Foreword. i BANK INDONESIA. Assalamu alaikum Wr. Wb.

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2 Foreword Assalamu alaikum Wr. Wb. Realizig the rapid developmet of sharia bakig i Idoesia, particularly after the Act No. 10 of 1998 o the amedmet of the Act No. 7 of 1992 o bakig ad the Act No. 23 of 1999 o Bak Idoesia have come ito effect, the eed for a Blueprit cotaiig a well-defied visio ad objectives of sharia bakig developmet becomes immiet. Based o a umber of o-goig researches coducted sice year 2001, Bak Idoesia, as the bakig regulatory authority, has formulated the Blueprit, which also defies strategic iitiatives ad stages to achieve the objectives for a sustaiable developmet. The Blueprit cotais a visio ad missio to develop sharia bakig derived from Islamic values captured both at a micro ad macro level. Based o the visio ad missio ad cosiderig the actual coditio of the sharia bakig that cover ifluecig factors, developmet treds, ad several key issues, Bak Idoesia has defied strategic objectives to be achieved i the ext te years. The strategic iitiatives basically ca be categorized ito four major activities, i.e., sharia compliace, regulatory ad supervisory istrumets quality improvemet, operatioal efficiecy support, ad systemic stability support. Cosiderig its comprehesiveess, the Blueprit is a ivaluable guidace for Bak Idoesia i developig sharia bakig i the future. Moreover, the Blueprit will be a critical referece to the istitutio takig over the role of regulatory ad supervisory role from Bak Idoesia eablig it to coduct a sustaiable ad cosistet developmet. The Blueprit also serves as a geeral referece for stake holders. comprisig of a Expert Committee for Sharia Bakig Developmet, sharia bakers, rural sharia baks ad o-bak sharia fiacial istitutios. A special team from SKha Cosultig has also cotributed i the early stage of developmet particularly i coductig surveys ad refiig the Blueprit format. Fially, we would like to express our gratitude to all parties that has cotributed i the fializatio of the Blueprit. Much remais to be doe to realize a soud ad compliat sharia bakig system ad could deliver beefits to the Idoesia society ad ecoomy i geeral. Its success depeds o the support of the sharia bakig stakeholders. May Allah always give us rahmat ad hidayah so that we would be able to coduct our task well. Jakarta, September 2002 Deputy Goveror of The Cetral Bak of The Republic of Idoesia Mama H. Somatri I order to accommodate expectatios of sharia bakig stake holders, Bak Idoesia has established a cosultative forum i

3 Glossary Mudaraba Mudarib Murabaha Musharaka Riba A form of busiess cotract betwee two parties i which oe party brigs 100% capital ad the other (etrepreeur) persoal effort I a mudaraba cotract, the perso or party who acts as a etre preeur A cotract of sale i which the seller ad buyer agree o the seller s cost ad profit A agreemet betwee two or more parties for a busiess purpose uder which each party ivests capital ad the risk ad beefit will be shared joitly. Literally meas a icrease o pricipal of loa. I bakig activity, it is assume to be similar with iterest. Sharia commercial bak A commercial bak that operates uder sharia priciples. This term is used by Bak Idoesia i its Bakig Acts. A commo iteratioal term for sharia bak is Islamic Bak. Sharia busiess uit Sharia rural bak Takaful Zakat Divisio of a covetioal commercial bak which is operated uder sharia priciples A rural bak that operates uder sharia priciples. Mutual support which is the basis of the cocept of isurace or solidarity amog Muslims A religious levy that is prescribed by Islam o all muslims havig wealth above a exemptio limit at a rate fixed by the Islamic law. Shahibul maal I a mudaraba cotract the perso who ivests the capital Sharia Literally meas the way of Allah as guided by the Qura ad the Suah of the Prophet Muhammad SAW. This term is used to refer to the Islamic law. Sharia bak Icludig sharia commercial bak, sharia rural bak ad sharia bakig uit of covetioal bak. ii

4 Abbreviatios ATM Automated Teller Machie IIFM Iteratioal Islamic Fiacial Market BAMUI Bada Arbitrase Muamalat Idoesia (Idoesia Muamalat Arbitrage Body) IMA Ivestasi Mudharabah Atar-bak (Mudharabah Iterbak Ivestmet) BAPEPAM Bada Pegawas Pasar Modal (Capital Market Supervisory Body) BAZIS BPRS Bada Amil Zakat Ifaq Shadaqah (Amil Zakat Ifaq Shadaqah Istitutio) Bak Perkredita Rakyat Syariah (Sharia Rural Bak) IT LDR MES NPL Iformatio Techology Loa to Deposit Ratio Masyarakat Ekoomi Syariah (The Society for Islamic Ecoomy) No Performig Loa CAR CBO CCB CCO DPS Capital Adequacy Ratio Covetioal Brach Office Covetioal Commercial Bak Covetioal Cash Office Dewa Pegawas Syariah (Sharia Supervisory Board [SSB]) OJK PLS PUAS SBO Otoritas Jasa Keuaga (Fiacial Services Authority) Profit Loss Sharig Pasar Uag Atar-bak berdasarka prisip Syariah (Sharia-based Iterbak Moey Market [SIMM]) Sharia Brach Office DSN Dewa Syariah Nasioal (Natioal Sharia Board) SBU Sharia Busiess Uit FDR Fiacig to Deposit Ratio SCB Sharia Commercial Bak GCG Good Corporate Goverace SME Small Medium Eterprise IAI Ikata Akuta Idoesia (Idoesia Accoutat Associatio) SU Sharia Uit IFSB Islamic Fiacial Services Board iii

