Growth and Outlook Acceleration Programme 2007-2008

Investment Guide to Islamic Banking in Indonesia 11 of 1999 amended by Act No. 3 of 2004 concerning Bank Indonesia provides the legal basis for Bank Indonesia to perform the regulation and oversight of the banking system, including Islamic banks, and to issue central bank instruments complying with sharia principles. This, coupled with the potential market offered by Indonesia’s Muslims representing about 85 of the 220 million population, offers opportunity for the rapid expansion of the Islamic banking sector in Indonesia through the provision of alternative financial instruments and banking services to Muslim customers in Indonesia . To seize this opportunity, Bank Indonesia has worked hard in its capacity as central bank to develop this industry. On the other hand, Islamic banks are also expected to support sustainable economic development and improvement in the welfare of the Indonesian people and the economy. The paradigm adopted in this policy is based on: i market driven approach, ii gradual and sustainable approach, iii fair treatment, and iv comply to sharia principles. Bank Indonesia has taken a strategic step for the long-term development of Islamic banking by preparing the Islamic Banking Blue Print until 2015, which sets out short, medium and long-term initiatives aligned with the Indonesian Banking Architecture for 2004-2015. The development of the Islamic banking system in Indonesia must uphold prudent banking and compliance with sharia principles. The infrastructure for compliance with sharia principles is now in place. The Indonesian Council of Ulamas MUI has established the National Sharia Board DSN as the sole institution for issuing fatwas on Islamic financial instruments in Indonesia and appointment of Sharia Supervisory Boards DPS at banks. These boards are responsible for ensuring that banks conducting business based on sharia principles comply with these principles in their operations, products and services. In addition to its active role at home in the development and provision of Islamic banking infrastructure, Bank Indonesia is also active in international Islamic banking organisations such as the Islamic Financial Services Board IFSB and Accounting, and Auditing Organization For Islamic Financial Institutions AAOIFI. Bank Indonesia’s involvement includes active participation in working groups for deliberation of the Guidance for Islamic Financial Institutions, some aspects of which have also been applied in the regulations issued by Bank Indonesia. To support more vigorous promotion of Islamic financial and banking services in Indonesia and attract more foreign investors, the Indonesian Parliament is currently deliberating the draft Islamic Banking Law, the draft Islamic Government Securities Law SBSN and the package of draft taxation laws specifying treatment for Islamic financial transactions.

2. Growth and Outlook

The Islamic banking system in Indonesia has charted above 65 growth in the past four years, based on a compounded annual growth rate CAGR. Market share in 2006 was 1.60 of national banking assets and is targeted to reach 9-10 by 2011. In the last year, from 2005 to 2006, Islamic banking assets expanded by a significant 32.8 yoy, October 2005-October 2006, ahead of the corresponding growth in the national 12 Investment Guide to Islamic Banking in Indonesia banking system at only 9.8. Depositor funds held at Islamic banks also mounted significantly with growth at 39.8 yoy, October 2005-October 2006, compared to the average 11.9 growth in national banking system. While Islamic banking assets in Indonesia came to only 1.56 of total banking assets at end- 2006 October 2006, Islamic bank financing reached about 2.4 October 2006 of total national bank lending and financing. This indicates that provision of funds by Islamic banks is focused more on creditfinancing, rather than other fund placements. Concerning the future potential and outlook, research by Bank Indonesia in one-third of Indonesia’s regencies and municipalities indicates that about 42 of regions have adequate to strong potential for Islamic banking. More than 85 of respondents agreed with the adoption of profit-sharing sharia principles in the Indonesian banking system.

3. Acceleration Programme 2007-2008

In view of the brisk expansion of Islamic banking in Indonesia and potential for growth, Bank Indonesia expects the share of Islamic banking assets to expand to 5 by the end of 2008. To support this objective, Bank Indonesia has launched a programme for accelerated expansion of Islamic banking as follows: a. More intensive public education on Islamic banking to stimulate public interest and build improved understanding of Islamic banking and financial services. b. Bank Indonesia will evaluate Islamic banking products and services and promote the expansion of Islamic banking outlets for easier public access to Islamic banking services. c. Bank Indonesia will participate actively in promoting foreign investment in Islamic financial instruments. Investment Guide to Islamic Banking in Indonesia 13 14 Investment Guide to Islamic Banking in Indonesia