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Yuslam FauziCEO

Bank Syariah Mandiri

Presented in:CEO Forum III

Masyarakat Ekonomi Syariah (MES)

Flipping Up the Pyramid:The Issue of Enhancing iB Competitiveness

Contents

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IIIIII

Reflectionsa.Maqasid al Shariab.Human Capital Readiness

Characteristics & Prospects of Indonesiaa. Historical

b. Economic & Business

What Islamic Bank Should Do?

ExpectationsIVIV

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Maqasid al Shariaa.

Tujuan syariah adalah terciptanya kesejahteraan manusia

Al Muwafaqat Fi Ushul Al-Syariah, 2:8

Menurut Imam Al-Syatibi:

Firman Allah SWT:

“Dialah (Allah) yang telah menciptakan kalian dari Bumi (tanah) dan telah meminta kalian untuk memakmurkannya (Bumi)” Q.S. Hud: 61

I. Reflections

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Contoh dari ayat Quran:

“Bukanlah menghadapkan wajahmu ke arah timur dan barat itu suatu kebajikan, akan tetapi sesungguhnya kebajikan itu ialah beriman kepada Allah, hari kemudian, malaikat-malaikat, kitab-kitab, nabi-nabi dan memberikan harta yang dicintainya kepada kerabatnya, anak-anak yatim, orang-orang miskin, musafir (yang memerlukan pertolongan) dan orang-orang yang meminta-minta; dan (memerdekakan) hamba sahaya, mendirikan shalat, dan menunaikan zakat; dan orang-orang yang menepati janjinya apabila ia berjanji, dan orang-orang yang sabar dalam kesempitan, penderitaan dan dalam peperangan. Mereka itulah orang-orang yang benar (imannya); dan mereka itulah orang-orang yang bertakwa. ” (QS. Al-Baqarah [2]: 177.)

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I. Reflections

Maqasid al Shariaa.

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I. Reflections

Maqasid al Shariaa.

Verses Translation Arabic

Al Fajr (15 – 20)

15

16

17

18

19

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Source: CK Prahalad, 2004. The Fortune at The Bottom of The Pyramid

Sharia banks should become the locomotive in flipping up the economic pyramid

The flipped economic pyramid once occurred in caliphate of Ùmar ibn Àbd al-Àziz, where it was very difficult to find zakat beneficiary (mustahiqq)

At least, 4 billion people live on less than $2 a day

Poo

r

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I. Reflections

Maqasid al Shariaa.

63.4%61.9%

55.8%

46.4%

43.3%

38.6%

33.6%

36.7%38.1%

44.2%

53.6%

56.7%

61.5%

66.4%

Jun-05 Des-05 Des-06 Des-07 Des-08 Des-09 Des-10

Korporasi UMKM (Non Korporasi)

Financing composition changed from corporate majority to non corporate majority

In BSM

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I. Reflections

Maqasid al Shariaa.

Daftar 42 Negara Muslim (Majority)No. Negara % Muslim

1 Afghanistan 99,72 Tunisia 99,53 Iran (Islamic Republic of) 99,44 Azerbaijan 99,25 Yemen 99,16 Mauritania 99,17 Morocco 99,08 Iraq 99,09 Niger 98,6

10 Somalia 98,511 Maldives 98,412 Comoros 98,313 Jordan 98,214 Turkey 98,015 Algeria 98,016 Occupied Palestinian Territories98,017 Saudi Arabia 97,018 Djibouti 96,919 Libyan Arab Jamahiriya 96,620 Uzbekistan 96,321 Pakistan 96,3

No. Negara % Muslim22 Senegal 96,023 Kuwait 95,024 Gambia 95,025 Egypt 94,626 Turkmenistan 93,127 Mali 92,528 Syrian Arab Republic 92,229 Bangladesh 89,630 Indonesia 88,231 Oman 87,732 Kyrgyzstan 86,333 Guinea 84,434 Tajikistan 84,135 Bahrain 81,236 Albania 79,937 Qatar 77,538 United Arab Emirates 76,239 Sudan 71,340 Sierra Leone 71,341 Brunei Darussalam 67,242 Malaysia 60,4

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I. Reflections

Maqasid al Shariaa.

