RECENT DEVELOPMENT OF ISLAMIC BANKING IN INDONESIA

By: Dr. Mulya E. SiregarDirectorate of Islamic Banking - Bank Indonesia

Islamic Finance News Roadshow Jakarta, 22nd March 2011

Presentation Agenda

• Islamic Banking System in Indonesia.• Government Commitment.• Islamic Banking Main Indicators.• Islamic Banking Performance.• Engine of Growth of Islamic Banking.• Blue Print of Islamic Banking Development.• Islamic Banking Expansion.• IB Campaign Stages 2011-2013.• Branding: Beyond Banking.

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Islamic Banking System in Indonesia

Regulatory Based :• 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.

Bank Types:• Conventional Banks: Commercial Banks and Rural Banks.• Islamic Banks: Islamic Commercial Banks (BUS), Islamic

Banking Units (UUS)and Islamic Rural Banks (BPRS).

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Islamic Banking System in Indonesia

International Standard adoption (with national condition adjustment):

• IFSB (CAR, GCG, Risk Management, Transparency and Market Discipline, Shariah Governance).

• AAOIFI (Islamic Banking Accounting Standard, Islamic Banking Accounting Guidance).

Islamic Financial Markets Infrastructures:• Islamic Interbank Money Market (PUAS).• Bank Indonesia Sharia Certificate (SBIS).• Islamic Government Securities (SBSN).

Deposit Insurance Insitution:• Indonesia Deposit Insurance Corporation (LPS). • Deposits in Islamic banks are guaranteed by LPS (max IDR 2

billion).4

Institutions Related to Islamic Banking Activities

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Islamic Banking Activities

Sharia Economic Community

(MES)

Indonesian Expert in Islamic Economics

(IAEI)

National Sharia Board

Indonesian Accounting Association

Indonesian Sharia Banks Association

(ASBISINDO)Sharia National Arbitrage

Institutions (BASYARNAS)

“Indonesia has opportunity to be a focal point of Islamic finance within the region even in the world, by which we could have a wider opportunity for tapping source of financing from the global Islamic finance to support national development program. In line with this, I request all related ministers and other national institutions to perform concerted efforts to develop national Islamic finance industry and put up the development of Islamic finance industry as a national agenda”. (President Susilo Bambang Yudoyono, at the opening speech of the Indonesian Islamic Economic Expo, 16 January 2008)

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Islamic Banking should stand in the first line because it does not affected by the global economic crisis. (President Susilo Bambang Yudoyono, at the opening speech of the World Islamic Economic Forum (WIEF), 2 March 2009)

Government Commitment

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2001 2008 2009 2010

Islamic Banking Main Indicators

Islamic Comm Banks

Islamic Banking Units

Islamic Rural Banks

Number of Offices

Total Assets

Total Deposits

Total Financing

Deposit Accounts

2

3

81

96

2.7 T

1.8 T

2.0 T

328.115

5

27

131

951

51.3 T

36.8 T

38.2 T

3.766.067

6

25

139

1.223

68.2 T

52.27 T

46.8 T

4.537.565

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23

150

1.763

100.8 T

76.0 T

68.18 T

6.053.658

Marketing & Promotion Grand Strategy (2008)

Office Channeling of Islamic Bank (2005-2007)

Islamic Bond (Sukuk) Act (2008)

Islamic Banking Performance 2009 2010Islamic Banks BUS 6 11UUS 25 23BPRS 139 150BUS & UUS Offices 1.223 1.763Offices Growth 19,5% 44,5%

The growth of Islamic banks is

higher than conventional

banks!!

Islamic Banking Act (2008)

Tax Neutrality Act (2009)

Islamic Banking Performance

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Consistent Growth in the Market Share of Islamic

Banking

Increasing Trend of Financing, particularly

the Equity based Financing.

Islamic Banking Performance

Active involvement of Islamic Banks in SBIS

Moderate Activities in Islamic Money Market

(PUAS)

Sukuk MarketVarious Issuances of Tradable Fixed Rate Government Sukuks

(SBSN)

Various Issuances of Non Tradable Government

Sukuks (SBSN)

Engine of Growth

Moslem Population:• 237 million people (National Survey 2010). • 88% are Moslem.

