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POLICY OF ISLAMIC BANKING

DEVELOPMENT IN INDONESIA

Dr. Rifki Ismal

Assistant Director

Department of Islamic Banking – Bank Indonesia

International Course on Financing Scheme in Islamic Banking and Finance

(AMED) Batch 5Jakarta, 15 April 2013

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Unique Characteristics of the Indonesian Islamic Banking

Vision and Mission of the Policy

Framework of the Development of Islamic Banking

Policy Direction and Paradigm

Legal Basis

Economic authorities

The Process of Islamic Banking Regulation and Types of

Bank Indonesia Regulation

Outline

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3

Robust Domestic Economy (Less Affected by Global Financial Crisis)

Supportive Social and Political Situation

More than 200 million are Moslem Population

Social Driven Islamic Banking Development

Domestic Orientation (strong domestic demand)

Real sectors oriented (around 80% financing for SMEs).

Coopetion with Conventional Banks

An independent National Sharia Board and Fatwa Issuance

Sharia Based with Selected Sharia Compliance contracts.

Unique Characteristics of the Indonesian IB

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10.5

8.1

5.9

4.4 4.33.6

2.9 2.61.5

0

2

4

6

8

10

12

5 years average growth China and BBB-/BBB/BBB+ peers country (%)

•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%

9,17

2,41

3,72

6,44

5,67

7,02

4,61

3,56

4,504,57

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

10,0

J-09 M-09 M-09 J-09 S-09 N-09 J-10 M-10 M-10 J-10 S-10 N-10 J-11 M-11 M-11 J-11 S-11 N-11 J-12 M-12 M-12 J-12 S-12 N-12 J-13

yoy (%)Headline Inflation

Source: BPS, (2012)

Headline Inflation

Source: Indonesia Statistic Bureau (BPS), Bloomberg, Moody’s (Ministry of Finance Presentation on Feb 28, 2013

Economic Performance

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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%

ECONOMIC PERFORMANCES

2008 2009 2010 2011

Indonesia 26.60 27.70 29.10 31.70

Singapore 106.70 109.90 100.00 112.60

Malaysia 96.70 111.60 110.70 112.20

Phillipines 29.10 29.20 29.60 31.80

Brunei 35.20 44.50 40.90 31.80

Thailand 113.00 116.40 123.90 140.100

20

40

60

80

100

120

140

160

Indonesia Singapore Malaysia Phillipines Brunei Thailand

2008

2009

2010

2011

%

Economic Performance

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Labor Productivity

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Labour Productivity, Current Price

Labour Productivity, Riil Price

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1000

1200

2004 2005 2006 2007 2008 2009 2010 2011 2012

Minimum Wage Minimum Wage Growth

Minimum Wage

Aug-12: 6.14%

5.8%-6.1%

5%

7%

9%

11%

2007 2008 2009 2010 2011 2012 2013target

Sept-12: 11.66%

9.5-10.5%

6%

9%

12%

15%

18%

2007 2008 2009 2010 2011 2012 2013target

Unemployment Rate Poverty Level

6Source: Ministry of Finance Presentation on Feb 28, 2013

OTHER INDICATORSSocial and Economic Performance

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VISION

MISSION

Islamic Banking Development in Indonesia

Establishing a strong and sound Islamic Banking System which is consistent

towards the implementation of sharia principles in the spirit of justice, general

well-being and balanced-living, to promote social prosperity in term of material

and spiritual

To create a conducive environment for developing competitive and efficient

Islamic Banking which complies to sharia principles and prudential standards,

as well as which has capability of supporting real economic sector through

the implementation of share-based financing and trades with real underlying

transactions to promote national economic growth

Islamic Banking Development in Indonesia

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Vision and Mission

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Fatwas & Islamic

Principles

Prudential Banking

Regulations

Operational &

Product of Islamic banking

Economic growth & real sector, reducing

poverty and unemployment

Islamic Banking Development based on Blueprint...

Prudential SupervisionShariah Supervision

Sound and strong Islamic banking which

supporting the creation of stable, sound, and

efficient financial system

Indonesia’s

Financial and

Banking

Architecture

National 10

Years Master

Plan

Framework of the Islamic Banking Development

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IAI

Baznas

Basyarnas

Associations

UUS

Depositors

- Public

- Government BPRS

- Foreign (limited)

BMT

Non bank

Islamic

Insurance/Takaful

Islamic Capital

(Sukuk) Market

Islamic Banks

Medium and Large

Business

Small and Micro Business

Guarantee

Deposits (LPS)

Islamic Stock Market

Central Bank

Investment Certificate

National Sharia BoardIslamic Banking

Committee

Real Sectors

Sharia Supervisory Board

Islamic Money Market

Infrastructure of the Indonesian Islamic Banking

1010

LINKAGE FINANCING AND INTEGRATION

Financing types

Executing: Islamic Banks place funds in Islamic non banks Channeling:

Islamic non banks are only intermediary (channel)

Delivering: Partnership between Islamic financial institutions

IAI

Baznas

Basyarnas

Associations

UUS

Depositors

- Public

- Government BPRS

- Foreign (limited)

BMT

Non bank

Islamic

Insurance/Takaful

Islamic Capital

(Sukuk) Market

Islamic Banks

Medium and Large

Business

Small and Micro Business

Guarantee

Deposits (LPS)

Islamic Stock Market

Central Bank

Investment Certificate

National Sharia BoardIslamic Banking

Committee

Real Sectors

Sharia Supervisory Board

Islamic Money Market

Financing:

BUS+UUS

with non

bank like

BMT

(>100.000

units),

Islamic

cooperative

(KJKS), 156

BPRS

Infrastructure of the Indonesian Islamic Banking

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POLICY DIRECTION :

• Expansive and prudent preparing condusive regulation in supporting

growth with effective supervision

• Innovative, educative and comprehensive provide financial services to

community through product development with intense public education

• Internationally qualified and domestic oriented directing domestic

dominance with international operational quality

• Selected open supporting national economy by inviting international

investor beside domestic investor concern to justice and equality

• Human capital investment supporting human capital development who

has capability, competency and good faith

Policy Direction

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POLICY PARADIGM :1. Directed Market Driven directing market preference to build Islamic

Banking industry which sound, strong, and consistency in Islamicprinciple

2. Fair Treatment building fair competition in Islamic Bankingindustry

3. Gradual & Sustainable Approach priority and development focusbased on situation and condition, also building in stages andcontinuity.

