Circular Letter of the Financial Services Authority Number 2/SEOJK.05/2016 Concerning the Financial Health Level of Sharia Financing

To:

1. The Board of Directors of Sharia Financing Companies; and
2. The Board of Directors of Financing Companies having Sharia Business Units,
   At their respective locations.

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 2 /SEOJK.05/2016

CONCERNING
THE FINANCIAL HEALTH LEVEL OF SHARIA FINANCING

In accordance with the mandate of Article 20 paragraph (4), Article 23 paragraph (7), Article 26 paragraph (6), Article 28 paragraph (3), and Article 29 paragraph (2) of the Financial Services Authority Regulation Number 31/POJK.05/2014 concerning the Conduct of Sharia Financing Business (State Gazette of the Republic of Indonesia Year 2014 Number 366, Supplement to the State Gazette of the Republic of Indonesia Number 5640), it is necessary to regulate implementation provisions regarding the financial health level for Sharia financing companies and Sharia business units in this Circular Letter of the Financial Services Authority as follows:

I. GENERAL PROVISIONS

1. Sharia Company means a Sharia financing company and a Sharia business unit.

2. Financing Company means a business entity that conducts financing activities for the procurement of goods and/or services.

3. Sharia Financing Company means a Financing Company whose entire business activities conduct Sharia financing.

4. Sharia Business Unit, hereinafter abbreviated as UUS, is a work unit of the Financing Company's headquarters functioning as the parent office of offices conducting Sharia financing.

5. Sharia Financing is the disbursement of financing conducted based on Sharia principles.

6. Sharia Principles are Islamic legal provisions based on fatwas and/or Sharia conformity statements from the National Sharia Board of the Indonesian Ulema Council.

7. Productive Assets are all assets owned by the Sharia Company with the intention of obtaining income in the form of Sharia Financing.

8. Financial Health Level of Sharia Financing is the result of assessing the capital adequacy, liquidity, quality of Productive Assets, and financial performance of the Sharia Company.

9. Financial Services Authority, hereinafter abbreviated as OJK, is an independent institution as referred to in laws concerning the Financial Services Authority.

II. ASSESSMENT OF FINANCIAL HEALTH LEVEL

1. Sharia Companies are required at all times to meet the requirements of the Financial Health Level of Sharia Financing.
2. The Financial Health Level of Sharia Financing referred to in paragraph 1 includes:
   a. capital adequacy ratio; b. quality of Productive Assets;
   c. profitability; and
   d. liquidity.

III. PROCEDURE FOR CALCULATING CAPITAL ADEQUACY RATIO

1. Sharia Companies are required to meet a capital adequacy ratio of at least 10% (ten percent).
2. The capital adequacy ratio of Sharia Companies is the ratio of adjusted capital to adjusted assets.
3. Adjusted capital as referred to in paragraph 2 is the sum of the following capital components:
   a. for Sharia Financing Companies in the form of a limited liability company, the sum of:
   1) adjusted equity consisting of:
   a) paid-up capital; b) additional paid-up capital, namely the sum of:
   (1) share premium/discount;
   (2) equity instrument issuance costs; and
   (3) others in accordance with financial accounting standards principles; c) transaction value differences of entities under common control; d) retained earnings/deficit; e) 50% (fifty percent) of current year profit/loss after tax; f) treasury stock; and g) other equity components, namely the sum of:
   (1) changes in revaluation surplus;
   (2) exchange differences due to translating financial statements in foreign currencies; (3) gains and losses from re-measuring available-for-sale financial assets; (4) effective portion of gains and losses of hedging financial instruments in cash flow hedging; and (5) other equity components in accordance with financial accounting standards principles, with deductions for:
   a) deferred tax calculations; b) goodwill; c) other intangible assets; and d) all equity investments in subsidiary companies;
   2) subordinated loans (qardh) of at most 50% (fifty percent) of paid-up capital meeting the following criteria:
   a) with a minimum term of 5 (five) years; b) in the event of liquidation, claims apply last among all existing loans; and c) stipulated in a notarial deed agreement between the Financing Company and the lender. Example:

