow.  The informal sector plays a significant role in serving Indonesians on the lending side.  Only 17% borrow from banks.  Creditworthiness is the most significant reason why people do not borrow.  46,7% use bank saving acc. and only 41% within this number have their own saving acc.  About 31,9% of the population do not save.  The main reasons for not saving is have no sufficient money and job.  46,7% use bank saving acc. and only 41% within this number have their own saving acc.  About 31,9% of the population do not save.  The main reasons for not saving is have no sufficient money and job. Main reasons: Saving (49,9%)

7. Only 16% informal workers are well literate; About half of them use banking products. National Survey on Financial Literacy Segments: Informal workers & MSMEs Source: OJK, 2013 Source : IFSA, 2013-2014 Facts on Financial Inclusion: An Update Financial Asset RatioRespondent 0% - 4%61% 5% - 8%17% >= 9%22% Most MSMEs have lower than 4% of financial asset in their balance; Access to the financial products also relatively low (saving:62%, insurance:19%, credit:18%, pension fund:6%). 7

8. Economic Growth Economic Growth The Significance of Micro-Small &Medium Enterprises: case of Indonesia Financial Services Providers Population Segments  Islamic Voluntary Sectors: Zakat, Charity, Waqaf,  Government Program: social safety net, direct cash support  Islamic Voluntary Sectors: Zakat, Charity, Waqaf,  Government Program: social safety net, direct cash support  Banking: Commercial Banks, Rural Banks,  NBFIs: BMTs, Pawnshop, Finance Companies  Government: sponsored financing program, technical assistance  Banking: Commercial Banks, Rural Banks,  NBFIs: BMTs, Pawnshop, Finance Companies  Government: sponsored financing program, technical assistance  Banking: Commercial Banks & rural Banks (share: Med. 10,3%, Sm. 5,7%, Mic. 3,8%)  NBFI: Finance Companies  Banking: Commercial Banks & rural Banks (share: Med. 10,3%, Sm. 5,7%, Mic. 3,8%)  NBFI: Finance Companies  Capital Market  Banking: Commercial Banks  Other Sources  Capital Market  Banking: Commercial Banks  Other Sources Poorest of Poor Poor-household Big 4,968 (+0.01%) Medium 48,997 (+0.1%) Micro Enterprises 55.86 mio (+98.8%) Small 629,418 (+1.1%) Absorbing the labor force Absorbing the labor force Dominant in Economic Structure Dominant in Economic Structure Accommodating the poorest of the poor Accommodating the poorest of the poor MFIs ZFIs MSMEs Supply Demand MSMEs=Micro,Small&Medium Enterprises MFIs = Microfinance Institution ZFIs = Zakah Fund Institutions + 97,2% of national labor force # Units of MSME +56,5 million/or 99,9% of enterprises +59,1% contribu tion to GDP Economic Volume Economic Volume 8 Source: IFSA, Ministry of Cooperatives & SMEs 2012

9. 2 2 1 1 National Strategy on Financial Literacy National Strategy on Financial Inclusion Product Transparency Dispute mediation Fin Services Market of Conduct No-Frill Saving Acc (TabunganKu) Branchless banking Land Ownership Legalization Multilicencing Start-up Credit Schools, Workers & Households Campaign & Awareness Programs Financial Identity Number (FIN) Credit Rating Programs Social Safety Net Programs Public Health Services Poor’s Direct Financing 9 The National Strategy - Indonesia Strategy

10. The National Strategy - Indonesia Education program in 24 cities Issue education materials, publication (magazine). Operate financial literacy car MSMEs preference survey Cooperate with Minister of Cooperatives and SMEs, Fisherman/Farmers Community, and relevant NGO. 10 2 2 1 1 National Strategy on Financial Literacy National Strategy on Financial Inclusion

11. Agenda: #1#1 #1#1 Financial Inclusion: a Global Agenda #3#3 #3#3 Enhancing ‘Inclusion’ through Islamic Finance #2#2 #2#2 Financial Inclusion as National Agenda: Indonesian case

12. Islamic Finance and Financial Inclusion Financial inclusion helps build domestic savings & stimulate business /entrepreneurial activity, with cummulative effect of lower economic inequality and more sustain growth. The issue of a just and egalitarian economic and social structure is central to Islamic economic. Islamic finance address this ‘exclusion’ problem by providing instruments to enhance access to finance and to ensure redistribution of wealth in a society *). Islamic financial inclusion would also address the issue of non-access to formal financial services of those who do not want to use interest based conventional system due to religious consideration.  Target of Islamic Financial Inclusion program: disconnected person either due to economic reasons or social/religious reasons, as well as micro-small businesses. 12 *) Mohieldin et.al.; The Role of Islamic Finance in Enhancing Financial Inclusion in OIC Countries; 2011

