Seminar on Islamic Finance MICRO FINANCE Is Islamic

Seminar on Islamic Finance: MICRO FINANCE Is Islamic Micro. Finance a Promising Solution to Lift People Out of Poverty? LAKSMI MUSTIKA NINGRAT SENIOR ADVISOR INDONESIAN ISLAMIC MICROFINANCE Jakarta, 27 NOVEMBER 2012 Source : Coordinator Minister of Economy, BI, BSM & ABSINDO

OUTLINE q Part I : Back Ground q Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) ü What is Financial Inclusion ü How does it contribute to economic growth and poverty reduction? q Part III : What We Should Do q Part IV : Expectations

BACK GROUND Fact and Figures Some key facts of Indonesia: – Population of Indonesia: 237 million – GDP per capita: USD 3, 508 – Banking industry holds more than 80% of financial sector assets – 97. 4% of banks accounts are less than IDR 100 million (less than USD 10, 000) – Number of commercial banks: 120 – Number of rural banks: +1. 667 – Number of cooperatives: +71. 000 – Number of islamic microfinance institutions: +5. 500 Category Population Number of Loan Account Number of Insured life Insurance Number of pension fund participant SOURCE : BI Quantity Percentage on Total Population 237. 641. 326 37. 929. 527 15, 96% 34. 564. 028 14, 54% 2. 817. 997 1, 19% Public access on financial services is relatively low that is reflected by (a) the number of loan accounts which reach only 15. 96% of the population, (b) the number of insured life insurance which reach only 14. 54% and (c) the number of pension fund participants which is only 1. 19 %

BACK GROUND Financial Services : Comparison No 1 2 Indicator Indonesia Malaysia Thai Phil Brazil Account at Formal Financial Institution 20% 66% 73% 27% 56% Adults saving in the past year (using Formal Account) 15% 35% 43% 15% 10% Adults Originating a new loan in the past year (Formal Financial Institution) 9% 11% 19% 11% 6% Adults With Mortgage 1% 13% 5% 4% 1% Adults paying personally for health insurance 1% 16% 24% 5% 8% Number of Bank Branch per 1. 000 km 2 7, 71 6, 18 11, 59 15, 69 2, 33 Number of Bank’s Branch per 100. 000 adult population 8, 32 10, 48 11, 16 7, 69 13, 76 Number of ATM per 1. 000 km 2 12, 39 33, 12 80, 68 30, 35 20, 46 Number of ATM’s per 100. 000 adult population 13, 37 56, 18 77, 69 14, 88 120, 62 Financial Services Utilization*) (Percentage of Total Population) Banking Services Access**) Source : *) World. Bank Policy Research Working Paper, April 2012 **)IMF & World. Bank, 2010

BACK GROUND ACCESS TO FINANCE IN INDONESIA 13. 33% 60% 64. 25% Below Poverty Line Living in Rural Area 99. 91% % MSME compare to total business unit Without access to bank 60 -70% MSMEs that have not been linked to bank 5 SOURCE : BI

BACK GROUND Acoording Imam Al-Syatibi: The purpose of Islamic Economic is the wealth creation and distribution Al Muwafaqat Fi Ushul Al-Syariah, 2: 8 God say: “God have been created you from the earth (soil) and asked you to create a prosperity on it (earth)” Q. S. Hud: 61 SOURCE : BSM 6

BACK GROUND Islamic Economic 1. Prohibition of interest (riba): Conventional interest on loans or savings, as a fixed return without sharing any risk, is not allowed. 2. Risk sharing: Because interest is prohibited, suppliers of funds become investors instead of creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profit. 3. Money as “potential”‖ capital: Money is treated as “potential”‖ capital, which means that it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money only when it acts as capital, not when it is “potential”‖ capital. 4. Prohibition of speculative behavior: An Islamic financial system discourages hoarding and prohibits transactions featuring extreme uncertainties, gambling, and risks. 5. Sanctity of contracts: Islam upholds contractual obligations and the disclosure of information. In sales contracts, the product or service that is bought or sold must be clear to both parties. This feature is intended to reduce the risk of asymmetric information and moral hazard. 6. Sharia-approved activities: Muslims cannot profit from activities considered immoral. Only those business activities that do not violate the rules of the Sharia qualify for investment. 7. “Short selling‖ is not permissible: Muslims are not allowed to sell what they do not own, therefore, “short selling‖ is not allowed. Source: BSM Research 7