5 Cotets Foreword Glossary Abbreviatios Cotets i ii iii iv Executive Summary 2 Chapter I. Backgroud A brief history of sharia bakig developmet i Idoesia 1.2. Idoesia sharia bakig i statistics 1.3. Objectives to achieve 1.4. Idoesia Bakig Architecture (API) 1.5. The purpose of the Blueprit Chapter II. Beefits ad Challeges Sharia priciples i ecoomic ad fiacial activities 2.2. Challeges for developmet of sharia bakig i Idoesia Chapter III. Visio, Missio ad Objectives Visio ad Missio 3.2. Objectives Chapter IV. Iitiatives Phase I ( ) 4.2. Phase II ( ) 4.3. Phase III ( ) iv

6 Executive Summary 1

7 Executive Summary The developmet of sharia bakig i Idoesia is a realizatio of the eeds of the public seekig a alterative bakig system that is both capable of deliverig soud bakig/ fiacial services ad compliat with sharia rules. As a matter of fact, the developmet of sharia fiacial istitutio has started well before a formal legal base for sharia bakig operatio came ito force. Therefore, the stipulatio of the Act No. 7 of 1992 cocerig Bakig as ameded by the Act No. 10 of 1998 ad the Act No. 23 of 1999 cocerig Bak Idoesia is the aswer to the eeds. After the stipulatio, the sharia bakig has show rapid developmet i terms of total assets (at average 74 percet aual growth). Bak Idoesia, as the bakig regulatory authority, is i a positio to coduct the task as madated i the Bakig Act to establish a soud sharia bakig system. The developmet of sharia bakig should be aliged with the Idoesia Bakig Architecture that is curretly i the process of developmet. For those reasos, Bak Idoesia eeds formalize its strategic directio i a Blueprit. Bak Idoesia together with other stakeholders i the ext period. The iitiatives ca be categorized ito four major activities, i.e., esurig a better sharia compliace, improvemet o prudetial regulatios, supportig operatioal efficiecy ad competitiveess, ad supportig a higher level of systemic stability. The iitiatives will be implemeted i three stages. The first stage puts strog foudatio for sustaiable developmet of the idustry. The secod stage focuses i stregtheig the structure of the idustry. The last stage focuses o the adoptio of iteratioal stadards for sharia bakig services. The Blueprit defies the positio, visio ad strategic iitiatives i developig sharia bakig for the ext te years. The Blueprit serves as a critical referece for the sharia bakig stakeholders. The visio of the sharia bakig developmet is defied as follows: The establishmet of a competitive ad efficiet sharia bakig that complies with prudetial bakig priciples, ad sigificatly support real sector activities through share-base fiacig with real uderlyig trasactios i the spirit of justice, brotherhood ad good deeds to promote the well-beig of the atio. The iitiatives, which are defied i the Blueprit, are derived from the strategic objectives that will be achieved by 2

8 Chapter I Backgroud 3

9 Backgroud 1.1. A Brief History of Sharia Bakig Developmet i Idoesia The developmet of the sharia bakig i Idoesia has started well before a formal legal base for sharia bakig operatio came ito force. Before 1992, there have bee several o-bak fiacial istitutios that apply share base cotract fouded. This evidece shows a public eed of the existece of fiacial istitutios applyig sharia priciples i their operatios. I order to accommodate the public eeds for the existece of the ew bakig system, the govermet has implicitly allowed the sharia bakig operatios i the Act No. 7 of 1992 cocerig Bakig which is elucidated i the Govermet Decree No. 72 of 1992 cocerig Bak Applyig Share Base Priciples. The set of regulatios have served as legal foudatios for sharia bakig operatios i Idoesia (the ew era of dual bakig system). Durig the period betwee 1992 to 1998, there was oly oe sharia commercial bak ad 78 sharia rural baks came ito operatio. I 1998, the Act No. 10 of 1998 o the amedmet of the Act No. 7 of 1992 cocerig bakig came ito force to give stroger legal foudatio for the existece of sharia bakig system. The ew Act No. 23 of 1999 cocerig Bak Idoesia gives a authority to Bak Idoesia to also coduct its task accordig to sharia priciples. Sice the, sharia bakig idustry has bee growig more rapidly. I geeral, the developmet of sharia bakig i Idoesia ca be illus- Exhibit 1 Sharia Bakig Developmet i Idoesia 1.2. Sharia Bakig i statistic The ecoomic ad moetary turmoil happeig durig the period 1997 to 1998 resulted i tremedous impact to the Idoesia ecoomy. Durig the period of crisis, may fiacial istitutios, icludig bakig istitutios, experieced fiacial hardship. High iterest rate has resulted i a high cost of capital to the etrepreeurs i.e. the real sector ad fially caused low productivity. The quality of bak assets has deteriorated sigificatly while the bakig system was burdeed by a high cost of fuds caused by high market iterest rates. 4

