FINANCIAL INSTITUTIONS: ISLAMIC VS

CONVENTIONAL IN INDONESIA

Presenter:

Nik Nainunis bt Abdul Ghani

Nurul Nadia bt Abdull Rashid

Nor Hafizah bt Samanal

agenda

Introduction

The Structure of Indonesia’s

Financial system

History

Regulation

Performance

Conclusion

Learning Outcomes

• At the end of this chapter, you should be able to:

Understand the main ideas behind the financial system, history and development both Islamic and conventional in Indonesia.

Differentiate the regulation involve in Islamic and conventional

Identify the Islamic and conventional performance of the Indonesia bank.

Introduction

- Largest

archipelago in the

world consisting of

over 17,508 islands

and 336 ethnic

group who speak

more than 250

different languages

and dialects

Indonesia’s

population ± 225

million with 85% of

this population is

Muslim, with a

GDP per capita

USD 3,475

a) Mazhab map:

-Sunni and follow

the Syafii

Mazhab

b) Perception on

Bank interest

General

informationPopulation

Indonesian

Muslim

POPULATION

Source: World Islamic Banking

Competitiveness Report 2013-2014

The Structure Of Indonesia’s Financial System

• Indonesia evolve to a dual financial system.

• Islamic financial services co-exist with itsconventional counterpart in all financial sub-sectors, and legalized (Islamic Banking Act 1992,1998 and 2008).

Cont…

Banking

institutions

such as

commercial

banks,

saving banks

and

development

banks

Non banking

financial

institutions

such as

security

companies,

leasing

companies,

insurance firm

and factoring.

Sharia

Financial Institutions

History of Islamic Banking in Indonesia

• 1991 - The establishment of the first Islamic Bank isBank Mualamat (Jakarta).

• In 1999, the second Islamic bank in Indonesia wasopened is Bank Shariah Mandiri and followed bysome commercial banks that opened its IslamicBanking units.

• Furthermore, another significant event took place in2002, when Indonesia Central Bank issued“Blueprint of Islamic Banking Development inIndonesia”.

Cont…

• In July 2004, the third Islamic bank in Indonesia isBank Mega Shariah that is from Bank Tugu.

• In addition, Indonesia Central Bank issued “officechanneling policy”, in 2006.

• Subsequently, on July 2007 witnessed the launchedof Shariah banking logo to socialize and improve theawareness of society regarding Islamic banking.

The Characteristics of Islamic Finance

Prohibited of

interest (riba)

Profit and loss

sharing

Prohibited of

Maysir

Prohibited of

Gharar

History of Commercial Banking Industry in Indonesia

• 1953 - Enactment of the central bank Act No.11 of1953 concerning Principal Act on Bank Indonesia.

• the formation of the Sole Bank in 1965, its processhad begun since 1959. BI operated under the nameof Bank Negara Indonesia Unit I and maintained itsrole as the Central Bank as previous BI.

• In 1960, the government established BankPembangunan Indonesia, especially for financingdevelopment projects.

Cont…

• In 1967, the government and Parliament issuedBanking Act No 14/1967 as a basis for the bankingindustry in Indonesia.

• Banking Act 1967 classified banks based on theirspecialization into general banks, saving banks anddevelopment banks, private banks, foreign banksand cooperative general bank.

CONT…

• The changes of BI’s policies through monetary andbanking deregulations announced from 1983 to 1991demanded the revisions of the banking system inIndonesia. As a result, Act No. 14 of 1967 and ActNo. 7 of 1992 on Banking was amended.

• Finally, in the end of 2003, Act No. 23 of 1999concerning Bank Indonesia was amended anddeclared as Act No. 3 of 2004 on 15 January 2004

MAIN BANKING ACT

Banking Act No. 7, 1992 (amended

Act 10, 1998

Banking Act No. 72, 1992

Banking Act No. 23, 1999

(amended Act 3, 2004)

Banking Act No.21, 2008

Sources :(Majid & Ghazali, 2012)

REGULATION

Establishment

Business operation

Bank management

Capital Adequacy

Requirement

Transparency of Bank

Financial Condition

ESTABLISHMENT

• Commercial banks may only be established and conduct business activities with a license of Board of Governors of BI.

