Contracts Used in Business Activities and Funding Sources Based on Sharia Principles for Microfinance Institutions Conducting Business Based on Sharia Principles

To:
The Board of Directors of Microfinance Institutions Conducting Business Based on Sharia Principles, At your location.

COPY
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 2 /SEOJK.05/2022 CONCERNING CONTRACTS USED IN BUSINESS ACTIVITIES AND FUNDING SOURCES BASED ON SHARIA PRINCIPLES FOR MICROFINANCE INSTITUTIONS CONDUCTING BUSINESS BASED ON SHARIA PRINCIPLES

In relation to the provisions of Article 16 of the Financial Services Authority Regulation Number 19/POJK.05/2021 concerning the Conduct of Business by Microfinance Institutions (State Gazette of the Republic of Indonesia Year 2021 Number 217, Supplement to the State Gazette of the Republic of Indonesia Number 6724), it is necessary to regulate further regarding the contracts used in business activities and funding sources based on Sharia principles for microfinance institutions conducting business based on Sharia principles in this Financial Services Authority Circular as follows:

I. GENERAL PROVISIONS
In this Financial Services Authority Circular, the following terms are meant:

1. Microfinance Institutions, hereinafter abbreviated as MFI, are financial institutions specifically established to provide business development services and community empowerment, either through loans or financing in micro-scale businesses to members and the public, savings management, or the provision of business development consulting services that do not solely seek profit.

2. Sharia Principles are Islamic legal provisions based on fatwas or statements of Sharia compliance from the National Sharia Board of the Indonesian Ulema Council.

3. Financing is the provision of funds by the MFI to the public that must be returned according to the agreement with Sharia Principles.

4. Savings are funds entrusted by the public to the MFI in the form of savings and/or deposits based on a fund storage agreement.

II. CONTRACTS USED IN BUSINESS ACTIVITIES

1. In conducting business activities, MFIs conducting business based on Sharia Principles must use contracts as regulated in the Financial Services Authority Regulation concerning the conduct of MFI business.
2. Business activities of MFIs conducting business based on Sharia Principles include business development and community empowerment services, either through Financing in micro-scale businesses to members and the public, Savings management, or the provision of business development consulting services.
3. Contracts in the business activity of distributing Financing:
   a. Financing based on profit-sharing principles

1. mudharabah is the contract underlying the cooperative business activity between two parties, where the first party provides all capital (shahib mal), while the second party acts as the fund manager (mudharib), and business profits are shared among them according to the agreement of the parties.
2. musyarakah is the contract underlying cooperative activities between two or more parties for a specific business, where each party provides a capital contribution with the provision that profits and risks will be shared according to the agreement of the parties.
   b. Financing based on leasing principles
3. ijarah is the contract underlying the activity of transferring the right to use (benefit) of a good for a certain period with the payment of rent (ujrah), between the lessor (mu’ajjir) and the lessee (musta’jir) without following the transfer of ownership of the good itself.
4. ijarah muntahiah bit tamlik is the contract underlying the activity of transferring the right to use (benefit) of a good for a certain period with the payment of rent (ujrah), between the lessor (mu’ajjir) and the lessee (musta’jir) accompanied by an option to transfer ownership of the good to the lessee after the lease period ends.
5. ijarah multijasa is the contract underlying the distribution of funds from the fund owner to customers to obtain benefits from a service.
   c. Financing based on sales and purchase principles
6. murabahah is the contract underlying the sales and purchase of a good by stating the purchase price or acquisition price to the buyer, and the buyer pays with a higher price or margin as profit according to the agreement of the parties.
7. istishna’ is the contract underlying the sales and purchase of a good in the form of ordering the manufacture of a good according to specific criteria and requirements and payment of the good price according to the agreement by the parties.
8. salam is the contract underlying the sales and purchase of goods with ordering with delivery at a later date by the seller according to certain conditions and payment of the good price in full in advance.
   d. Financing based on lending principles is based on the qardh contract, which is the contract underlying the activity of lending funds without remuneration with the obligation of the borrower to return the principal Financing in a lump sum or installments within a certain period.

