1
INDONESIAN ISLAMIC BANKING:
CURRENT PERFORMANCE
AND PROSPECT
Associate Professor Rifki Ismal
Guest Lecture in the
Singapore Management University (SMU)
Singapore, 2-3 April 2013
2
UNDERLYING ECONOMIC AND
BANKING CONDITIONS
ECONOMIC PERFORMANCES
5 years average growth China and BBB-/BBB/BBB+
peers country (%)
12
10.5
10
8.1
8
5.9
6
4.4
4.3
4
•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%
3.6
2.9
2.6
1.5
2
0
Headline Inflation
10,0
9,0
8,0
7,0
6,0
5,0
4,0
3,0
2,0
1,0
0,0
yoy (%)
Headline Inflation
9,17
7,02
6,44
4,50
3,72
5,67
4,57
4,61
3,56
2,41
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
Source: BPS, (2012)
Source: Indonesia Statistic Bureau (BPS), Bloomberg, Moody’s (Ministry of Finance Presentation on Feb 28, 2013
ECONOMIC PERFORMANCES
Exchange Rate
Rp is relatively stable between Rp9600/USDRp9700/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%
%
160
140
2008
2009
120
2010
2011
100
80
60
40
20
0
Indonesia
Singapore
Malaysia
Phillipines
Brunei
Thailand
Indonesia
Singapore
Malaysia
Phillipines
Brunei
Thailand
2008
26.60
106.70
96.70
29.10
35.20
113.00
2009
27.70
109.90
111.60
29.20
44.50
116.40
2010
29.10
100.00
110.70
29.60
40.90
123.90
2011
31.70
112.60
112.20
31.80
31.80
140.10
BANKING PERFORMANCES
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.
OTHER INDICATORS
Unemployment Rate
Poverty Level
11%
18%
15%
9%
Sept-12:
11.66%
12%
Aug-12: 6.14%
7%
5.8%-6.1%
5%
9%
9.5-10.5%
6%
2007
2008
2009
2010
2011
2012
2013
target
2007
Labor Productivity
2008
2009
2010
2011
2012
2013
target
Minimum Wage
1200
80
25%
Minimum Wage
70
Labour Productivity, Current Price
60
Labour Productivity, Riil Price
Minimum Wage Growth
1000
20%
800
15%
50
40
600
10%
30
20
400
5%
200
10
0
0
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Ministry of Finance Presentation on Feb 28, 2013
6
OTHER INDICATORS
• International surveys on investment prospects highlight Indonesia as one of the
most attractive investment destinations..
The A. T. Kearney FDI
Confidence Index: Indonesia's
ranking rose from 20  9
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
Ranking
‘07
‘10
‘12
1
5
6
3
10
11
7
4
21
16
18
8
20
12
8
13
24
22
15
22
1
3
4
2
5
7
24
10
20
21
18
23
12
11
13
9
6
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
China
India
Brazil
United States
Germany
Australia
Singapore
United…
Indonesia
Malaysia
South Africa
Russia
Turkey
Vietnam
United Arab…
Thailand
France
Taiwan
South Korea
Canada
Japan
Switzerland
Poland
Spain
The…
Source: UNCTAD, July 2012
Source: A.T. Kearney, February 2012
Source: The Economist, January 2013
Source: Ministry of Finance Presentation on Feb 28, 2013
7
8
THE INDONESIAN
ISLAMIC BANKING INDUSTRY
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.
9
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
Social Driven Islamic Banking Development
More than 200 million are Moslem Population and Support Islamic Banks
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
Robust Domestic Economy (Less Affected by Global Financial Crisis)
Supportive Social and Political Situation
BLUE PRINT OF ISLAMIC BANKING
To create Leading Islamic Banking Industry, efficient
and to be chosen by public to support sustainable
economic growth (visi 2020)
7 Pillar of Development
High Quality HR
1
2
Supported
Infrastructures
Strategic
Alliances
3
4
Regulation and
Effective Supervision
Development of
Products & Markets
5
6
Effective Utilizing
of Depositors
Effective Banking
Structures
Legal foundations, related regulatory standards, standard setting, and fatwas
Syariah
Akhlaq
Aqidah
Ukhuwah
7
ECONOMIC AUTHORITIES IN INDONESIA
Banking
Fiscal Authority
Government
Non Bank Financial
Institutions
Financial Sector
Authority
Otoritas Jasa Keuangan
Financial Markets
Monetary Authority
Bank Indonesia
Indonesian Economic
Development
FINANCIAL SECTOR AUTHORITY
Islamic Banks
Islamic
Banking
BPRS
LKNB syariah
Government
Sukuk
Corporate
Sukuk
Bank
BPR
MONETARY AUTHORITY
Bank Indonesia
Banking
Dana Pensiun
Pawn shop
Insurance
Multifinance
Financing
Non Bank
Bond Markets
Stock Market
Financial
Markets
FISCAL AUTHORITY
Government
Projects
Flow of Funds
Economic Activities
Flow of Funds
Productive Sect
Industry
Agriculture
Trade
Private Projects