• PT ABC Finance Syariah has paid-up capital of Rp100,000,000,000.00 and subordinated loans (qardh) of Rp25,000,000,000.00. Therefore, the amount of subordinated loans (qardh) that can be added to the adjusted equity calculation is Rp25,000,000,000.00.
• PT XYZ Finance Syariah has paid-up capital of Rp100,000,000,000.00 and subordinated loans (qardh) of Rp75,000,000,000.00. Therefore, the amount of subordinated loans (qardh) that can be added to the adjusted equity calculation is Rp50,000,000,000.00.
  b. for Sharia Financing Companies in the form of a cooperative legal entity, the sum of principal savings, mandatory savings, reserve funds, grants, and undistributed net profit.
  c. for UUS, the sum of:
  1) adjusted equity consisting of:
  a) working capital; b) retained earnings/deficit; c) 50% (fifty percent) of current year profit/loss after tax; and d) other equity components, namely the sum of:
  (1) changes in revaluation surplus;
  (2) exchange differences due to translating financial statements in foreign currencies; (3) gains and/or losses from re-measuring available-for-sale financial assets; (4) effective portion of gains and losses of hedging financial instruments in cash flow hedging; and (5) other equity components in accordance with financial accounting standards principles, with deductions for:
  a) deferred tax calculations; and b) other intangible assets;
  2) subordinated loans (qardh) of 50% (fifty percent) meeting the following criteria:
  a) with a minimum term of 5 (five) years; b) in the event of liquidation, claims apply last among all existing loans; and c) stipulated in a notarial deed agreement between the UUS and the lender, with a maximum amount of 50% (fifty percent) of the relevant UUS working capital. Example:
• UUS PT ABC Finance has working capital of Rp100,000,000,000.00 and subordinated loans (qardh) of Rp25,000,000,000.00. Therefore, the amount of subordinated loans (qardh) that can be added to the adjusted equity calculation is Rp25,000,000,000.00.
• UUS PT XYZ Finance Syariah has working capital of Rp100,000,000,000.00 and subordinated loans (qardh) of Rp75,000,000,000.00. Therefore, the amount of subordinated loans (qardh) that can be added to the adjusted equity calculation is Rp50,000,000,000.00.

4. Adjusted assets as referred to in paragraph 2 are the Sharia Company's assets multiplied by the asset risk weights as stated in Appendix I, which is an integral part of this OJK Circular Letter.
5. In calculating adjusted assets, the basis for assessing the nominal value of Productive Assets is outstanding Productive Assets (outstanding principal) minus formed reserves. Outstanding Productive Assets (outstanding principal) is the total claims, investments, and/or service claims minus deferred income minus:
   a. deferred income (unearned revenue); and b. other income and expenses related to financing transactions that are amortized.
6. The measurement of the capital adequacy ratio is documented according to the worksheet format as stated in Format 1 of Appendix II, which is an integral part of this OJK Circular Letter.