1. HDI negara-negara muslim lebih rendah dibanding dengan HDI negara-negara non-muslim.

Statistik:

Human Development Index (HDI)

Negara Muslim Bukan Negara Muslim

Rerata HDI 0,578 0,654

Top 30 HDI 0% 100%

Top 40 HDI 8%1.United Arab Emirates (rank 32)2.Brunei Darussalam (rank 37)3.Qatar (rank 38)4.Bahrain (rank 39)Penduduk Muslim: +/- 5,2 juta (0,37% dari total muslim dunia)

92%

Top 50 HDI 10%

1.All above +2.Kuwait (rank 47)Penduduk Muslim: +/- 8 juta orang (0,57% dari total muslim dunia)

90%

Bandingkan dengan total muslim di Eropa sebesar +/- 51,46 juta

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I. Reflections

Maqasid al Shariaa.

2. Education Index negara-negara muslim lebih rendah dibanding dengan Education Index negara-negara non-muslim.

Statistik:

Education Index (EI)


Rerata EI 0,502 0,606

Top 30 EI 0% 100%

Top 40 EI 0% 100%

Top 50 EI 2%

1.Bahrain (rank 49)

Penduduk muslim:• +/- 642 ribu • hanya 0,05% dari total muslim dunia• lebih rendah dari total muslim di Jerman

sebesar 4 juta orang

98%


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I. Reflections

Maqasid al Shariaa.

3. Life Expectancy Index negara-negara muslim lebih rendah dibanding dengan Life Expectancy Index negara-negara non-muslim.

Statistik:

Life Expectancy Index (LEI)


Rerata LEI 0,747 0,780

Top 30 LEI 0% 100%

Top 40 LEI 2%1.Kuwait (rank 39) , penduduk 2,8 juta (0,2% total muslim dunia)

98%

Top 50 LEI 8%

1.Kuwait +2.United Arab Emirates (rank 41)3.Brunei Darussalam (rank 42)4.Albania (rank 45)Penduduk muslim:

• +/- 9,24 juta• hanya 0,65% dari total muslim dunia

92%


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I. Reflections

Maqasid al Shariaa.

4. GNI pc negara-negara muslim lebih rendah dibanding dengan GNI pc negara-negara non-muslim.

Statistik:


Rerata GNI pc 11.567 13.797

Top 30 GNI pc 8% 92%

Top 40 GNI pc 14%1.Qatar (rank 2)2.Uni Arab Emirate (rank 4)3.Kuwait (rank 5)4.Brunei Darussalam (rank 7)5.Bahrain (rank 31)6.Oman (rank 33)7.Saudi Arabia (rank 36)Penduduk muslim:

• +/- 35,5 juta• hanya 32,51% dari total muslim

dunia

86%

Top 50 GNI pc 8% 92%


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I. Reflections

Maqasid al Shariaa.

5. Top 10 negara muslim adalah natural resource-based economy

No. Top 10 HDI in Muslim Country HDI % Muslim Economic Driver KEI*1 United Arab Emirates 0.815 76.2 Natural Resource-Based 6.662 Brunei Darussalam 0.805 67.2 Natural Resource-Based N/A3 Qatar 0.803 77.5 Natural Resource-Based 6.154 Bahrain 0.801 81.2 Natural Resource-Based 6.025 Kuwait 0.771 95.0 Natural Resource-Based 6.016 Libyan Arab Jamahiriya 0.755 96.6 Natural Resource-Based N/A7 Saudi Arabia 0.752 97.0 Natural Resource-Based 5.158 Malaysia 0.744 60.4 Natural Resource-Based 6.069 Albania 0.719 79.9 Natural Resource-Based 4.04

10 Azerbaijan 0.713 99.2 Natural Resource-Based 3.81

Top 10 HDI of Muslim Country Natural resource based-economy

1. Knowledge Economic Index (KEI) rendah

2. Rerata KEI sebesar 5,49

2⃰ The Knowledge Economy Index (KEI) takes into account whether the environment is conducive for knowledge to be used effectively for economic development

