POJK on Prudential Provisions in the Context of National Economic Stimulus for Islamic Commercial Banks and Islamic Business Units

REPUBLIC OF INDONESIA
FINANCIAL SERVICES AUTHORITY
COPY
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 12 /POJK.03/2015
CONCERNING
PRUDENTIAL PROVISIONS IN THE CONTEXT OF NATIONAL ECONOMIC STIMULUS FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS BY THE GRACE OF GOD THE ALMIGHTY THE COMMISSIONERS BOARD OF THE FINANCIAL SERVICES AUTHORITY,

Considering:
a. that currently there is a slowdown in Indonesia's economic growth which can affect the performance and condition of the banking industry, including Islamic banking, thereby potentially disrupting financial system stability; b. that to respond to the slowing economic growth conditions, it is necessary to implement countercyclical and temporary policies to encourage the optimalization of the intermediation function of Islamic banking and economic growth while still paying attention to prudential principles and Sharia principles;
c. that in line with the policy as referred to in letter b, it is necessary to implement policies to support the government program in order to increase welfare and economic growth, especially those favoring micro, small, and medium enterprises;
d. that based on the considerations referred to in letters a, b, and c, it is necessary to establish a Financial Services Authority Regulation concerning Prudential Provisions in the Context of National Economic Stimulus for Islamic Commercial Banks and Islamic Business Units;

Recalling:

1. Law Number 21 of 2008 concerning Islamic Banking (State Gazette of the Republic of Indonesia Year 2008 Number 94, Supplement to the State Gazette of the Republic of Indonesia Number 4867);
2. Law Number 21 of 2011 concerning the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to the State Gazette of the Republic of Indonesia Number 5253);

DECIDING:
Establishing: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING PRUDENTIAL PROVISIONS IN THE CONTEXT OF NATIONAL ECONOMIC STIMULUS FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS.

CHAPTER I
GENERAL PROVISIONS
Article 1
In this Financial Services Authority Regulation, the following terms are defined:

1. Bank means Islamic Commercial Banks and Islamic Business Units.
2. Islamic Commercial Bank means an Islamic Commercial Bank as referred to in Law Number 21 of 2008 concerning Islamic Banking.
3. Islamic Business Unit means an Islamic Business Unit as referred to in Law Number 21 of 2008 concerning Islamic Banking.
4. Financing means the provision of funds or claims that are equivalent to it in the form of profit-sharing transactions, leasing transactions including service leasing, buying and selling transactions, and borrowing/lending transactions based on agreement or consensus between the Bank and other parties that obligate the financed party and/or the party given financial facilities to return the funds after a certain period with compensation, without compensation, profit-sharing, or margin.
5. Credit Risk is the risk arising from the failure of customers or other parties to fulfill their obligations to the Bank in accordance with the agreed contract.
6. Financing Restructuring is an effort made by the Bank to help customers fulfill their obligations.
7. Equity Participation is the investment of Islamic Commercial Bank funds in the form of shares in Islamic banks and other companies in the financial sector that conduct business activities based on Sharia principles as regulated in legislation, including investment in the form of mandatory convertible bonds or certain types of transactions that result in the Islamic Commercial Bank having or will have shares in companies operating in the financial sector that conduct business activities based on Sharia principles.
8. Micro, Small, and Medium Enterprises, hereinafter referred to as MSMEs, are MSMEs as regulated in the Law concerning micro, small, and medium enterprises.

Article 2
(1) In implementing policies supporting economic growth stimulus, Banks must still apply prudential principles and Sharia principles.
(2) The policy as referred to in paragraph (1) for Islamic Commercial Banks is applied to:
a. the calculation of Risk-Weighted Assets (RWA) for Credit Risk using the standard approach for:
1. Residential mortgage financing; and
2. Financing to MSMEs guaranteed by a guarantee institution or Financing insurance with the status of Regional State-Owned Enterprises (BUMD);
b. the assessment and determination of asset quality for:
1. Financing and other fund provision in small amounts; and
2. Restructured Financing;
c. Equity Participation.
(3) The policy as referred to in paragraph (1) for Islamic Business Units is applied to the assessment and determination of asset quality for:
a. Financing and other fund provision in small amounts; and b. Restructured Financing.