BACK GROUND Poor Islamic Economic At least, 4 billion people live on less than $2 a day Source: CK Prahalad, 2004. The Fortune at The Bottom of The Pyramid Source: BSM Research Islamic Economic Institutions should become the locomotive in flipping up the economic pyramid The flipped economic pyramid once occurred in caliphate of `Umar ibn `Abd al`Aziz, where it was very difficult to find zakat beneficiary (mustahiqq) 8

OUTLINE q Part I : Back Ground q Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) ü What is Financial Inclusion ü How does it contribute to economic growth and poverty reduction? q Part III : What We Should Do q Part IV : Expectations

MICRONOMICS Poverty Reduction Social inclusion (Access to Basic Services ) Promote empowerment among the poor (e. g. , Health & Education, Social mobilization) Financial inclusion Economic inclusion Expand the financial capacity of the poor Increase access to the income generating opportunities for the poor (e. g. , MSME development) (Access to Finance) Without inclusive financial systems, poor individuals and small enterprises will have to rely on their personal wealth or internal resources to invest in their education, become entrepreneurs or take advantage of promising growing opportunities 10 SOURCE : WORLD BANK

MICRONOMICS • Asset Building & business start up • Start Accessing Broader Formal Financial Services ( Saving, Credit, remittance etc) • Financial management & Planning Skills NEEDS: • Asset Building • Entry point for Formal Financial Services (saving) Escape from poverty Poor (Cluster 3) almost graduate (still vulnerable) Poorer (Cluster 2) Poorest (Cluster 1) with sources of income with limited assets • PKH (CCT program) • Scholarship & school operational assistance • Asset & income expansion • Regular Access to Formal Services • Asset/life protection (insurance) l cia So sion lu Inc • Jamkesmas (health assistance) • Raskin (rice assistance) SOURCE : WORLD BANK l cia So sion lu Inc i. e. PNPM Program: • Mandiri Rural-Urban, Revolving Loan Fund (RLF) • PISEW (regional infrastructure development) • P 2 DTK (enhancing the development of underdeveloped region) l cia So sion lu Inc • KUR Program (partial guaranteed credit) • KUBE program (joint business group program for productive poor) 11

MICRONOMICS SOURCE : WORLD BANK

MICRONOMICS Islamic Finance Co. 2 Sharia Unit of Finance Co. 12 Finance Co. Offer Islamic Prod TOTAL 16 Islamic Life Insurance 3 Islamic Non Life Insurance 2 Sharia Unit of Life Insurance 17 Sharia Unit of Non Life Insurance Sharia Unit of Reinsurance 18 TOTAL 43 2 3 Islamic Com Bank 11 Islamic Windows 24 Islamic Rural Bank 155 2. 380 Offices BUSSINESS PLAYER Finance Companies SERVICES APEX for BPRS & BMT Product: auto/motorcycles financing Insurance Product : microinsurance Pawn Shop Product : funds for startup/existing micro business Banking Micro-Small Enterprises BUS/UUS Product : microfinancing Microfinance Institutions: BPRS Islamic Cooperatives (BMT) > 5, 500 Conventional Cooperatives (Financial Sector) 71, 365 Conventional Cooperatives (Total) 187. 598 Zakat Fund Institutions SOURCE : BI >500 Cooperatives Microfinance Institutions: BMTs Zakah Fund Institutions Empowerment Programs Poorest of the 13 Poor

MICRONOMICS BUS/UUS Products: microfinancing Banking Microfinance Institutions: Islamic Rural Banks (BPRS) Cooperatives Microfinance Institutions: BMTs SOURCE : BI Banking Profiles Number of institutions: 11 Islamic Commercial Banks, 24 Islamic Banking Units, 155 Islamic Rural Banks (1, 820 total Rural Banks) Assets ICB: IDR 149 tr (USD 17 bio) or 4% Market share Assets IRB: IDR 3. 6 tr (USD 400 mio) or 6% market share Annuall Growth: 45– 50% (ICB); 25– 30% (IRB) Total Customers: 9 mio (ICB); 684, 167 (IRB) Asset Volume Number of IRB < 1 Billion 3 1 up to 5 Billion 24 >5 up to 10 Billion 39 > 10 Billion 89 Total 155 BMT Profiles Number of Institutions: More than 5500 BMTs (Conventional Cooperatives 71. 365 units) Assets: IDR 3, 5 tr (USD 389 mio) Annuall Growth: 30 – 40% Number of Employee: 5 – 10 (average) Total members: 10 mio Non-Performing Financing/Loan: 4 -5 % (Modus) Mostly initiated by group of people in particular 14 community; Islamic Mass Organization, Mosque Comm.

