Source : Coordinator Minister of Economy, BI, BSM & ABSINDO

1. Seminar on Islamic Finance:MICRO FINANCEIs Islamic MicroFinance a Promising Solution to Lift People Out of Poverty? Source : Coordinator Minister of Economy, BI, BSM & ABSINDO LAKSMI MUSTIKA NINGRAT SENIOR ADVISOR INDONESIAN ISLAMIC MICROFINANCE Jakarta, 27 NOVEMBER 2012

2. OUTLINE • Part I : Back Ground • Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) • What is Financial Inclusion • How does it contribute to economic growth and poverty reduction? • Part III : What We Should Do • Part IV : Expectations

3. BACK GROUND Fact and Figures • Some key facts of Indonesia: • Population of Indonesia: 237 million • GDP per capita: USD 3,508 • Banking industry holds more than 80% of financial sector assets • 97.4% of banks accounts are less than IDR100 million (less than USD10,000) • Number of commercial banks: 120 • Number of rural banks: +1.667 • Number of cooperatives: +71.000 • Number of islamic microfinance institutions: +5.500 Public access on financial services is relatively low that is reflected by (a) the number of loan accounts which reach only 15.96% of the population, (b) the number of insured life insurance which reach only 14.54% and (c) the number of pension fund participants which is only 1.19 % SOURCE : BI

4. BACK GROUND Financial Services : Comparison Source : *) WorldBank Policy Research Working Paper, April 2012 **)IMF & WorldBank, 2010

5. BACK GROUND ACCESS TO FINANCE IN INDONESIA 60% 13.33% 64.25% Below Poverty Line Living in Rural Area Without access to bank 99.91% 60-70% MSMEs that have not been linked to bank % MSME compare to total business unit 5 SOURCE : BI

6. BACK GROUND Acoording Imam Al-Syatibi: The purpose of Islamic Economic is the wealth creation and distribution Al Muwafaqat Fi Ushul Al-Syariah, 2:8 God say: “God have been created you from the earth (soil) and asked you to create a prosperity on it (earth)” Q.S. Hud: 61 6 SOURCE : BSM

7. BACK GROUND Islamic Economic Prohibition of interest (riba): Conventional interest on loans or savings, as a fixed return without sharing any risk, is not allowed. Risk sharing: Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profit. Money as “potential”‖ capital: Money is treated as “potential”‖ capital, which means that it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money only when it acts as capital, not when it is “potential”‖ capital. Prohibition of speculative behavior: An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling, and risks. Sanctity of contracts: Islam upholds contractual obligations and the disclosure of information. In sales contracts, the product or service that is bought or sold must be clear to both parties. This feature is intended to reduce the risk of asymmetric information and moral hazard. Sharia-approved activities: Muslims cannot profit from activities considered immoral. Only those business activities that do not violate the rules of the Sharia qualify for investment. “Short selling‖ is not permissible: Muslims are not allowed to sell what they do not own, therefore, “short selling‖ is not allowed. Source: BSM Research 7

8. BACK GROUND Islamic Economic Poor At least, 4 billion people live on less than $2 a day Islamic Economic Institutions should become the locomotive in flipping up the economic pyramid Source: CK Prahalad, 2004. The Fortune at The Bottom of The Pyramid The flipped economic pyramid once occurred in caliphate of `Umar ibn `Abd al-`Aziz, where it was very difficult to find zakat beneficiary (mustahiqq) Source: BSM Research 8

9. OUTLINE • Part I : Back Ground • Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) • What is Financial Inclusion • How does it contribute to economic growth and poverty reduction? • Part III : What We Should Do • Part IV : Expectations

10. MICRONOMICS Poverty Reduction Financial inclusion (Access to Finance) Expand the financial capacity of the poor Social inclusion (Access to Basic Services ) Promote empowerment among the poor (e.g., Health & Education, Social mobilization) Economic inclusion Increase access to the income generating opportunities for the poor (e.g., MSME development) Without inclusive financial systems, poor individuals and small enterprises will have to rely on their personal wealth or internal resources to invest in their education, become entrepreneurs or take advantage of promising growing opportunities 10 SOURCE : WORLD BANK

11. MICRONOMICS Poorest (Cluster 1)with limited assets • Asset & income expansion • Regular Access to Formal Services • Asset/life protection (insurance) Poor (Cluster 3) almost graduate (still vulnerable) Poorer (Cluster 2) with sources of income Social Inclusion Escape from poverty • Asset Building & business start up • Start Accessing Broader Formal Financial Services ( Saving, Credit, remittance etc) • Financial management & Planning Skills Social Inclusion Social Inclusion • NEEDS: • Asset Building • Entry point for Formal Financial Services (saving) • KUR Program (partial guaranteed credit) • KUBE program (joint business group program for productive poor) • i.e. PNPM Program: • Mandiri Rural-Urban, Revolving Loan Fund (RLF) • PISEW (regional infrastructure development) • P2DTK (enhancing the development of underdeveloped region) • PKH (CCT program) • Scholarship & school operational assistance • Jamkesmas (health assistance) • Raskin (rice assistance) 11 SOURCE : WORLD BANK