CHAPTER II
CALCULATION OF RISK-WEIGHTED ASSETS (RWA) FOR CREDIT RISK USING THE STANDARD APPROACH FOR ISLAMIC COMMERCIAL BANKS
Section One
Risk Weight of Residential Mortgage Financing
Article 3
The risk weight of Residential Mortgage Financing is established as follows:
a. at least 35% (thirty-five percent) for Consumption Financing for the purpose of owning a residence or apartment or Consumption Financing guaranteed by collateral in the form of a residence or apartment that meets all the following criteria:
1. is granted to individual customers;
2. the collateral is bound by a mortgage right or fiduciary right so as to provide a preferred position (preferential right) to the Islamic Commercial Bank; and
3. the Islamic Commercial Bank has adequate systems and procedures to assess and monitor the value of the collateral periodically;
b. at least 20% (twenty percent) for Consumption Financing for the purpose of owning a residence that is an Indonesian Government program that meets all the following criteria:
1. is carried out in accordance with applicable legislation; and
2. is 100% (one hundred percent) guaranteed by a guarantee institution or Financing insurance with the status of State-Owned Enterprises (BUMN) that meets the guarantee recognition requirements in Credit Risk mitigation techniques.

Article 4
The guarantee recognition requirements in Credit Risk mitigation techniques as referred to in Article 3 letter b number 2 are as follows:
a. the Islamic Commercial Bank has the right to claim directly against the guarantor without having to take legal action first against the customer in the event of default; b. The claim or administrative account transaction that is guaranteed is stated specifically and clearly in the guarantee agreement;
c. The guarantee agreement is unconditional and irrevocable;
d. The guarantee is paid out within a maximum period of 90 (ninety) days since the exposure has been overdue for more than 90 (ninety) days, either for principal payment and/or margin/profit-sharing/ujrah payment; and e. The guarantee issued by the guarantor has been recognized as a liability in the books of the guarantor.

Section Two
Risk Weight of Financing to MSMEs Guaranteed by Guarantee Institutions or Financing Insurance with BUMD Status
Article 5
(1) The risk weight of Financing to MSMEs guaranteed by a guarantee institution or Financing insurance with BUMD status is established at 50% (fifty percent) provided that the established requirements are met. (2) The requirements for guarantee institutions or Financing insurance with BUMD status as referred to in paragraph (1) are established as follows:
a. having a rating from a rating agency recognized by the Financial Services Authority equivalent to BBB-; or b. receiving a written recommendation from the Financial Services Authority to conduct a guarantee program. (3) In addition to meeting the requirements as referred to in paragraph (2), the recognition of Financing guarantee or insurance, the Financing guarantee or insurance scheme, and the guarantee institution or Financing insurance with BUMD status must still meet the requirements:
a. guarantee recognition in Credit Risk mitigation techniques as referred to in Article 4; b. the Financing guarantee or insurance scheme; and
c. the guarantee institution or Financing insurance status is not BUMN.

Article 6
(1) The requirements for the Financing guarantee or insurance scheme as referred to in Article 5 paragraph (3) letter b are as follows:
a. the share of Financing guarantee by the guarantee institution or Financing insurance is at least 70% (seventy percent) of the Financing provided by the Islamic Commercial Bank; b. the Islamic Commercial Bank submits a claim to the guarantee institution or Financing insurance at the latest 1 (one) month since the occurrence of principal, margin/profit-sharing/ujrah, and/or other claims arrears that cause the quality of Financing to be assessed as "Doubtful" at best in accordance with applicable Financial Services Authority regulations even though the Financing has not yet matured;
c. the payment of Financing guarantee or insurance is at the latest 15 (fifteen) working days after the claim is submitted by the Islamic Commercial Bank and the documents are received completely by the guarantee institution or Financing insurance;
d. the duration of the Financing guarantee or insurance is at least equal to the duration of the Financing; and e. the Financing guarantee or insurance is unconditional and irrevocable. (2) The requirements for guarantee institutions or Financing insurance with status other than BUMN as referred to in Article 5 paragraph (3) letter c are as follows:
a. the establishment of the guarantee institution or Financing insurance in accordance with applicable regulations regarding guarantee institutions or Financing insurance; b. supported by guarantee funds (capital) with a gearing ratio referring to applicable regulations, at most 10 (ten) times;
c. complying with regulations regarding guarantee institutions or Financing insurance regulated by the Financial Services Authority; and
d. not being a related party of the Islamic Commercial Bank except for such connection due to ownership relationships with the regional government.
(3) The requirements for the Financing guarantee or insurance scheme as referred to in paragraph (1) are stated in the agreement between the Islamic Commercial Bank and the guarantee institution or Financing insurance.

