Financial Environment

Overall investment climate in Indonesia is very attractive to foreign investment access. The availability of fiscal incentives to attract foreign investors, no limitation on the value of investment, the possibility for foreign investors to wholly own their investment in almost all sectors and simplified investment approval process are some of advantages for foreign investment to invest their money in Indonesia. As a member nation of the ASEAN countries, Indonesia is located on the cross road of two great continents, namely Asia and Australia, and the Indian and Pacific Oceans, offers some comparative advantages to investors with attractive ranges and combinations such as:

• A large population of about 241 million (88.2% Moslem) and dynamically adaptive to progress (GDP 2009 Forecast 5.5% (5.8% in 2008 - real change pa)), constituting a huge potential market as well as the competitive work force.
• A strategic location controlling vital international sea communication lines.
• A more democratic country.
• An open market-oriented economy, with free foreign currency exchange regime.
• The Indonesian Government realizes that investment is one of the most important factors in driving economic growth and, thus, tries hard to improve investment procedures in the future in order to stimulate a more favorable investment climate.

Banking

As per September 2009, there are 122 Commercial Banks, 1,765 Rural Banks and 5 Shariah Banks in Indonesia, with combined asset worth over US$ 242 billion.

Twenty four (24) of the commercial banks have established Shariah Business Units. These 5 Shariah Banks and 24 Shariah Business Units have made up just over US$ 5.8 billion in combined asset. The industry has grown with an average of 33% growth rate over the period of 2005 – 2008, outpacing the total banking industry growth with 16% growth rate over the same period.

Shariah banking ( both in the form of shariah banks and shariah business units) is running based on Islamic principles which replace interest-based financial activities with shariah-compliance schemes such as profit sharing, purchase-selling, leasing, custodian and partnership.

Shariah-based Shares

Share/stock is a certificate that represents equity participation of investor in a certain company. Shariah principles do not forbid equity participation in companies as long as business activities of the companies do not contradict Shariah principles such as gambling, conventional financial business, manufacturing or trading of prohibited foods or goods, etc. In addition, financials of the companies must not breach certain limit of financial ratios set by the Indonesia Capital Market and Financial Institution Supervisory Agency, which are: (i) maximum ratio of interest-bearing debt to total equity of 82%, and (ii) maximum ratio of interest income and other non-shariah-compliance income to total income of 10%.

The Indonesia Stock Exchange ("IDX") provides a stock index which tracks performance of 30 Shariah-compliance shares, Jakarta Islamic Index ("JII"). List of shares composing the JII are reviewed and updated on semi-annual basis, at the beginning of January and July on each year. Changes in the issuer’s core business will be monitored all the time based on the public data available. The JII is intended to become a benchmark to measures performance of investors' investment in syariah-compliance shares. Besides criterias above, the process of shares selection in the JII also considering the aspects of liquidity of the shares, such as:

• The share is listed in the Exchange for more than 3 months (except if the shares include in the 10 biggest capitalization list)
• Included in the top 60 shares based on its last year average of market capitalization.
• Included in the top 30 shares based on its last year average of liquidity in regular market.

Shariah-based Bond (Sukuk)

According to the Decree of National Shariah Board No. 32/DSN-MUI/IX/2002 "Sukuk is long-term securities which is based on Syariah principles, issued by an issuer to investors (Sukukholders). Issuer of the Sukuk has the obligation to pay profit amount or fee to the Sukukholders and to repay principal amount of the Sukuk at maturity". Different from conventional bonds, Sukuk require certain underlying assets, with the Sukukholders being entitled to share the income generated through the underlying assets.

There are 2 schemes of Sukuk in Indonesia which are Sukuk Mudharabah and Sukuk Ijarah.

• Sukuk Mudharabah is based on profit sharing agreement between the issuer and Sukukholders, whereby periodic distribution amount received by the Sukukholders derived from profit generated by certain business of the issuer.
• Sukuk Ijarah is based on lease agreement between the issuer and Sukukholders whereby periodic distribution amount received by the Sukukholders derived from ijarah (rental) fee paid by the issuer, amount of which can be predetermined and fixed throughout tenor of the Sukuk.

Source: Indonesia Stock Exchange, HSBC.

Shariah-based Mutual Fund

Shariah Mutual Fund is Mutual fund that allocates all of its fund/ portfolios into the Shariah instruments such as in the shares that joined the JII, Shariah bond, and other Shariah financial instrument.

The first Islamic mutual funds were launched in 1997. The market subsequently boomed in 2004 and until July 2007 the total number of these funds reached 24. The growth of Islamic mutual fund has reached 14.3% and Net Asset Value reached 75.1% since the end of 2006. As a result of this growth, the percentage of Islamic mutual funds to the overall mutual funds market climbed from 5.23% in 2005 to 5.71% in 2006 (also in July 2007 is around 5.71%). Similarly, Net Assets Value (NAV) mounted from IDR. 559.1 billion (US$55.9 million equivalent) in 2005 to IDR. 723.4 billion (US$72.3 million equivalent) in 2006, and in July 2007 reached IDR. 72.38 trillion (US$ 7.78 billion equivalent).

The investment instruments used in Islamic mutual funds are: JII shares, Islamic deposits, Bank Indonesia Wadiah Certificates and Interbank Mudharabah Investment (IMA) Certificates.

Taxation

Income tax for Shariah based activities

Indonesian Tax Authority has issued Government Regulation No. 25/2009 regarding Income Tax on Sharia Based Activity. The regulation, which effective starting 1 Jan 2009, stipulates the tax treatment on income earned from sharia based activity such as profit sharing, bonus, margin and other sharia based income, shall be applied based on equal treatment with general income tax treatment ("mutatis mutandis"). For instance, tax treatment on interest shall also be applied on profit sharing from mudharabah deposits, bonus from current account arranged with akad wadiah, and margin from murabahah financing.

• Income tax on Profit
  Interest on time or saving deposits and discount on Bank Indonesia Certificates (SBIs) other than that payable to banks operating in Indonesia and to government-approved pension funds is subject to withholding tax at 20%.
  
  Interest on bonds other than that payable to banks operating in Indonesia and government-approved pension funds is subject to withholding tax at 15%.
  
  Interest paid to a non-resident is subject to withholding tax of 20% or a lower applicable tax treaty rates.
  
• Income tax on dividend
  Dividends paid by a domestic corporate taxpayer to a corporate resident are subject to 15% withholding tax. Dividend payment to non-resident is subject to withholding tax of 20% or a lower applicable tax treaty rates.
  
• Sale of shares
  Sale of listed shares on Indonesian stock exchanges are subject to tax of 0.1% of the transaction value.
  
• Other taxes
  Stamp duty is tax on document. Stamp duty is applied on documents used in financial transactions, deeds, and receipts at rates ranging from IDR 3,000 to IDR 6,000 depending on the amount of the transaction or type of document.
  
  Value added tax is typically due on events involving the transfer of taxable goods or the provision of taxable services in the Indonesian Customs Area with rate of 10%.