Circular of the Financial Services Authority of the Republic of Indonesia Number 10/SEOJK.03/2023 Concerning the Implementation of Products of Sharia People's Economic Banks

To the Directors of Sharia People's Economic Banks, in place. COPY CIRCULAR OF THE FINANCIAL SERVICES AUTHORITY OF THE REPUBLIC OF INDONESIA NUMBER 10/SEOJK.03/2023 CONCERNING THE IMPLEMENTATION OF PRODUCTS OF SHARIA PEOPLE'S ECONOMIC BANKS In connection with the enactment of Financial Services Authority Regulation Number 25/POJK.03/2021 concerning the Implementation of Products of Rural Banks and Sharia Rural Financing Banks (State Gazette of the Republic of Indonesia Year 2021 Number 271, Supplement to the State Gazette of the Republic of Indonesia Number 6743), hereinafter referred to as POJK on BPR and BPRS Product Implementation, and in order to realize highly competitive Sharia People's Economic Banks that contribute significantly to the national economy and social development, as well as alignment with statutory provisions to encourage the development of Sharia People's Economic Bank product implementation while still observing the principles of adequate capital, effective risk management, and prudential principles, it is necessary to replace the provisions for the implementation of Sharia People's Economic Bank products in the Financial Services Authority Circular as follows: I. GENERAL PROVISIONS

1. In this Financial Services Authority Circular, the following terms are defined as: a. Sharia People's Economic Bank, hereinafter abbreviated as BPRS, is a type of sharia bank whose activities do not directly provide services in giro traffic.

• 2 - b. Product refers to business activities carried out by BPRS in the form of providing products, services, and/or other activities to support BPRS business. c. Sharia Principles are Islamic legal principles based on fatwas and/or statements of sharia compliance issued by institutions authorized to issue fatwas in the sharia field.

2. In implementing Products, BPRS ensures that risk management and governance for Product implementation are carried out in accordance with Financial Services Authority Regulations regarding the application of risk management and governance for BPRS. II. BPRS PRODUCTS
3. The classification of BPRS Products is determined based on all risks inherent in the Product. BPRS Products are grouped into: a. Basic Products, namely products, services, and/or other activities inherent in the BPRS business license in the form of fund collection, fund distribution, fund placement, and/or other basic activities as listed in Appendix I. b. Advanced Products, namely products, services, and/or other activities to support BPRS business that are information technology-based, related to the implementation of non-bank financial service institution activities or products, or affect the assessment of BPRS risk profiles, and that require permits and/or approvals from other authorities. Advanced Products are Products not listed in Appendix I.
4. BPRS Products are categorized as New Products if: a. never previously implemented by the BPRS concerned. For example: BPRS for the first time implements an electronic banking service Product in the form of mobile banking services; or

• 3 - b. previously implemented by the BPRS concerned but Product development is carried out resulting in changes to the Product's inherent risk and the BPRS's risk profile. For example:

1. BPRS has implemented a Product in the form of automated teller machine (ATM) card issuance services and will develop it into cardless ATMs;
2. BPRS will develop service features in mobile banking applications;
3. BPRS has implemented fund collection or fund distribution activities and will develop them by changing features or characteristics, among others, based on sharia compliance statements or through cooperation with insurance companies for savings or financing Products (bancassurance); and
4. BPRS has collaborated with a third party and will, among other things, change the business model, change sharia contracts, develop features, and/or Product characteristics. The criteria for New Product categories are determined by BPRS and become part of the written policies and procedures for Product implementation. BPRS conducts a self-assessment of the planned Product development to be implemented in accordance with the established criteria. The Financial Services Authority may establish different assessments based on the evaluation of the self-assessment carried out by BPRS.