12. MICRONOMICS SOURCE : WORLD BANK

13. MICRONOMICS SERVICES BUSSINESS PLAYER Micro-Small Enterprises APEX for BPRS & BMT Product: auto/motorcycles financing Finance Companies Product: microinsurance Insurance Product: funds for start-up/existing micro business Pawn Shop BUS/UUS Product: microfinancing Banking Microfinance Institutions: BPRS Cooperatives Microfinance Institutions: BMTs Zakah Fund Institutions Empowerment Programs 13 Poorest of the Poor SOURCE : BI

14. MICRONOMICS Banking Profiles Number of institutions: 11 Islamic Commercial Banks, 24 Islamic Banking Units, 155 Islamic Rural Banks (1,820 total Rural Banks) Assets ICB: IDR 149 tr (USD 17 bio) or 4% Market share Assets IRB: IDR 3.6 tr (USD 400 mio) or 6% market share Annuall Growth: 45–50% (ICB); 25–30% (IRB) Total Customers: 9 mio (ICB); 684,167 (IRB) BUS/UUS Products: microfinancing Banking Microfinance Institutions: Islamic Rural Banks (BPRS) BMT Profiles Number of Institutions: More than 5500 BMTs (Conventional Cooperatives 71.365 units) Assets: IDR 3,5 tr (USD 389 mio) Annuall Growth: 30 – 40% Number of Employee: 5 – 10 (average) Total members: 10 mio Non-Performing Financing/Loan: 4-5 % (Modus) Mostly initiated by group of people in particular community; Islamic Mass Organization, Mosque Comm. Cooperatives Microfinance Institutions: BMTs 14 SOURCE : BI

15. MICRONOMICS BMT Operations Source of Funds Social Activities as Baitul Mal Commercial Activities as Baitul Tamwil Beneficiaries/Customers Zakah, Infaq, Sadaqa, Awqaf Grant, Endowment, Non Commercial Fund, etc Needy People EQUITY MEMBERS DONORS APEX MICRO-SMALL ENTREPRENUERS (MEMBERS) Funding; Wadiah, Mudharabah, Musyarakah Financing; Murabahah, Ijarah, Mudharabah, Musyarakah, etc 15 SOURCE : BI

16. MICRONOMICS PT Permodalan BMT Ventura Cooperatives Offices of Regional Government PUSKOPSYAH Regional Associations Ministry of Cooperatives & Small Medium Enterprises Regulations: supervision TA, advocacy & Participation in Policy Dialogue Regulations: licensing Capicity Building & Other Supporting Programs The Lender of the Last Resort Apex for Financing MSMEs Projects 16 SOURCE : BI

17. MICRONOMICS • How About Digital Economic ? PC, Only 5 % penetration Number of PC in Indonesia 12 Million Units a Internet, Only18,5% penetration Internet Users 45,000,000 people b Mobile Phone no 5 in the world. Mobile Phone 165,000,000 Mobile Phones c Face Book no 2 in the world. FB Users 35,174,940 users d Size of ICT Market in 2011 IDR 220 trilions Size of ICT Market in 2014 IDR 440 trilions e 17 SOURCE : ASOCIO ICT SUMMIT 2011, YOGYAKARTA - INDONESIA

18. The Future of BMT (Low Cost Banking) MICRONOMICS • Community Channel (BMT) • Face Book BMT • ATM • EDC • CDM • BMT Click • Mobile Money • KYC (Biometric – eKTP) Outlet BMT Channel compared with Bank SOURCE : ABSINDO

19. ABSINDO Member Strength MICRONOMICS Coverage Nationwide Member Aproximately 5.500 BMT’s Outlets Over 22.000 outlets Account Holders Potentially over 22 million SOURCE : ABSINDO

20. OUTLINE • Part I : Back Ground • Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) • What is Financial Inclusion • How does it contribute to economic growth and poverty reduction? • Part III : What We Should Do • Part IV : Expectations

21. National Strategy on Financial Inclusion WHAT WE SHOULD DO ? Vision Mission Source: BI 21

22. Financial Inclusion Framework WHAT WE SHOULD DO ? Remarks : On going Programn by BI : Program will be conducted by BI : Paralel program with other institutions outside of BI 22 SOURCE : BI

23. Strategic Target WHAT WE SHOULD DO ? Policy and Regulation Financial Education Financial Eligibility Preparing the regulation that support financial access and eliminating the various types of barriers • The Improvement of financial literacy on: • Banking products ; • Consumer Protection; • Financial management Increasing the number of eligible/bankable person or SME’s Intermediation Distribution Channel Increasing the range of formal financial system especially to remote areas community Increasing the financial distribution channel in terms of number and quality Source: BI 23

