MULTI-YEAR EXPERT MEETING ON SERVICES, DEVELOPMENT AND TRADE:

THE REGULATORY AND INSTITUTIONAL DIMENSION

Geneva, 6-8 April 2011

ISLAMIC BANKING IN INDONESIA:

Lessons to be learned
By

Rifki ISMAL
Directorate of Islamic Banking
Bank of Indonesia

ISLAMIC BANKING IN
INDONESIA: LESSONS TO
BE LEARNED
Expert Annual Meeting on Trade and Development
United Nations of Conferences on Trade and
Development (UNCTAD)
Geneva, April 6-8th, 2011

Rifki Ismal
Directorate of Islamic Banking
Bank Indonesia

Outline of Presentation

Background

The Indonesian Islamic Banking Industry

Legal Aspect, Infrastructure and Program of Development

Engines of Growth

Performance of the Islamic Banking Industry

Challenges of the Industry

Small Market Share

Lack of Human Resources

Lack of Product Development

Recommendations

Conclusion

Background
The Islamic banking industry develops progressively in

the world with 10%-20% annual growth.

There are at least 300 Islamic financial institutions in the
world separated in 75 countries and managing USD1-2
trillion.
It introduces the ethical banking and financial system
with no interest, speculation, inequality and uncertainty.
Instead, it promotes public welfare with the requirement
to apply an asset or project based investment in each of
Islamic financial transaction (contract).
Such industry also expands promisingly in Indonesia
with the support from public, government, Islamic
scholars, etc.
However, despite its robust performance, the Indonesian
Islamic banking industry faces some challenges mainly:
small market share, lack of human resources, lack of
product development.

The Indonesian Islamic Banking Industry:

Legal aspect, Infrastructure and Program of Development

The central bank act number 23 of 1999 amended

by act number 3 of 2004, stated that the country

operates both Islamic and conventional monetary
operations.
The banking act number 7 of 1992 and amended
by act number 10 of 1998 allows the
implementation of Islamic banks along with the
conventional ones.
In mid 2008, Indonesia has had two important acts
namely the Islamic banking act number 21 of 2008
and Sukuk act number 19 of 2008.
Recently the parliament and government discuss
and prepare zakah act and takaful act.

The Indonesian Islamic Banking Industry:

Legal aspect, Infrastructure and Program of Development

The operations of Islamic banks and, non banks Islamic

financial institutions (such as Islamic multi finance,

BMT and takaful) and are equipped by the operations of
Islamic money and capital markets.
The blue print of the development of Islamic banking
industry 2002-2015 and the revised version in 20052006.
Islamic Financial
Institution

Islamic Capital
Market

Islamic Money Market

Real Sector

Non Bank Islamic

Financial Institution

Takaful

The Indonesian Islamic Banking Industry:

Legal aspect, Infrastructure and Program of Development

The blue print applies six initiative programs to be

implemented within 10 years (2005-2015), which
are:
Increasing the Sharia compliance;
Increasing the quality of prudential banking
operations;
Increasing the operational efficiency and
competitiveness;
Increasing the stability of banking system;
Increasing the expertise and quality of human
resources;
Optimizing the social roles of Islamic banks in
developing the small and medium enterprises
(SME).

The Indonesian Islamic Banking Industry:

Legal aspect, Infrastructure and Program of Development

A grand strategy of the development of Islamic banking

industry which is now named as market development
strategic program or simply MDSP.
to position the industry as the most attractive one and
the leader among the ASEAN countries in 2009 and
2010 respectively;
to create the new image of Islamic banks which are
inclusive and universal;
to accurately map the Islamic banking potential
market;
to develop the Islamic banking products;
to improve the banking services and;
to newly communicate the position of Islamic banks
as the beyond banking.

The Indonesian Islamic Banking Industry:

Engines of Growth

At least 208 million Moslem people of 237 million

populations and almost all of them support the idea of
Islamic banks and their counterparts.
The support from banking regulators, parliament,
government and Sharia scholars, for example:
channeling program, less capital to establish a new
Islamic bank and, a linkage between placement in the
central bank certificate (SBIS) and reserve requirement
and establishment of Islamic banking committee.
The robust performance of Islamic banks has attracted
public to deposit and become business partners.
They involve in Islamic banks mainly if the banks: (i)
pay a competitive return on Islamic deposits and (ii)
have a complete banking facilities and services.
The performance of the Indonesian economy backs up
the business operations of Islamic banks.

