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OVERVIEW OF ISLAMIC BANKING REGULATIONS IN INDONESIA Dr. Rifki Ismal Assistant Director Department of Islamic Banking – Bank Indonesia

International Course on Financing Scheme in Islamic Banking & Finance for AMED Member Countries Batch 3 Jakarta, 17-19 September 2012 1

Overview of the Indonesia’s Islamic Banking Regulations 

Policy Background of Bank Indonesia’s Islamic Banking Regulation (vision, mision, Direction, Paradigm)

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Banking Regulation by Bank Indonesia (Legal Base, Authority, Reason)

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Reference and Hierarchy of the Bank Indonesia Regulations

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The Process of Islamic Banking Regulation

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Types of Bank Indonesia Regulation

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Framework for Development of Islamic Banking, and Direction of Regulation based on Islamic Banking BluePrint.

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Act No. 21/2008 concerning Islamic Banking

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Policy Background of the Bank Indonesia Regulations concerning Islamic Banking

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(Vision, Mision, Policy Direction and Paradigm) Islamic Banking Development in Indonesia

VISION

Establishing a strong and sound Islamic Banking System which is consistent towards the implementation of sharia principles in the spirit of justice, general well-being and balanced-living, to promote social prosperity in term of material and spiritual

Islamic Banking Development in Indonesia

MISSION

To create a conducive environment for developing competitive and efficient Islamic Banking which complies to sharia principles and prudential standards, as well as which has capability of supporting real economic sector through the implementation of share-based financing and trades with real underlying transactions to promote national economic growth 3

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Infrastructure of Islamic Finance in Indonesia Islamic Banking Committee

National Sharia Board IAI Baznas Basyarnas Sharia Supervisory Board Islamic Insurance/Takaful

Islamic Banks

UUS Depositors - Public - Government - Foreign (limited)

Associations Central Bank Investment Certificate Medium and Large Business Islamic Money Market

BPRS

Real Sectors Islamic Capital (Sukuk) Market

BMT Small and Micro Business Guarantee Deposits (LPS)

Non bank

Islamic Stock Market 4

Policy Background of the Bank Indonesia Regulation concerning Islamic Banking (Vision, Mision, Policy Direction and Paradigm) POLICY DIRECTION : • Expansive and prudent  preparing condusive regulation in supporting growth with effective supervision • Innovative, educative and comprehensive  provide financial services to community through product development with intense public education • Internationally qualified and domestic oriented  directing domestic dominance with international operational quality • Selected open  supporting national economy by inviting international investor beside domestic investor concern to justice and equality • Human capital investment  supporting human capital development who has capability, competency and good faith 5

Policy Background of Bank Indonesia Syariah Regulations Paradigma Kebijakan Perbankan concerning Islamic Banking (Vision, Mision, Policy Direction and Paradigm)

POLICY PARADIGM :

1. Directed Market Driven  directing market preference to build Islamic Banking industry which sound, strong, and consistency in Islamic principle 2. Fair Treatment  building fair competition in Islamic Banking industry 3. Gradual & Sustainable Approach  priority and development focus based on situation and condition, also building in stages and continuity. 4. Sharia Compliance  Industry regulation and infrastructure development suitable with Islamic Principle 5. Professional  Each development effort based on expertise consideration and good governance 6

BANKING REGULATIONS – LEGAL BASIS Article 8, Act No. 23/1999 concerning BI amended By Act No. 3/2004 & Act. No. 6 Thn 2009: BI’s Task : a. Monetary; b. Payment System ; c. Bank Regulation and Supervision

Bank Indonesia is the authority of banking regulation and supervision in Indonesia (included for Islamic banking)

Article 29 (1) , Act No.7 /1992 concerning Banking as amended by Act No. 10/1998 : Bank’s Guidance and Supervision conducted by Bank Indonesia

Article 50, Act No. 21/2008 concerning Islamic Banking : The Guidance and Supervision of Islamic Bank and UUS conducted by Bank Indonesia

Financial Service Authority (OJK) is the New Financial Sector Authority (2013-future) 7

ECONOMIC AUTHORITIES IN INDONESIA FINANCIAL SECTOR AUTHORITY Islamic Banks Islamic Bank Windows IRB IRB Pension funds Islamic Non Pawnshop Banks Insurance Mutual funds Government Multifinance sukuk Bond market Corporate stock market sukuk