IV. QUALITY OF PRODUCTIVE ASSETS

1. Sharia Companies are required at all times to maintain the ratio of problematic Productive Assets, net of impairment allowances, at no more than 5% (five percent) of total Productive Assets.
2. Productive Assets categorized as problematic Productive Assets consist of Productive Assets with fair, doubtful, and/or non-performing quality.
3. The value of Productive Assets is calculated based on outstanding Productive Assets (outstanding principal), namely total claims, investments, or service claims minus:
   a. deferred income (unearned revenue); and b. other income and expenses related to financing transactions that are amortized.
4. The assessment of Productive Asset quality is established as:
   a. fair; b. special attention;
   c. substandard;
   d. doubtful; or e. non-performing.
5. The assessment of Productive Asset quality as referred to in paragraph 4 is established based on the factors of timely payment of principal, margin, investment/profit-sharing results, and/or service fees (ujrah).
6. The assessment of Productive Asset quality as referred to in paragraph 4 is categorized as follows:
   a. fair if there is no delay or there is a payment delay of principal, margin, investment/profit-sharing results, and/or service fees (ujrah) of up to 30 (thirty) calendar days; b. special attention if there is a payment delay of principal, margin, investment/profit-sharing results, and/or service fees (ujrah) that has exceeded 30 (thirty) calendar days up to 90 (ninety) calendar days;
   c. substandard if there is a payment delay of principal, margin, investment/profit-sharing results, and/or service fees (ujrah) that has exceeded 90 (ninety) calendar days up to 120 (one hundred twenty) calendar days;
   d. doubtful if there is a payment delay of principal, margin, investment/profit-sharing results, and/or service fees (ujrah) that has exceeded 120 (one hundred twenty) calendar days up to 180 (one hundred eighty) calendar days; or e. non-performing if there is a payment delay of principal, margin, investment/profit-sharing results, and/or service fees (ujrah) that has exceeded 180 (one hundred eighty) calendar days.
7. In addition to the factors of timely payment of principal, margin, investment/profit-sharing results, and/or service fees (ujrah) as referred to in paragraph 5, the assessment of Productive Asset quality for investment financing with a financing value at the time of signing the agreement of Rp3,000,000,000.00 (three billion rupiah) or more, may also be established by considering the factors:
   a. consumer's ability to pay; b. consumer's financial performance; and
   c. consumer's business prospects.
8. The assessment of consumer's ability to pay as referred to in paragraph 7 letter a includes assessments of the following components:
   a. availability and accuracy of consumer financial information; b. completeness of Sharia Financing documentation;
   c. compliance with Sharia Financing agreements;
   d. appropriateness of Sharia Financing fund usage; and e. fairness of the source of obligation payments.
9. The assessment of consumer's financial performance as referred to in paragraph 7 letter b includes assessments of the following components:
   a. profit generation; b. capital structure;
   c. cash flow; and
   d. sensitivity to market risks.
10. The assessment of consumer's business prospects as referred to in paragraph 7 letter c includes the following components:
    a. business growth potential; b. market conditions and consumer's position in competition;
    c. management quality and labor issues;
    d. support from groups or affiliates; and e. efforts made by consumers to maintain the living environment.
11. Guidelines for assessing Productive Asset quality as referred to in paragraph 7, paragraph 8, paragraph 9, and paragraph 10 are conducted based on guidelines as stated in Appendix III, which is an integral part of this OJK Circular Letter.
12. Worksheet assessments of Productive Asset quality as referred to in paragraph 7, paragraph 8, paragraph 9, and paragraph 10 must be conducted using the assessment forms as stated in Appendix IV, which is an integral part of this OJK Circular Letter, and completed with supporting documents for Productive Asset quality assessment.
13. Sharia Companies may conduct restructuring for consumers experiencing difficulties in paying principal, margin, investment/profit-sharing results, and/or service fees (ujrah), but who still have the ability to pay and good business prospects.
14. The assessment of Productive Asset quality for financing valued at Rp3,000,000,000.00 (three billion rupiah) or more that is restructured as referred to in paragraph 13 applies the following provisions:
    a. at most equal to the Productive Asset quality before financing restructuring, provided that the consumer has not met the obligation to pay principal installments, margin, investment/profit-sharing results, and/or service fees (ujrah) consecutively for 3 (three) periods according to the agreed time; b. may increase by at most 1 (one) level from the Productive Asset quality before restructuring, after the consumer has met the obligation to pay principal installments, margin, investment/profit-sharing results, and/or service fees (ujrah) consecutively for 3 (three) periods as referred to in letter a;
    c. the quality of restructured Productive Assets may be established based on assessment factors as referred to in paragraph 7, in the event that the implementation of financing restructuring is not supported by adequate analysis and documentation; and
    d. based on assessment factors as referred to in paragraph 7:
    1) after establishing Productive Asset quality as referred to in letter b; or
    2) in the event that the consumer does not meet the conditions and/or payment obligations in the financing restructuring agreement, both during and after 3 (three) periods of payment obligations according to the agreed time.
15. Additional Productive Asset quality as part of the financing restructuring package as referred to in paragraph 14 is established equal to the quality of the restructured Productive Assets.
16. The assessment of Productive Asset quality in the context of restructuring as referred to in paragraph 14 must be accompanied and completed with supporting documents for Productive Asset quality assessment.
17. In the event of a difference between the Productive Asset quality assessment by the Sharia Company and the OJK, the Productive Asset quality established by the OJK applies.
18. Sharia Companies are required to adjust Productive Asset quality in accordance with the Productive Asset quality assessment established by the OJK as referred to in paragraph 12 in reports submitted to the OJK.
19. Types of collateral that can be calculated in the impairment allowance calculation for Productive Assets are as follows:
    a. cash collateral consisting of:
    1) bank deposits, security deposits, and/or gold;
    2) Bank Indonesia Certificates, Sharia Bank Indonesia Certificates, Government Bonds, sukuk, and/or other securities issued by the government or Bank Indonesia; and/or
    3) government and foreign government guarantees included in the investment grade category;
    b. securities listed on the stock exchange or securities included in the investment grade category from rating agencies recognized by the OJK;
    c. motor vehicles, heavy equipment, and inventory;
    d. warehouse receipts; e. machinery and/or electronics that are an integral part of land; f. machinery and/or electronics that are not an integral part of land; g. aircraft or sea vessels with a size above 20 (twenty) cubic meters; and h. land, houses, apartments, commercial houses, and office buildings.
20. Ijarah Muntahiya Bittamlik objects where waad (option right) has been executed can be calculated as a deduction in the impairment allowance calculation for Productive Assets.
21. Cash collateral as referred to in paragraph 19 letter a number 1) and number 2) must meet the following requirements:
    a. can only be liquidated with the approval of the Sharia Company (blocked and accompanied by a power of attorney); b. the blocking period is at least equal to the financing term; and
    c. has strong legal binding and can be executed (legally enforceable).
22. Cash collateral as referred to in paragraph 19 letter a number 3) must meet the following requirements:
    a. unconditional and irrevocable; b. can be liquidated within at most 5 (five) working days since the claim is submitted, including partial liquidation to pay principal installments, margin, investment/profit-sharing results, and/or service fees (ujrah) arrears; and
    c. has a term at least equal to the financing term.
23. Collateral as referred to in paragraph 19 is accompanied by valid legal documents.
24. Collateral as referred to in paragraph 19 letter b, letter c, letter d, letter e, letter f, letter g, and letter h, must:
    a. be bound according to collateral provisions under applicable laws and regulations to provide preferential rights for the Sharia Company, such as land rights, mortgages, fiduciary, or pawn; and b. be protected by Sharia insurance on the financing object with clauses granting the Sharia Company the right to receive insurance payouts in the event of claim payments and having an insurance coverage term at least equal to the Sharia Financing term.
25. Insurance companies providing Sharia insurance protection for collateral as referred to in paragraph 24 letter b must meet the following requirements:
    a. having a business license from the OJK; and b. not subject to business activity restriction sanctions or business activity suspension from the OJK.
26. The procedure for calculating collateral value as a deduction for the impairment allowance for Productive Assets is established as follows:
    a. bank deposits, security deposits, Bank Indonesia Certificates, and Sharia Bank Indonesia Certificates are established at nominal value; b. gold is established at market value;
    c. Government Bonds, sukuk, and/or other securities issued by the government or Bank Indonesia are established at market value or, in the event of no market value, based on fair value;
    d. securities listed on the stock exchange or securities included in the investment grade category are established at most 50% (fifty percent) of the market value of the securities; e. government and foreign government guarantees included in the investment grade category are established at most equal to the guarantee value; f. land, houses, apartments, commercial houses, and office buildings are established at most equal to independent appraisal value, internal appraisal value, acquisition value, or tax object sale value; g. aircraft, sea vessels, motor vehicles, heavy equipment, inventory, and warehouse receipts, machinery and/or electronics considered an integral part of land, and machinery and/or electronics not an integral part of land are established at most equal to:
    1) 100% (one hundred percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    a) independent appraisal or sales transaction was conducted within the last 12 (twelve) months; or b) internal appraisal was conducted within the last 6 (six) months;
    2) 80% (eighty percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    a) independent appraisal or sales transaction was conducted more than 12 (twelve) months but not exceeding 24 (twenty-four) months; or b) internal appraisal was conducted more than 6 (six) months but not exceeding 12 (twelve) months;
    3) 60% (sixty percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    a) independent appraisal or sales transaction was conducted more than 24 (twenty-four) months but not exceeding 36 (thirty-six) months; or b) internal appraisal was conducted more than 12 (twelve) months but not exceeding 18 (eighteen) months;
    4) 40% (forty percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    a) independent appraisal or sales transaction was conducted more than 36 (thirty-six) months but not exceeding 48 (forty-eight) months; or b) internal appraisal was conducted more than 18 (eighteen) months but not exceeding 24 (twenty-four) months;
    5) 20% (twenty percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    a) independent appraisal or sales transaction was conducted more than 48 (forty-eight) months but not exceeding 60 (sixty) months; or b) internal appraisal was conducted more than 24 (twenty-four) months but not exceeding 30 (thirty) months;
    6) 0% (zero percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    a) independent appraisal or sales transaction was conducted more than 60 (sixty) months; or b) internal appraisal was conducted more than 30 (thirty) months.
27. The value of Ijarah Muntahiya Bittamlik objects where waad (option right) has been executed, which can be calculated as a deduction in the impairment allowance calculation for Productive Assets, is established as:
    a. 100% (one hundred percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:
    1) independent appraisal or sales transaction was conducted within the last 12 (twelve) months; or
    2) internal appraisal was conducted within the last 6 (six) months;
    b. 80% (eighty percent) of independent appraisal value, internal appraisal value, or sales transaction value, if:

1) independent assessment or sales transaction is conducted more than 12 (twelve) months but does not exceed 24 (twenty-four) months; or
2) internal assessment is conducted more than 6 (six) months but does not exceed 12 (twelve) months;
c. 60% (sixty percent) of the value of the independent assessment, the value of the internal assessment, or the value of the sales transaction, if:
1) independent assessment or sales transaction is conducted more than 24 (twenty-four) months but does not exceed 36 (thirty-six) months; or
2) internal assessment is conducted more than 12 (twelve) months but does not exceed 18 (eighteen) months;
d. 40% (forty percent) of the value of the independent assessment, the value of the internal assessment, or the value of the sales transaction, if:
1) independent assessment or sales transaction is conducted more than 36 (thirty-six) months but does not exceed 48 (forty-eight) months; or
2) internal assessment is conducted more than 18 (eighteen) months but does not exceed 24 (twenty-four) months;
e. 20% (twenty percent) of the value of the independent assessment, the value of the internal assessment, or the value of the sales transaction, if:
1) independent assessment or sales transaction is conducted more than 48 (forty-eight) months but does not exceed 60 (sixty) months; or
2) internal assessment is conducted more than 24 (twenty-four) months but does not exceed 30 (thirty) months;
f. 0% (zero percent) of the value of the independent assessment, the value of the internal assessment, or the value of the sales transaction, if:
1) independent assessment or sales transaction is conducted more than 60 (sixty) months; or
2) internal assessment is conducted more than 30 (thirty) months;
28. For Productive Assets with a value of Rp3,000,000,000.00 (three billion rupiah) or more and having collateral as referred to in point 26 letter g, or being the value of the ijarah muntahiya bitamlik object where waad (option right) has been executed as referred to in point 27, the assessment of the collateral or the ijarah muntahiya bitamlik object where waad (option right) has been executed, which will be used as a deduction in the calculation of the provision for write-down of Productive Assets, must be conducted by an independent appraiser. In the event that there is no independent assessment, the Sharia Company may use the sales transaction value as the basis for assessing the collateral, taking into account the provisions as referred to in point 26 letter g and point 27.
29. For Productive Assets with a value of less than Rp3,000,000,000.00 (three billion rupiah) and having collateral as referred to in point 26 letter g, or being the value of the ijarah muntahiya bitamlik object where waad (option right) has been executed as referred to in point 27, the assessment of the collateral, which will be used as a deduction in the calculation of the provision for write-down of Productive Assets, may be conducted by an independent appraiser or internal assessment. In the event that there is no independent assessment or internal assessment, the Sharia Company may use the sales transaction value as the basis for assessment, taking into account the provisions as referred to in point 26 letter g and point 27.
30. In order to calculate collateral, the Sharia Company must have and implement guidelines for determining the basis of assessment or collateral or the value of the ijarah muntahiya bitamlik object where waad (option right) has been executed, as referred to in point 26 and point 27.
31. The Sharia Company must re-evaluate the calculation of the provision for write-down of Productive Assets at least every 6 (six) months for the positions of June and December.
32. The OJK has the authority to recalculate the value of collateral that has been deducted or matters that can reduce the provision in the calculation of the provision for write-down of Productive Assets.
33. The Sharia Company must notify consumers regarding the return of collateral or documents related to collateral no later than 1 (one) month from the date of settlement of Sharia Financing.