10 Furthermore, low productivity ad high risk ivestmets have preveted the baks from ivestig their fuds i the real sector. As the cosequece, the bakig system started to loose its itermediary fuctio as idicated by a low LDR ratio. Cotrariwise, durig the ecoomic crisis, sharia bakig could still perform better tha the covetioal bakig as idicated by a relatively low level of o-performig loas ad the absece of egative spread i the operatioal activities (see Exhibit 2 (a)). This could be uderstood sice the rates of returs paid to the depositors are ot determied by market iterest rates. Therefore, sharia baks are able to chael a relatively lower cost of fuds to the etrepreeurs. The evidet shows that sharia baks are relatively more able to coduct ledig as idicated by a relatively high LDR ratio i.e. betwee percet (see Exhibit 2 (b)). This experiece has brought a hope to the public for the presece of sharia bakig as a alterative bakig sistem that is capable of both deliverig ecoomic beefits ad esurig compliace with sharia priciples. Durig the period betwee 1998 to 2001, sharia bakig system has grow quite rapidly at about 74 percet aually (i terms of asset size) from Rp. 479 billio i 1998 to Rp billio i The third party maaged fuds has also icreased from Rp. 392 billio to Rp billio. The sharia bakig system has also developed istitutioally. There has bee aother commercial bak covertig its operatios ito sharia commercial bak, besides there have also bee 3 sharia uit baks ad 3 sharia rural bak came ito operatios by the ed of The umber of sharia brach offices ad sharia uit baks has also icreased from 26 to 51 braches. I spite of its rapid developmet, sharia bakig system still acquires a small portio of market share (approximately 0.26% of the total asset size of the atioal bakig system). May steps have bee take to improve the operatioal quality of the sharia bakig i order to gai public cofidece ad customer satisfactio Objectives The sharia bakig developmet should be coducted i accordace with the actual eeds ad expectatios by the stakeholders of the sharia bakig i Idoesia that icludes: Sharia commercial baks, sharia uit baks ad sharia rural baks Bak Idoesia as bakig regulatory ad supervisory authority Natioal sharia coucil (DSN) Muamalat arbitrage body (BAMUI) Other sharia fiacial istitutios: Takaful (sharia isurace), Baitul Mal wat Tamwil, BAZIS, ad sharia security compaies Other regulatory bodies: Miistry of fiace ad capital market regulatory body (BAPEPAM) Uiversities / educatioal istitutios that cocer about traiig program o sharia fiace ad ecoomics Orgaisatios ad compaies related to sharia ecoomic ad fiace such as: sharia ecoomic society (MES), Associatio of atioal sharia baks, Jakarta Stock Exchage, vedors ad etc. Public i geeral The strategic objective of the sharia bakig developmet icludes: High level of competitiveess while complyig with sharia priciples Sigificat roles i sustaiig atioal ecoomy ad public welfare Global competitiveess through compliace to iteratioal operatioal stadards The success of the sharia bakig developmet fully depeds upo the stakeholders. Therefore, the same visio ad proper coordiatio are the key success factors supportig a sustaiable sharia bakig deveopmet i the future. 5

11 Exhibit 2 Fiacial performace of sharia bakig as compared to the covetioal bakig i Idoesia Sharia Baks NPL level has bee lower ad improved faster tha that of Covetioal bak durig crisis Covetioal baks LDR fell ad stay below 50% while sharia baks is already back above 100% 1.4. Idoesia Bakig Architecture (API) as a tred for Idoesia bakig developmet I its effort to establish a soud, efficiet ad structurally strog bakig system leadig to systemic stability ad ecoomic developmet, Bak Idoesia is developig API. The objectives of API cover: To have a strog bakig idustrial structure supportig a sustaiable ecoomic developmet. To have a robust bakig idustry that is resiliet to fiacial risks. To implemet good corporate goverace i the bakig idustry To have effective ad efficiet bakig regulatory ad supervisory system. To have ifrastructure supportig efficiet operatioal bakig activities. To provide cosumer protectio. Sharia bakig developmet, basically, has the same objectives with the developmet of API, apart from the sharia aspects. The Blueprit emphasises the iitiatives by Bak Idoesia to achieve the strategic objectives The purpose of the Blueprit The Blueprit is developed to idetify challeges faced by sharia bakig idustry i the comig years. The Blueprit also defies the Visio, Misio ad Objectives of the developmet so that the stakeholders ca use it as a referece i aligig their aspiratios. The Blueprit defies strategic iitiatives i priorities for the ext 10 years. The Blueprit serves as: A guidace for Bak Idoesia to develop sharia bakig ii Idoesia A referece to stakeholders A referece to the istitutio that will take over the role of regulatory ad supervisio of bakig from Bak Idoesia. 6

12 Chapter II Beefits ad Challeges 7

13 Beefits ad Challeges 2.1. Sharia priciples i ecoomic ad fiacial activities The recet theory of the firm emphasised the profit maximatio for the shareholders eve though it has curretly shifted to deliverig beefits to wider parties (maximatio of stakeholder value). The sharia base ecoomics offers a wider cocept of beefits. The beefits should be gaied ot oly at the ed of the ecoomic trasactio, but also beefits from the proccess ad the products. Ay ecoomic trasactio should cotet more beefits (maslahat) ad promote justice. Exhibit 3 Perspectives of sharia priciples o ecoomics Sharia priciples also support the ecoomic players to comply with local law system ad codes of coducts i ay ecoomic activity. As the realisatio of the sharia priciples, sharia bakig/fiacial system differs at three areas: priciples of justice avoidig prohibited activities ad cocerig beefits. Exhibit 3 above illustrates the iterpretatio of ecoomic priciples accordig to sharia. Sharia bakig system, therefore, does ot oly focus o the prohibitio of riba but also o the implemetatio of sharia priciples comprehesively ad maitai them i a balace. Therefore, a balace betwee profit maximatio ad compliace to the other sharia priciples is essetial to the sharia Sharia ecoomic priciples are reflected i the macro ad micro perspectives. I the micro perspective, sharia priciples emphasise competece/ professioalism ad trust (amaah). I the macro perspective, sharia priciples emphasise distributio, prohibitio of riba ad activities that do ot brig beefits to the system as a whole. I geeral, the two perpectives are illustrated i Box 1. Thus, the beefits of the existece of the sharia bakig/fiacial system, which is ot oly purposed to the Muslim society but also all huma beig (rahmata lil alami blessig to the uiverse), ca be clearly see. 8

