The Indonesian banking system is regulated by Law No. 7 of 1992 on Banking as amended by Law No. 10 of 1998 (Banking Law), and, as of 31 January 2013, is supervised by a new independent financial institution called the Financial Services Authority (OJK) pursuant to Law No. 21 of 2011 concerning the Financial Services Authority.
Previously, the Indonesian banking system was supervised by Bank Indonesia, the Indonesian central bank. As Indonesia’s central bank, Bank Indonesia acted as the regulator and supervisor in the banking system and banking activities in Indonesia. This changed as of 31 December 2013, when several of Bank Indonesia’s banking supervision powers and functions were taken over by the OJK pursuant to Law No. 21 of 2011. As such, the OJK now issues and revokes licences to institutions and for certain banking activities, issues and revokes regulations, performs banking supervision and imposes sanctions on banks. Banking regulations issued by Bank Indonesia, however, are still applicable provided that they are not in conflict and have not yet been replaced by new regulations issued by the OJK. The OJK also took over the supervision and regulatory functions of the Capital Market and Financial Institutions Supervisory Body on 31 December 2012. Thus, in general, the OJK regulates and supervises banking and financing activities (including any activities in financial markets, insurance and pension funds), financing institutions and other types of financial services institutions.
The primary function of banks in Indonesia is to mobilise and channel funds from the public to support national development for the purpose of improving equitable distribution, economic growth, dynamic sustainable growth and dynamic sustainable national stability, all aimed at improving the welfare of the Indonesian people.
The Banking Law recognises two systems used in the banking system: banks that use the conventional banking system and principles (commercial bank) and banks that use shariah principles (shariah banks or Islamic banks). By category, Indonesian banks consist of commercial banks, locally known as ‘Bank Umum’, and rural banks, locally known as ‘Bank Pembangunan Rakyat’ or ‘BPR’.
Commercial banks carry out their business activities based on conventional and shariah principles with the ability to provide services in payment transactions, whereas rural banks carry out their business activities based on conventional or shariah principles without the ability to provide any service in payment transactions.
Commercial banks may only be established by an Indonesian citizen or an Indonesian legal entity, or a joint venture between an Indonesian citizen or an Indonesian legal entity and a foreign citizen or a foreign legal entity. Rural banks can only be established and owned by an Indonesian citizen, an Indonesian legal entity wholly owned by Indonesian citizens or a regional government, or jointly among these three parties.
In 2012, Bank Indonesia introduced a new rule for the implementation of structuring of bank ownership, which was aimed at enhancing good governance and bank soundness ratings. Accordingly, banks whose soundness ratings and governance are deemed to be strong will be exempted from this regulation as long as they successfully maintain strong governance and ratings.
This new rule was later complemented and updated by a set of regulations to regulate activities and bank network expansion on the basis of capital (also known as a ‘multi licensing system’) aimed at fostering the competitiveness of banks. On the basis of this new regulation, which came into force on 2 January 2013, commercial banks are categorised into four types depending upon their core capital size. The bigger the core capital, the wider the scope of the activities and network outreach of the banks.
Together with the regulatory regime for banking activities and networks, Bank Indonesia also introduced the Single Presence Policy amendment. The amendment is undertaken by reopening the option to establish a holding company.
II THE REGULATORY REGIME APPLICABLE TO BANKS
Prior to the OJK taking over banking authority and supervision, Bank Indonesia was working towards a better future for the Indonesian banking industry through implementation of the programmes under the Indonesian Banking Architecture (API). In this role, Bank Indonesia both initiated programmes and provided facilitation. The API was urgently needed to strengthen the fundamentals of the banking industry. The Asian financial crisis of 1997 exposed the institutional weaknesses in the banking industry, and the lack of proper management and an adequate supporting infrastructure. The weaknesses in the fundamentals of the national banking system not only posed challenges for the banking industry, but also for Bank Indonesia as the authority that was responsible for bank supervision.2
The API is a comprehensive, basic framework for the Indonesian banking system setting forth the direction, outline and working structures for the banking industry over the next five to 10 years.
Under the API, the policy direction for the future development of the banking industry is based on a vision of building a sound, strong and efficient banking system to create financial system stability for the promotion of national economic growth.3 The API consists of six major pillars containing the following objectives:
- a to establish a robust structure for the domestic banking system capable of meeting the needs of the public and promoting sustainable economic development;
- b to create an effective system for bank regulation and supervision in line with international standards;
- c to build up a strong, highly competitive banking industry that is resilient in the face of risks;
- d to ensure good corporate governance for the internal strengthening of the national banking industry;
- e to provide a complete range of infrastructures to support the creation of a healthy banking industry; and
- f to empower and protect consumers of banking services.