Government
Projects
Infrastructures
Education
Health
Social
Mapping
per region
per project
per tenor
per econ scale
12
FINANCING TO SMEs
Investors
of BPR/S
Bank Umum
Konvensional
Medium and
Large
Business
UUS
BMT
Bank Umum
Syariah
Small and
Micro
Business
SMEs Financing is done by:
•Conventional Banks
•Islamic Banks
•Islamic Banking Windows
•Islamic Rural bank
•Rural Bank
•New Investors
Existing
BPRS
New
BPRS
Existing
Community
New
Community
Existing
BPR
Existing
Community
New
BPR
New
Community
•Baitul Maal Watamwill (BMT)
LINKAGE MODELS
Executing
Channeling
ICB
ICB
Based on
Mudharaba
IRB
MSMEs
Based on
Wakala
Joint Financing
IRB
ICB
Based on
Musharaka
IRB
MSMEs
MSMEs
LINKAGE MODELS
Executing
Channeling
ICB/BPRS
ICB/BPRS
Based on
Mudharaba
BMT
MSMEs
Based on
Wakala
Joint Financing
BMT
ICB/BPRS
Based on
Musharaka
BMT
MSMEs
MSMEs
ISLAMIC BANKING PERFORMANCES
Rp. Triliun
250,000,000
60%
ASSET (left axis)
GASSET
Gfinancing
Gdeposit
50%
200,000,000
40%
150,000,000
30%
100,000,000
20%
50,000,000
10%
0%
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
Mei-08
Juli-08
Sept - 08
Nov-08
Jan-09
Mar-09
Mei-09
Jul-09
Sept-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Feb-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
0
BANKING INDICATORS
Islamic banks (unit)
Islamic banking units (unit)
Islamic rural banks (unit)
Total offices (unit)
Total asset (trillion Rp)
Total financing (trillion Rp)
Total deposit (trillion Rp)
2000
2
3
79
146
1.79
1.27
1.03
2003
2
8
84
337
7.86
5.53
5.72
Source : Bank Indonesia, data up to February 2013
2006
3
20
105
567
26.72
19.53
20.67
2007
3
25
114
683
36.53
27.94
25.65
2008
5
27
131
951
49.55
38.19
36.85
2009
6
25
138
1223
66.09
46.88
52.27
2010
11
23
150
1763
97.51
68.18
76.03
2011
11
23
154
2054
127.15
96.8
101.81
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.
2012
11
24
156
2344
194.34
147.59
147.95
2013
11
24
158
2633
197
154
151
ISLAMIC BANK: PROMOTE FINANCIAL STABILITY
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 involved
b. Exposure to currency risk, financial sector is relatively small
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)
18
19
PROSPECT
ECONOMIC PROSPECT
2010
GDP
Agriculture
Mining and Quarrying
Processing Industry
Electric, Gas and Clean Water
Constructions
Trade, Hotel and Restaurant
Transport and Communication
Finance
Services
6.2%
3.0%
3.9%
4.7%
5.3%
7.0%
8.7%
13.4%
5.7%
6.0%
2011
6.5%
3.4%
1.4%
6.1%
4.8%
6.7%
9.2%
10.7%
6.8%
6.7%
2012
6.2%
4.0%
1.5%
5.7%
6.4%
7.5%
8.1%
10.0%
7.2%
5.2%
Budget
2013
6.8%
3.7%
2.8%
6.5%
6.6%
7.5%
8.9%
12.1%
6.1%
6.0%
Outlook
2013
6.6%
6.8%
4.1%
4.1%
0.3%
0.3%
6.3%
6.5%
6.7%
6.7%
8.8%
9.3%
8.1%
8.3%
11.7%
11.9%
6.7%
7.1%
5.7%
5.7%
Contribution to Growth
2012
2013
0.51%
0.11%
1.47%
0.05%
0.49%
1.44%
0.98%
0.69%
0.49%
0.51%
0.02%
1.62% - 1.67%
0.05%
0.58% - 0.62%
1.45% - 1.5%
1.19% - 1.21%
0.65% - 0.68%
0.53%
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
Finance
7.0%
Transportati
on
6.5%
Services
10.3% Agriculture
15.6%
Mining
12.3-12.4%
Trade
13.0%
Industry
24.2.3%
Constructio
n
Electricity
10.3%
0.8%
OUTLOOK: ISLAMIC BANKING INDUSTRY
220,000,000
280,000,000
actual
200,000,000
Asset IB (actual)
230,000,000
180,000,000
estimation
Asset IB (pesimist)
Financing IB (actual)
Financing IB (pesimist)
Financing IB (moderate)
Financing IB (optimist)
Asset IB (moderate)
160,000,000
Asset IB (optimist)
180,000,000
actual
140,000,000
120,000,000
estimation
actual
130,000,000
100,000,000
80,000,000
80,000,000
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
60,000,000
200,000,000
180,000,000
160,000,000
Scenarios
140,000,000
Pesimist
Moderate
Optimist
Feb 2013
trillions Rp
120,000,000
100,000,000
80,000,000
actual
estimation
actual
60,000,000
40,000,000
20,000,000
DPK
DPK
DPK
DPK
IB
IB
IB
IB
(actual)
(pesimist)
(moderate)
(optimist)
0
End of 2013
Total Assets Total Deposits Total Financing
255.26
168.45
200.43
268.69
177.32
210.98
295.56
186.06
221.53
196.98
150.79
154.07
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
BANK INDONESIA POLICIES
1.
2.
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.
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
THANK YOU
SHORT BIO
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)