INDONESIAN ISLAMIC BANKING:INDONESIAN ISLAMIC BANKING:CURRENT PERFORMANCE CURRENT PERFORMANCE

AND PROSPECTAND PROSPECT

Associate Professor Rifki Ismal

Guest Lecture in theSingapore Management University (SMU)

Singapore, 2-3 April 2013

1

UNDERLYING ECONOMIC AND UNDERLYING ECONOMIC AND BANKING CONDITIONSBANKING CONDITIONS

2

ECONOMIC PERFORMANCES

•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

4,613,56

4,504,57

0,01,02,03,04,05,06,07,08,09,0

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

Exchange RateRp is relatively stable between Rp9600/USD-Rp9700/USD with a monthly average of Rp9654/USDRoles of Banking in the Domestic EconomyThe 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 countriesThe 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 2011Indonesia 26.60 27.70 29.10 31.70Singapore 106.70 109.90 100.00 112.60Malaysia 96.70 111.60 110.70 112.20Phillipines 29.10 29.20 29.60 31.80Brunei 35.20 44.50 40.90 31.80Thailand 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

%

Sound Financial Sector The banking industry is more resilient, as indicated by level of CAR above the

minimum level of 8% (17.3% at the end of Dec’2012) and gross NPLs is at level below 5% (1.9% in Dec’2012).

Further improvement in National banking intermediation is also reflected in progressively 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), respectively.

BANKING PERFORMANCES

Labor Productivity Minimum Wage

Unemployment Rate Poverty Level

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

OTHER INDICATORS

The A. T. Kearney FDI Confidence Index: Indonesia's ranking rose from 20 9

• International surveys on investment prospects highlight Indonesia as one of the most attractive investment destinations..

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 2012Source: UNCTAD, July 2012 Source: The Economist, January 20137

Ranking

‘07 ‘10 ‘12

1 1 1

5 3 2

6 4 3

3 2 4

10 5 5

11 7 6

7 24 7

4 10 8

21 20 9

16 21 10

18 - 11

8 18 12

20 23 13

12 12 14

8 11 15

- - 16

13 13 17

- - 18

24 - 19

22 9 20

15 - 21

- - 22

22 6 23

    24

    25

Source: Ministry of Finance Presentation on Feb 28, 2013

OTHER INDICATORS

THE INDONESIAN THE INDONESIAN ISLAMIC BANKING INDUSTRYISLAMIC BANKING INDUSTRY

8

9

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.

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

To create Leading Islamic Banking Industry, efficient and to be chosen by public to support sustainable

economic growth (visi 2020)

High Quality HR

Supported Infrastructures

Strategic Alliances

Development of Products & Markets

Regulation and Effective Supervision

Effective Banking Structures

Effective Utilizing of Depositors

7 Pillar of Development

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

Syariah Akhlaq Ukhuwah

Aqidah

BLUE PRINT OF ISLAMIC BANKING

1

2

3

4

5

6

7

12

ECONOMIC AUTHORITIES IN INDONESIA

Fiscal AuthorityGovernment

Otoritas Jasa Keuangan

Indonesian Economic Development

Bank Indonesia

BankingNon Bank Financial

InstitutionsFinancial Markets

Financial Sector Authority

Monetary Authority

FINANCIAL SECTOR AUTHORITY MONETARY AUTHORITY FISCAL AUTHORITY Islamic Banks

Bank InfrastructuresBPR Banking Education

BPRS Health Dana Pensiun SocialPawn shopInsurance Non Bank Productive Sect MappingMultifinance Industry per regionFinancing Agriculture per project

Trade per tenorBond Markets per econ scaleStock Market

Private Projects

Financial Markets

Government Projects

Corporate Sukuk

Government Projects

Bank Indonesia

Economic Activities

Government Sukuk

Islamic Banking

LKNB syariah

Flow of Funds

Flow of Funds

Medium and Large

Business

Small and Micro

Business

Bank Umum Konvensional

Bank Umum Syariah

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

•Islamic Banking Windows

•Islamic Rural bank

•Rural Bank

•New Investors

•Baitul Maal Watamwill (BMT)

BMT

FINANCING TO SMEs

ExecutingExecuting

ICBICB

IRBIRB

MSMMSM

EsEsMSMEsMSMEs MSMEsMSMEs

Joint FinancingJoint Financing

ICBICB IRBIRB

ChannelinChannelingg

ICBICB

IRBIRB

Based on Mudharaba

Based on Wakala Based on

Musharaka

LINKAGE MODELS

ExecutingExecuting

ICB/ICB/BPRSBPRS

BMTBMT

MSMEsMSMEs MSMEsMSMEs MSMMSMEsEs

Joint FinancingJoint Financing

ICB/ICB/BPRSBPRS

BMTBMT

ChannelingChanneling

ICB/ICB/BPRSBPRS

BMTBMT

Based on Mudharaba

Based on Wakala Based on

Musharaka

LINKAGE MODELS

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.