34. The measurement of the Productive Asset quality factor is documented according to the worksheet format as contained in Format 2 of Appendix II, which is an integral part of this OJK Circular.
35. The method for calculating provisions is done by calculating the difference between the Productive Asset balance and the collateral value, taking into account the provision calculation percentage according to the Productive Asset quality, with calculation examples as follows:
    Example 1:
    At the beginning of January 2016, Consumer A obtained Sharia Financing (through sales financing) from PT XYZ Finance Syariah with a nominal value of Rp70,000,000.00 with collateral in the form of a motor vehicle valued at Rp100,000,000.00 (representing acquisition price). At the end of June 2019, Consumer A's remaining Productive Asset balance was Rp50,000,000.00, and Consumer A did not make payments for 9 months (doubtful quality). The Company has never re-evaluated the value of the aforementioned collateral. Based on the regulations, the basis for collateral assessment used in the provision calculation is 40% of the collateral value (i.e., equal to the acquisition price) because the calculation date is 40 months from the date of the transaction for the acquisition of goods. The collateral value that can be recognized as a provision deduction is Rp100,000,000.00 x 40% = Rp40,000,000.00. Thus, the provision for write-down of Productive Assets is (provision amount based on Productive Asset quality) x (Productive Asset balance that can be calculated) = 100% x (Rp50,000,000.00 - Rp40,000,000.00) = Rp10,000,000.00. Example 2:
    At the beginning of January 2016, Consumer A obtained Sharia Financing (through sales financing) from PT XYZ Finance Syariah with a nominal value of Rp70,000,000.00 with collateral in the form of a motor vehicle valued at Rp100,000,000.00 (representing acquisition price). At the end of June 2019, Consumer A's remaining Productive Asset balance was Rp30,000,000.00, and Consumer A did not make payments for 9 months (doubtful quality). The Company has never re-evaluated the value of the aforementioned collateral. Based on the regulations, the basis for collateral assessment used in the provision calculation is 40% of the collateral value (i.e., equal to the acquisition price) because the calculation date is 40 months from the date of the transaction for the acquisition of goods. The collateral value that can be recognized as a provision deduction is Rp100,000,000.00 x 40% = Rp40,000,000.00. However, because the Productive Asset balance is larger than the collateral value, the collateral value that can be calculated is maximally only equal to the Productive Asset balance, namely Rp30,000,000.00. Thus, the provision for write-down of Productive Assets is (provision amount based on Productive Asset quality) x (Productive Asset balance that can be calculated) = 100% x (Rp30,000,000.00 - Rp30,000,000.00) = Rp0.00.