4. Contracts in the management of Savings:
   a. management of Savings in the form of savings using the wa'diah contract is the contract underlying the deposit of funds from the fund owner to the MFI conducting business based on Sharia Principles as a fund keeper with the obligation for the MFI conducting business based on Sharia Principles to return the deposited funds at any time. b. management of Savings in the form of savings using the mudharabah contract is the contract underlying the deposit of funds from the fund owner to the MFI conducting business based on Sharia Principles as a fund manager with the sharing of profits between both parties based on a ratio that has been agreed upon.
   c. management of Savings in the form of temporary partnership fund management in the form of deposits or savings with a certain period is based on a contract in accordance with Sharia Principles, with the sharing of business results between both parties based on a ratio that has been agreed upon in advance. The contract used to conduct temporary partnership fund management is the mudharabah contract.
5. Contracts in the activity of providing business development consulting services:
   a. ijarah is the contract underlying the activity of transferring the right to use (benefit) of a good for a certain period with the payment of rent (ujrah), between the lessor (mu’ajjir) and the lessee (musta’jir) without following the transfer of ownership of the good itself. b. ju'alah is a contract containing a promise or commitment (iltizam) to provide a specific remuneration (reward/’iwadh/ju’l) for the achievement of a result (natijah) determined from a job.
6. In carrying out business activities as referred to in item 2, MFIs conducting business based on Sharia Principles may conduct fee-based activities as long as they are in accordance with Sharia Principles and do not conflict with provisions of legislation in the financial services sector.

III. CONTRACTS USED IN FUNDING SOURCES OF MFIs CONDUCTING BUSINESS BASED ON SHARIA PRINCIPLES ORIGINATING FROM LOANS

1. MFIs conducting business based on Sharia Principles are prohibited from accepting loans except from Indonesian citizens and/or business entities established and operating within the territory of the Republic of Indonesia based on a lending agreement.
2. Contracts in funding sources originating from loans:
   a. qardh is the contract underlying the activity of lending funds without remuneration with the obligation of the borrower to return the principal Financing in a lump sum or installments within a certain period. b. mudharabah is the contract underlying the cooperative business activity between two parties, where the first party provides all capital (shahib mal), while the second party acts as the fund manager (mudharib), and business profits are shared among them according to the agreement of the parties.
   c. musyarakah is the contract underlying cooperative activities between two or more parties for a specific business, where each party provides a capital contribution with the provision that profits and risks will be shared according to the agreement of the parties.

IV. APPLICATION FOR APPROVAL OF OTHER CONTRACTS IN ACCORDANCE WITH SHARIA PRINCIPLES

1. MFIs conducting business based on Sharia Principles may use contracts other than those regulated in this Financial Services Authority Circular by first obtaining approval from the Financial Services Authority.
2. The application for approval of the use of other contracts must be accompanied by a fatwa from the National Sharia Board of the Indonesian Ulema Council and supporting documents containing information, including:
   a. a description of the background of the need for other contracts other than those regulated in this Financial Services Authority Circular; b. a description of the business activities related to the contract to be used; and
   c. proof of operational readiness to conduct business activities related to the contract to be used.
3. The application for approval of the use of other contracts is submitted to the Financial Services Authority:
   Up. Director of Microfinance Institutions

This copy is in accordance with the original
Director of Law 1
Legal Department signed
Mufli Asmawidjaja
Wisma Mulia 2 Building, 11th Floor
Jalan Jenderal Gatot Subroto Kav. 40 Jakarta 12710.
4. In the event of a change in the address of the Financial Services Authority office for the submission of the approval application as referred to in item 3, the Financial Services Authority conveys notification regarding the change of address through a letter or announcement.

V. OTHERS
Guidelines on contracts used in business activities and funding sources based on Sharia Principles for MFIs conducting business based on Sharia Principles refer to:

1. Implementation of Sharia Principles in the activity of distributing Financing;
2. Implementation of Sharia Principles in the activity of managing Savings;
3. Implementation of Sharia Principles in the activity of business development consulting services; and
4. Implementation of Sharia Principles in the activity of receiving funding originating from loans,
   as stated in the Appendix which is an integral part of this Financial Services Authority Circular.

VI. CLOSING
This Financial Services Authority Circular takes effect on the date of establishment.
Established in Jakarta on January 25, 2022
EXECUTIVE HEAD OF INSURANCE SUPERVISOR,
PENSION FUNDS,
FINANCING INSTITUTIONS, AND
OTHER FINANCIAL SERVICES INSTITUTIONS
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
RISWINANDI

APPENDIX
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA NUMBER 2 /SEOJK.05/2022 CONCERNING CONTRACTS USED IN BUSINESS ACTIVITIES AND FUNDING SOURCES BASED ON SHARIA PRINCIPLES FOR MICROFINANCE INSTITUTIONS CONDUCTING BUSINESS BASED ON SHARIA PRINCIPLES

CHAPTER I
IMPLEMENTATION OF SHARIA PRINCIPLES
IN FINANCING DISTRIBUTION ACTIVITIES

1. FINANCING BASED ON PROFIT-SHARING PRINCIPLES
   A. MUDHARABAH FINANCING
2. Description: Provision of funds for business cooperation between two parties where the fund owner provides all funds, while the fund manager acts as the manager, and profits are shared among them according to the agreed ratio.
3. Contract Form: a. Mutlaq Mudharabah.
   b. Muqayyadah Mudharabah.
4. Rights and
   Obligations
   : a. The MFI conducting business based on Sharia Principles (MFI-S) acts as the fund owner and the customer as the fund manager. b. In the event Financing uses:

1. mutlaq mudharabah contract,
   then MFI-S as the fund owner gives freedom to the customer as the fund manager in managing the funds.
2. muqayyadah mudharabah contract,
   then MFI-S as the fund owner gives specific restrictions to the customer as the fund manager, including regarding the specification of business type, time, and business area according to the request of the fund owner.
   c. The repayment period and sharing of business results from fund management are determined based on the agreement between MFI-S and the customer.
   d. The sharing of business results from fund management is stated in an agreed ratio. e. The sharing of business results is carried out based on the customer's business result report. f. The agreed profit-sharing ratio cannot be changed throughout the Financing period, except based on the agreement of the parties. g. MFI-S will bear losses based on the proportion of funds managed by the customer. In the event the customer commits negligence, fraud, and/or intentional errors that result in business losses, then:
3. MFI-S is not responsible for the losses incurred; and
4. the customer is responsible for returning the remaining Financing provided by MFI-S and the profit share that has become MFI-S's right but has not yet been paid.
   h. MFI-S conducts an analysis of the Financing application from the customer based on, among others, the customer's ability to pay Financing (capacity) and the customer's track record/character.
   i. MFI-S and the customer put the Financing agreement in a written agreement.
   j. MFI-S has adequate recording and account administration systems.

4. Characteristics: a. MFI-S can set a specific ceiling amount.
   b. MFI-S can set a specific Financing period.
   c. MFI-S can request collateral from the customer at the time of Financing disbursement.
   d. MFI-S can charge administrative fees according to the agreement, the amount of which is in accordance with the actual costs directly related to the Financing. e. The Financing profit-sharing ratio is determined according to the agreement. The method of setting the ratio is agreed upon at the beginning of the contract and can be changed according to the agreement. f. Financing disbursement by MFI-S can be done in a lump sum or in stages. g. Financing repayment by the customer can be done in 2 (two) ways, namely:

1. periodically according to the projection of the customer's business cash inflow; or
2. in a lump sum at the end of Financing (for Financing with a period of up to 1 (one) year).

5. Sharia Fatwa: a. DSN Fatwa Number 07/DSNMUI/IV/2000 concerning Mudharabah Financing (Qiradh).
   b. DSN Fatwa Number 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).
   c. DSN Fatwa Number 105/DSNMUI/X/2016 concerning Guarantee of Return of Mudharabah, Musyarakah, and Wakalah Bil Istismar Financing Capital.
   d. DSN Fatwa Number 115/DSNMUI/X/2017 concerning Mudharabah Contract. e. DSN Fatwa Number 129/DSNMUI/VIII/2019 concerning Actual Costs as Ta’widh Due to Breach of Contract.

B. MUSYARAKAH FINANCING

1. Description: Provision of funds for specific business cooperation where each party provides a capital contribution with the provision that profits will be shared according to the agreed ratio, while losses are borne according to each party's capital proportion.
2. Contract Form: Musyarakah.
3. Rights and
   Obligations
   : a. MFI-S and the customer each act as business partners by jointly providing funds to finance a specific business activity. b. The business period, repayment method, and profit sharing are determined based on the agreement of both parties.
   c. The sharing of business results from fund management is stated in the form of an agreed ratio.
   d. The sharing of business results is carried out based on the customer's business result report. e. The agreed profit-sharing ratio cannot be changed throughout the investment period, except based on the agreement of the parties. f. MFI-S and the customer bear losses proportionally according to each party's capital share. In the event the customer commits negligence, fraud, and/or intentional errors that result in business losses, then:

1. MFI-S is not responsible for the losses incurred; and
2. The customer is responsible for returning the remaining Financing provided by MFI-S and the profit share that has become MFI-S's right but has not yet been paid.
   g. MFI-S conducts an analysis of the customer's Financing application based on, among others, the customer's ability to pay Financing (capacity) and the customer's track record/character. h. MFI-S and the customer put the Financing agreement in a written agreement.
   i. MFI-S has adequate recording and account administration systems.

4. Characteristics: a. MFI-S can set a specific ceiling amount.
   b. MFI-S can set a specific Financing period.
   c. MFI-S can request collateral from the customer at the time of Financing disbursement.
   d. MFI-S can charge administrative fees according to the agreement, the amount of which is in accordance with the actual costs directly related to the Financing. e. The Financing profit-sharing ratio is determined according to the agreement at the beginning of the contract and can be changed according to the agreement. j. Financing disbursement by MFI-S can be done in a lump sum or in stages. k. Financing repayment by the customer can be done in 2 (two) ways, namely:

1. periodically according to the projection of the customer's business cash inflow; or
2. in a lump sum at the end of Financing (for Financing with a period of up to 1 (one) year).

