1. ROLES OF THE GOVERNMENT TO IMPROVE THE PERFORMANCE OF ISLAMIC FINANCIAL INSTITUTIONS Rifki Ismal International Seminar of SETY 2013 Gadjahmada University Jogjakarta, 30 November 2013 1

2. Unique Values and Characteristics of the Indonesian Islamic Banking 2

3. 3 UNIQUE VALUES OF THE INDONESIAN IB Sharia Based with Selected Sharia Compliance contracts. Real sectors oriented (around 80% financing for SMEs). Domestic Orientation (strong domestic demand, market share is still 3.8%) Coopetion with Conventional Banks An independent National Sharia Board and Fatwa Issuance Comprehensive structure of Islamic bank and non bank Financial Institutions Retail Banking instead of Investment Banking A High Annual Growth of Islamic Banking Industry (+/- 40% per year). An Average of 101% Financing to Deposit Ratio in the last 2 Decades An Increasing Trend of Investment Based Financing Social Driven Islamic Banking Development More than 200 million are Moslem Population and Support Islamic Banks Robust Domestic Economy (Less Affected by Global Financial Crisis) Supportive Social and Political Situation

4. Driving Factors of the Indonesian Islamic Banking 4

5. 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 Waqf Act no. 23 of 2011 Financial Service Authority (OJK) Act no. 21 of 2011 5 LEGAL SUPPORTS

6. Medium and Large Business Small and Micro Business Conventional Banks Islamic Banks UUS Existing BPRS New BPRS New BPR Existing BPR Existing Community Existing Community New Community New Community Investors of BPR/S SMEs Financing is done by: Conventional Banks Islamic Banks Unit Usaha Syariah Rural Banks Islamic Rural Banks New Investors Baitul Maal Watamwill (BMT) BMT LINKAGES AMONG INSTITUTIONS

7. Executing ICB IRB MSMEs MSMEs MSMEs MSMEs Joint Financing ICB IRB Channeling ICB IRB Based on Mudharaba Based on Wakala Based on Musharaka MODELS OF LINKAGES

8. ExecutingICB/BPRS BMT MSMEs MSMEs MSMEs MSMEs Joint Financing ICB/BPRS BMT Channeling ICB/BPRS BMT Based on Mudharaba Based on Wakala Based on Musharaka MODELS OF LINKAGES

9. (Trilion Rp) Types2009201020112012Q3 2013 MARKET SHARE Islamic Banking 66,09 97,52145,47174,09223,50**4,80% Takaful4,86,979,1513,114,97*2,40% Islamic Financing0,642,363,6222,6627,54*8,27% Islamic Stocksn.a 1.968,102.451,332.475,3658,22% Corporate Sukuk7,027,827,929,7911,413,26% Islamuc Mutual Funds 4,63 5,23 5,568,059,354,94% Government Sukuk 20,32 44,3477,73124,36147,8010,23% * Per June 2013 ** Per August 2013 ASSETS OF ISLAMIC FINANCE Source: Presentation of OJK in FREKS UIN Jakarta 2013

10. Proportion of Islamic Stocks (October,2013) Stocks in DES Stocks outside DES Note : *) Per October 2013, Numbers of Stocks in DES are 309 stocks constisting of: 302 stocks Period 1 was issued 24 May 2013 7 stocks is from IPO ISLAMIC STOCKS Source: Presentation of OJK in FREKS UIN Jakarta 2013 Development of Islamic Stocks

11. ISLAMIC MUTUAL FUNDS Source: Presentation of OJK in FREKS UIN Jakarta 2013

12. CORPORATE SUKUK Source: Presentation of OJK in FREKS UIN Jakarta 2013 Outstanding and Numbers of Corporate Sukuk

13. GOVERNMENT SUKUK Source: Presentation of OJK in FREKS UIN Jakarta 2013 Government Sukuk (Numbers and Outstanding)

14. Future Development and Supports from the Regulators 14

15. 15 Retail Konsumtif Retail Produktif (SMEs) Corporate Government Unbankable (micro) Business Models  Investment Banking  Development/ Infrastructure Banking  Special Purpose Banking for Hajj  Agriculture Banking  Infrastructure Banking  Corporate/Wholesale Banking  Investment Banking  Commercial Banking  Retail Business Banking  Consumer Banking  Retail Banking  Micro Banking  Branchless Banking  Community Banking (for women) Potential Markets Business sectors are dominated by SME (99.9%): (53,823,732 units) Share of Banks’ financing to SMEs is only 20.7% (Rp481.2 T) 50% population do not have financial access Government credits distributions were Rp20 T(2011) Domestic labors, overseas workers and remote areas people Hajj Funds  Rp 25 T. Infrastructure Funds +/- Rp75,15 trillion MP3EI up to 2025 needs Rp1.923 trillion Mining sectors 150 T IDB financing for private sector: US$1,1 billion up to 2014. High net worth individual (HNWI) are 112,000 persons Local Investors are 363.094 persons  Middle Class potentials with 9 million growth/year  Mass Affluent depositors  Demands for housing 2,6 million/year (REI)  Estimation of car sales of more than 875,000 unit (GAIKINDO) POTENTIAL MODELS OF ISLAMIC BANKS

16. OUTLOOK of ISLAMIC BANKING 2013 TPF Financing Assets NPF

17. MARKET SHARE OF ISLAMIC BANKING

18. OUTLOOK of ISLAMIC BANKING 2014 TPF Financing Assets NPF

19. PROMISING FACTORS A New State Owned Islamic Bank 100% Hajj Funds in Islamic Banks Establishment of Waqf Banks Conversion of UUS to become BUS until 2023 Robust policy coordination under OJK Project based Sukuk to be issued by the government Continuous supports from the parent banks to their IB subsidiaries Market expansion in MEA (2015-2020) Directorate of Islamic Finance in Ministry of Finance Islamic Finance Division in Deposit Guarantee Institution (LPS)

20. Macroprudential and Economic stability Robust Coordination of Monetary Policy, Fiscal Policy and Financial Sector Policy Micro and Macro Development of Islamic finance SUPPORTS FROM THE CENTRAL BANK Source: Presentation of OJK in FREKS UIN Jakarta 2013

21. Pengembangan Kerangka Regulasi yang bersinergi dan menciptakan iklim kondusif Pengupayaan kesetaraan (level playing field) Sosialisasi dan Edukasi terencana dan berkelanjutan Pengembangan Sumber Daya Manusia Pengembangan dan inovasi produk dengan prinsip dan nilai syariah SUPPORTS FROM OJK Source: Presentation of OJK in FREKS UIN Jakarta 2013 Developing regulations to create conducive condition Level of Playing Field Developing Products with Islamic Principles Developing Islamic HR Well-planned socialization and education programs

22. Contribution on Acceleration of the Indonesian Economic Development Capturing the potential of middle class and upper class people Opening an access for developing middle class people in all segments FUTURE ROLES OF ISLAMIC FINANCE Source: Presentation of OJK in FREKS UIN Jakarta 2013

23. 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), PhD in Islamic economics and Finance from Durham University (England) and an Associate Professor in Islamic Banking and Finance is from the Australian Government (Australian Center for Islamic Financial Studies). Besides lecturing in some Universities, 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) SHORT BIO

24. THANK YOU 24