In its implementation, the programme is aimed at building stronger capitalisation in commercial banks (conventional and shariah) as part of strengthening banking capacity for business and risk management, development of information technology and expansion of business scale to support increased capacity for bank credit expansion.4 The programme to improve the capitalisation of commercial banks is expected to produce a more optimum structure for the banking system within the next 10 to 15 years, and this structure is envisaged as follows:
- a two or three banks with the potential to emerge as international banks possessing the capacity and ability to operate with an international presence and having total capital exceeding 50 trillion rupiah;
- b three to five national banks having a broad scope of business and operating nationwide with total capital of between 10 trillion rupiah and 50 trillion rupiah;
- c 30 to 50 banks operating as focused players operating in particular business segments according to the capability and competence of each banks. These banks will have capital of 100 billion rupiah up to 10 trillion rupiah; and
- d rural banks and banks with a limited scope of business having capital of less than 100 billion rupiah.5
With regard to banking operations, the Banking Law requires any parties intending to collect funds from the public in the form of deposits (funds entrusted to the bank by the public based on an agreement in the form of demand deposits, time deposits, certificate of deposits, savings, etc.) to first obtain an operating licence as a commercial bank or a rural bank from the OJK (formerly Bank Indonesia). Whoever collects funds from the public in the form of deposits without an operating licence from the OJK is subject to imprisonment for a minimum of five years up to a maximum of 15 years, and a fine of between 10 billion rupiah and 200 billion rupiah.
To obtain an operating licence as a commercial bank or a rural bank, the applicant is required to fulfil requirements concerning the following matters:
- a organisation and management structure;
- b capital;
- c ownership;
- d expertise in banking; and
- e feasibility of the business plan.
Further, a commercial bank may be established in any of the following legal forms: limited liability company, cooperative or regional government enterprise. A rural bank may be established under any of the following legal forms: regional development enterprise, cooperative, limited liability company or any other form of legal entity stipulated in a government regulation. The legal form of a representative office and a branch office of a bank whose head office is domiciled overseas (foreign bank) shall correspond to the legal form of the respective head office.
The multiple licensing system classifies all banks into four categories based on their capital level (BUKU):
- a BUKU 1 for banks with core capital less than 1 trillion rupiah;
- b BUKU 2 for banks with core capital between 1 trillion rupiah and 5 trillion rupiah;
- c BUKU 3 for banks with core capital between 5 trillion rupiah and 30 trillion rupiah; and
- d BUKU 4 for banks with core capital of at least 30 trillion rupiah.
Each BUKU has a clearly defined scope of activities. A lower BUKU only permits banks to offer basic banking services, whereas a higher BUKU permits commercial banks to have a wider scope and undertake more complex activities.
Essentially, the business activities carried out by a conventional commercial bank and shariah bank are as follows:
- a collection of funds;
- b disbursement of funds;
- c trade finance;
- d treasury;
- e foreign exchange;
- f agency and cooperation;
- g payment system and electronic banking activities;
- h capital participation;
- i temporary capital participation in the framework of credit saving (or financing saving for shariah banks);
- j other services; and
- k other common activities carried out by a bank insofar as they do not conflict with the applicable laws (or shariah principles for shariah banks).
Under the new multiple licensing system, the following business activities can be conducted by a conventional commercial bank and shariah bank depending on its BUKU.
BUKU 1 banks may only carry out the following basic banking services and activities:
- a business activities in rupiah:
• collecting of funds being basic products or activities;
• channelling of funds being basic product or activities;
• trade finance;
• activities with limited coverage to agency and cooperation;
• payment system and electronic banking activities with limited coverage;
• temporary capital participation in the framework of credit saving (or financing saving for shariah banks); and
• other services;
- b activities as a foreign exchange trader; and
- c other activities categorised as a basic product or activity in rupiah that are commonly conducted by a bank and do not conflict with the applicable laws (and shariah principles for shariah banks).
BUKU 2 banks may carry out broader business activities and limited capital investment, which include the following activities:
- a business activities in rupiah and foreign currencies:
• accumulating funds as conducted by banks under BUKU 1;
• channelling funds as conducted for banks under BUKU 1 with wider coverage;
• trade finance;
• limited treasury activity; and
• other services;
- b business activities as intended in BUKU 1 with wider coverage for agency and cooperation, payment system activities and electronic banking;
- c capital participation activity in financial institutions (or shariah financial institutions for shariah banks) in Indonesia;
- d temporary capital participation activity in the framework of credit saving (or financing saving for shariah banks); and
- e other common banking activities insofar as they do not conflict with the applicable laws (and shariah principles for shariah banks).