5. Sharia Fatwa: a. DSN Fatwa Number 08/DSNMUI/IV/2000 concerning Musyarakah Financing.
   b. DSN Fatwa Number 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).

6. FINANCING BASED ON LEASING PRINCIPLES
   A. IJARAH FINANCING

7. Description: Provision of funds in the context of transferring the right to use/benefit of an asset for a certain period with the payment of rent (ujrah) without following the transfer of ownership of the asset itself.

8. Contract Form: Ijarah.

9. Rights and
   Obligations
   : a. MFI-S acts as the owner and/or party having the right of control over the leased object, which is goods or services, which leases the leased object to the customer according to the agreement. b. Leased goods must be assessable and specifically identifiable and clearly stated, including the amount of rent and its period.
   c. Rent payment cannot be done in the form of receivables nor in the form of debt forgiveness.
   d. MFI-S can request the customer to be responsible for damage to the leased goods that occurs due to breach of contract or customer negligence. e. MFI-S conducts an analysis of the customer's Financing application based on, among others, the customer's ability to pay Financing (capacity) and the customer's track record/character. f. MFI-S and the customer put the Financing agreement in a written agreement. g. MFI-S has adequate recording and account administration systems.

10. Characteristics: a. MFI-S can set a specific period.
    b. MFI-S can charge administrative fees according to the agreement, the amount of which is in accordance with the actual costs directly related to the Financing.
    c. MFI-S can adjust ujrah if it meets the following conditions:

1. there is a change in the contract period;
2. there is a very strong indication that if no adjustment is made, losses will arise for one of the parties; and
3. it is agreed upon by both parties (MFI-S and the customer).
   d. Leased goods are movable or immovable goods that can be utilized. e. MFI-S can request the customer to maintain the integrity of the leased goods, and bear the maintenance costs of the leased goods according to the agreement, where a description of material and structural maintenance costs must be included in the contract. f. Rent payment can be done either in installments or in a lump sum according to the agreement.

5. Sharia Fatwa: a. DSN Fatwa Number 09/DSNMUI/IV/2000 concerning Ijarah Financing.
   b. DSN Fatwa Number 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).
   c. DSN Fatwa Number 56/DSNMUI/V/2007 concerning Ujrah Review Provisions at Sharia Financial Institutions.

B. IJARAH MUNTAHIAH BIT TAMLIK FINANCING

1. Description: Provision of funds in the context of transferring the right to use or benefit of a good or service based on a lease transaction with an option to transfer ownership of the good.
2. Contract Form: Ijarah Muntahiah Bit Tamlik (IMBT).
3. Rights and
   Obligations
   : a. MFI-S as the fund provider in the IMBT activity with the customer, also acts as the giver of promise (wa’ad), including to provide an option to transfer ownership of the leased good to the customer according to the agreement. b. The transfer of ownership of an asset from MFI-S to the customer can be done if the leasing activity has ended or been terminated and the ijarah asset has been handed over to the customer by making a separate contract.
   c. Leased goods must be assessable and specifically identifiable and clearly stated, including the amount of rent and its period.
   d. Rent payment cannot be done in the form of receivables nor in the form of debt forgiveness. e. Leased goods must be tangible and already available or ready for use (ready stock). f. MFI-S conducts an analysis of the customer's Financing application based on, among others, the customer's ability to pay Financing (capacity) and the customer's track record/character. g. MFI-S and the customer put the Financing agreement in a written agreement. h. MFI-S has adequate recording and account administration systems.
4. Characteristics: a. MFI-S can set a specific period.
   b. MFI-S can charge administrative fees according to the agreement, the amount of which is in accordance with the actual costs directly related to the Financing.
   c. MFI-S can adjust ujrah if it meets the following conditions:

1. there is a change in the contract period;
2. there is a very strong indication that if no adjustment is made, losses will arise for one of the parties; and
3. it is agreed upon by both parties (MFI-S and the customer).
   d. Leased goods are movable or immovable goods that can be utilized. e. MFI-S can request the customer to maintain the integrity of the leased goods, and bear the maintenance costs of the leased goods according to the agreement, where a description of material and structural maintenance costs must be included in the contract. f. Rent payment can be done either in installments or in a lump sum according to the agreement.

5. Sharia Fatwa: a. DSN Fatwa Number 09/DSNMUI/IV/2000 concerning Ijarah Financing.
   b. DSN Fatwa Number 27/DSNMUI/III/2002, concerning Al-Ijarah Al-Muntahiyah Bi Al-Tamlik.
   c. DSN Fatwa Number 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).
   d. DSN Fatwa Number 56/DSNMUI/V/2007 concerning Ujrah Review Provisions at Sharia Financial Institutions.

C. IJARAH MULTIJASA FINANCING

1. Description: Provision of funds in the context of transferring benefits from services for a certain period with the payment of rent (ujrah).