4. Sharia Compliance Industry regulation and infrastructuredevelopment suitable with Islamic Principle

5. Professional Each development effort based on expertiseconsideration and good governance

Policy Paradigm

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Vision and Mission of

the Islamic Banking Industry

High Qualified

HRD

Supported

Infrastructure

Strategic Alliances

and Synergy

Product and Market

Development

Effective Regulation

Supervision

Effective Banking

Structure

Utilizing Depositors

7 Pillars of Development

Legal foundations, related regulatory standards, standard setting, and fatwas

Sharia Akhlaq Ukhuwah

Aqidah

BLUE PRINT PERBANKAN SYARIAH

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Blue Print of the Development of Islamic Banking

1414

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.

Legal Basis

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Fiscal Authority

Government

Economic Development

Bank Indonesia

BankingNon Bank Financial

InstitutionsFinancial Markets

Financial Sector

Authority

Monetary Authority

OJK

USD83B

USD441B

USD371B

Banking

Non Bank

Financial Markets

Government conducts fiscal policiesOJK conducts financial sector policiesBank Indonesia conducts monetary policies

More than USD900 billion funds managed by OJK

OTORITAS EKONOMIEconomic Authorities

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FINANCIAL SECTOR AUTHORITY MONETARY AUTHORITY FISCAL AUTHORITY

Islamic Banks

Bank Infrastructure

IRB Banking Education

IRB Health

Pension funds Social

Pawnshop

Insurance Productive sector Mapping

Mutual funds Industry per area

Multifinance Agriculture per project

Trading per tenor

Bond market

stock market

Private Projects

Non

Bank

Financial

markets

Government

Projects

Corporate

sukuk

Government

ProjectsBank Indonesia

Economic Activities

Government

sukuk

Islamic

Windows

Islamic Non

Banks

per economic

scale

Flow of funds

flow of funds

Economic Authorities

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Issues OJK Bank Indonesa Impacts

License Fully done by OJK

Transferred to OJK

System, HRD, mechanism, etc

Regulation Fully done by OJK for

microprudential

Macroprudential regulation

including IB

Coordination between OJK & BI

Supervision Fully done by OJK Dialihkan dari BI ke OJK

System, HRD, mechanism, etc

Information System

Join and Share with OJK

Join and Share with OJK

SDM, IT, coordination

Education and Socialization

Division of education and socialization

No more Fully authority of OJK

Research Division of research

Some department for

macroprudential

Macro & Micro prudential research

Bank Indonesia and OJK

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1. Financial sector stability, micro prudential and

supporting macroprudential, monetary stability and

economic stability

2. Protecting customers especially small customers

and public community.

3. Optimizing banking institution as sources of funds

to support economic development program.

4. Integrating banking, non banking and financial

markets

5. Anticipating banking fraud.

The Need for Islamic Banking Regulation

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I. A new product needs BI’s approval (if it is not listed in a codification book),

II. Establishment of a new Islamic bank

III. Islamic bank’s management and ownership

IV. Prudential asset quality, minimum capital, bank rating

V. Payment System/ Financial market/Monetary SBIS, Islamic interbank money market, statutory reserve (GWM)

VI. Islamic Banking Monthly report

Types of Islamic Banking Regulation

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Establishing a New

Islamic Bank (Rp.

1 trillion)

Conversion of

Conventional to Islamic

Bank

(Rp. 100 Billion)

Dual System Bank

(Islamic Business Unit/ UUS)

(Rp. 100 Billion)

Islamic

Banking

Services

Spin Off UUS to IslamicBank(Rp. 500 Billion Rp. 1 Trillion in 10 yr)

Establishing a New Islamic Bank

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International i.e. :

- IFSB (Islamic Financial Services Board) Head quarter is in Malaysia

- AAOIFI (Accounting and Auditing Organization for Islamic Financial

Institution) Head quarter is in Bahrain

- BIS (Bank for International Settlements) Head quarter is in

Switzerland

National i.e. :

- Relevan regulation principles in conventional banking

- Fatwas/opinion of the Sharia National Board

- Accounting Standard

- Consideration & input from Islamic banking industry best practices

References of Islamic Banking Regulation

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Decision Making Process of the Islamic Banking Regulations

BI’s

Board of

Governor

Bank/ Sharia Banking Committee/National Sharia

Board/Sharia Bank Association/Other party

Islamic Banking Regulation Initial DraftInformation

& Input

Islamic

Banking

General

Policy

Other Team/Department

Regulation Team

Information & Input

- research result

- bank supervision

- licensing practices

Final and Legalised of

Regulation

BI’s Other Departments

BI’s Islamic Banking Department

Regulation

Explanation

Regulation

Explanation

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Information

&

Input

KEP and RDG

Legal Review and finalised draft

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Legal

Review

by DHk

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2

3

4

DHk = Legal Directorate ; KEP = Banking Evaluation Committee/Forum ; RDG = Board of Governor ‘s Meeting

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THANK YOU

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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).

An Associate Professor in Islamic Banking and Finance is from the

Australian Government (Australian Center for Islamic Financial

Studies)

Short Bio