The Indonesian Islamic Banking Industry:

Performance of the Islamic Banking Industry

Until the latest data of Jan 2011, there are 11 Islamic

Banks (BUS), 23 Islamic Banking Unit (UUS) and 151
Islamic Rural Banks (BPRS), integrating 1796 offices.
In the last 5 years, the industry grows 46% per year (the
world growth is 10%-20% per year). The 2010 growth
was recorded 47%.
The Financing to Deposit Ratio (FDR) has been lying on
117.12% (December 2000 to January 2011). Non
Performing Financing (NPF) stands between 2%-5% of
the total financing.
The total assets of Jan 2011 was Rp95.74 trillion with
total financing of Rp69.72 trillion and the total deposits
of Rp75.81 trillion.
Total capital of 2010 has passed Rp100 billion matching
the requirement of the Indonesian Banking Architecture
(API)

The Indonesian Islamic Banking Industry:

Performance of the Islamic Banking Industry

3.5

2.5

1.5

0.5

Oc t-10

A pr-10

Oc t-09

A pr-09

Oc t-08

A pr-08

Oc t-07

A pr-07

Oc t-06

A pr-06

Oc t-05

A pr-05

Oc t-04

A pr-04

Oc t-03

A pr-03

Oc t-02

0
A pr-02

Both the growth of assets and financing of Islamic

banks stand in a higher growth rate than conventional
ones.
Such a progressive growth is also implied in the
upward trend of the Islamic banking market share

Oc t-01

The Indonesian Islamic Banking Industry:

Performance of the Islamic Banking Industry

The share of investment based financing have

captured 34% of total financing (trade based = 56%).
No application the controversial contracts such as Bay
al Innah, Bay al Wafa, Tawarruq, Bay al Dayn.
Liquidity shortages or surpluses is solved through the
Islamic money market (PUAS) but market activities
are not very active.

The Indonesian Islamic Banking Industry:

Performance of the Islamic Banking Industry

Placing funds in the central banks Islamic monetary

instrument (SBIS). But, this is not the primary target
of their financing (only 2.6% of total financing).
Despite PUAS and SBIS, there is the Islamic capital
market to locate funds in the long term investment.
Until the end of 2010, total government Sukuk was
USD4.4 billion.

The Indonesian Islamic Banking Industry:

Performance of the Islamic Banking Industry

Based on sector, most of Islamic banks financing go

to other sector (35%), commercial sector (28%) and
trade, hotel and restaurant sector (10%).
Meanwhile, most of them are for working capital
financing (45%) followed by consumption (35%) and
investment (19%).

30,000,000

35,000,000
Working Capital

25,000,000

Investment

30,000,000

Consumption

Commercial Sector
Other Sector
20,000,000

25,000,000

Trade, hotel, restaurant

20,000,000

15,000,000
15,000,000

10,000,000
10,000,000

5,000,000

5,000,000

0
Nov-10

Aug-10

May-10

Feb-10

Nov-09

Aug-09

May-09

Feb-09

Nov-08

Aug-08

May-08

Feb-08

Nov-07

Aug-07

May-07

Feb-07

Nov-06

Aug-06

May-06

Feb-06

Nov-10

Jul-10

Mar-10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

Nov-04

Jul-04

Mar-04

The Indonesian Islamic Banking Industry:

Performance of the Islamic Banking Industry

Placing funds in the central banks Islamic monetary

instrument (SBIS). But, this is not the primary target
of their financing (only 2.6% of total financing).
Despite PUAS and SBIS, there is the Islamic capital
market to locate funds in the long term investment.
Until the end of 2010, total government Sukuk was
USD4.4 billion.

Challenge of the Industry:

Small Market Share

It is because:
the limited involvement of the government funds.
the non comprehensive understanding of depositors,
business partners and public.
the limited number of Islamic banks and windows.
If the government is willing to:
locate hajj funds (USD2.6 billion) in Islamic banks,
invest assets of state owned companies (USD250
billion) in Islamic banks,
convert at least one of 4 state banks (total assets of
USD111.5 billion) into Islamic banks,

the market share would go up significantly.

Challenge of the Industry:

Small Market Share

The public support Islamic banks but they are realistic

thus robust performance of Islamic banks is one of the

key success factors to boost the market share of the
industry.
The limited number of Islamic banks restrains the
industry to optimally utilize the domestic demand from
Moslem population. But, almost all of Islamic banks in
Indonesia are retail banks which extend financing
directly to real sector.
They do not seek profit from trading Islamic securities
in Islamic money market, Islamic capital market and
Islamic stock market.
The ideal practices of Islamic banks should directly
extend funds to the real sector and seek profit directly
from the robust performance of the real sector.

Challenge of the Industry:

Lack of human resources

The number of offices accelerates 44.5% and it

needs additional human resources.

It cant be fulfilled because:
the limited formal and informal institutions teaching
Islamic banking/finance.
the lack of books on Islamic banking and finance.
No Islamic banking and finance curriculum in all level
of the national education system.

Ideal human resources should understand both the

conventional and Islamic finance perfectly.

But, almost all of the government and private
universities in Indonesia do not have Islamic
banking/finance program.

Challenge of the Industry:

Lack of product development

The industry also has limited products. However, the

existing contracts are all classic contracts.

Even though there are a variety of banking products, if
the public is less understood, it would be useless.
Recommendation:

To expand the market share, it needs to intensify and

integrate efforts to socialize Islamic banking.

To increase the human resources: (i) give incentives to
establish formal and informal institutions teaching
Islamic banking/finance, (ii) add Islamic finance lessons
in the national curriculum and, (iii) encourage
publication of Islamic banking/finance books.
It needs to create and offer more varieties of products on
both liability and asset sides