2. Contract Form: Ijarah Multijasa.

3. Rights and
   Obligations
   : a. MFI-S can obtain service remuneration/ujrah/fee the amount of which is agreed upon at the beginning of the contract and stated in nominal form (not in percentage form). b. Financing involves three parties, namely MFI-S, the customer, and a third party, including among others education service providers, health services, tourism services, umrah worship services, and other services that do not conflict with Sharia Principles.
   c. MFI-S conducts an analysis of the customer's Financing application based on, among others, the customer's ability to pay Financing (capacity) and the customer's track record/character.
   d. MFI-S and the customer put the Financing agreement in a written agreement. e. MFI-S has adequate recording and account administration systems.

4. Characteristics:
   a. Sharia-based Microfinance Institutions (LKMS) may provide multi-service Ijarah financing, including for education services, health services, tourism services, and other services that do not contradict Sharia Principles. b. LKMS may require customers to attach proof of order/invoice before applying for financing disbursement.
   c. LKMS may conduct random checks after the disbursement process to prove that the funds used are consistent with the intended use.
   d. LKMS may charge administrative fees consistent with the actual costs directly related to the Financing. e. LKMS may require credit guarantees or collateral in the form of cash collateral or other forms of guarantees. f. LKMS may set specific limits. g. LKMS may set specific durations.

5. Sharia Fatwas:
   a. DSN Fatwa No. 09/DSNMUI/IV/2000 concerning Ijarah Financing. b. DSN Fatwa No. 44/DSNMUI/VII/2004 concerning Multi-Service Financing.
   c. DSN Fatwa No. 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).
   d. DSN Fatwa No. 11/DSNMUI/IV/2000 concerning Kafalah.

6. FINANCING BASED ON SALES AND PURCHASE PRINCIPLES

A. MURABAHAH FINANCING

1. Description: Provision of funds or claims that can be equated to those for a goods purchase transaction at the base price plus a margin based on agreement or consensus between the fund provider, in this case LKMS, and the customer, which obligates the customer to repay the debt/liability.

2. Agreement Form: Murabahah.

3. Rights and Obligations:
   a. LKMS acts as the fund provider in purchasing goods, and the customer acts as the buyer of the goods. b. Goods that are murabahah assets must be clearly known in quantity, quality, acquisition price, and specifications.
   c. Goods that are murabahah assets must already exist and be available or ready for use (ready stock) at the time of the agreement.
   d. The acquisition price of murabahah assets must be informed by LKMS to the customer. e. The financing duration is determined based on agreement between LKMS and the customer. f. LKMS and the customer embody the financing agreement in a written contract. g. LKMS conducts an analysis of the customer's financing application, including among others based on the customer's ability to repay Financing (capacity) and the customer's track record/character. h. LKMS has adequate recording and account administration systems.

4. Characteristics:
   a. Assets that are murabahah objects include, among others, property, motor vehicles, or other assets. b. LKMS may finance part or all of the purchase price of goods.
   c. LKMS may delegate to the customer to purchase goods needed by the customer from third parties on behalf of and in the name of LKMS. In this case, the murabahah agreement can be conducted if, in principle, the goods become the property of LKMS after purchase.
   d. LKMS may request a down payment from the customer as proof of commitment to purchase murabahah assets before the agreement is concluded, with the following provisions:

1. If the murabahah agreement is concluded, the down payment becomes part of the settlement of murabahah receivables.
2. If the murabahah agreement is cancelled, the down payment is returned to the customer after being reduced by the actual losses borne by LKMS. If the down payment is smaller than the actual loss, LKMS may request additional payment from the customer.
   e. LKMS may provide discounts at the time of settlement of murabahah receivables, provided that it is not agreed upon in the agreement and the amount of the discount is left to LKMS's policy. f. LKMS may provide price discounts (discount) on the price of goods from suppliers (suppliers) with the following treatment:
3. If given before the murabahah agreement occurs, the price discount becomes the customer's right and reduces the murabahah selling price.
4. If given after the murabahah agreement occurs, it is divided according to the agreement in the contract. If not regulated in the agreement, the price discount becomes LKMS's right.
   g. LKMS may provide installment (installment) discounts on unpaid murabahah bills if the customer makes installment payments on time and/or experiences a decrease in repayment ability, provided that it cannot be agreed upon in the agreement and the amount of the discount is left to LKMS's policy. In the event that LKMS provides discounts on unpaid murabahah bills because the customer pays installments on time, LKMS must have policies and criteria regarding customers who pay installments on time. h. LKMS may charge penalties to customers who cannot make murabahah receivable installment payments, with indications including among others the element of intent and the element of misuse of funds.