14 2.2. Challeges i developig sharia bakig system i Idoesia The evidece shows that i the period of ecoomic turmoil, sharia bakig performed relatively better tha the covetioal bakig. Therefore, the sharia bakig system is expected to play more sigificat roles i the Idoesia ecoomic recovery process. However, the sharia bakig system is still facig challeges especially i the early stage of developmet. Some key issues iclude: Lack of comprehesive ad appropriate framework ad istrumets for regulatio ad supervisio Limited market coverage Lack of kowledge ad uderstadig by the public Lack of efficiet istitutioal structure supportig efficiet sharia bakig operatios Operatioal iefficiecy Domiatio of o-share base fiacig Capability to comply with iteratioal sharia fiacial stadards Box 1. Micro ad Macro Perspectives Sharia values i micro perspectives emphasise itegrity ad prudetiality i maagig public fuds, elaborated i several basic characteristics as follows: Shiddiq: to esure high morality i bak maagemet leadig to hoesty. Fiacial maagemet should be coducted legitimately (halal) ad prevet doubtful (subhat) ad illegitimate (haram) activities. Tabligh: to socialize ad to educate the public about sharia priciples, products ad services ad also the beefits to gai. Amaah, to preserve mutual trust betwee capital owers (shahibul maal) ad the trustee (mudharib) through hoesty ad prudetiality i the bakig operatios. Fathaah, to esure the bak is maaged professioally i order to geerate profit with maageable risks ad to esure the services is provided i maers (ri ayah) ad sicerity (mas uliyah). Sharia values i macro perspectives emphasise real cotributio to social welfare though the implemetatio of several orms, such as: Norms of zakat: To stimulate people for ivestmet while providig disicetive to people who do ot wish to ivest their fuds productively, sice zakat is oly levied o the profit of the ivestmet ad o the pricipal of wealth. Norms of the prohibitio of riba : To promote share base fiacig ad to prohibit riba. The implemetatio of this orm is expected to improve brotherhood ad sicerity i facig fiacial ucertaity. Norms of the prohibitio of uproductive speculatio/gamblig (maisir) : To esure that ecoomic activities are always attached to real ecoomic activities. Lack of comprehesive ad appropriate framework ad istrumets for regulatio ad supervisio To support the operatioal soudess, sharia bakig should be equipped with a proper set of regulatory ad supervisory istrumets that fit its operatioal activities, which are differet from the covetioal oes. At the early stage of developmet, sharia bakig still applies covetioal framework for regulatory ad supervisory activities although a few set of regulatios have bee developed, such as: licesig regulatio, iter-sharia bak fiacial istrumets, sharia moetary istrumets (SWBI) ad miimum statutory reserve for sharia bakig. The lack of proper regulatory ad supervisory framework could potetially reduce its operatioal capability. To cope with the challeges, Bak Idoesia as the bakig regulatory authority has put foudatios for regulatory istrumets that cover: Establishmet of fiacial istrumets that is expected to improve efficiecy Formulatio of early warig system for sharia bakig (CAMEL ratig system) which is capable of describig its operatioal risks ad maitaiig sustaiability, ad also trasparecy i the reportig Formulatio of the rules of coduct for the players to improve the quality of corporate goverace Developig the cocept of regulatio that cocers about systemic stability Developig the cocept of regulatio that esures compliace with sharia priciples 9

15 Limited market coverage For the time beig, sharia bakig system still acquires a limited market share. By the ed of 2001 sharia bakig services could oly be delivered through 51 sharia braches, uit offices ad 81 sharia rural baks that represet oly 2% of all commercial bakig offices i Idoesia. Limited operatioal coverage could potetially reduce customer comfort sigificatly. There are several challeges that should be faced i the effort to expad the operatioal coverage, such as: Creatig a coducive eviromet to attract ew comers, especially the covetioal baks that already have wide operatig etwork or promotig strategic alliace with other fiacial istitutios to improve efficiecy Simplifyig of the licesig procedures for the ew comers without reducig prudetiality Providig iformatio about sharia fiacial services Improvig the professioalism ad the quatity of mapower of the idustry. Low awareess ad kowledge of sharia fiacial products ad services Based o surveys coducted i a collaboratio with uiversities withi six provices i Idoesia betwee 2000 to 2001, it is cocluded that there is still a gap betwee eeds ad kowledge of sharia fiacial products ad services (see Box 2). The gap could delay the success to mobilise potetial public fuds to ivestmet because of low switchig rate from potetial demad to real demad. Furthermore, the gap will also make marketig ad sellig effort for sharia bakig products ad services more difficult. There are several challeges to face i order to improve the awareess ad kowledge amog the potetial target customers, such as: Large umbers of people dispersig i wide diversified backgroud Effort to educate the public requires cosiderable budget ad other resources Limited promotio budget of the stakeholders i idustry due to the small size of the idustry Oe potetial solutio to overcome these challeges is to have a cocerted ad coordiated effort of public educatio. To erich Box 2 The result of surveys o public perceptio 10

16 the perspectives for developmet strategy, Bak Idoesia could also idetify key success factors determiig the success of atioal iitiatives i several evets such as Natioal Savig Movemet (Geraka Tabuga Nasioal) ad Family Plaig (Keluarga Berecaa). Lack of efficiet istitutioal structure supportig efficiet sharia bakig operatios A comprehesive, effective ad efficiet istitutioal structure is essetial to esure stability ad sustaiable developmet of sharia bakig. Curretly, there have bee supportig istitutios fouded as parts of sharia bakig i Idoesia (see Box 3). However, it still requires substatial effort to make them more effective i order to sustai a efficiet sharia bakig operatios. There are several istitutios ad fuctios that eed to be developed to improve the istitutioal eviromet, such as: Sharia auditor, to esure the compliace of sharia baks with the sharia priciples Commuicatio Board (FKPPS) to eable a effective coordiatio of the effort to improve public awareess ad educatio for sharia bakig Istitutio for Sharia Fiacig Isurace, to provide fiacial protectio to the sharia baks agaist fraudulat practices by recommeded customers. Sharia fiace iformatio ceter, servig as a likage betwee real sector ad sharia fiace sector by providig Box 3. Istitutioal structure supportig efficiet sharia bakig operatios Supportig istitutios ca be categorized ito 4 mai fuctios as follows: Supervisio. Supervisio o fiacial aspects is coducted by Bak Idoesia whilst supervisio o sharia aspects is coducted by Sharia Supervisory Board (DPS) operatig uder the authorisatio of Natioal Sharia Coucil (DSN) Fiacial Market. Domestic Iterbak Sharia Fiacial Market (PUAS) uses Mudharaba Iterbak Ivestmet Certificate, while iteratioally is accomodated i Iteratioal Islamic Fiacial Market (IIFM) Legal Dispute Settlemet ad Arbitrage, to settle ay legal dispute arisig withi sharia bakig activities. The fuctio of arbitrage is ow coducted by Idoesia Muamalat Arbitrage Body (BAMUI) Other supportig istitutios like Idoesia Accoutat Associatio (IAI) ad other istitutios fouded i the ear future 11