3. BPRS Products categorized as New Products must be included in the BPRS business plan. The Financial Services Authority may request BPRS to provide a comprehensive explanation regarding the plan for implementing New Products, including: a. the purpose of implementing the New Product; b. analysis of the mechanism for implementing the New Product; and

• 4 - c. readiness of the New Product implementation plan, including if carried out through cooperation with third parties. The inclusion of the New Product implementation plan in the business plan is carried out in accordance with Financial Services Authority Regulations regarding the business plan of rural banks and sharia rural financing banks. III. PRINCIPLES OF BPRS PRODUCT IMPLEMENTATION

1. BPRS ensures that the application of risk management, including compliance with Sharia Principles, and the application of governance for Product implementation are carried out, among others, in accordance with: a. Financial Services Authority Regulations regarding the application of risk management for BPRS; and b. Financial Services Authority Regulations regarding the application of governance for BPRS.
2. BPRS implementing Advanced Products must observe the principles of: a. adequate capital, with the following explanation:

1. BPRS prepares financial and capital projections showing that the minimum capital adequacy ratio and minimum core capital are in accordance with provisions and that BPRS financial performance is well maintained during the implementation of new Advanced Products. For example: BPRS with a minimum capital adequacy ratio of 20% (twenty percent) that will implement electronic banking services must maintain its financial performance so that there is no significant decrease in the minimum capital adequacy ratio as a result of the implementation of the said Product. The implementation of such Products is expected to improve BPRS financial performance.

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2. In preparing financial and capital projections, BPRS considers: a) implementation needs such as investment costs, operational costs, and/or marketing costs, as well as revenue targets; and b) fulfillment of capital requirements set by other authorities, if any.
3. The calculations as referred to in point 2) are carried out by considering the results of business analysis in the form of market potential and segments, including competition analysis, as well as non-financial benefits of the Product for BPRS, among others, because BPRS carries out social functions in accordance with statutory provisions.
4. BPRS prepares financial and capital projections for at least the first 1 (one) year since the Product is implemented, with a scope appropriate to the complexity and relevance of the Advanced Product to be implemented. For example: financial and capital projections for Advanced Products such as cooperation related to fund distribution can be in the form of financial highlights.
5. The Financial Services Authority may request BPRS to prepare financial and capital projections with a longer period than those prepared by BPRS. b. effective application of risk management, with the following explanation:
6. The application of risk management includes comprehensive identification of inherent risks from Product implementation and mitigation of risks arising in Product implementation. For example: BPRS that will cooperate with providers of technology-based joint funding services identifies all inherent risks, including: a) credit risk, such as those related to financing concentration, types of financing, profiles of prospective facility recipients, and other factors that may affect credit risk in the future; b) operational risk, such as those related to system failures or errors, accounting calculation errors, delays and inaccuracies in fund disbursement; c) compliance risk, such as those related to weaknesses in engagements or cooperation agreements, potential losses due to claims from related parties, cancellation of cooperation agreements due to changes in statutory provisions and other aspects that must be met with regard to Sharia Principles; d) liquidity risk, such as those related to measuring the composition and concentration of assets and liabilities and the impact arising from other risks such as credit risk and operational risk; and e) reputation risk, such as those related to media coverage, customer complaints, and the reputation of cooperating third parties.

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2. The application of risk management, including the readiness of information technology infrastructure, especially for information technology-based Advanced Products, and the readiness of human resources in terms of quantity and quality.
3. In addition to applying risk management, BPRS also complies with other provisions related to Product implementation as a form of applying prudential principles. For example: a) BPRS acting as a provider or agent of branchless financial services for financial inclusion still complies with Financial Services Authority Regulations regarding branchless financial services for financial inclusion; and b) BPRS providing bancassurance Products complies with provisions related to bancassurance, such as BPRS employees having insurance agency certification issued by the relevant association for distribution and integration model bancassurance business.

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4. In the event that Product implementation is carried out through cooperation with a third party, the scope and responsibilities of each party need to be clearly regulated to minimize risks that may arise in the form of a cooperation agreement. The content of the cooperation agreement is prepared by considering the complexity and risks of the Product to be implemented. Examples of cooperation agreement content for Product implementation include: a) scope of the cooperation agreement; b) clarity of rights and obligations of each party, including cooperation implementation mechanisms, such as service level agreements, document administration, and problem monitoring and resolution; c) business model along with features or characteristics of the Product to be implemented; d) distribution of profit or risk sharing among the parties, including responsibility for losses, in the event of system failure, fraud, and/or failure due to other internal and external factors; e) duration of the cooperation agreement; f) clauses causing the termination of the cooperation agreement, including those allowing BPRS to terminate cooperation before the agreement period ends or based on an order from the Financial Services Authority; g) settlement of rights and obligations of the parties, including to consumers; h) obligations and responsibilities of the parties to conduct customer due diligence, apply transparency, and maintain customer data confidentiality; i) resolution in conditions of force majeure and breach of contract or disputes between the parties; and/or j) handling of customer complaints, in cases where cooperation directly involves customers.