Article 7
(1) The risk weight of Financing to MSMEs guaranteed by a guarantee institution or Financing insurance with BUMD status that:
a. has a rating higher than BBB-; and b. the recognition of Financing guarantee or insurance, the Financing guarantee or insurance scheme, and the guarantee institution or Financing insurance with BUMD status meet the requirements as referred to in Article 5 paragraph (3), is based on the rating of the guarantee institution or Financing insurance with BUMD status according to the portfolio category of claims to public sector entities. (2) The risk weight of claims to public sector entities as referred to in paragraph (1) is as follows:
a. 50% (fifty percent) for ratings equivalent to BBB+ to BBB-; b. 50% (fifty percent) for ratings equivalent to A+ to A-; or
c. 20% (twenty percent) for ratings equivalent to AAA to AA-.
(3) The rating illustration as referred to in paragraph (2) uses the rating notation issued by the Standard and Poor’s rating agency.

CHAPTER III
ASSESSMENT AND DETERMINATION OF ASSET QUALITY
FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS
Section One
Financing and Other Fund Provision in Small Amounts
Article 8
(1) The determination of the quality of Financing and other fund provision can be based solely on the timeliness of principal and/or margin/profit-sharing/ujrah payment, for:
a. Financing and other fund provision provided by each Bank to 1 (one) customer or 1 (one) project with an amount less than or equal to IDR 5,000,000,000.00 (five billion rupiah); b. Financing and other fund provision provided by each Bank to MSME customers with an amount:

1. More than IDR 5,000,000,000.00 (five billion rupiah) up to IDR 20,000,000,000.00 (twenty billion rupiah) for Banks that meet the following criteria:
   a) have a very adequate Risk Management Application Sufficiency Assessment (KPMR) rating for Credit Risk; b) have a Minimum Capital Adequacy Ratio (KPMM) ratio at least in accordance with applicable regulations; and c) have a Composite Rating of Bank health level at least 3 (PK-3).
2. More than IDR 5,000,000,000.00 (five billion rupiah) up to IDR 10,000,000,000.00 (ten billion rupiah) for Banks that meet the following criteria:
   a) have an adequate Risk Management Application Sufficiency Assessment (KPMR) rating for Credit Risk; b) have a KPMM ratio at least in accordance with applicable regulations; and c) have a Composite Rating of Bank health level at least 3 (PK-3). (2) The determination of the quality of Financing and other fund provision as referred to in paragraph (1) letter b for Islamic Business Units applies the following provisions:
   a. the KPMR rating for Credit Risk refers to the KPMR sufficiency assessment rating of the Islamic Business Unit; and b. the Composite Rating of Bank health level and KPMM ratio refer to the Composite Rating of Bank health level and KPMM ratio of its parent bank. (3) The provisions as referred to in paragraph (1) letter b are not applied to Financing and other fund provision provided to 1 (one) MSME customer with an amount more than IDR 5,000,000,000.00 (five billion rupiah) that is:
   a. Restructured Financing; and/or b. Fund provision to the 50 (fifty) largest customers of the Bank.

Section Two
Determination of the Quality of Restructured Financing
Article 9
(1) The quality of Financing after restructuring is established as follows:
a. at most Substandard for Financing that before restructuring was classified as Doubtful or Loss; b. remains unchanged for Financing that before restructuring was classified as Pass, Special Mention, or Substandard. (2) The quality of Financing after restructuring as referred to in paragraph (1) can become Pass, if there are no arrears for 3 (three) consecutive periods of principal and/or margin/profit-sharing/ujrah installment payments in accordance with the Financing Restructuring agreement. (3) In the event that the customer does not meet the criteria and/or requirements in the Financing Restructuring agreement, the quality assessment of Financing is established in accordance with applicable provisions based on:
a. timeliness of principal and/or margin/profit-sharing/ujrah payment for Restructured Financing up to an amount of IDR 5,000,000,000.00 (five billion rupiah); or b. business prospects, customer performance, and repayment ability for Restructured Financing with an amount more than IDR 5,000,000,000.00 (five billion rupiah). (4) In the event that the period for principal and/or margin/profit-sharing/ujrah installment payments is less than 1 (one) month, the improvement of quality to Pass as referred to in paragraph (2) can be done at the earliest 3 (three) months since the Financing Restructuring was conducted.

Article 10
The quality of Restructured Financing as referred to in Article 8 paragraph (3) letter a is established in accordance with the provisions as referred to in Article 9.