V. PROCEDURES FOR ASSESSMENT OF PROFITABILITY FACTORS

1. Assessment of the Sharia Company's ability to generate profit consists of several ratios, namely:
   a. Return on Asset
   The ratio used to measure the Sharia Company's ability to generate profit from assets used to support the Sharia Company's operations and capital. b. Return on Equity The ratio used to measure the Sharia Company's ability to generate profit from equity, for Sharia Financing Companies, or working capital of Sharia business units, for UUS.
   c. Operating Expenses against Operating Income
   The ratio used to measure the Sharia Company's ability to measure the level of efficiency and the Sharia Company's ability to carry out its operational activities. d. Net Sharia Financing Income The ratio used to measure the Sharia Company's ability to manage Productive Assets to generate net operating income.

2. The calculation of profitability ratios is established as follows:
   a. Return on Asset
   1) Return on Asset is calculated from the comparison between profit or loss before tax against total assets.
   2) For the calculation of profit or loss before tax, an annualized calculation is used. As an example, for the March report position, the calculation method is as follows:
   (profit or loss before tax as of March/3) x 12.
   3) Profit or loss before tax as of the reporting month is calculated based on the amount of income minus the amount of expenses before deducting the estimated income tax.
   4) For the calculation of total assets, the average assets throughout the year are used. As an example, for the March report position, the calculation method is as follows:
   (Sum of total assets from January to March)/3. b. Return on Equity
   1) Return on Equity is calculated from the comparison of Net Profit against equity.
   2) For the calculation of net profit or loss, an annualized calculation is used. As an example, for the March report position, the calculation method is as follows:
   (net profit or loss as of March/3) x 12.
   3) Net profit or loss as of the reporting month is calculated based on the amount of income minus the amount of expenses after deducting the estimated income tax.
   4) For the calculation of total equity, the average equity throughout the year is used. As an example, for the March report position, the calculation method is as follows:
   (sum of total equity from January to March)/3.
   c. Operating Expenses against Operating Income
   1) Operating Expenses against Operating Income is calculated from the comparison between operating expenses against the Sharia Company's operating income.
   2) The detail of operating income and operating expense accounts in the calculation of the operating expense ratio against operating income refers to the OJK Circular regarding monthly reports of Financing Companies.
   3) In order to maintain the efficiency of managing the Sharia Company, particularly regarding financing acquisition, incentive costs that can be provided by the Sharia Company to third parties are limited based on a certain percentage of the income to be received related to financing. The income to be received related to financing consists of:
   a) profit sharing/margin/service fee income before considering cost of fund; b) insurance income; c) administrative income; and d) commission income.
   4) Third-party incentive costs related to financing acquisition per financing agreement are limited to 15% (fifteen percent) of the value of income related to financing, including the third party's income tax.
   5) Total third-party incentive costs related to financing acquisition are limited to 20% (twenty percent) of the value of income related to financing, including the third party's income tax.
   6) Third-party incentive costs related to financing acquisition include all types of payments to third parties or third-party employees, including commissions, incentives, third-party travel costs, joint promotional costs with third parties, for example, costs for purchasing additional motor vehicle accessories, costs for promoting vehicle delivery, and other expenditures related to financing acquisition paid to third parties.
   7) Example of limitation on incentive costs based on Sharia Financing disbursement per financing agreement, as regulated in point 5), namely:
   a) PT ABC Finance Syariah disburses motor vehicle financing to a consumer in one financing agreement with a price of Rp100,000,000.00. b) Through the financing disbursement, PT ABC Finance Syariah receives the following income:
   (1) margin income of Rp43,000,000.00;
   (2) insurance discount of Rp15,000,000.00;
   (3) administrative income of Rp1,000,000.00; and (4) commission income of Rp1,000,000.00. c) Thus, the third-party incentive costs related to Sharia Financing acquisition that can be provided for the financing disbursement to the consumer are equal to = (15% x (Rp43,000,000.00 + Rp15,000,000.00 + Rp1,000,000.00 + Rp1,000,000.00)) = Rp9,000,000.00. d) The total incentive costs have taken into account commissions, incentives, third-party income tax, and other expenditures related to financing acquisition paid to third parties.
   8) Example of limitation on incentive costs based on total amounts as regulated in point 6), namely:
   a) Based on the Monthly Report of the Sharia Financing Company for January 2016, PT ABC Finance Syariah has a profit and loss statement structure with details as follows:
   (1) margin income of Rp80,000,000.00;
   (2) insurance discount of Rp20,000,000.00;
   (3) administrative income of Rp10,000,000.00; and (4) commission income of Rp10,000,000.00. b) Thus, the total third-party incentive costs related to Sharia Financing acquisition that can be provided are equal to = 20% x (Rp80,000,000.00 + Rp20,000,000.00 + Rp10,000,000.00 + Rp10,000,000.00)) = Rp24,000,000.00. c) The total incentive costs have taken into account commissions, incentives, third-party income tax, third-party travel costs, joint promotional costs with third parties, and other expenditures related to financing acquisition paid to third parties. d. Net Sharia Financing Income
   1) Net Sharia Financing Income is obtained from the comparison between operating income derived from Sharia Financing, including margin, investment results/profit sharing, and/or service fees (ujrah), against the average Productive Assets. The income from Sharia Financing mentioned is obtained after being reduced by the costs from the Sharia Company's financing activities.
   2) For the calculation of operating income derived from Sharia Financing, including margin, investment results/profit sharing, and/or service fees (ujrah), an annualized calculation is used. As an example, for the March report position, the calculation method is as follows:
   (Operating Income as of March/3) x 12.
   3) For the calculation of financing acquisition costs, an annualized calculation is used. As an example, for the March report position, the calculation method is as follows:
   (Financing acquisition costs as of March/3) x 12.
   4) For the calculation of total Productive Assets, the average Productive Assets throughout the year are used. As an example, for the March report position, the calculation method is as follows:
   (Sum of total Productive Assets from January to March)/3.