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5. In applying risk management, BPRS has and implements written policies and procedures for Product implementation. Both principles of Product implementation as referred to in letters a and b aim to support the implementation of BPRS Products and are fulfilled by BPRS consistently and continuously throughout the Product implementation process, from planning to implementation.

3. Written policies and procedures for Product implementation as referred to in point 2 letter b point 5) must at least include: a. determination of business benefits and customer needs for the Product, by considering:

1. business benefits aligned with the established strategy and business plan as set out in the policy direction; and
2. the principle of benefit and customer needs for the Product to be implemented in accordance with customer capabilities; b. identification of all inherent risks in the Product and their mitigation, carried out, among others, to:
3. measure the level of risk and mitigation to be undertaken by BPRS before Product implementation; and
4. determine the criteria for Products to be implemented, including New Products. Identification of inherent risks in the Product includes credit risk, operational risk, compliance risk, liquidity risk, reputation risk, and strategic risk. Mitigation for each identified risk is prepared in detail and concretely with implementation stages carried out by BPRS. As a form of risk mitigation implementation, BPRS, among others, prepares the scope and scenario for implementing limited pilot projects for Advanced Products to be implemented through limited pilot projects;

• 9 - c. accurate recording methods and accounting information systems for Products, including:

1. transaction recording must comply with accounting standards and guidelines; and
2. accounting treatment is prepared for each Product to be implemented; d. establishment of criteria and evaluation process for third parties, if Product implementation is carried out through cooperation, including:
3. ensuring that the third party involved in cooperation has a license, approval, is registered as a digital financial innovation provider, or has a business certificate from the authorized agency or authority; and
4. evaluating the performance and/or reputation of the said third party periodically at least 1 (one) time in 1 (one) year or at any time; and e. methods for measuring and monitoring risks of BPRS Products as outlined in systems and procedures, among others, to evaluate:
5. risks and business benefits arising from Product implementation, including the effectiveness of risk mitigation; and
6. the conformity of Product implementation realization with previously prepared plans or targets.

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4. In accordance with Financial Services Authority Regulations regarding the application of governance for sharia rural financing banks, the Sharia Supervisory Board is obliged to evaluate BPRS policies and procedures regarding Product implementation as referred to in point 3 to ensure compliance with Sharia Principles.
5. In accordance with POJK on BPR and BPRS Product Implementation, BPRS is obliged to review and update written policies and procedures for Product implementation periodically in accordance with each BPRS's policy. The review and update of policies and procedures are carried out by considering: a. internal factors, including new Product development plans, changes in business strategy direction, and findings regarding weaknesses or deviations, including deviations from sharia principles; and b. external factors, including adjustments to financial accounting standards, fatwas issued by institutions authorized to issue fatwas in the sharia field, and changes in statutory provisions. IV. MECHANISMS FOR NEW PRODUCT IMPLEMENTATION
6. In accordance with POJK on BPR and BPRS Product Implementation, the BPRS Sharia Supervisory Board submits opinions related to New Products, which, among others, refer to fatwas and/or statements of sharia compliance issued by institutions authorized to issue fatwas in the sharia field and provisions regulating the implementation of Sharia Principles. In the event that the opinion related to New Products is based on a fatwa issued by an institution authorized to issue fatwas in the sharia field, the format of the BPRS Sharia Supervisory Board's opinion is listed in the appendix to POJK on BPR and BPRS Product Implementation. In the event that the opinion related to New Products is based on a statement of sharia compliance issued by an institution authorized to issue fatwas in the sharia field, the format of the BPRS Sharia Supervisory Board's opinion is listed in Appendix II Part A. In the event that the opinion related to New Products is based on fatwas and statements of sharia compliance issued by an institution authorized to issue fatwas in the sharia field, the format of the BPRS Sharia Supervisory Board's opinion is listed in Appendix II Part B.