No. Top 10 HDI in The World HDI % Muslim Economic Driver KEI*1 Norway 0.938 1.0 Knowledge-Based 9.272 Australia 0.937 1.7 Knowledge-Based 8.893 New Zealand 0.907 0.9 Knowledge-Based 8.874 United States 0.902 0.8 Knowledge-Based 9.085 Ireland 0.895 0.5 Knowledge-Based 8.926 Liechtenstein 0.891 4.8 Knowledge-Based N/A7 Netherlands 0.890 5.7 Knowledge-Based 9.328 Canada 0.888 2.0 Knowledge-Based 9.219 Sweden 0.885 2.0 Knowledge-Based 9.52

10 Germany 0.885 4.0 Knowledge-Based 8.87

Top 10 HDI of the World Knowledge based-economy

1. Knowledge Economic Index (KEI) tinggi

2. Rerata KEI sebesar 9,11

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I. Reflections

Maqasid al Shariaa.

HDI Indonesia 2010

Indikator Value Ranking KeteranganHDI 0,600 108

Life Expectancy Index

0,815 Kontribusi positif terhadap HDI

Education Index

0,539 Kontribusi negatif terhadap HDI

Income Index 0,491 Kontribusi negatif terhadap HDI

- Tahun 2009, dari 184 negara, Indonesia menempati peringkat 111 dengan HDI Index: 0,734.

- Tahun 2010, dari 192 negara, Indonesia berada pada peringkat ke-108 mengalami peningkatan dibanding tahun 2009.

- Faktor utama penyebab rendahnya HDI Indonesia adalah tingkat Income Indeks dan Education Index.

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I. Reflections

6. Indonesian Prosperity

Maqasid al Shariaa.

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Human Resource

(Thousand)

Islamic Banking Asset(IDR Trillion)

83 thousand human resources gap to be solved

I. Reflections

2010 2020

101*

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97.5

1.800*

1. Islamic banking growth must be supported by ...... thousands resources

2. All of them must have hi-competences and unquestionable integrity

3. How can we deal with this challenge? 4. What kind of education we need to deal with?

* Assumption:

1.the ratio of asset per employee increases by 13% per year based on data 2007 to 20102.Asset growth 34% p.a.

Human Capital Readinessb.

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Contents

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ExpectationsIVIV

1. Different country/nation has different characteristics in developing Islamic banking;2. There is a need for developing nation-based iB product development.

a. Historical: Growth Driver

Abundant Petrodollars Abundant

Petrodollars

Malaysia Indonesia

Islamic

Banking

Islamic

Banking

to retain Petrodollar & to reach int’l investment to retain Petrodollar &

to reach int’l investment

Government-driven iB

Government-driven iB

Society–driven iB

Society–driven iB

II. Characteristics & Prospects of Indonesia

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Oil prices are rising; Islamic banks are flush with funds and are driving growth on the back of strong recent performances.

1.Propelled by rising oil prices and economic diversification, GCC (Gulf Cooperation Council) countries are growing rapidly. 2.Islamic banks, or banks that offer Islamic banking units, have a market that holds half of the world’s oil reserves and whose citizens have an estimated $1.5 trillion in private wealth, according to the International Monetary Fund.

Source: Rajashekara V Maiya, Basudev Banerjee. 2009. Banking on Faith: Islamic Banking in the Middle East. Prespective. Finale Infosys.

Islamic banks in Middle East are petrodollar-driven

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a. Historical: Growth Driving Factor in Middle East


1. An added spur is the huge liquidity overhang in the Gulf due to the high petroleum prices for which Shariah compliant investments are the channel of choice.

2. This situation has led to European states promoting their acceptance of Islamic finance.

3. Europe’s acceptance of Islamic finance is a natural follow-through to the emergence of a sizeable Muslim middle and upper classes, but the players are eyeing the overall population as a cycle of financial and credit crises pushes consumers to seek ethical financial services.