17 Special Purpose Compay, to facilitate asset securitizatio for Islamic baks that wat to ehace its liquidity maagemet. It also provides sharia ivestmet opportuities for other domestic baks ad ivestors as well as iteratioal ivestors. Cotiual improvemet of sharia baks performace I spite of its performace that is systematically better tha the covetioal oes, sharia bakig still gives a lower rate of retur to the ivestors compared to the rate of retur paid by the covetioal baks. Improvig the operatioal efficiecy leadig to a higher rate of retur to the customers could motivate ivestors of the sharia bakig to stay loyal with Islamic baks sice they expect both the sharia compliace ad also the rate of retur. This should be oted carefully, particularly whe facig a era of free competitio i which the competitors come ot oly from bakig idustry but also from other compaies from differet idustries that are capable of deliverig similar fiacial services. The scarcity of competet sharia bakers who are skilful, kowledgeable i sharia bakig operatio ad sharia midset has also bee critical for improvig the performace of sharia bakig. The effort to improve the quality of huma resources will also iclude maagerial ad operatioal aspects. applicatios, such as: Higher risk ivolved i the ivestmet due to lack of trasparecy ad iability to moitor the ivestmet Pricipal-aget problem, where the aget (mudharib) does ot always act i the best iterest of the pricipal (shahibul maal) Lack of competecy of the sharia baks huma resources to coduct such ivestmets Uavailability of iformatio about busiess performace of each targeted idustrial sector. There are several alteratives to overcome this challege, such as: Idetificatio of o-claimable source of fuds like zakat, ifaq da sadaqah to be chaelled through competet istitutios Reducig factors causig agecy-problem i share base trasactio such as stadardizatio of cotract ad establishig idustrial idices as bechmarks Improvig the competece of the huma resource i coductig share base fiacig like project assessmet capacity. Ability to comply with iteratioal sharia fiacial stadards Besides improvig iteral efficiecy, the sharia bakig may also apply differet strategies for expasio: ecoomies of scale ad or ecoomies of scope. The first strategy could be coducted through the expadig the operatioal coverage, such as coductig strategic alliaces with either domestic or iteratioal compaies. The secod strategy could be coducted by providig a wider variety of bakig products (icludig the use of techology advatages) so that the public could ejoy the sharia fiacial services i a more flexible way. Domiatio of share base fiacig i sharia bakig trasactio Oe of the features that could potetially beefit the ecoomic system is the preseces of share base fiacig. However, the share base fiacig has ot bee domiatig due to some possible reasos that prevet share base fiacig from the Global sharia fiacial/bakig idustry has achieved sigificat busiess volume (approximately US$ 140 billio i 1997). There have bee 170 sharia fiacial istitutios established i more tha 30 coutries. Such busiess volume offers opportuity to coduct strategic alliaces with iteratioally reputated sharia fiacial istitutios. I order to achieve that visio, atioal sharia bakig system has to be able to operate with iteratioal sharia fiacial stadards. With this ability, the atioal sharia bakig system could also participate i the Iteratioal Islamic Fiacial Market (IIFM) that will operate i Idoesia sharia bakig system will also be prepared to adopt iteratioal sharia bakig stadard set by Islamic Fiacial Services Board (IFSB) that will be established i Geerally, the challeges for sharia bakig developmet that based o the idustry structure aalysis is illustrated i Exhibit 4. 12

18 Exhibit 4 Affectig factors i sharia bakig idustry developmet 13

19 14

20 Chapter III Visio, Missio ad Objectives 15

21 Visio, Missio ad Objectives Visio ad missio of sharia bakig developmet are derived from Islamic values ad realised ito each operatioal activities. The objectives are defies after accomodatig the actual coditio withi the idustry. To pursue the established objectives, Bak Idoesia has also defied iitiatives ad paradigm for the policies to be take. The framework for sharia bakig developmet coverig visio, missio, objectives ad iitiatives, is illustrated i Exhibit 5. Exhibit 5. Developmet framework coverig visio, missio, objectives, ad iitiatives 3.1. Visio ad Missio Based o sharia values, visio for sharia bakig developmet i Idoesia is stated as follows: A soud sharia bakig system that is competitive, efficiet ad compliat with prudetial practices, ad capable of supportig real ecoomic sector through the implemetatio of share based fiacig ad trades with real uderlyig trasactios i the spirit of brotherhood ad good deeds to promote well-beig for all society The missio which reflects the roles of Bak Idoesia i fulfillig the visio is: Creatig a coducive eviromet for sharia bakig developmet that is compliat to sharia priciples ad capable of supportig real ecoomic sector, which covers: Coductig cotiual studies ad researches about coditios, opportuities ad requiremets for sharia bakig; Preparig the cocept ad coductig risk-based supervisio that fit with its characteristics to maitai operatioal sustaiability; Preparig istitutioal structure that aimed at improvig operatioal efficiecy of the sharia bakig; Desigig a appropriate framework for a soud etry ad exit policy that is capable of maitaiig systemic stability 16