Economic Performance:• GDP = Rp6,422 trillion or USD700 billion (the 18th highest GDP

in the world – world bank report 2009).• A single digit inflation in the last 2 years.• A stable Rp exchange rate in Rp9,000-Rp10,000/USD.

Islamic Banking Performance:• A high growth of Islamic banking industry: 37.9% (the last 5 Y)• A high Financing to Deposit Ratio (FDR): 89.67% (Dec 2010).• A low Non Performing Financing (FDR): 3.02 (Dec 2010).• Investment based financing is 34% while trade based financing is

only 55% of the total financing. • Islamic banking offices are available in all provinces.

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Blueprint of Islamic Banking Development

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Development StrategiesCurrent Strategies Proposed Strategies

- Equal regulatory framework with

fair treatment

- No incentives

- Providing facilities and incentives

2010 – 2015

Policy Directions

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• Human capital investment; Supporting the development of human resources which have capability, competency and good moral.

• Expansive and prudent; Preparing the conducive regulatory which supports the development and complies with Sharia and prudential regulations and supervisions.

• Innovative, educative and comprehensive; Giving comprehensive banking services to all people with product development and proper public education;

• Internationally qualified and domestic oriented; Focusing on obtaining the domestic markets with the international quality in operation;

• Beneficial Investors; Supporting economic development by inviting both international and domestic investors while still maintaining equality principles.

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ISLAMIC BANKING

EXPANSION!

Regulatory Framework :•Central Bank Act of 2004•Banking Act of 1998 •Islamic Banking Act of 2008•Sukuk Act of 2008 •Deposit Insurance Act of 2004

Tax neutrality: Amended by Tax Law no. 42 of

2009.

Government commitment:

The development of Islamic finance industry as a national

agenda”.

International Standard adoption (with national condition

adjustment): IFSB and AAOIFI

Proposed Development Strategies:

Providing facilities and incentives

LenientRegulation

ConduciveEnvironment

AgressivePromotion & Dev. under iB

Campaign Program

iB Campaign: Expansion Target 2010

Current Future

To attract international investors and players in the Islamic Banking industry, Bank Indonesia has commitment to create:

Creating a conducive environment to attract new players, promoting strategic alliance with other institutions to improve reach and outreach of Islamic Banking services, both domestic and international.

Simplifying licensing procedures for a new banks while maintaining prudent measures and systemic stability concern.

Maintaining sustainable growth of supply (bank) and demand (i.e. promoting and dissemination of Islamic mode of finance to address needs of business/ community).

Attraction Strategy for Expansion

LenientRegulation

ConduciveEnvironment

AgressivePromotion & Dev. under iB Campign

Program

EXPANSION!

Priority Agenda

1. Regulating Islamic banking products which fit with prudential aspects, customer needs and sharia principles.

2. Strengthening Islamic banking structure and developing efficient services delivery channels.

3. Research based regulation and risk based supervision implementation.

LenientRegulation

ConduciveEnvironment

AgressivePromotion & Dev. under iB Campign

Program

1. Intensify public awareness and education – incl. familiarization program on Islamic banking.

2. Developing high competitive advantage of Islamic banking products

1. Bringing Islamic banking & finance development as a national agenda to support a strong and sound economic system.

2. Strengthening Human Resource on Islamic banking industry and its supporting institutions.

3. Need tax Incentive for Islamic Banking Industry

The iB Campaign Stages: 2011-20013

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2011 2012 2013

Branding: Beyond Banking

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POSITIONING DIFFERENTIATION

“Banking which benefits both parties”

Content: Varieties in Products and Schemes

Context: Transparant to be equal to both parties.

People: Competent in Finance & Ethical.

Technology: Up dated IT system & user friendly

Facility: Expert in investment, finance and sharia

BRAND

LEBIH DARI SEKEDAR BANK

(BEYOND BANKING)

Thank You

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© 2010, Directorate of Islamic Banking, Bank IndonesiaMH Thamrin Street #. 2 Building ’A’ 21-22 Floor, Jakarta 10110Phone : (021) 3817513/7774Fax. (021) 350 1989 / 1990E-mail : dbps@bi.go.id