INDONESIAN ISLAMIC BANKING: CURRENT PERFORMANCE AND PROSPECT

1. INDONESIAN ISLAMIC BANKING: CURRENT PERFORMANCE AND PROSPECT Associate Professor Rifki Ismal Guest Lecture in the Singapore Management University (SMU) Singapore, 2-3 April 2013

2. 2 UNDERLYING ECONOMIC AND BANKING CONDITIONS

3. ECONOMIC PERFORMANCES • GDP is among the highest one in ASIA • Inflation in January 2013 remained subdued and arrive at 4.57%(yoy) which is within target range of 4.5%±1% Headline Inflation Source: Indonesia Statistic Bureau (BPS), Bloomberg, Moody’s (Ministry of Finance Presentation on Feb 28, 2013

4. ECONOMIC PERFORMANCES • Exchange Rate • Rp is relatively stable between Rp9600/USD-Rp9700/USD with a monthly average of Rp9654/USD Roles of Banking in the Domestic Economy • The role of the Indonesian banking is not yet optimal to support the real sector. Credit to GDP ratio is relatively low compared to the ASEAN countries • The Indonesian Credit to GDP ratio stands between 26%-32%, almost the same as Philippines and Brunei. While others, especially Thailand and Singapore has more than 100% credit to GDP ratio. Malaysia is following them with a growing ratio from 96% to 112%

5. BANKING PERFORMANCES Sound Financial Sector • The banking industry is more resilient, as indicated by level of CAR above the minimum level of 8% (17.3% at the end of Dec’2012) and gross NPLs is at level below 5% (1.9% in Dec’2012). • Further improvement in National banking intermediation is also reflected in progressively improving credit growth, recorded in December 2012 at 23.1% (yoy), in which investment credit, working capital credit, and consumption credit grew by 27.4% (yoy), 23.2% (yoy), and 19.9% (yoy), respectively.

6. OTHER INDICATORS Unemployment Rate Poverty Level Labor Productivity Minimum Wage 6 Source: Ministry of Finance Presentation on Feb 28, 2013

7. OTHER INDICATORS • International surveys on investment prospects highlight Indonesia as one of the most attractive investment destinations.. The A. T. Kearney FDI Confidence Index: Indonesia's ranking rose from 20 9 UNCTAD: Indonesia's ranking rose from position 6  4 as a prime investment destination 2012-2014 The Economist: Indonesia ranks third major investment destination in Asia in 2013 Source: UNCTAD, July 2012 Source: The Economist, January 2013 Source: A.T. Kearney, February 2012 7 Source: Ministry of Finance Presentation on Feb 28, 2013

8. 8 THE INDONESIAN ISLAMIC BANKING INDUSTRY

9. SUPPORTED REGULATIONS AND ACTS • 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. • Government Law No. 25 of 2009 (income tax for sharia transactions). • Tax Neutrality in Government Law no. 42 of 2009. • Microfinance Act No. 20 of 2008 • Zakah (Islamic levy) Act No. 23 of 2011. • Waqf (endowment) Fund Act No. 41 of 2004. 9

10. UNIQUE VALUES OF THE INDONESIAN IB

11. BLUE PRINT OF ISLAMIC BANKING To create Leading Islamic Banking Industry, efficient and to be chosen by public to support sustainable economic growth (visi 2020) 7 Pillar of Development Regulation and Effective Supervision Effective Utilizing of Depositors High Quality HR 2 Strategic Alliances 4 6 Supported Infrastructures Development of Products & Markets Effective Banking Structures 5 3 7 1 Legal foundations, related regulatory standards, standard setting, and fatwas Syariah Akhlaq Ukhuwah Aqidah

12. ECONOMIC AUTHORITIES IN INDONESIA 12

13. FINANCING TO SMEs Investors of BPR/S Bank Umum Konvensional Medium and Large Business • SMEs Financing is done by: • Conventional Banks • Islamic Banks • Islamic Banking Windows • Islamic Rural bank • Rural Bank • New Investors • Baitul Maal Watamwill (BMT) UUS BMT Bank Umum Syariah Small and Micro Business Existing BPRS New BPRS Existing BPR New BPR Existing Community New Community Existing Community New Community

14. LINKAGE MODELS Executing Joint Financing Channeling IRB ICB ICB ICB Based on Wakala Based on Musharaka Based on Mudharaba IRB IRB MSMEs MSMEs MSMEs

15. LINKAGE MODELS Executing Joint Financing Channeling ICB/BPRS ICB/BPRS BMT ICB/BPRS Based on Wakala Based on Musharaka Based on Mudharaba BMT BMT MSMEs MSMEs MSMEs

16. ISLAMIC BANKING PERFORMANCES Rp. Triliun Indonesia’s IB (BUS+UUS) average growth in last 5 years reach 37% for asset then 36% for financing and 38% for deposits. Whereas in 2012, the growth for asset (±34%) value Rp. 195 T, financing (±44%) value Rp.147,5 T and deposit (±28%) value Rp.147,5 T.

17. ISLAMIC BANK: PROMOTE FINANCIAL STABILITY • The nature of islamic banks business is profit/loss sharing, with prohibition in speculation • This will promote financial stability and cause islamic banks to be resilient to financial crisis This in the end will promote financial stability and resilience to financial crisis Advantages as Islamic banks during current global uncertain periods: • Profit and loss sharing system will be beneficial and provide fair return to all parties. With this system, islamic banks will promote social welfare as the benefit receivers need to pay zakah as part of social contribution while complying to the shariah principle. • The products offered by islamic banks always use real sector transaction as its underlying; therefore, the impact of islamic financial transaction can be significant to promote economic growth • Reduce potential excessive speculation since islamic finance prohibits the speculative motive. Derivatives products are prohibited by islamic principles because of the existance of gharar • In the case of Indonesia: • Islamic banks nature is to focus on developing small and medium enterprises as the underlying, and there are relatively small risks involved • Exposure to currency risk, financial sector is relatively small

18. INTERNATIONAL RECOGNITION 18

19. 19 PROSPECT

20. ECONOMIC PROSPECT • Projection for 2013: • The industrial sector remains the largest contributor to growth. • The agricultural sector will grow by about 4%, supported by productivity improvement programs, land, and diversification of products. • Transport and communications, construction, and trade are the sector with the highest growth. Source: Ministry of Finance Presentation on Feb 28, 2013

21. OUTLOOK: ISLAMIC BANKING INDUSTRY

22. BANK INDONESIA POLICIES • Bank Indonesia will emphasis islamic banks to provide more financing to productive sector, SMEs and corporates In return, this will help promoting resilience of islamic banks, as well as generate higher asset growth, so that asset share of islamic banks compared to that of in conventional will gradually increase  projection of 15-20% in the next decade Bank Indonesia in its capacity will facilitate link and match program between islamic banks and industry which is prioritized by the government, such as infrastructure, agriculture, as well as others. Focus Group Discussions and business match will be the main forum to match supply and demand between banks and productive sectors.  BI have facilitated several FGDs and have received positive feedbacks.

23. THANK YOU

24. SHORT BIO Associate Professor Rifki Ismal is both central banker and lecturer. He earned bachelor degree in economics from University of Indonesia, master degree in economics from University of Michigan, Ann Arbor (USA) and PhD in Islamic economics and Finance from Durham University (England). An Associate Professor in Islamic Banking and Finance is from the Australian Government (Australian Center for Islamic Financial Studies). He has published more thirty papers in international journals and a book titling Islamic Banking in Indonesia: New Perspective in Monetary and Finance (John Wiley and Sons, March 2013)