13. 13 Integrated Islamic Financial System to Support ‘Inclusion’ Poorest of the Poor Non-poor & Productive Entreprenuenurs/ Sustainable SMEs Takaful Islamic Finance Companies Islamic S&L Cooperatives (BMT) Pawn Shop (Rahn) Islamic Voluntary Sector (Zakat, Waqaf, Charity Fund) Islamic Banks Islamic Finance Services Financial Services Provided  Act as APEX for BMT and i-Rural banks  Provide consumer financing and SME capital Micro-insurance funds for start- up/existing micro business  microfinancing  Liquidity providers for S&L/BMT Microfinance Institutions: BPRS Microfinance Institutions: BMTs Poor & Community Empowerment Programs Islamic Life Takaful3 Islamic Non Life Takaful2 Sharia Unit of Life Takaful18 Sharia Unit of Non Life Takaful 23 Sharia Unit of Re-Takaful3 TOTAL49 Islamic Finance Co. 3 Sharia Unit of Finance Co. 41 Islamic Venture Co. 4 TOTAL 48 Islamic S&L Cooperatives (BMT)> 5,500 S& L Cooperatives (Financial Sector)71,365 Conventional Cooperatives (Total)187.598 Formal Zakat, Infaq and Charity Fund Institutions>500 Indonesian Islamic financial system may provides wide spectrum of services, yet enhancing financial inclusion requires more integration of services, as well as infrastructure & regulatory improvement. Islamic Bank 12 Sharia Unit of Conventional Banks 22 Islamic Rural Banks 163 TOTAL 187

14. Regulatory Environment Product Development Enhance necessary regulations i.e. introduce branchless services, improves licensing (office, product), develop regulations for institutions offerring Islamic micro- financial services. Engage in ‘inclusion’ related studies i.e. survey on financial literacy. Enhance necessary regulations i.e. introduce branchless services, improves licensing (office, product), develop regulations for institutions offerring Islamic micro- financial services. Engage in ‘inclusion’ related studies i.e. survey on financial literacy. Develop Islamic ‘inclusive’ products i.e. basic saving account (e.g. student account) & micro- financing/takaful schemes (e.g. complement scheme to government’s direct financing/safety net program), together with industry players. Design financial education program for students which also support promotion of various Islamic ‘inclusive’ products. Develop campaign program to promote access to Islamic financial services, supported by industry players. Design financial education program for students which also support promotion of various Islamic ‘inclusive’ products. Develop campaign program to promote access to Islamic financial services, supported by industry players. Collaborate with third parties or private sector in increasing delivery of financial services and particularly in integrating with services provided by Islamic social sector (zakah, infaq, awqaf). Current Strategy to Enhance Financial Inclusion Through Islamic Finance Education & Campaign Collaboration with Stakeholder 14

15. Directions to Enhance Financial Inclusion Through Islamic Finance Authorities to consider enhancing current strategy with several initiatives: [Regulatory incentives]: consider incentives on prudential regulation, level playing field between financial services providers & development of infrastructures in areas with limited access, as well as fiscal incentive for financial inclusion schemes. Authority also needs to participate in studies on financial behavior of targeted population, accesibility of financial services & existence of social capital to support more inclusion. [Product development]: consider long term asset development scheme for children, develop combined schemes (saving, equity, financing, insurance, social) and digitally delivered products for different segments (youth, women, migrant workers). [Collaborative efforts]: development of shared information services between Islamic financial sectors and Islamic social sectors, encourage private participation e.g. through participation in financial education, provision of social fund, or partnership/guarantees to SMEs, and build links and partnership with relevant international bodies. [Campaign program]: designated program for person excluded due to religious reasons e.g. collaborate with ‘ulama’ and Islamic community/social organisations 15

16. End of Presentation Thank You – Terima Kasih

17. 1 1 Laku Pandai (Branchless Banking) Basic Saving Account Micro Credit Micro Insurance  Simple feature and administration.  Easy to access.  Economical (Start from IDR5,000)  Fast claim settlement and payment.  Not more than 1 year, or based on debtor’s business cycle  Maks IDR20Million  Collateral - Not Necessary  Free adm fee  No minimum account limit  No minimum deposit  Earn interest/profit sharing  Other characteristics 2 2 Micro Mutual Fund  Series of Investment  Start from IDR100,000  Without Tax ID/Number (NPWP)  Fast claim settlement and payment. 3 3 17 Financial Inclusion Programs: Indonesian Case Key features of ‘branchless’ product introduced by OJK and Financial Services Industry