Source: Islamic Finance News, Vol. 5, Issue 355th, September 2008 www.assaif.org/content/download/1243/8684/version/1/file/IFN+Sept.+08.pdf

The main reason behind the development of Islamic bank in Europe is due to the opportunity maximization of huge liquidity of in the Gulf countries.

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a. Historical: Growth Driving Factor in Europe


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Source: Jennifer Chang. 2009. Incentives from the Malaysian Government. Islamic Venture Capital & Private Equity Conference 2009. PriceWaterHouseCoopers. Online. www.assaif.org/content/download/3046/18281/file//Incentives%20from%20the%20Malaysian%20Government-Jennifer%20Chang.pdf

Government of Malaysia has played significant role on boosting Islamic banking industry

a. Historical: Growth Driving Factor in Malaysia


*Santrinic is terminology to describe to those who has more concern on religion**Abangan is a terminology to describe to those who has less concern on religion or syncretism.

Two ministers’ Joint decree: - Religious-based

school teach general studies

- Public school teach religious studies

A dichotomy era of “santrinic” *and

“abangan”**

1949 1955 1961 1965

Organisational leaders come from santrinic

family, a diploma graduate, which has experienced in public

school

1970s 1980s 1990s

Family of “Santrinic” just

haveBachelor Deg

Newly fashionable of “Mosque in office” and veil

Elemen-tary

Senior High Sch

ICMI(the origin of

social Islamization)

DiplomaDegree

1st Generation

2000s

Islamic Banking Booming

• Islamic banking is an accumulated result of those two minister’s joint decree

• At present, the development of Islamic banking has become the driving force of the development other Islamic finance & economic practices

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a. Historical: Growth Driving Factor in Indonesia


Recently, Indonesia has about 102 mn middle class

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b. Economic & Business: Population (Middle Class)

Sources: Key Indicator for Asia and Pacific (barrolee.com)


1. Middle-class in Indonesia will be doubled

2. Household consumption as GDP growth driver

3. There is gonna be a big challenge to solve

Sources: Key Indicator for Asia and Pacific (barrolee.com), BPS, Facebook, media reports, A.T. Kearney analysis


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1. Growing 7% per year, Indonesia shall become the fifth biggest economies in the world by 2030.

2. The Indonesian economy prospect should affect to the Bottom of the Pyramid. For Islamic bank, this requires sophisticated capabilities of Islamic banking in providing products & services.

Source: IMF, Standard Chartered Research (Desember, 2010)

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b. Economic & Business: Future Economy


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Contents

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ExpectationsIVIV

How to inline the wealth creation & distribution issues in the light of Indonesian economy prospective in the next two

decades?

What should Islamic bank do next? What business model should Islamic bank pursue?

?

III. What Islamic bank should do?

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Islamic banks

• Islamic banks is supposedly able to take optimally these opportunities thru advancing technology, innovating product scheme, and creating new business models, etc.

Take opportunity optimallyTake opportunity optimally

• Islamic banks should implement its main mission: wealth creation & distribution

Shari’a missionShari’a mission

How Islamic banks should take the role?


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• Fiskal (?)• ATMR (?)• Relaksasi regulasi (?)• Relaksasi syariah (?)• Dst



Fulfill Maqashid Syariah!!!

Fulfill Maqashid Syariah!!!

Comply with Fiqh???

Comply with Fiqh???

..Giving fair competitiveness & incentives to both BoP Market and Islamic banks become a strategic enabler for succeeding wealth creation & distribution in Indonesia…

Which one is better & relevant for wealth creation & distribution?

Incentives



Competition Fairness

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ExpectationsIVIV

BoP Market Segment BoP Market Segment

…The most challenging of Islamic bank on tapping up the BoP Market is more than

providing customized, simple, and cheap Products, but on how shari’a compliance deals with flexibility & cost…

Customised

ProductsSimple

products

Cheap

products

IV. Expectations

1 2 3

Pembiayaan Sektor PertanianContraints: No “IDC” syariahPossible solutions: Margin During Construction/Plantation

Pembiayaan Sektor PertanianContraints: No “IDC” syariahPossible solutions: Margin During Construction/Plantation