• The paid up capital for establishment of a Commercial Bank is stipulated at no less than Rp 3 trillion and paid up capital for establishment of islamic commercial bank is stipulated at no less than Rp 1 trillion

Bank Indonesia Regulation Number 14/15/PBI/2012 Concerning Assessment Of Commercial Bank

Asset Quality

Bank Indonesia Regulation Number 12/21/PBI/2011 Concerning Bank Business Plan

Bank Indonesia Regulation Number 14/14/PBI/2012 Concerning Bank Report Transparency and

Publication

Bank Indonesia Regulation Number 15/1/PBI/2013 Concerning Credit Bureau

Bank Indonesia Regulation Number 14/27/PBI/2012 Concerning Implementation of Anti Money

Laundering and Combating the Financing of Terrorism Program for Commercial Bank

Bank Indonesia Regulation Number 14/18/PBI/2012 Concerning Minimum Capital Adequacy

Requirement for Commercial Banks

Bank Indonesia Regulation Number 14/17/PBI/2012, dated 23rd November 2012 Concerning Bank

Business Activity in the Form of Trust

Bank Indonesia Regulation Number 13/19/PBI/2011 Concerning The Amendment to Bank Indonesia

Regulation Number 8/12/PBI/2006 Concerning The Periodic Report of Commercial Bank

Bank Indonesia Regulation Number 12/19/PBI/2010 Concerning Statutory Reserves In Rupiah and

Foreign Currency for Commercial Banks

BUSINESS OPERATION• Commercial Bank

BUSINESS OPERATION

Bank Indonesia Regulation Number 13/23/PBI/2011 Concerning The Implementation of Risk

Management in Islamic Commercial Banks and Islamic Business Units

Bank Indonesia Regulation Number 13/13/PBI/2011 Concerning Asset Quality Rating For Islamic

Commercial Banks And Islamic Business Units

Bank Indonesia Regulation Number 13/9/PBI/2011 Concerning Amendment to Bank Indonesia

Regulation Number 10/18/PBI/2008 Concerning Restructuring of Financing for Islamic Banks

and Islamic Business Units

Bank Indonesia Regulation Number 11/33/PBI/2009 Concerning The Implementation of Good

Corporate Governance by Islamic Commercial Banks and Islamic Business Units

Bank Indonesia Regulation Number 11/15/PBI/2009 Concerning Conversion of

Business Activities from Commercial Bank to Sharia Bank

Bank Indonesia Regulation Number 11/10/PBI/2009 Concerning Sharia Business Units

Bank Indonesia Regulation Number 11/3/PBI/2009 Concerning Sharia Commercial Bank

Bank Indonesia Regulation Number 10/32/PBI/2008 Concerning Sharia Banking Committee

Bank Indonesia Regulation Number 10/18/PBI/2008 Concerning Restructuring of Financing for

Islamic Banks and Islamic Business Units

• Islamic Commercial Bank

BANK MANAGEMENTBoard of Commissioners & Board Directors Sharia and conventional Commercial Bank

Conventional Sharia

SIMILARITIES

The number of members of a Board of Commissioners of a conventional Commercial Bank is a minimum 3

members and a maximum the same number as the members of the Board of Directors. At least 1 of the

members of a Board of Commissioners must be domiciled in Indonesia.

A Board of Commissioners is chaired by a President Commissioner.

A board of Commissioners consists of the Commissioner and Independent Commissioners

A minimum 50% of the total members of a Board of Commissioners are Independent Commissioner.

A majority of the members of a Board of Director

must have a minimum 5 years’ experience in bank

operations as an executive manager of a bank.

The majority of members of the Board of Directors

are obliged to have a minimum experience of 4

(four) years at least as Executive Officer in banking

industry such as at least 1 (one) year as Executive

Officer in Islamic Bank and/or Islamic Business

Unit.

A Board of Directors is fully responsible for the

management of a Bank.

The Board of Directors is fully responsible for the

management implementation of Sharia Bank based

on prudential and Sharia principles.