3. Assessment of the profitability factor is implemented with the following provisions:
   a. Assessment of the Return on Asset ratio is as follows:
   1) Value 1 if the Sharia Company has a Return on Asset of 2% (two percent) or more.
   2) Value 2 if the Sharia Company has a Return on Asset from 1% (one percent) to less than 2% (two percent).
   3) Value 3 if the Sharia Company has a Return on Asset from 0% (zero percent) to less than 1% (one percent).
   4) Value 4 if the Sharia Company has a Return on Asset of less than 0% (zero percent).
   b. Assessment of the Return on Equity factor is as follows:
   1) Value 1 if the Sharia Company has a Return on Equity of 6% (six percent) or more.
   2) Value 2 if the Sharia Company has a Return on Equity from 3% (three percent) to less than 6% (six percent).
   3) Value 3 if the Sharia Company has a Return on Equity from 0% (zero percent) to less than 3% (three percent).
   4) Value 4 if the Sharia Company has a Return on Equity of less than 0% (zero percent).
   c. Assessment of the operating expense ratio against operating income factor is as follows:
   1) Value 1 if the Sharia Company has an operating expense ratio against operating income of less than 70% (seventy percent).
   2) Value 2 if the Sharia Company has an operating expense ratio against operating income from 70% (seventy percent) to less than 80% (eighty percent).
   3) Value 3 if the Sharia Company has an operating expense ratio against operating income from 80% (eighty percent) to less than 90% (ninety percent).
   4) Value 4 if the Sharia Company has an operating expense ratio against operating income of 90% (ninety percent) or more.
   d. Assessment of the net Sharia financing income ratio factor is as follows:
   1) Value 1 if the Sharia Company has a net Sharia financing income ratio of 6% (six percent) or more.
   2) Value 2 if the Sharia Company has a net Sharia financing income ratio from 4% (four percent) to less than 6% (six percent).
   3) Value 3 if the Sharia Company has a net Sharia financing income ratio from 2% (two percent) to less than 4% (four percent).
   4) Value 4 if the Sharia Company has a net Sharia financing income ratio of less than 2% (two percent).