5. Sharia Fatwas:
   a. DSN Fatwa No. 04/DSNMUI/IV/2000 concerning Murabahah. b. DSN Fatwa No. 10/DSNMUI/IV/2000 concerning Wakalah.
   c. DSN Fatwa No. 13/DSNMUI/IX/2000 concerning Down Payment in Murabahah.
   d. DSN Fatwa No. 16/DSNMUI/IX/2000 concerning Discounts in Murabahah. e. DSN Fatwa No. 23/DSNMUI/III/2002 concerning Settlement Discounts in Murabahah. f. DSN Fatwa No. 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh). g. DSN Fatwa No. 46/DSNMUI/II/2005 concerning Murabahah Bill Discounts (Khashm Fi Al-Murabahah). h. DSN Fatwa No. 47/DSNMUI/II/2005 concerning Settlement of Murabahah Receivables for Customers Unable to Pay.
   i. DSN Fatwa No. 48/DSNMUI/II/2005 concerning Rescheduling Murabahah Receivables.
   j. DSN Fatwa No. 49/DSNMUI/II/2005 concerning Conversion of Murabahah Agreements. k. DSN Fatwa No. 84/DSNMUI/XII/2012 concerning the Recognition of Profit Method Al-Tamwil Bi Al-Murabahah (Murabahah Financing) in Sharia Financial Institutions.

B. ISTISHNA’ FINANCING

1. Description: Provision of funds or claims that can be equated to those for a goods purchase transaction in the form of ordering the production of specific goods with agreed criteria and requirements between the orderer/buyer and the seller/manufacturer.

2. Agreement Form: Istishna’.

3. Rights and Obligations:
   a. LKMS acts as the fund provider and seller for istishna’ transactions with the customer as the buyer. b. Specifications and prices of ordered goods in istishna’ have been agreed upon by the customer and LKMS at the beginning of the agreement.
   c. Ordered goods must be known in their general characteristics, including type, variety, quality, and quantity. Ordered goods must be consistent with the characteristics agreed upon between the customer and LKMS. In the event that the delivered ordered goods are wrong or defective, LKMS must be responsible for its negligence.
   d. Payments by the customer to LKMS must not be in the form of debt forgiveness or in the form of granting receivables. e. LKMS cannot request additional prices if the customer receives goods of higher quality unless there is mutual agreement. f. LKMS is not required to provide price discounts (discount) if the customer receives goods of lower quality unless there is mutual agreement. g. The financing duration is determined based on agreement between LKMS and the customer. h. LKMS conducts an analysis of the customer's financing application, including among others based on the customer's ability to repay Financing (capacity) and the customer's track record/character.
   i. LKMS and the customer embody the financing agreement in a written contract.
   j. LKMS has adequate recording and account administration systems.

4. Characteristics:
   a. Goods that are istishna’ objects can include houses, motor vehicles, or other assets consistent with LKMS characteristics. b. Istishna’ payment mechanisms are agreed upon in the contract and can be done in the following ways:

1. Advance payment in full or in part after the agreement but before the production of goods.
2. Payment at the time of goods delivery or during the production process (payment per term).
3. Payment deferred after goods delivery.
4. Combination of the above payment methods.
   c. In the event that all or part of the goods are not available according to the delivery time, quality, or quantity as agreed, the customer has the option to:
5. cancel the agreement and request refund of funds to LKMS;
6. wait for the delivery of available goods; or
7. request that LKMS replace the goods with others of the same or different type as long as the market value is the same as the original ordered goods.

5. Sharia Fatwas:
   a. DSN Fatwa No. 06/DSNMUI/IV/2000 concerning Istishna’ Sales. b. DSN Fatwa No. 22/DSNMUI/III/2002 concerning Parallel Istishna’ Sales.
   c. DSN Fatwa No. 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).

C. SALAM FINANCING

1. Description: Provision of funds or claims that can be equated to those for the sale of ordered goods with goods delivery at a later time by the seller and repayment by the buyer at the time the agreement is concluded according to certain conditions.

2. Agreement Form: Salam.

3. Rights and Obligations:
   a. LKMS may act as buyer and/or seller in a salam transaction.

1. In the event that LKMS acts as the buyer, LKMS conducts a salam transaction.
2. In the event that LKMS acts as the seller, LKMS will order from other parties to provide ordered goods in parallel salam.
   b. Specifications and prices of ordered goods are agreed upon at the beginning of the agreement by the customer and LKMS in the first agreement or by LKMS with the supplier in the second agreement. The price of ordered goods cannot change during the duration of the agreement.
   c. Ordered goods must be known in their general characteristics, including type, variety, quality, and quantity.
   d. Ordered goods must be consistent with the characteristics agreed upon between the customer and LKMS or LKMS and the supplier. In the event that the delivered ordered goods are wrong or defective, LKMS or the supplier must be responsible for its negligence. e. Payments by the customer to LKMS must not be in the form of debt forgiveness or in the form of granting receivables. f. Salam income is obtained from the difference between the selling price to the customer and the purchase price from the supplier. g. LKMS conducts an analysis of the customer's financing application, including among others based on the customer's ability to repay Financing (capacity) and the customer's track record/character. h. LKMS and the customer embody the financing agreement in a written contract.
   i. LKMS has adequate recording and account administration systems.