CAPITAL ADEQUACY REQUIREMENT

Conventional Sharia

• Bank is obliged to provide minimum

capital amounting to 8% of the Risk

Weighted Assets (ATMR).

• Islamic Commercial Banks based on

SHARIA principles and are required to

set aside minimum capital at 8% of

risk weighted assets.

• NOT required to set aside the

minimum capital in respect of risk

weighted assets of business based on

sharia principles

• Islamic Business Units are required to

set aside the minimum capital in

respect of risk weighted assets of

business based on sharia principles

TRANSPARENCY OF FINANCIAL CONDITION

Conventional Sharia

NOT disclose related to zakat infaq,

and sadaqah.

Disclose the report on sources and

use of qardh fund and the fund

related to zakat, infaq and sadaqah

(ZIS) as well as the statement of

change of restricted investment

fund (if any).

Required to disclose their financial

condition to BI and the public in

monthly, quarterly, and annual

reports.

Required to provide information on

quarterly profit sharing distribution

and for the position of June and

December.

OPERATION

Conventional Sharia Mobilizing funds from the public in the form of

deposits comprising demand deposits, time deposits,

certificates 10 of deposit, savings deposits, and/or

other equivalent form;

Mobilizing fund in the form of saving comprising

demand deposit, saving deposit or other equivalent

form based on wadi’ah agreement or other agreement

not in contravention with Sharia principles;

Conducting activities in foreign currencies with due

observance to the regulation of BI;

Conducting activities in foreign currency based on

Sharia principles;

Acting as founder and the management of a pension

fund in accordance with the prevailing laws on

pension funds

Acting as the founder and the manager of pension

fund based on Sharia principles;

Accepting payments in respect or claims for

securities, settling accounts with or among third

parties;

Accepting payment of liabilites on securities and

negotiating with a third party or among third parties

based on Sharia principles;

Conducting other business commonly undertaken by

banks providing that such activities shall not be in

contravention of Act concerning Banking and

prevailing laws

Conducting other activities normally undertaken in the

field of banking and social insofar as not in

contravention with Sharia principles and in

accordance with provisions of the applicable laws and

regulations

Data

Analysis

Sample

Measurement

SourceAnnual report of

Bank Indonesia

Financial ratio

Financial analysis

from 2009-2013

• Profitability ratio

• Efficiency ratio

• Liquidity ratio

23

Performance of Shariah and Commercial Bank in Indonesia

Sources: World Islamic Banking Competitiveness Report 2013-2014

• Profit for the year

2009 2010 2011 2012 2013

Shariah commercial Bank 3.01% 3.02% 2.52% 2.22% 2.62%

Commercial Bank 3.14% 3.50% 3.21% 5.49% 4.89%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

RA

TIO

Profit for the Year

Profitability Ratio

Figure 1

• Return on Assets

2009 2010 2011 2012 2013

Shariah commercial bank 1.48% 1.67% 1.59% 1.94% 1.58%

Commercial bank 2.60% 2.86% 3% 3.11% 3.08%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

RA

TIO

Return on Assets

Figure 2

• Operating Expenses Ratio

2009 2010 2011 2012 2013

Shariah commercialBank

81.30% 82.38% 81.65% 76.35% 82.16%

Commercial Bank 86.63% 86.14% 85.42% 74.10% 74.08%

66.00%

68.00%

70.00%

72.00%

74.00%

76.00%

78.00%

80.00%

82.00%

84.00%

86.00%

88.00%

RA

TIO

Operating Expenses Ratio

Efficiency Ratio

Figure 3

• Loan to Deposit Ratio (LDR)

2009 2010 2011 2012 2013

Shariah commercialBank

89.70% 89.67% 91.41% 120.65% 95.87%

Commercial Bank 72.88% 75.21% 78.77% 83.58% 89.70%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

RA

TIO

Loan to Deposit Ratio

Liquidity Ratio

Figure 4

CONCLUSION

• Commercial banks is more effective in the operationrather than Shariah commercial Banks.

• Shariah commercial banks should be more efficientin the operation either domestic or international.

• Shariah commercial banks may penetrate theirmarket to Non-Muslim.