BUKU 3 banks can perform full business activities and capital investment, which include all of the above-mentioned basic banking business activities, either in rupiah or foreign currencies, and can have capital participation in financial institutions (or shariah financial institutions for shariah banks) in Indonesia and overseas, but only within Asia.
BUKU 4 banks can perform full business activities and broader capital investment, including all of the above-mentioned basic banking business activities, either in rupiah or foreign currencies, and can have capital participation in financial institutions (or shariah financial institutions for shariah banks) in Indonesia and all overseas areas with an amount larger than BUKU 3.
Further, the amount of capital participation that can be had by banks also depends on their BUKU: BUKU 2, a maximum of 15 per cent from the bank’s capital; BUKU 3, a maximum of 25 per cent from the bank’s capital; and BUKU 4, a maximum of 35 per cent from the bank’s capital.
Further, under the multiple licensing system, banks will be encouraged to foster the provision of financial services at affordable costs to support economic development in regions that are currently underserved by regulating the mechanism for opening bank office networks. Banks are being provided with incentive and disincentive mechanisms to expand their activities and branch office networks depending upon their allocation of core capital, regionalisation and level of efficiency. The incentives and disincentives are provided through the allocation of core capital required in a different manner for the various types of branch networks to be opened by banks (full branch, sub-branch and cash payment points) depending upon the zone and considering the efficiency level of the bank. Under the multiple licensing system, the territory is divided into six zones (zone 1 has the highest density of banks with a high coefficient, zone 6 has the lowest where the number of banks is still small and has the lowest coefficient). The core capital required for banks opening office networks in a zone with a high bank density (such as the Special Capital Region of Jakarta, West Java and Bali) must be higher than that for those with lower density (such as Lampung, West Sumatra, Maluku and West Papua). The zones are as follows:
- a Zone 1 (with coefficient 5) comprises the Special Capital Region of Jakarta and foreign countries;
- b Zone 2 (with coefficient 4) comprises West Java, Central Java, the Special Region of Yogyakarta, East Java and Bali;
- c Zone 3 (with coefficient 3) comprises East Kalimantan, the Riau Islands and North Sumatra;
- d Zone 4 (with coefficient 2) comprises Riau, South Sumatra, Central Kalimantan, South Kalimantan, North Sulawesi, South Sulawesi and Papua;
- e Zone 5 (with coefficient 5) comprises the Special Region of Aceh, Jambi, West Sumatra, Bangka Belitung, Bengkulu, Lampung, West Kalimantan and Southeast Sulawesi; and
- f Zone 6 (with coefficient 4) comprises West and East Nusa.6
A bank opening office networks in the form of a branch office or representative office and another office overseas is obligated to obtain a licence from the OJK. The opening of an office network other than the kind of office mentioned above must be reported to the OJK, and its consent must be given.
The opening of office networks overseas can only be conducted by BUKU 3 and BUKU 4 with the following provisions: BUKU 3 can open office networks overseas, but limited to Asia, while BUKU 4 can open office networks worldwide.
Regulatory capital and liquidity are further discussed in Section III, infra.
Each bank is required to guarantee public funds deposited in the bank concerned, and to protect deposits of the public, the bank concerned must be registered with the Deposit Protection Institution.
For rural banks, the permitted banking operations are as follows:
- a mobilising funds from the public in the form of deposits, comprising time deposits, savings and other equivalent forms of deposits;
- b extending credit;
- c providing financing and placing funds based on shariah principles, according to Bank Indonesia regulations;7 and
- d placing funds in Bank Indonesia certificates (SBIs), time deposits, certificates of deposits or savings in other banks.
Rural banks are prohibited from conducting any of the following activities:
- a accepting deposits in the form of demand deposits and participating in transactions;
- b conducting business in foreign exchange;
- c conducting equity participation; and
- d conducting insurance business.
Foreign banks in Indonesia may operate in the form of a branch, a subsidiary (either through direct investment or capital market investment) or a representative office. While representative offices do not conduct business activities, branches and subsidiaries play an active role in the domestic banking industry.
III PRUDENTIAL REGULATION
The Banking Law requires all banks in Indonesia to conduct their business operations according to the principle of economic democracy applying the prudential principle. Further, all banks are required to maintain soundness in accordance with the provisions concerning capital adequacy, asset quality, quality of management, liquidity, profitability, solvency and other aspects related to the operations of a bank.