Context: Pembiayaan Multi GunaContraints: compliance cost• PMG Konsumer: satu obyek satu akad. Solusi: satu paket satu akad• PMG Konsumer/Mikro: Tawarruq. Possible solutions: Bai’ Al Inah• Pembiayaan Executing: satu akad satu disbursement. Possible

solutions: ??• dsb

Context: Pembiayaan Multi GunaContraints: compliance cost• PMG Konsumer: satu obyek satu akad. Solusi: satu paket satu akad• PMG Konsumer/Mikro: Tawarruq. Possible solutions: Bai’ Al Inah• Pembiayaan Executing: satu akad satu disbursement. Possible

solutions: ??• dsb

Compliance cost

Operational cost

Sharia Compliance Flexibility

Kontekstualisasi & Reaktualisasi

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1. To Regulators & Ulama: Contextualization & Reactualization

Instead of Tax Incentives(Case of Malaysia)

We need Tax Fairness(a Proposal for Indonesia)

Tax Incentives

Tax Fairness

1. To create fair competition, Islamic banking must be placed in “the same playing ground” with the conventional one

2. Tax fairness could be considered3. See one example in the next slide

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2. To the Government: Tax Fairness

IV. Expectations

Income Tax of Depositors

Customer’s Question:

“Why are we (depositors) charged with the same tax rate while facing higher uncertainty in Islamic Banking?”

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IV. Expectations

Conventional Commercial Bank

Islamic Commercial Bank

Investment Bank

Both principal and interest are guaranteed

Principal is guaranteed but yield is not guaranteed

Both principal and interest are not

guaranteed

Debt Culture(low risk)

In Between(moderate risk)

Equity Culture(high risk)

Income TaxFor Depositors/

Investors20% ? 15%

Interest Profit Sharing Dividend

10%

Corporate Tax

Individual Tax

1. Based on the risk-return principle, is 20% of Income Tax for islamic banking depositors fair?

2. How much is the appropriate percentage of tax for Islamic banking depositors (investment account)?

3. We think it should be lower than 20%

20%

Income Tax of Depositors

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IV. Expectations

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Quality of the educational systemHow well does the educational system in your country meet the needs of a competitive economy? [1 = not well at all; 7 = very well]

1. Education in Indonesia has not matched yet with business needs2. Can our education meet Islamic banking needs?3. Supposedly, educational institution can play hand in hand with business

player, especially Islamic banking players

4. We should consider tax incentives for sharia human capital development

Source: Klaus Schwab. 2010. The Global Competitiveness Report 2010–2011. World Economic Forum. Geneva, Switzerland 2010

Therefore, to fully utilize the ‘window of opportunity’ in 2020-

2030, Indonesia needs to immediately initiate policies and programs to prepare high quality human capital to meet the rapid

changing demand of labor

Intenational Labor Org. (ILO) - Indonesia

Source: ILO Jakarta News Letter. 2008. Indonesia-ILO to Continue Tackling the Worst Forms of Child Labour. http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/documents/publication/wcms_101368.pdf .

2. To the Government : Human Capital

IV. Expectations

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Human Resource

(Thousand)

Islamic Banking Asset(IDR Trillion)

83 thousand human resources gap to be solved

2010 2020

101*

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97.5

1.800*

1. Islamic banking growth must be supported by 83 thousands resources

2. All of them must have hi-competences and unquestionable integrity

3. How can we deal with this challenge? 4. What kind of education we need to deal with?

* Assumption:

1.the ratio of asset per employee increases by 13% per year based on data 2007 to 20102.Asset growth 34% p.a.


IV. Expectations

1. Tax incentives on training in Islamic Finance2. Tax exemption for non-resident Islamic finance expert3. Additional 20% stamp duty exemption on Islamic Financial

instruments4. Tax deduction for promoting MIFC


IV. Expectations

Lessons Learnt from Malaysia

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IV. Expectations

Experience

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Government should take a role to equip adequate training for judges who are

involved in dispute in sharia economic & finance

Islamic banking practitioners are unsatisfied with unfair decision

made by court due to lack of understanding of Islmic economic

and finance.

Islamic banking had unnecesary lost

Finish

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