4. The Sharia Company is required to meet the profitability ratio with a composite value of no more than 2.5 (two point five). The composite value is calculated using the weighted average method of 4 profitability ratios, each with a weight of 25% (twenty-five percent).

5. The measurement of the profitability factor is documented according to the worksheet format as contained in Format 3 of Appendix II, which is an integral part of this OJK Circular.

VI. PROCEDURES FOR ASSESSMENT OF LIQUIDITY

1. Assessment of the level of matching between current assets and current liabilities is established as:
   a. Current Ratio
   The ratio used to assess the Sharia Company's ability to repay its short-term obligations. The higher the current ratio, the higher the Sharia Company's ability to repay short-term obligations. b. Cash Ratio The ratio used to assess the Sharia Company's ability to pay obligations from cash and securities. The higher the cash ratio, the higher the Sharia Company's ability to pay obligations from cash and securities. The Sharia Company's securities components consist of checks, giro bills, and promissory notes.
2. The calculation of liquidity ratios is established as follows:
   a. Current Ratio
   1) Current ratio is calculated from the value of current assets divided by the value of current liabilities.
   2) The Sharia Company's current assets consist of cash and cash equivalents, banks, derivative receivables, short-term investments in securities, Productive Assets less than one year, prepaid expenses, and various assets that can be liquidated with a maturity of less than one year.
   3) Current liabilities consist of obligations that can be paid immediately, derivative obligations, tax liabilities, financing that will mature in less than 1 year, and various liabilities that will mature in less than 1 year.
   b. Cash Ratio
   Cash ratio is calculated from the value of cash plus securities divided by current liabilities. The method for calculating current liabilities is the same as the method for calculating current liabilities in the current ratio.
3. Assessment of the liquidity factor is implemented with the following provisions:
   a. Assessment of the current ratio is as follows:
   1) Value 1 if the Sharia Company has a current ratio of 150% (one hundred fifty percent) or more.
   2) Value 2 if the Sharia Company has a current ratio from 125% (one hundred twenty-five percent) to less than 150% (one hundred fifty percent).
   3) Value 3 if the Sharia Company has a current ratio from 100% (one hundred percent) to less than 125% (one hundred twenty-five percent).
   4) Value 4 if the Sharia Company has a current ratio of less than 100% (one hundred percent).
   b. Assessment of the cash ratio is as follows:
   1) Value 1 if the Sharia Company has a cash ratio of 3% (three percent) or more.
   2) Value 2 if the Sharia Company has a cash ratio from 2% (two percent) to less than 3% (three percent).
   3) Value 3 if the Sharia Company has a cash ratio from 1% (one percent) to less than 2% (two percent).
   4) Value 4 if the Sharia Company has a cash ratio from 0% (zero percent) to less than 1% (one percent).
4. The Sharia Company is required to meet the liquidity ratio with a composite value of no more than 2.5 (two point five). The composite value is calculated using the weighted average method of the value of each liquidity ratio, each with a weight of 50% (fifty percent).
5. The measurement of the liquidity factor is documented according to the worksheet format as contained in Format 4 of Appendix III, which is an integral part of this OJK Circular.

VII. VERIFICATION AND VALIDATION BY THE OJK

1. The OJK may conduct verification and validation of the truthfulness and fairness of data that serves as the basis for calculating the factors measuring the Financial Health Level of Sharia Financing prepared by the Sharia Company.
2. In the event that there is a difference between the Financial Health Level of Sharia Financing prepared by the Sharia Company and the Financial Health Level of Sharia Financing resulting from the OJK's verification and validation, the Financial Health Level of Sharia Financing that applies is the Financial Health Level of Sharia Financing established by the OJK.

VII. TRANSITIONAL PROVISIONS
Collateral that has been obtained by the Sharia Company before the establishment of this OJK Circular is exempt from the provisions as referred to in Roman numeral IV point 21, point 22, point 23, point 24, and point 25.
VIII. CLOSING
The provisions in this OJK Circular shall take effect on July 1, 2016.
Established in Jakarta on February 23, 2016
EXECUTIVE HEAD OF SUPERVISOR
OF INSURANCE, PENSION FUNDS,
FINANCING INSTITUTIONS, AND
OTHER FINANCIAL SERVICE INSTITUTIONS
FINANCIAL SERVICES AUTHORITY, sd
FIRDAUS DJELANI
Copy matches the original
Legal Director 1
Legal Department sd
Yuliana