Rp. Triliun

ISLAMIC BANKING PERFORMANCES

BANKING INDICATORS 2000 2003 2006 2007 2008 2009 2010 2011 2012 2013

Islamic banks (unit) 2 2 3 3 5 6 11 11 11 11Islamic banking units (unit) 3 8 20 25 27 25 23 23 24 24Islamic rural banks (unit) 79 84 105 114 131 138 150 154 156 158Total offices (unit) 146 337 567 683 951 1223 1763 2054 2344 2633Total asset (trillion Rp) 1.79 7.86 26.72 36.53 49.55 66.09 97.51 127.15 194.34 197Total financing (trillion Rp) 1.27 5.53 19.53 27.94 38.19 46.88 68.18 96.8 147.59 154Total deposit (trillion Rp) 1.03 5.72 20.67 25.65 36.85 52.27 76.03 101.81 147.95 151Source : Bank Indonesia, data up to February 2013

Advantages as Islamic banks during current global uncertain periods:1. 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.

2. 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

3. Reduce potential excessive speculation since islamic finance prohibits the speculative motive. Derivatives products are prohibited by islamic principles because of the existance of gharar

4. In the case of Indonesia: a. Islamic banks nature is to focus on developing small and medium enterprises as the

underlying, and there are relatively small risks involvedb. Exposure to currency risk, financial sector is relatively small

ISLAMIC BANK: PROMOTE FINANCIAL STABILITY

18

INTERNATIONAL RECOGNITION

The 4 best Islamic finance industries in the world (BMB Islamic index called Islamic Finance Country Index-IFCI, published in the Global Islamic Finance Report/GIFR) in 2011

Bank Indonesia is the best central bank in the world which promotes Islamic finance (IFN) 2012

Bank Muamalat Indonesia is the most innovative Islamic bank in the world (IFN) 2012

The world rank number 5 as the top lead arrangers for global aggregate Sukuk (Thompson Reuters Zawya Sukuk Perceptions and Forecast Study 2013)

PROSPECTPROSPECT

19

ECONOMIC PROSPECT

2010 2011 Budget2013 2012 2013

GDP 6.2% 6.5% 6.2% 6.8% 6.6% 6.8%Agriculture 3.0% 3.4% 4.0% 3.7% 4.1% 4.1% 0.51% 0.51%Mining and Quarrying 3.9% 1.4% 1.5% 2.8% 0.3% 0.3% 0.11% 0.02%Processing Industry 4.7% 6.1% 5.7% 6.5% 6.3% 6.5% 1.47% 1.62% - 1.67%Electric, Gas and Clean Water 5.3% 4.8% 6.4% 6.6% 6.7% 6.7% 0.05% 0.05%Constructions 7.0% 6.7% 7.5% 7.5% 8.8% 9.3% 0.49% 0.58% - 0.62%Trade, Hotel and Restaurant 8.7% 9.2% 8.1% 8.9% 8.1% 8.3% 1.44% 1.45% - 1.5%Transport and Communication 13.4% 10.7% 10.0% 12.1% 11.7% 11.9% 0.98% 1.19% - 1.21%Finance 5.7% 6.8% 7.2% 6.1% 6.7% 7.1% 0.69% 0.65% - 0.68%Services 6.0% 6.7% 5.2% 6.0% 5.7% 5.7% 0.49% 0.53%

Contribution to GrowthOutlook2013

2012

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.

Source: Ministry of Finance Presentation on Feb 28, 2013

OUTLOOK: ISLAMIC BANKING INDUSTRY

80,000,000

130,000,000

180,000,000

230,000,000

280,000,000

Jan-11Feb-11M

ar-11A

pr-11M

ay-11Jun-11Jul-11A

ug-11S

ep-11O

ct-11N

ov-11D

ec-11Jan-12Feb-12M

ar-12A

pr-12M

ay-12Jun-12Jul-12A

ug-12S

ep-12O

ct-12N

ov-12D

ec-12Jan-13Feb-13M

ar-13A

pr-13M

ay-13Jun-13Jul-13A

ug-13S

ep-13O

ct-13N

ov-13D

ec-13

Asset IB (actual)

Asset IB (pesimist)

Asset IB (moderate)

Asset IB (optimist)

actual

estimation

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Jan-1

1F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Jun-1

1Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Jan-1

2F

eb-1

2M

ar-1

2A

pr-1

2M

ay-1

2Jun-1

2Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Jan-1

3F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Jun-1

3Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

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3D

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3

DPK IB (actual)DPK IB (pesimist)DPK IB (moderate)DPK IB (optimist)

actualestimation actual

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

220,000,000

Jan-1

1F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Jun-1

1Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Jan-1

2F

eb-1

2M

ar-1

2A

pr-1

2M

ay-1

2Jun-1

2Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Jan-1

3F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Jun-1

3Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3

Financing IB (actual)Financing IB (pesimist)Financing IB (moderate)Financing IB (optimist)

actual

estimation actual

Total Assets Total Deposits Total FinancingPesimist 255.26 168.45 200.43Moderate 268.69 177.32 210.98Optimist 295.56 186.06 221.53Feb 2013 196.98 150.79 154.07trillions Rp

ScenariosEnd of 2013

1. 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.

2. 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

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

BANK INDONESIA POLICIES

THANK YOU

Associate Professor 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) 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). 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