22 3.2. Objectives I the pursuit of the realizatio of the established visio ad havig take ito cosideratio of the actual coditios, Bak Idoesia set up realistic objectives that icludes the affectig factors shapig the idustry i the years to come (see Exhibit 5); beefits ad challeges; ad stregth ad weakesses of the players ad the stakeholders of the idustry. The objectives of the sharia bakig developmet util the year of 2011 are: - Implemetatio of good corporate goverace i sharia bakig operatios - Implemetatio of efficiet exit ad etry policy - Implemetatio of real time supervisio - Implemetatio of self regulatory system A competitive ad efficiet sharia bakig system; as idicated by: - Globally competitive players - Effective strategic alliace - Good coordiatio with supportig istitutios Compliace to sharia priciples i bakig operatios, as idicated by: - The establishmet of stadardizatio of sharia fiacial orms - Efficiet sharia supervisory framework (istrumets ad istitutioal coordiatio) - Low level of complaits by the public Implemetatio of prudetial practices i bakig operatio, that covers: - Implemetatio of risk based regulatory ad supervisory that fit with its characteristics supported by competet huma resources Systemic stability ad beefits to society, as idicated by: - Implemetatio of safety et arragemet as a itegrated part of the soud atioal bakig system - Fulfillig the demad of sharia bakig services by the public with the targeted market share at 5 percet of the total share - The implemetatio of sharia fiacial system comprehesively that serves all the society - The sigificat use of share base fiacig 17

23 18

24 Chapter IV Iitiatives 19

25 Iitiatives To achieve the established objectives, Bak Idoesia embarks o strategic iitiatives, which eed to be udertake by itself or by cooperative effort with other stakeholders of sharia bakig (as illustrated i Exhibit 5). Therefore, the success depeds upo the cotributio by all stakeholders. Bak Idoesia as bakig regulatory authority that should always promote compliace with sharia priciples ad soud bakig practices. Bak Idoesia has also established paradigms i the implemetatio of the strategic iitiatives so that the objectives would be achieved objectively. Those paradigms iclude: Market drive, real demad based developmet Fair treatmet, developig soud ad fair competitio based of its ow characteristics; ot by givig special treatmet as a ifat idustry Gradual ad sustaiable approach, priority ad focus are determied based o situatio ad coditio to adopt gradual ad sustaiable approach Comply with sharia priciples, sharia based regulatory framework ad supportig istitutioal structure The iitiatives estalished ca be categorized ito four areas ad will be implemeted i three phases based o the level of urgecy. The four mai areas cover compliace to sharia priciples ad prudetial bakig practices, operatioal efficiecy ad systemic stability. The iitiatives are to be coducted i stages i order to place strog developmet base that accommodate real public demads. Systematically, strategic iitiatives ca be illustrated i Exhibit 6. base for sharia bakig regulatory framework that adopts soud operatioal bakig characteristics. I. Compliace to sharia priciples Promotig a better uderstadig about sharia fiacial cocepts Every player i the sharia bakig system should have the same level of uderstadig about the sharia fiacial cocepts. A balace of kowledge o theory of fiace ad sharia cocepts is essetial to a better udertadig about sharia fiacial cocepts. Therefore, the establishmet of sharia compliace authority would also play importat role to improve its operatioal quality. Ay support by Bak Idoesia that is purposed to improve the competece of the sharia compliace authority is cosidered importat. Supportig ad facilitatig the formulatio of sharia fiacial orms As a matter of fact, the stadardizatio of iteratioal sharia fiacial orms has bee started by iteratioal sharia istitutios like AAOIFI. However, to implemet those orms locally, it is cosidered ecessary to have a set of sharia fiacial orms that is fully uderstood by all the players to avoid differet perceptios o iteratioal fatwas. Coductig a studies to develop a itegrated regulatory ad supervisory mechaism 4.1. Stage I ( ) The first stage focuses o the establishmet of a strog A soud fiacial operatios ad compliace with sharia priciples are two differet aspect that should be achieved simultaeously. I practice, a clear mechaism should be 20

26 Exhibit 6. Stages for implemetatio ad priority of strategic iitiatives Placig strog base for sustaiable developmet Stregtheig idustrial structure Complyig with iteratioal stadards for fiacial products ad services Stage I ( ) Stage II ( ) Stage III ( ) Compliace to sharia priciples Promotig a better uderstadig about sharia fiacial cocept Supportig ad facilitatig the formulatio of sharia fiacial orms Coductig a studies to develop a itegrated regulatory ad supervisory mechaism Supportig a more efficiet sharia supervisory activities Developig icetive cocept to improve compliace with sharia priciples Realisig the itegrated ratig system that accomodates sharia ad fiacial aspects Prudetial set of regulatios Improvig foudatio for prudetial regulatio ad good corporate goverace Improvig etwork regulatios To study a feedback mechaism i developig bakig regulatios To study the implemetatio of real time supervisio Developig risk based regulatios ad supervisio Developig etry ad exit policy Promotig the establishmet of self-regulatory system Operatioal efficiecy ad competitiveess Supportig ecoomies of scope ad ecoomies of scale Supportig huma resource quality developmet To study about mutual cooperatio with related istitutios Supportig the effort to sigify the role of sharia arbitrage istitutios Suportig strategic alliaces Establishig cooperatios with related supportig istitutios Supportig the establishmet of global ad iteratioally competitive players Systemic stability ad beefits to the ecoomy To advocate the establishmet of sharia fiacial iformatio ceter Coductig prelimiary studies about potetial systemic costs Coductig studies for the beefits of the implemetatio of sharig cotracts Ehacig the roles of the sharia fiacial iformatio ceter Supportig the ivolvemet of ratig agecies i sharia bakig activities Desigig a appropriate cocept of depositisurace Coductig studies about volutary sector Supportig the use of share base fiace Supportig the realisatio of a comprehesive ad itegrated sharia fiacial system 21