MONETARY AUTHORITY Bank Indonesia Banking

FISCAL AUTHORITY Government Projects

flow of funds Non Bank

Economic Activities Flow of funds

Financial markets

Productive sector Industry Agriculture Trading

Government Projects Infrastructure Education Health Social Mapping per area per project per tenor per economic scale

Private Projects

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BANKING REGULATION – BI’S AUTHORITY In order to fulfill the task of banking regulation and supervision, BI has the authorities to : •

issue regulation

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license Islamic banking institutional and business activities supervise impose sanction

Sound banking and financial system

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BANKING REGULATIONS – WHY IS IT NEEDED ?

1. Maintaining banking and financial stability (macro prudential) and bank’s going concern (micro prudential). 2. Protecting customers  especially small customers and public community. 3. Optimizing banking institution as sources of funds to support economic development program. 4. Anticipating banking fraud.

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REFERENCE OF BI’S ISLAMIC BANKING REGULATION 

International i.e. : - IFSB (Islamic Financial Services Board)  Head quarter is in Malaysia

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AAOIFI (Accounting and Auditing Organization for Islamic Financial Institution)  Head quarter is in Bahrain - BIS (Bank for International Settlements)  Head quarter is in Switzerland

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National i.e. : - Relevan regulation principles in conventional banking - Fatwas/opinion of Sharia National Board - Accounting Standard - Consideration & input from Islamic banking industry best practices

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Decision Making Process of the Islamic Banking Regulations BI’s Board of Governor Islamic Banking General Policy

Bank/ Sharia Banking Committee/National Sharia Board/Sharia Bank Association/Other party

BI’s Islamic Banking Department

BI’s Other Departments

Other Team/Department

Regulation Team

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Islamic Banking Regulation Initial Draft

Information & Input Information & Input - research result - bank supervision - licensing practices

Legal Review by DHk

KEP and RDG

Legal Review and finalised draft

DHk = Legal Directorate ;

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4

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Regulation Explanation

Information & Input

Final and Legalised of Regulation

KEP = Banking Evaluation Committee/Forum ;

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Regulation Explanation

RDG = Board of Governor ‘s Meeting

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TYPES OF BANK INDONESIA REGULATION I.

Islamic Banking Institution  new product needs BI’s approval (if it is not covered in a codification book), bank establishment, bank’s management and ownership

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Prudential  asset quality, minimum capital, bank rating

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Payment System/ Financial market/Monetary  SBIS, sharia interbank money market, statutory reserve (GWM)

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Accounting Standard & Reporting  PSAK 59 Islamic banking, PAPSI 2003, Bank’s Monthly report 13

ENTRY GATE FOR ISLAMIC COMMERCIAL BANKING SERVICES Establishing a New Islamic Bank (Rp. 1 trillion) Conversion of Conventional to Islamic Bank (Rp. 100 Billion)

Islamic Banking Services

Dual System Bank (Islamic Business Unit/ UUS)

(Rp. 100 Billion)

Spin Off UUS to IslamicBank (Rp. 500 Billion  Rp. 1 Trillion in 10 yr) 14

LATEST BANKING REGULATIONS (2011-2012) No

Type

Regulatory Aspect

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PBI number 14/6/PBI/2012 Fit and proper test in Islamic banks and Islamic (June 18th, 2012) banking unit (UUS)

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Circular Letter number Product of gold financing in Islamic banks and Islamic 14/6/DPbS (May 31st, 2012) banking unit (UUS)

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Circular Letter number Product of Qardh (benevolent loan) with gold as a 14/7/DPbS (February 29th, 2012) collateral (Rahn)

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PBI number 13/23/PBI/2011 Risk Management for Islamic banks and Islamic (November 2nd, 2011) banking unit (UUS)

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Circular Letter number Financing restructuring in Islamic banks and Islamic 13/18/DPbS (May 30th, 2011) banking unit (UUS)

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Circular Letter number Maximum financing for Islamic Rural Banks (BPRS) 13/17/DPbS (May 30th, 2011)

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Circular Letter number Monthly report of Islamic Rural Banks (BPRS) 13/15/DPbS (May 30th, 2011)

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Circular Letter number Asset quality valuation for Islamic Rural Banks (BPRS) 13/11/DPbS (April 13th, 2011) 15

