Potensi Pengembangan Ekonomi Syariah di Indonesia

1. The Central Bank of Republic of Indonesia Potensi Pengembangan Ekonomi Syariah di Indonesia Associate Prof. Dr Rifki Ismal Universal Indonesia Economic Fastival 9 Maret 2013 Sekolah Tinggi Akuntansi Negara

2. Indonesian Economy : Monetary Policy and Financial Stability – Recent Development

3. Executive Summary • Indonesia’s economic growth remains robust in 2012 amidst the continuation of global economic slowdown. Contributed by buoyant consumption and investment, economic growth in the Q4-2012 reached 6.11%, and charted 6.23% for the whole year of 2012. • Inflation in January 2013 remained subdued and arrive at 4.57%(yoy) which is within target range of 4.5%±1%. • Financial system stability remained solid with intermediation function is improving within prudential manner: capital adequacy ratio (CAR) is well above 8% and gross non-performing loan (NPL) below 5%. In December 2012, credit growth charted 23.1% (yoy) with investment loan recorded the highest growth of 27.4% (yoy), • In the Board of Governors' Meeting convened on 7 March 2013, Bank Indonesia decided to hold the BI rate steady at 5.75% in which considered consistent with low inflation forecast and contained within its target range of 4.5%±1% in 2013 and 2014.

4. The resilience of economic growth remains evident... Global Financial Crisis Asian Financial Crisis Source: Indonesia Statistic Bureau (BPS), Bloomberg, Moody’s (Ministry of Finance Presentation on Feb 28, 2013 4

5. Most sectors in 2013 will grow higher than the previous year GDP by Sectors • 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. Economic Structure 2013 Source: Ministry of Finance Presentation on Feb 28, 2013 5

6. EKONOMI GLOBAL: “PERTUMBUHAN EKONOMI MULAI PULIH” Pertumbuhan PDB (%): Cina, India, dan Indonesia terlindungi dari rentannya ekonomi global Sumber: Standard Chartered Research

7. Indonesian Economy • Exchange Rate • On January 2013, Rupiah depreciated by 0.22% (mtm) to Rp9.654 per USD, with a contained volatility. • In the future, BI will continue to maintain the stability of Rupiah exchange rate consistent with its economic fundamentals. • Direct Investment • Investment activity Indonesia continues on an upward trend. Total direct investment in 2010-2012 are around US$22.9 billion, US$27.9 billion, and US$34.8 billion respectively. • In 2012, direct investment exceeded government target and increased by 24.6% (yoy) Direct Investment Growth (%,yoy) Source: Ministry of Finance Presentation on Feb 28, 2013

8. Inflation pressure remain contained, with core inflation continuing to trend down … Headline Inflation December 2012 inflation: Ytd = 4.3% Yoy = 4.3% Mtm= 0.54% January 2013 inflation: Ytd = 1.03% Yoy = 4.57% Mtm= 1.03% Inflation by Component Source : National Bureau of Statistics Source: Ministry of Finance Presentation on Feb 28, 2013 8

9. Labor productivity keeps increasing … Unemployment Rate Poverty Level Labor Productivity Minimum Wage 9 Source: Ministry of Finance Presentation on Feb 28, 2013

10. The Archipelago Economy: Unleashing Indonesia’s Potential - McKinsey Report, September 2012 Indonesia Today Indonesia By 2030 Favorable Population • Challenges: • Productivity improvement • Uneven distribution of growth • Infrastructure and resource constraints Source: Ministry of Finance Presentation on Feb 28, 2013 10

11. Investment will remain strong, driving forward economic growth in 2013 … • 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: A.T. Kearney, February 2012 Source: UNCTAD, July 2012 Source: The Economist, January 2013 11 Source: Ministry of Finance Presentation on Feb 28, 2013

12. Indonesian Banking: Recent Development

13. Indonesian Banking Sound Financial Sector • Banking industry has been more resilient, as indicated by secure level of CAR above 8% (17.3% at the end of Dec’2012) and gross NPLs managed at below 5% (1.9% in Dec’2012). • Further improvement in banking intermediation is reflected in 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).

14. Executive Summary 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%. As such, the are more rooms to utilize the banking sector to boost the domestic economy.

15. Indonesian Islamic Banks – Sustainable Growth and Role in Economic Development & Financial Stability

16. Indonesia’s Islamic Bank (iB) Development 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. Indonesia’s iB aset ±98% dominated by Islamic Commercial Bank (BUS) and Islamic Busines Unit (UUS). In year 2012, the IB’s (BUS+UUS) performance relatively good, reflected by : (i) optimum intermediation function with average FDR reach 97,16%; (ii) CAR beyond minimum regulation 8% with average CAR reach ±17%; and (iii) Non Performing Financing (NPF) under 5% with average 2.72% and even in December 2012 reach 2.22%.