27 II. Prudetial set of sharia bakig regulatios Improvig foudatio for prudetial regulatio ad good corporate goverace Regulatory foudatios that ca adopt its operatioal characteristics ad sharia priciples is importat to support operatioal sustaiabilty i the log ru. For that reaso, Bak Idoesia has bee supportig the establishmet of several sharia fiacial stadards. Fializatio of Statemets for Fiacial Accoutig Stadards (PSAK) for sharia bakig ad Idoesia Sharia Bakig Accoutig Guidace (PAPSI) prepared by Idoesia Accoutat Associatio (IAI) i cooperatio with other sharia fiacial istitutios is importat for the developmet of sharia bakig regulatios. The two stadards are expected to be fialised i Set of regulatios that are cosidered as priority icludes: Improvemet of regulatios o specific areas, such as: - Earig asset quality - Allowace for earig asset losses - Short term liquidity facility - Itra-day liquidity facility - Regulatio o mothly reportig - Capital Adequacy Ratio - Legal ledig limit - Net ope positio - Liquidity measuremet - Soudess ratig system - Trasparecy Improvig the quality of early warig system for sharia bakig (CAMEL ratig) Improvemet o: - Regulatio cocerig Reserve Requiremet for sharia baks, icludig: adjustmet for miimum statutory reserves, secodary reserves ad liquid asset ratio - Regulatio cocerig earig asset portfolio to aticipate the developmet of sharia fiacial market Developig a cooperatio mechaism betwee sharia rural baks ad sharia commercial baks or sharia uit baks i order to improve fiacial services to the rural society Coductig academic research ad other activities i a effort to fid a possibility of the issuace of sharia bakig act Improvig etwork regulatio I order to attract ew comers ito sharia bakig system, Bak Idoesia i March 2002 has issued a ew regulatio No. 4/1/PBI/2002 cocerig the coversio of a commercial bak to sharia commercial bak ad opeig sharia brach office by a commercial bak without reducig prudetiality i the operatios. The regulatio covers: The coversio of covetioal commercial bak to sharia commercial bak The sharia busiess uit relatig to the establishmet of sub-brach office or the expasio the etwork by colocatio of sharia sub-brach office i a covetioal commercial bak. This ca be coducted for the commercial bak that has at least oe sharia brach office i a particular workig area. To study a feedback mechaism i process to develop bakig regulatios I accordace with a soud bakig regulatory cocept, the role of stakeholder is very importat. Therefore, Bak Idoesia will always support effective feedback mechaism i the desig process of bakig regulatios. The support has, i fact, bee realized i terms of cooperatio with other parties (icludig academicias) i desigig the bakig regulatios. To study the implemetatio real-time supervisio I order to improve the effectiveess of bakig supervisio, Bak Idoesia will coduct a study seekig a possibility of coductig iformatio techology base bakig supervisio. The objectives of the techology 22

28 based bakig supervisio is the Real Time Supervisio for sharia baks ad sharia uit bak. For sharia rural baks, Bak Idoesia will develop a system that eable the supervisors to observe the fiacial coditios daily. III. Operatioal efficiecy ad competitiveess Lecturers from uiversities ad other academical istitutios, that are expected to socialize sharia bakig i their curriculum To study about mutual cooperatio with related istitutios Supportig ecoomies of scope ad ecoomies of scale The etry of the ew comers ito sharia bakig system will operatioally improve efficiecy (ecoomies of scale). This effort icludes attractig global players to participate i the system. As metioed earlier, Bak Idoesia has bee tryig to reduce the obstacles for the establishmet of the ew sharia commercial baks, coversio of the covetioal commercial baks to sharia commercial baks ad opeig sharia uit baks without igorig prudetial priciples ad cosiderig the curret policy implemeted i geeral. Besides, Bak Idoesia will cotiuously coduct research o the market potetial that is purposed to idetify potetial target ad to provide iformatio to potetial ivestors. The iformatio provided is expected to ease the potetia ivestors i decisio makig process (reducig the budget for feasibility study). Supportig huma resource quality developmet I accordace with its operatioal features, the operatios of sharia bakig should closely attached to real sector. Therefore, support from other govermetal istitutios ad related istitutios from locally ad iteratioally could be expected to icrease efficiecy. Several local istitutios iclude Cetral Statistic Bureau, Capital Market Authority, ratig agecies, istitutio maagig zakat, ifaq ad sadaqah. Supportig the effort to sigify the role of sharia arbitrage istitutios Oe of importat aspects i developig sharia bakig is the availability of sharia arbitrage istitutios that is capable of resolvig sharia fiacial disputes effficietly. Iefficiet dispute settlemets would affect liquidity ad could also cause isolvecy. Curretly, BAMUI is the oly oe dispute settlemet agecy that is established to resolve sharia fiacial disputes. Bak Idoesia will cosistetly support BAMUI to sigify its roles ad fuctios. Sharia bakig is a ew idustry which characterised by specialised skills ad kowledge. Lack of operatioal skill would edager its operatioal sustaiability. Bak Idoesia as bakig regulatory authority, together with other stakeholders, supports huma resources quality developmet through traiig programs that are purposed for: Staf of commercial baks that are iterested i the bakig operatios accordig to sharia priciples Studets from uiversities ad other academical istitutios, that are expected to be potetial players or users of the sharia bakig system IV. Systemic stability ad beefits to the ecoomy Advocatig the establishmet of Sharia Fiacial Iformatio Ceter (FKPPS/ Commuicatio Board) Accurate perceptio ad uderstadig about coditio ad features of sharia bakig by the public could improve syatemic stability. This could be uderstood sice better kowledge about the real market coditio of sharia bakig could mitigate paic. Iformatio sharig could be iitiated by the establishmet a forum that is credible to iform the market about actual market coditio 23