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2. In accordance with POJK on BPR and BPRS Product Implementation, BPRS that implements new Basic Products in the form of other basic activities must submit a report on the realization of the new Basic Product implementation, as listed in the appendix to POJK on BPR and BPRS Product Implementation, completely and relevantly to the new Basic Product implemented.
3. In accordance with POJK on BPR and BPRS Product Implementation, BPRS that will implement Advanced Products must obtain approval for the implementation of new Advanced Products from the Financial Services Authority, with the following mechanisms: a. Approval with limited pilot project (piloting review)

1. BPRS that will implement Advanced Products through a limited pilot project must explain in the readiness document for the limited pilot project plan, covering: a) the scope of the limited pilot project, including the duration of the limited pilot project, including Product implementation time, target customers and/or prospective customers, location or region, and transaction limits; and b) the scenario for the limited pilot project, including potential failures in the implementation of the limited pilot project, such as those related to operational risk (e.g., information technology system failure, human resource weaknesses) and compliance risk (e.g., violation of provisions, fulfillment of sharia principles, and/or consumer and public protection), as well as resolutions that BPRS must undertake to mitigate the widespread impact of these risks. For example: BPRS that will cooperate with digital financial innovation providers and will implement a limited pilot project prepares a timeline for the limited pilot project for 3 (three) months, including the target time for submitting the approval application. BPRS maps the target customer locations within a limited area and transaction limits appropriate to the level of risk to be taken and risk tolerance during the limited pilot project period.
2. During the implementation of the limited pilot project, BPRS may submit progress reports on the limited pilot project periodically or based on evaluation results and requests from the Financial Services Authority, among others, through meetings or written documents.
3. If BPRS has ensured that no problems have arisen in connection with the implementation of the limited pilot project, including following up on recommendations given by the Financial Services Authority, BPRS submits an application for approval to the Financial Services Authority.
4. BPRS submits the approval application as referred to in point 3) accompanied by: a) supporting documents for the completion of the limited pilot project, which may include documents explaining the final evaluation results of the Product that has been piloted, such as updated information on the realization of the limited pilot, challenges faced, and improvements made; and b) endorsement of Product issuance, such as internal BPRS decisions regarding Product implementation.

• 12 - b. Approval without a limited pilot project

1. Products requiring permits from other authorities or financial service sectors include Products whose full implementation is linked to permits from other authorities or financial service sectors, such as providing access to funding sources, for example, ATM card issuance.
2. For Products requiring permits from other authorities or financial service sectors: a) an application for a permit to the other authority or financial service sector, accompanied by a copy to the Regional Office or Financial Services Authority Office; and b) an application for approval to the Financial Services Authority accompanied by a permit letter from the other authority or financial service sector.
3. BPRS that will implement Advanced Products without a limited pilot project must prove that the implementation of such Advanced Products does not materially impact the risk profile, health rating predicate, key financial ratios, and that there are underlying business reasons.

• 13 - c. Approval in the form of notification of the plan for implementing new Advanced Products (instant-approval).

1. Applications for approval through the instant-approval mechanism can be made for the implementation of new Advanced Products in the form of developments from information technology-based activities or products, services, and/or other activities that affect the assessment of BPRS risk profiles. For example: a) BPRS that has obtained approval and implements electronic banking services will develop features; or b) BPRS that will cooperate with providers of information technology-based money lending and borrowing services with a channeling business model.
2. Applications for approval as referred to in point 1) can be made by BPRS that meet the criteria: a) risk rating of 1 (one) or 2 (two) in the last 2 (two) periods; and b) composite health rating of 1 (one) in the last 2 (two) periods. Until the full implementation of BPRS risk management provisions in accordance with Financial Services Authority Regulations regarding the application of risk management for BPRS and Financial Services Authority Regulations regarding the assessment of the health level of rural banks and sharia rural financing banks, the risk rating assessment as referred to in point 2) letter a) is carried out using risk management application component ratings of A or B in accordance with Financial Services Authority Regulation Number 20/POJK.03/2019 concerning the Sharia Rural Financing Bank Health Level Assessment System.
3. BPRS includes the Product implementation date in the notification letter for the plan to implement new Advanced Products submitted to the Financial Services Authority.
4. BPRS implements new Advanced Products by observing the time for the Financial Services Authority to examine the fulfillment of requirements, which is 10 (ten) working days after the complete application documents are received.

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4. In the event that, according to the Financial Services Authority's assessment, there are inconsistencies with statutory provisions and/or the potential to cause significant risks in the mechanism for implementing New Products, the Financial Services Authority is authorized to take certain actions, including: a. requesting BPRS to fulfill requirements and/or adjust the implementation mechanism to be through a limited pilot project. For example: 1) BPRS cannot provide adequate explanation that Pro

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