Article 11
(1) Restructured Financing with the granting of a grace period for principal payment is established to have the following quality:
a. at most Substandard for Financing that before restructuring was classified as Doubtful or Loss; b. remains unchanged for Financing that before restructuring was classified as Pass, Special Mention, or Substandard; (2) The quality of Financing during the grace period for principal payment as referred to in paragraph (1) can:
a. become Pass, if there are no arrears for margin/profit-sharing/ujrah payment for 3 (three) consecutive payment periods in accordance with the Financing Restructuring agreement; or b. be in accordance with the worse quality of Financing between the quality of Financing as referred to in paragraph (1) or the actual quality of Financing, if there are arrears for margin/profit-sharing/ujrah payment or do not meet the criteria and/or requirements in the Financing Restructuring agreement. (3) The quality of Financing after the grace period for principal payment is based on:
a. timeliness of principal and/or margin/profit-sharing/ujrah payment for Restructured Financing up to an amount of IDR 5,000,000,000.00 (five billion rupiah); or b. business prospects, customer performance, and repayment ability for Restructured Financing with an amount more than IDR 5,000,000,000.00 (five billion rupiah).

CHAPTER IV
EQUITY PARTICIPATION FOR ISLAMIC COMMERCIAL BANKS
Article 12
(1) Equity Participation for the purpose of:
a. establishing a company that will take over problematic Financing assets from the Islamic Commercial Bank making the participation with the Islamic Commercial Bank's ownership at most 20% (twenty percent) of the company's capital and the Islamic Commercial Bank does not become the controller; or b. additional participation for the rescue of a subsidiary company that is a bank conducting business activities based on Sharia principles, can be conducted if the Islamic Commercial Bank has a Composite Rating of Islamic Commercial Bank health level last before making the participation at least 3 (PK-3) and has a prospect of improving the Composite Rating to be better. (2) Other requirements for the purpose of Equity Participation as referred to in paragraph (1) refer to the applicable provisions regarding prudential principles in Equity Participation activities.

CHAPTER V
TRANSITIONAL PROVISIONS
Article 13
Applications for approval of Equity Participation as referred to in Article 12 submitted to the Financial Services Authority before this Regulation comes into force are adjusted to this Financial Services Authority Regulation.

Article 14
When this Financial Services Authority Regulation comes into force:
a. The quality of Restructured Financing that is still within the period of 3 (three) times the obligation to pay principal and/or margin/profit-sharing/ujrah after the signing of the Financing Restructuring agreement; or b. The quality of Restructured Financing that is still within the grace period for principal payment after the signing of the Financing Restructuring agreement, is established in accordance with this Financial Services Authority Regulation.

CHAPTER VI
CLOSING PROVISIONS
Article 15
When this Financial Services Authority Regulation comes into force, the provisions in:
a. Bank Indonesia Regulation Number 15/11/PBI/2013 concerning Prudential Principles in Equity Participation Activities (State Gazette of the Republic of Indonesia Year 2013 Number 187, Supplement to the State Gazette of the Republic of Indonesia Number 5466); b. Financial Services Authority Regulation Number 16/POJK.03/2014 concerning the Assessment of Asset Quality of Islamic Commercial Banks and Islamic Business Units (State Gazette of the Republic of Indonesia Year 2014 Number 347, Supplement to the State Gazette of the Republic of Indonesia Number 5625);
c. Bank Indonesia Circular Letter Number 7/53/DPbS dated November 22, 2005 regarding Minimum Capital Provision Requirements for Commercial Banks Conducting Business Activities Based on Sharia Principles as amended by Bank Indonesia Circular Letter Number 8/10/DPbS dated March 7, 2006,
are declared to still be in force insofar as they do not conflict with the provisions in this Financial Services Authority Regulation.

Article 16
This Financial Services Authority Regulation is in force until 2 (two) years from the date of promulgation.

Article 17
This Financial Services Authority Regulation comes into force on the date of promulgation.

In order that everyone knows it, order the promulgation of this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Established in Jakarta
On August 21, 2015
CHAIRMAN OF THE COMMISSIONERS BOARD
FINANCIAL SERVICES AUTHORITY, signed
MULIAMAN D. HADAD

Promulgated in Jakarta
On August 24, 2015
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2015 NUMBER 198 Copy in accordance with the original Director of Law 1 Ministry of Law signed Sudarmaji

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 12/POJK.03/2015
CONCERNING
PRUDENTIAL PROVISIONS IN THE CONTEXT OF NATIONAL ECONOMIC STIMULUS FOR ISLAMIC COMMERCIAL BANKS AND ISLAMIC BUSINESS UNITS