17. Current Growth is in line with projections Islamic banks’ (BUS+UUS+BPRS) asset growing in 2012 reach Rp. 199,72 T and within BI’s previous projection scenarios between moderate scenario (Rp.187.2T) and optimistic scenario (Rp.206T). Banks’ current asset growth is in line with BI projections. Asset Growth Actual vs Projections 2012 Projections European Crisis

18. Increasing number of Islamic Bank (iB) s Customer • With 11 Islamic Commercial Bank (BUS), 24 Islamic Business Unit (UUS) and 156 Islamic Rural Bank (BPRS), the office network increased from 2.101 in year 2011 becoming into 2.663 (26,75%). • The increasing number of iB’s customer  iB’s account number (financing + deposits) increases ±4 million accounts from ± 10.4 mio year 2011 into ± 14.4 mio in Dec’12 (38%, yoy) • The significant increasing number of iB’s customer in last 4 years (average ± 31%), even growth in period 2011 – 2012 (± 38%) higher than previous period  reflect the more trusted iB by Indonesia’s people for saving/invest fund • More broaden customer has been serviced by Islamic banks

19. The Decreasing Growth of Non Productive Financing Share/Sector • The direction of more financing toward productive sector looks on the right track by the end of 2012 • Decreasing growth of non productive financing share • Financing growth to Non productive sector (services and others) has decelerated from 8,4% (2010 - 2011) become 0,82% (2011 – 2012) or decreasing 7,59%. • The growth share of Non Productive financing type compare to productive (working capital + Investment) has decelerated from 30,09% (2010 - 2011) become 1,92% (2011 - 2012) or decreasing 28%. Data :Sept’12

20. iB’s Role in Private Sector Towards More Distributed Economic Development : Financing Power Plant throughout the country Total Financing to Power Plant > Rp 3,5 Triliun eq. ± US$ 360 million and area covered throughout Indonesia’s archipelago for Bank Muamalat only (source : Bank Muamalat, Dec’12)

21. Islamic Banks (iB) : 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 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 This in the end will promote financial stability and resilience to financial crisis

22. Indonesian Islamic Banks – Policy Direction and Prospect

23. Maintaining Strong Growth • With 80% of population is muslim, Indonesian Islamic Banks have chances to be leader in global islamic finance. However, Currently we have only less than 2% of Global Islamic Finance Assets • Needs key thrust to maintain strong growth • 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 socialization Steps Forward Muslim population With Rp.199,72 trilion of iB (BUS+UUS+BPRS) asset in Dec’12 (eq $ 22 billion) we only account for 4.6% of Indonesian banking industry, or less than 2% of global islamic assets. 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

24. BI Policy: Product Innovation Working Group Discussions between related institutions to increase creativity on product innovation to attract customers • In the current highly competitive environment, islamic banks cannot rely on standard product to attract customers. Islamic financial institutions must act and able to offer pure and genuine Islamic products that bring up the uniqueness of sharia principles that can meet customers' and investors needs • BI will facilitate Working Group Discussions (with National Sharia Board and indonesia Accountant Association) to activate innovation and creativity regarding product development to attract more customers. • BI will consider to improve related regulations on Islamic banking products in order to increase the efficiency of the product licensing process. • In order to increase public awareness to Islamic banking products (iB financial literacy), socialization programs / public education and communication will be more focused on equality "parity" and the uniqueness of "distinctiveness" of the productIslamic banking. Islamic banks are expected to strengthen the product development unit in order to accelerate the equalization of products and service levels with conventional banks, to increase service to meet customers needs

25. BI Policy: Emphasis Financing in Productive Sector • Bank Indonesia will emphasis islamic banks to provide more financing to productive sector, SMEs and corporates • 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. 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

26. Projection of Indonesia’s iB (BUS+UUS+BPRS): 2013 Growth (%) Growth (Rp. Triliun) Base line Base line

27. . Wass. Wr. Wb. The End Thank You

28. SHORT BIO Associate Prof. Dr. Rifki Ismal is both a central banker and lecturer. He earned bachelor degree in economics from University of Indonesia, master in economics from University of Michigan, ann arbor (USA) and PhD in Islamic economics and Finance from Durham University (England) in 2010. An Associate Professor in Islamic Banking and Finance is from the Australian Government (Australian Center for Islamic Financial Studies). He has published more than 30 papers in international journals (especially emerald journal series – london) and will publish a book titling: Islamic bank in Indonesia (John Wiley and Sons) in March 2013.