4. Characteristics:
   a. In the event that LKMS acts as the buyer, LKMS may request collateral from the supplier to avoid risks detrimental to LKMS. b. LKMS may charge penalties to the supplier.

5. Sharia Fatwas:
   a. DSN Fatwa No. 05/DSNMUI/IV/2000 concerning Salam Sales. b. DSN Fatwa No. 43/DSNMUI/VIII/2004 concerning Compensation (Ta’widh).

6. FINANCING BASED ON BORROWING PRINCIPLES BASED ON QARDH AGREEMENT

7. Description: Provision of funds or claims that can be equated to those based on agreement or consensus between the borrower and the lender, which obligates the borrower to repay the debt after a certain period.

8. Agreement Form: Qardh.

9. Rights and Obligations:
   a. LKMS acts as the fund provider to provide Qardh Financing to customers based on agreement. b. The Qardh loan provided is a loan that does not require any compensation.
   c. LKMS may only charge administrative fees in Qardh Financing.
   d. LKMS conducts an analysis of the customer's financing application, including among others based on the customer's ability to repay Financing (capacity) and the customer's track record/character. e. LKMS and the customer embody the agreement in a written contract. f. LKMS has adequate recording and account administration systems.

10. Characteristics:
    a. Qardh funds can come from internal or external sources of LKMS. b. LKMS may charge administrative fees to customers in nominal form and not linked to the amount and duration of the loan.

11. Sharia Fatwas:
    a. DSN Fatwa No. 19/DSN-MUI/IV/2001 concerning Al-Qardh. b. DSN Fatwa No. 79/DSN-MUI/IV/2001 concerning Qardh Using Customer Funds.

CHAPTER II
IMPLEMENTATION OF SHARIA PRINCIPLES IN SAVINGS MANAGEMENT ACTIVITIES

I. SAVINGS MANAGEMENT IN THE FORM OF SAVINGS

1. Description: Customer fund deposits at LKMS, the withdrawal of which can be done according to certain agreed conditions, but cannot be withdrawn with checks and/or equivalents.

2. Agreement Form:
   a. Wadiah. b. Mudharabah.

3. Rights and Obligations:
   a. LKMS acts as the recipient of deposited funds, and the customer acts as the owner of the funds. b. LKMS may manage or use customer deposited funds. In the event that the agreement used is wadiah ad amanah, LKMS cannot manage or use customer deposited funds.
   c. LKMS is not permitted to promise bonuses or remuneration to customers.
   d. LKMS may return customer funds at any time. e. LKMS and the customer embody the agreement on the opening and use of savings products in a written contract. f. LKMS has adequate recording and administration systems.

4. Characteristics:
   a. LKMS may set customer targets. b. LKMS may provide savings books.
   c. LKMS may set initial deposits and specific minimum savings balances.
   d. LKMS may charge account administrative fees consisting of costs directly related to account management, such as transaction report printing costs, account opening costs, and account closure costs. e. LKMS may provide prizes for promotional purposes, meeting the following requirements:

1. promotional prizes are not agreed upon at the beginning and do not contain elements of riba;
2. promotional prizes must be in the form of goods and/or services (not in the form of money);
3. in the event that promotional prizes are in the form of goods, the prizes must be tangible and halal items; and
4. promotional prizes are given before the occurrence of the wadiah agreement.

5. Sharia Fatwas:
   a. DSN Fatwa No. 02/DSNMUI/IV/2000 concerning Savings. b. DSN Fatwa No. 86/DSNMUI/XII/2012 concerning Prizes in Fund Collection by Sharia Financial Institutions.

II. SAVINGS MANAGEMENT IN THE FORM OF TEMPORARY SHIRKAH FUND MANAGEMENT

1. Description: Customer fund investments at LKMS, the withdrawal of which can only be done at specific times agreed upon based on the agreement between the customer depositor and LKMS.