MICRONOMICS BMT Operations Source of Funds Social Activities as Baitul Mal Zakah, Infaq, Sadaqa, Awqaf Grant, Endowment, Non Commercial Fund, etc Beneficiaries/Customers Needy People EQUITY MEMBERS MICRO-SMALL ENTREPRENUERS (MEMBERS) DONORS APEX Funding; Wadiah, Mudharabah, Musyarakah SOURCE : BI Commercial Activities as Baitul Tamwil Financing; Murabahah, Ijarah, Mudharabah, Musyarakah, etc 15

MICRONOMICS Ministry of Cooperatives & Small Medium Enterprises Regulations: licensing Cooperatives Offices of Regional Government Regulations: supervision TA, advocacy & Participation in Policy Dialogue Capicity Building & Other Supporting Programs The Lender of the Last Resort SOURCE : BI Apex for Financing MSMEs Projects PUSKOPSYAH Regional Associations PT Permodalan 16 BMT Ventura

MICRONOMICS How About Digital Economic ? a PC, Only 5 % penetration Number of PC in Indonesia 12 Million Units b Internet, Only 18, 5% penetration Internet Users 45, 000 people c Mobile Phone no 5 in the world. Mobile Phone 165, 000 Mobile Phones d Face Book no 2 in the world. FB Users 35, 174, 940 users e Size of ICT Market in 2011 IDR 220 trilions Size of ICT Market in 2014 IDR 440 trilions 17 SOURCE : ASOCIO ICT SUMMIT 2011, YOGYAKARTA - INDONESIA

MICRONOMICS Community Channel (BMT) Ø Ø Ø Ø Face Book BMT ATM EDC CDM BMT Click Mobile Money KYC (Biometric – e. KTP) The Future of BMT (Low Cost Banking) Outlet BMT Channel compared with Bank SOURCE : ABSINDO

MICRONOMICS Coverage Nationwide Member Aproximately 5. 500 BMT’s Outlets Over 22. 000 outlets Account Holders Potentially over 22 million SOURCE : ABSINDO Member Strength

OUTLINE q Part I : Back Ground q Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) ü What is Financial Inclusion ü How does it contribute to economic growth and poverty reduction? q Part III : What We Should Do q Part IV : Expectations

WHAT WE SHOULD DO ? National Strategy on Financial Inclusion Vision Mission Source: BI 21

WHAT WE SHOULD DO ? Remarks : On going Programn by BI : : Program will be conducted by BI Paralel program with other institutions outside of BI SOURCE : BI Financial Inclusion Framework 22

WHAT WE SHOULD DO ? Strategic Target Financial Education The Improvement of financial literacy on: a. Banking products ; b. Consumer Protection; c. Financial management Financial Eligibility Policy and Regulation Increasing the number of eligible/bankable person or SME’s Preparing the regulation that support financial access and eliminating the various types of barriers Intermediation Increasing the range of formal financial system especially to remote areas community Source: BI Distribution Channel Increasing the financial distribution channel in terms of number and quality 23

WHAT WE SHOULD DO ? Challenges Ahead Problems Identified Lack of Customer Protection Framework for MFI Customer Lower income people is categorized as unbankable since they can not fulfill bank requirement Source: BI Pillars Proposed Program

WHAT WE SHOULD DO ? Challenges Ahead Problems Identified Accelerating Financial education Program Banks and MFI compete in the same segment Financial services for people in remote are SOURCE : BI Pillars Proposed Program

WHAT WE SHOULD DO ? How Islamic banks, Finance & Bussiness Institutions should take the role? Islamic banks Islamic mission • Islamic banks should implement its main mission: wealth creation & distribution Take opportunity optimally • Islamic banks is supposedly able to take optimally these opportunities thru advancing technology, innovating product scheme, and creating new business models, etc. Source: BSM Research 26

OUTLINE q Part I : Back Ground q Part II : Micronomics (Financial Inclusion = Islamic Micro Finance) ü What is Financial Inclusion ü How does it contribute to economic growth and poverty reduction? q Part III : What We Should Do q Part IV : Expectations

EXPECTATIONS STRATEGY : TRIPLE TRACT STRATEGY POVERTY ALLEVIATION DECREADING UN EMPLOYMEN INCOME GENERATION EMPLOYMENT CREATION JOB GROWTH ACCELERATION SAVING PROFIT Sub Apex - BMT POOR PEOPLE EQUITY ASSISTANT CAPACITY BUILDING INSTITUTIONAL BUILDING CHARACTER BUILDING EQUITY BUILDING Source : Prof. Gunawan Sumodiningrat modification SYSTEM WEALTH PEOPLE