I. GENERAL
In order to stimulate national economic growth, efforts are needed to encourage the intermediation function of the banking industry, including Islamic banking, through countercyclical policies, including regarding provisions concerning the calculation of Risk-Weighted Assets for Credit Risk using the standard approach, asset quality assessment, and prudential principles in conducting Equity Participation. The aforementioned countercyclical policy is aimed at maintaining financial system stability, encouraging the intermediation function in order to increase the potential expansion of Bank Financing conducted in a measured manner while still paying attention to prudential principles and Sharia principles, and preventing moral hazard. This countercyclical policy is temporary, so as the performance and financial condition of Banks and economic growth improve, the aforementioned policy needs to be adjusted again. This countercyclical policy is focused on encouraging the growth of Financing to MSMEs and Residential Mortgage Financing, as well as improving Bank performance and conditions. In addition, this policy is in line with the government program in order to increase welfare and economic growth, especially in the program for Housing Financing for low-income communities and the distribution of Financing to MSMEs. In relation to the above considerations, it is necessary to implement a policy in the form of Prudential Provisions in the Context of National Economic Stimulus for Islamic Commercial Banks and Islamic Business Units in a Financial Services Authority Regulation.

II. ARTICLE BY ARTICLE EXPLANATION
Article 1
Clear enough.

Article 2
Clear enough.

Article 3
Letter a
What is meant by residence or apartment is a landed house or apartment building but does not include shops and office buildings.
Letter b
What is meant by the Indonesian Government is the Central Government as referred to in the Law regulating regional government.

Article 4
Letter a
What is meant by default is the failure or negligence of the customer to pay financial obligations and fulfill other obligations to the Islamic Commercial Bank; for example, the customer's failure to pay principal and margin/profit-sharing/ujrah at the specified time (default). Letter b Clear enough. Letter c Clear enough. Letter d Clear enough. Letter e Clear enough.

Article 5
Paragraph (1)
Clear enough.
Paragraph...

Paragraph (2)
Letter a
Clearly stated.
Letter b
Criteria for guarantee or insurance institutions for Financing that are state-owned enterprises (BUMD) receiving recommendations from the Financial Services Authority include having good financial performance.

Paragraph (3)
Clearly stated.

Article 6
Paragraph (1)
Letter a
Clearly stated.
Letter b
Clearly stated.
Letter c
Clearly stated.
Letter d
The determination of related parties for Islamic Commercial Banks is based on ownership relationships, management relationships, and financial relationships as regulated in the applicable provisions regarding maximum credit limits.

Paragraph (2)
Clearly stated.
Paragraph (3)
Clearly stated.

Article 7
Paragraph (1)
Public sector entities refer to State-Owned Enterprises, local governments (provinces, cities, and regencies) in Indonesia, and bodies or institutions of the Government of the Republic of Indonesia that do not meet the criteria as the Indonesian Government. The Indonesian Government refers to the Central Government of the Republic of Indonesia, Bank Indonesia, and other government bodies and institutions whose entire operational funding comes from the State Budget (APBN) of the Government of the Republic of Indonesia.

Paragraph (2)
Clearly stated.
Paragraph (3)
Clearly stated.

Article 8
Paragraph (1)
"Other fund provision" refers to the issuance of guarantees and/or the opening of letters of credit.
Included in "Financing and other fund provision" are all types of Financing or other fund provision provided to all categories of customers.

Paragraph (2)
Clearly stated.
Paragraph (3)
Letter a
Clearly stated.
Letter b
The term "50 (fifty) largest customers" refers to the 50 (fifty) largest customers of the Islamic Commercial Bank individually.
The term "50 (fifty) largest customers of the Islamic Banking Unit" refers to the 50 (fifty) largest customers of the Islamic Banking Unit, excluding those from its parent bank.

Article 9
Paragraph (1)
Clearly stated.
Paragraph (2)
Clearly stated.
Paragraph (3)
Letter a
Clearly stated.
Letter b
Factors for assessing business prospects, customer performance, and repayment capacity refer to provisions regarding the asset quality assessment of Islamic Commercial Banks and Islamic Banking Units.

Paragraph (4)
Clearly stated.

Article 10
Clearly stated.

Article 11
Paragraph (1)
Clearly stated.
Paragraph (2)
Letter a
Clearly stated.
Letter b
The term "actual financing quality" refers to the quality assessment of Financing based on:
a. Timeliness of principal and/or margin/profit-sharing/ujrah payments for restructured Financing up to an amount of Rp5,000,000,000.00 (five billion rupiah); or b. Business prospects, customer performance, and repayment capacity for restructured Financing with an amount exceeding Rp5,000,000,000.00 (five billion rupiah).

Article 12
Clearly stated.

Article 13
Clearly stated.

Article 14
Clearly stated.

Article 15
Clearly stated.

Article 16
Clearly stated.

Article 17
Clearly stated.

SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 5735