29 effectively. Besides, the establishmet of such forum is i accordace with the spirit of tabligh (to broadcast good deeds). The target groups that are icluded i the public educatio programs icludes: Religious leaders (Ulama) Studets, teachers/lecturers of the uiversities ad other academical istitutios Professioals (i bakig ad other sectors) Compaies (corporates ad SMEs) Mass orgaizatios Related istitutios Public i geeral especially i high potetial areas Coductig prelimiary studies about potetial systemic costs The studies about potetial systemic costs caused by bakig failure is oe of the aspect that is madatory. The studies will be started by the aalysis of cotract (level of fiacial risks) ad followed by the studies about deposit isurace (takaful) ad optimal stoppig rules/exit policy. Coductig studies for the beefits of the implemetatio of sharig cotract Share based fiace is the major sharia modes of fiace. Practically, there are variatios i the implemetatio of sharig cotracts depedig upo several aspects: level of trasparecy, the availability of idustry idices ad level of basic eeds. As a matter of fact, the beefits gaied from the implemetatio of share base fiace ca be observed withi certai commuities. There is a eed to explore further so that the implemetatio of share base fiacig could beefit the public more. I. Compliace to sharia priciples Suportig a more efficiet sharia supervisory activities There are two choices to be take, either simultaeously or idepedetly, to improve efficiecy of supervisory activities o sharia compliace, such as: To stregthe the positio of Natioal Sharia Coucil ad Sharia Supervisory Coucil by desigig the most appropriate remueratio mechaism that esures their idepedecy i coductig their tasks. This iitiative is expected to icrease the commitmet for time allocatio ad improvemet of professioalism. There is also a eed to draw a clear jurisdictio of their task to avoid overlappig. To prepare ad to support the establishmet of idepedet sharia fiacial auditors havig skill competece i sharia bakig ad idepedece like geeral public accoutat. Developig icetive cocept to improve compliace with sharia priciples Oe of the supportig factors for sharia compliace is the implemetatio of appropriate icetive (either rewards ad puishmets). I order to support the implemetatio of sharia priciples, Bak Idoesia with other stakeholders will coduct studies for a itegrated icetive mechaism betwee fiacial ad sharia aspects. II. Prudetial set of sharia bakig regulatios Developig risk based regulatio ad supervisio 4.2. Stage II ( ) The secod stage comprises cotiual steps udertake i the first stage. The programs are focused o the realizatio of what have bee started i the first stage. I accordace with the developmet of comprehesive regulatory cocept, Bak Idoesia will implemet risk based regulatory cocept. Alog with the implemetatio of the cocept, sharia bakig is expected to operate withi a soud bakig regulatory framework. 24

30 Developig exit ad etry policy Oe of the importat compoets to maitai the soudess of the sharia bakig operatios is a appropriate etry da exit policy. Alog with the implemetatio of such policy, it is expected that the idustry will be supported by high skilled ad dedicated players. Besides, a clear ad appropriat etry ad exit policy would help i desigig other bakig regulatios that could give impact more systemically, such as deposit takaful. Developig the real-time supervisio commuicatio chael betwee the regulator ad the regulatees ad also the public i geeral. Supportig the ivolvemet of ratig agecies i sharia bakig activities Bak Idoesia will support the ivolvemet of ratig agecies to assess sharia bakig coditio i micro as well as macro level. At the micro level, the ivolvemet of ratig agecies could promote soud developmet of sharia fiacial market, such as i the issuace of sharia fiacial papers. Real-time bakig supervisio is importat i assessig the real assets quality of the baks. The supervisio activities will also be supported by automated data processig so that it could simplify ad improve the efficiecy of the regulatory ad supervisory activities. III. Operatioal efficiecy ad competitiveess Supportig the strategic alliaces Havig adopted iteratioal sharia fiacial stadards, atioal sharia bakig istitutios will always be promoted to coduct strategic alliaces with iteratioally reputated sharia fiacial istitutios. Establishig a cooperatios with related supportig istitutios Based o the studies coducted, Bak Idoesia will put a effort to realise the cooperatio with related istitutios i order to improve operatioal efficiecy. IV. Systemic stability ad beefits to the ecoomy Ehacig the roles of the Sharia Fiacial Iformatio Ceter Bak Idoesia will support the activities promotig Desigig a apropriate cocept of deposit takaful I order to icrease robustess whe facig fiacial ucertaity, Bak Idoesia will develop appropriate safety et scheme (deposit takaful) to mitigate paic sice its presece is essetial to maitai public cofidece. Coductig studies about alterative sources of fuds from the volutary sectors Followig up the cooperatio with related istitutios, Bak Idoesia will also coduct a study to more activate the role of volutary sector i the ecoomic system. Supportig the use of share base fiace I order to gai more beefit for the ecoomic system, Bak Idoesia will cosistetly support the use of share base fiacig. The success of the implemetatio of share base ecoomy will deped upo the readiess of the system such as idustry idexatio, trasparecy ad the use of volutary sector as the source of fiace for share base fiacig. The support also icludes the persuatio to the sharia commercial bak to implemet share base fiacig without igorig prudetial bakig operatios. 25

31 4.3. Stage III ( ) III. Operatioal efficiecy ad competitiveess The third stage of implemetatio is the fializatio process i the developmet program. At this fial stage, the system is expected to be capable of adoptig iteratioal stadards for sharia bakig operatio ad services. I. Compliace to sharia priciples Supportig the establishmet of globally competitive players of sharia bakig idustry Bak Idoesia will cosistetly support the establishmet of globally competitive players of sharia bakig idustry. IV. Systemic stability ad beefits to the ecoomy Realisig the itegrated ratig system that accommodate sharia ad fiacial aspects Followig up the effort to itegrate fiacial ad sharia aspects i sharia bakig activities, Bak Idoesia cosistetly supports the implemetatio of the itegrated fiacial ad sharia regulatory ad supervisory framework. II. Prudetial set of sharia bakig regulatios Supportig the establishmet of a comprehesive ad itegrated (kaffah) sharia fiacial system Bak Idoesia will cosistetly support the establishmet of a comprehesive ad itegrated sharia fiacial system that is capable of optimize the use of all possible fiacial sources ad use it efficietly ad professioally for the sake of public welfare. Realisig icetive base regulatory framework I accordace with the moder bakig paradigm, Bak Idoesia ultimately will support the implemetatio of icetive based bakig regulatory system. The ultimate objective is to establish self-regulatory bakig system. 26