2. Agreement:
   a. Mudharabah Mutlaqah. b. Mudharabah Muqayyadah.

3. Rights and Obligations:
   a. LKMS acts as the fund manager, and the customer acts as the fund owner. b. In the event of deposits or savings with a specific duration using the mudharabah mutlaqah agreement:

1. LKMS is not limited in using customer funds in fund distribution activities as long as they do not contradict Sharia Principles; and
2. Customers as fund owners bear the risk of loss in the event that:
   a) the financed investment object or underlying asset experiences a decline in quality; or b) losses occur not due to the negligence of LKMS as fund manager, unless LKMS as fund manager guarantees all customer fund principal.
   c. In the event of deposits or savings with a specific duration using the mudharabah muqayyadah agreement:
3. customers as fund owners provide specific conditions and limitations to LKMS, including among others regarding location, method, and/or investment objects, stated clearly in the contract; and
4. customers as fund owners bear the risk of loss in the event that the financed investment object or underlying asset experiences a decline in quality or losses occur not due to the negligence of LKMS as fund manager and/or violate the substance of the agreement.
   d. LKMS and customers conduct profit sharing stated in the form of nisbah agreed upon and embodied in the account opening agreement. e. LKMS is not permitted to reduce customer profit shares without customer approval. f. LKMS has adequate recording and account administration systems.

4. Characteristics:
   a. LKMS may set customer targets, namely individuals and/or non-individuals. b. LKMS may set specific durations.
   c. LKMS may set specific nominal amounts.
   d. LKMS may charge account administrative fees consisting of costs directly related to account management costs, including among others account opening costs and account closure costs. e. Matured deposits can be automatically extended (automatic roll over) according to agreement. f. Deposit profit shares can increase the deposit principal or be transferred to savings accounts according to requests. g. LKMS may charge penalties if customers withdraw deposit funds before maturity. h. LKMS may provide prizes for promotional purposes, meeting the following requirements:

1. promotional prizes are not agreed upon at the beginning, do not contain elements of hidden riba and/or do not become customary (habitual);
2. promotional prizes must be in the form of goods and/or services (not permitted in the form of money); and
3. in the event that promotional prizes are in the form of goods, promotional prizes must be tangible and halal items.

5. Sharia Fatwas:
   a. DSN Fatwa No. 03/DSNMUI/IV/2000 concerning Deposits. b. DSN Fatwa No. 02/DSNMUI/IV/2000 concerning Savings.

CHAPTER III
IMPLEMENTATION OF SHARIA PRINCIPLES
IN BUSINESS DEVELOPMENT CONSULTING SERVICE ACTIVITIES

1. Description: Services conducted to empower micro businesses through guidance, mentoring, and strengthening assistance to grow and increase the capacity and competitiveness of micro businesses.

2. Agreement Form:
   a. Ijarah. b. Ju’alah.

3. Rights and Obligations:
   a. LKMS acts as a provider of business development consulting services to customers based on agreement. b. Work objects must be work not prohibited by Sharia Principles.
   c. Work results based on agreements embodied in the agreement must be clear and known by the parties at the time of the offer.
   d. Consulting service remuneration must be determined in amount by the ja’il and known by the parties at the time of the offer. e. There must be no conditions for remuneration to be given in advance (before work execution). f. in the event that business development consulting services use ijarah, LKMS receives remuneration for consulting services according to the duration of the lease of the consulting services. g. in the event that business development consulting services use the ju’alah agreement, LKMS receives remuneration for the consulting services based on the benefits of the consulting services.

4. Characteristics:
   a. The provision of business development consulting services must contain clear benefits and can be utilized according to Sharia Principles. b. In certain work, limiting specific times is not permitted, but for types of work with clear completion times, time can be limited.

5. Sharia Fatwas:
   a. DSN Fatwa No. 112/DSNMUI/IX/2017 concerning Ijarah. b. DSN Fatwa No. 62/DSNMUI/XII/2007 concerning Ju’alah Agreements.

CHAPTER IV
IMPLEMENTATION OF SHARIA PRINCIPLES
IN FUND RECEIPTS
ORIGINATING FROM LOANS

1. Description: Financing received from financial institutions or third parties that are not financial institutions.

2. Agreement Form:
   a. Qardh. b. Mudharabah.
   c. Musyarakah.

3. Rights and Obligations:
   a. LKMS must disclose details of loans received regarding:

1. Type (source of funds) of loans received;
2. Duration, remuneration (if any), and maturity of loans received; and
3. Associated obligations.
   b. Loans received are recognized at nominal value at the time the contract is signed or an agreement occurs between both parties.

4. Characteristics: LKMS may provide profit shares on loans received.

5. Sharia Fatwas:
   a. DSN Fatwa No. 115/DSN-MUI/IX/2017 concerning Mudharabah Agreements. b. DSN Fatwa No. 08/DSN-MUI/IV/2000 concerning Musyarakah Financing.

c. DSN Fatwa No. 19/DSN-MUI/IV/2001 concerning Al-Qardh.

This copy is consistent with the original
Legal Director 1
Legal Department signed
Mufli Asmawidjaja

Established in Jakarta on January 25, 2022

EXECUTIVE HEAD OF INSURANCE, PENSION FUND,
FINANCING INSTITUTION, AND OTHER FINANCIAL SERVICE INSTITUTIONS SUPERVISOR FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA, signed RISWINANDI