24. Challenges Ahead WHAT WE SHOULD DO ? Problems Identified Pillars Proposed Program Lack of Customer Protection Framework for MFI Customer Lower income people is categorized as unbankable since they can not fulfill bank requirement Source: BI

25. Challenges Ahead WHAT WE SHOULD DO ? Problems Identified Pillars Proposed Program Accelerating Financial education Program Banks and MFI compete in the same segment Financial services for people in remote are SOURCE : BI

26. WHAT WE SHOULD DO ? Islamic banks How Islamic banks, Finance & Bussiness Institutions should take the role? Islamic mission • Islamic banks should implement its main mission: wealth creation & distribution Take opportunity optimally • Islamic banks is supposedly able to take optimally these opportunities thru advancing technology, innovating product scheme, and creating new business models, etc. Source: BSM Research 26

27. OUTLINE • Part I : Back Ground • Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) • What is Financial Inclusion • How does it contribute to economic growth and poverty reduction? • Part III : What We Should Do • Part IV : Expectations

28. EXPECTATIONS WEALTH PEOPLE EMPLOYMENT CREATION GROWTH ACCELERATION POOR PEOPLE INCOME GENERATION POVERTY ALLEVIATION GROWTH DECREADING UN EMPLOYMEN STRATEGY : TRIPLE TRACT STRATEGY SAVING JOB PROFIT Sub Apex - BMT SYSTEM EQUITY ASSISTANT CAPACITY BUILDINGINSTITUTIONAL BUILDINGCHARACTER BUILDINGEQUITY BUILDING Source : Prof. Gunawan Sumodiningrat modification

29. EXPECTATIONS s GOVERNMENT (REGULATION & SUPERVISORY) BANK-BANK STRATEGIC PARTNER APEX PROVIDER/IMPLEMENTOR Financial Assistance Technical Assistance Technical Assistance Apex Arrangement Financing Access (Financing & Equity) Management Standardization (SOP, ICT, Training) 165.000 Cooperatives & 5000 IMF MICRO & SMALL ENTREPRENEUR COMMUNITY SOURCE : ABSINDO

30. EXPECTATIONS APEX MFI “An APEX Institution serves its owner/members (MFI’s) to strengthen their commercial position, viability and future, sound and profitable development” (Cleman Wendland GTZ; 2004). SOURCE : ABSINDO

31. EXPECTATIONS ……APEX MFI APEX is a Central for MFI (Micro Finance Institution) Integrated system comprising of social network microfinance, mobile payment solution, core switching for finance, groups of MFI which enable distribution of funds to the saving account holder, transaction between account holders, and payment for utilities and other services. SOURCE : ABSINDO

32. EXPECTATIONS SOURCE : ABSINDO

33. EXPECTATIONS BMT UGT, Pasuruan – East Java Asset IDR 287 bio (USD 25.5 mio) 33

34. EXPECTATIONS MIDDLE COY SMALL COMPANY MICRO ENTERPRISES Islamic Creative Economics should become the locomotive in flipping up the economic pyramid To the Community : Creative Micronomics UU No. 20/2008 ttg UMKM Big Coy/Conglomerat : Omzet/pa > IDR 50 B Asset > IDR 10 B BIG COY : Net Assets/pa > 10 B Sales Volume > 50 B BIG COY ± 4,52 thou = 0,01% Middle Coy Omzet/ pa from IDR 1 B - IDR 50 B Asset from IDR 200 M - IDR 10 B MIDDLE COY : Net Assets/pa > IDR 500 M s.d 10 B Sales Volume > IDR 2,5 B - 50 B MICRO ± 120,25 thou = 0,24% Small Coy : Omzet/pa from IDR 200 M - IDR 1 B Asset until IDR 200 M SMALL COY : Net Assets/pa > IDR 50 M s.d 500 M Sales Volume > IDR 300 M - 2,5 B ± 2,02 mio = 4,05% Micro Enterprises : Omzet/pa until IDR 200 M Asset until IDR 50 M MICRO ENT : Net Assets/pa Maximum IDR 50 M Sales Volume Maximum IDR 300 M ± 47,70 mio = 95,70% SOURCE : MODIFICATION FROM UMKM DATA 2007, BERITA RESMI STATISTIK No. 28 BPS 2008 SOURCE : RUU No. ../2008 ttg UMKM (Kep Sidang Paripurna DPR) Kekayaan Bersih = total nilai kekayaan usaha (asset) – total nilai kewajiban, tidak termasuk tanah dan bangunan tempat usaha. Hasil Penjualan = hasil penjualan bersih (netto) dari barang dan jasa dlm 1 th buku UU No. 9/1995 ttg Usaha Kecil PP No. 32/1989 ttg Pembinaan dan Pengembangan Usaha Kecil Inpres No. 10/1989 ttg Pemberdayaan Usaha Menengah 34

35. INDONESIAN TODAY (2012) RICH COUNTRY POOR PEOPLE INDONESIANTOMORROW (2045) RICH & SUPER POWER COUNTRY WEALTH &ETHICAL