EXPECTATIONS GOVERNMENT (REGULATION & SUPERVISORY) BANK-BANK STRATEGIC PARTNER APEX PROVIDER/IMPLEMENTOR Financial Assistance Apex s Financing Access (Financing & Equity) Arrangement Technical Assistance Management Standardization (SOP, ICT, Training) 165. 000 Cooperatives & 5000 IMF MICRO & SMALL ENTREPRENEUR COMMUNITY SOURCE : ABSINDO

EXPECTATIONS APEX MFI “An APEX Institution serves its owner/members (MFI’s) to strengthen their commercial position, viability and future, sound and profitable development” (Cleman Wendland GTZ; 2004). SOURCE : ABSINDO

EXPECTATIONS ……APEX MFI • APEX is a Central for MFI (Micro Finance Institution) • Integrated system comprising of social network microfinance, mobile payment solution, core switching for finance, groups of MFI which enable distribution of funds to the saving account holder, transaction between account holders, and payment for utilities and other services. SOURCE : ABSINDO

EXPECTATIONS No Function Institution Explanation Analog 1 SRO Apex Internal Regulations for its Member BI, LPS, OJK 2 Saving Guarantee MFI-SG IDR 25. 000, - Maximum LPS 3 Mismatch Liquidity Apex SWM from Apex Member LPS, BI 4. Settlement Apex Virtual Clearing Systems BI 5 Payment Systems e. MF Card & Mobile Payment Systems BI 6 Wholesaler Apex Donor Funds like World Bank BI 7 Linkage Program Apex/creditor Funds from Creditor BI 8 Credit Biro Apex Credit Information Center/Call Center BI 9 ICT e. MF Back Office/ Centralized Data Center BI 10 Rating Systems e. MF System Rating (ICT Base) BI 11 Management Services Apex SBU Training (Certif), SOP, ISO etc BI 12 Supervision/MONEVA Apex, e. MF MONEVA to member (exclude FS) OJK SOURCE : ABSINDO

EXPECTATIONS BMT UGT, Pasuruan – East Java Asset IDR 287 bio (USD 25. 5 mio) 33

EXPECTATIONS Islamic Creative Economics To the Community : Creative Micronomics should become the locomotive in flipping up the economic pyramid UU No. 20/2008 ttg UMKM Big Coy/Conglomerat : Omzet/pa > IDR 50 B Asset > IDR 10 B BIG COY : Net Assets/pa > 10 B Sales Volume > 50 B MIDDLE COY : Net Assets/pa > IDR 500 M s. d 10 B Sales Volume > IDR 2, 5 B - 50 B SMALL COY : Net Assets/pa > IDR 50 M s. d 500 M Sales Volume > IDR 300 M - 2, 5 B MICRO ENT : Net Assets/pa Maximum IDR 50 M Sales Volume Maximum IDR 300 M BIG COY ± 4, 52 thou ± 120, 25 thou = 0, 24% Small Coy : Omzet/pa from IDR 200 M - IDR 1 B Asset until IDR 200 M SMALL COMPANY ± 2, 02 mio = 4, 05% MICRO ENTERPRISES SOURCE : RUU No. . . /2008 ttg UMKM (Kep Sidang Paripurna DPR) Kekayaan Bersih = total nilai kekayaan usaha (asset) – total nilai kewajiban, tidak termasuk tanah dan bangunan tempat usaha. Hasil Penjualan = hasil penjualan bersih (netto) dari barang dan jasa dlm 1 th buku 0, 01% Middle Coy Omzet/ pa from IDR 1 B - IDR 50 B Asset from IDR 200 M - IDR 10 B MICRO MIDDLE COY = Micro Enterprises : Omzet/pa until IDR 200 M Asset until IDR 50 M ± 47, 70 mio = 95, 70% SOURCE : MODIFICATION FROM UMKM DATA 2007, BERITA RESMI STATISTIK No. 28 BPS 2008 UU No. 9/1995 ttg Usaha Kecil PP No. 32/1989 ttg Pembinaan dan Pengembangan Usaha Kecil Inpres No. 10/1989 ttg Pemberdayaan Usaha Menengah 34

INDONESIAN TODAY (2012) RICH COUNTRY POOR PEOPLE INDONESIANTOMORROW (2045) RICH & SUPER POWER COUNTRY WEALTH &ETHICAL