FRAMEWORK ISLAMIC BANKING DEVELOPMENT AND Framework Pengembangan DIRECTION of REGULATION BASED ON BLUEPRINT Economic growth & real sector, reducing poverty and unemployment

National 10 Years Master Plan

Sound and strong Islamic banking which supporting the creation of stable, sound, and efficient financial system

Shariah Supervision

Operational & Product of Islamic banking

Fatwas & Islamic Principles

Indonesia’s Financial and Banking Architecture

Prudential Supervision

Prudential Banking Regulations

Islamic Banking Development based on Blueprint... 16

FRAMEWORK OF ISLAMIC BANKING DEVELOPMENT BASED ON BLUEPRINT Islamic Banking Blueprint : Effective Regulation and Supervision Pillar Development target

Industrial Condition

Strategic Initiatives

Strategic Initiatives

2009-2012

2013-2015

Regulation Based by Research Research that support effective development policy, regulation and supervision

- Regulatory cycle backed up - Developing of regulation mechanism and infrastructure by research and supervised - Cooperation with distinguished research centre and/or regional that needed the development research centre in order improving research quality and quantity

Regulation that accomodate international standard such as IFSB, AAOIFI, IASB, and BIS

- Limitation for adaption of - Improvement of international cooperation in regulation changes in international research development in improving configurated effort and standard coordination with industry in implementation process.

Framework Sharia in Regulation Regulation which adopted - Accomodate Fatwa into -Supporting issuance of fatwas sharia research based in area of comprehensive sharia principles existing banking regulation management, governance, market discipline, financial stability and and norm . business ethic . - Need further adjustment in - Developing coordination with KPS or relevan institution to non financial aspect positivism fatwa in framework of prudential, positive law and good management quality 17

Rifki Ismal was born in Bogor (West Java – Indonesia) and earned bachelor degree in economics from Faculty of Economics, University of Indonesia (FEUI). In 2002, he graduated from University of Michigan, ann arbor (USA) for his master degree in applied economics and got a PhD in Islamic economics and Finance from Durham University (England). Finally, he was awarded an Associate Professor in Islamic Banking and Finance from Australian Government (Australian Center for Islamic Financial Studies) in 2012. Besides working as a senior bank researcher at Bank Indonesia (central bank of Indonesia), since 1997 he has been lecturing at FEUI especially in its graduate school of management (MMUI), graduate school of accounting (MAKSI) and the undergraduate program. While actively doing economic and banking research projects and giving lectures, he has ever been a visiting researcher at Bank for International Settlements (BIS) – Hongkong in 2006, and a lecturer at MSc Islamic finance program of the Strasbourg University (France) in 2009. Recently, he is part of the IFSB (Islamic finance service board) working groups in Kuala Lumpur. Moreover, he has published academic research papers in various International journals such as: (1) Review of Islamic Economics (England); (2) Journal of Islamic Banking and Finance (Pakistan); (3) Journal of Islamic Economics, Banking and Finance (Bangladesh); (4) IQTISAD International Journal of Islamic Economics (Indonesia – Malaysia); (5) International Journal of Management Research (India and University of Philadelphia, USA); (6) ISRA International Journal of Islamic Finance (Malaysia); (7) Gadjah Mada International Journal of Business (Indonesia); (8) Kyoto Bulletin of Islamic Studies (Kyoto University, Japan); (9) Al-Liqa Journal (Palestine) and; some Emerald Journal Series (England) such as: (10) Humanomics International Journal of system and ethic; (11) International Journal of Islam and Middle Eastern Finance; (12) Journal of Studies in Economics and Finance and; (13) International Journal of Qualitative Research. As an active researcher, he is also an editor of: (1) the International Journal of Islam and Middle Eastern Finance (Emerald journal series – England), (2) the International Journal of Art Sciences and Commerce, the Research worlds (India) and, (3) the Australian Journal Islamic Banking and Finance (Australia). Lastly, Dr. Ismal is an active speaker in international conferences and seminars on Islamic banking and finance such as the ones organized by: (1) London School of Economics, (2) Edinburgh University, (3) Leicester University, (4) Durham University, (5) Islamic Development Bank (IDB), (6) UNCTAD (United Nations), Hong Kong Monetary Authority (HKMA), and (7) University of Robert Schuman (France). 18

Wass. Wr. Wb. TERIMA KASIH

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