The implementation of a good corporate governance system in the banking industry is based on five main principles:
- a transparency, which means openness in disclosing material and relevant information, and openness in the process of decision-making;
- b accountability, which means clarity of functions and implementation of the accountability of a bank’s bodies to ensure effective management;
- c responsibility, which means consistency between bank management and prevailing laws and regulations as well as prudential bank management principles;
- d independence, which means bank management in a professional manner without undue influence or pressure from any parties; and
- e fairness, which means justice and equality in fulfilling shareholders’ rights arising from agreements and prevailing laws and regulations.
In implementing these five principles, a bank shall refer to various regulations and minimum requirements as well as related guidance for good corporate governance implementation.
In providing funds to customers and their related parties, particularly if it involves funds of a large amount (large exposures), to avoid a bank’s business failure due to concentrated fund provision and to increase bank management’s independence from potential intervention by related parties, banks must implement prudential principles and risk management in providing funds by, inter alia, diversifying the portfolio of funds channelled. As part of the application of prudential principles and risk management, banks are required to have written policy guidelines and procedures on the provision of funds to related parties, large exposure and the provision of funds to other parties with an interest in the bank.
The scope of the policy guidelines and procedures covers at least:
- a standards and criteria for selection and assessment of the creditworthiness of the borrower and borrower’s group;
- b standards and criteria for the establishment of limits on the provision of funds;
- c a management information system for the provision of funds;
- d a monitoring system on the provision of funds; and
- e establishment of remedial actions to resolve any concentration of the provision of funds.
Written policy guidelines and procedures concerning the provision of funds shall apply at least the same or a greater degree of prudence as the policy and procedures for the implementation of credit risk management in general, and are reviewed periodically once every year. The written policy guidelines and procedures constitute an integral part of the policy, procedures and determination of credit risk as stipulated in Bank Indonesia regulations8 concerning the application of risk management for commercial banks.
With regard to the issuance of credit cards, the prudential regulations are to be implemented on the basis of the risk-management approach. Therefore, Bank Indonesia has not stipulated any specific rigid criteria for issuance of credit cards, such as minimum income limit, maximum credit limit and a limit on the number of cards that may be held by a person.
i Relationship with the prudential regulator
The OJK has powers, responsibilities and liabilities to carry out bank supervision by taking both preventive and repressive measures. On the other hand, a bank must formulate and implement an internal supervision system to ensure that the decision-making processes of the bank’s management are conducted in accordance with prudential principles. Considering that banks especially operate with funds from the public deposited in those banks based on trust, each bank shall be required to maintain its soundness and public trust.
To ensure that the prudential principle is consistently applied, all banks must submit to the OJK all information and explanations on their business, including annual balance sheets and profit and loss statements (audited by a public accountant) along with their explanations, as well as other periodical reports, according to the procedure stipulated by the prevailing banking law and regulations. On the other hand, the OJK, either periodically or at any time deemed necessary, has the right to audit banks. Thus, at the request of the OJK, banks shall be ready at any time for the examination of books and files they maintain, and provide assistance needed for the purpose of establishing the truthfulness of all information, documents and explanations reported by the banks concerned.
ii Management of banks
Being in the form of a legal entity, banks in Indonesia must be managed by a board of directors (BOD). The management conducted by the BOD will be supervised by a board of commissioners (BOC).
Authorities and responsibilities
In general, BODs shall be fully responsible for performing daily management functions. A BOD shall manage a bank in accordance with its articles of association and the prevailing laws and regulations. Furthermore, the BOD must implement good corporate governance principles in each of the bank’s business activities for all organisational levels or hierarchies. The BOD shall also present its annual report to all shareholders at the shareholders’ meeting.
Requirements and qualifications for directors
The following are the procedures and requirements for the nomination of a director:
- a any nomination for the replacement or appointment of BOD members to the shareholders’ meeting of the bank concerned must observe the recommendation from the remuneration and nomination committee;
- b the majority of BOD members must have at least five years’ experience working as bank executive officers;
- c each director must pass a ‘fit and proper test’ conducted by the OJK; and
- d the majority of BOD members must not have any family relationship with other members of the BOD or the BOC.
Upon their appointment, BOD members must comply with the following requirements:
- a all members of the BOD must reside in Indonesia; and
- b in the report on the implementation of good corporate governance, the BOD members must disclose the following:
• their share ownership in the bank concerned or in other local or overseas banks and companies if their shareholding reaches 5 per cent or more of the total capital in the bank or company concerned; and
• any financial association or family relationship with BOC members, other members of the BOD and the controlling shareholder of the bank concerned.
BOD members are prohibited from concurrently holding positions as a member of the supervisory board (or the BOC), management (BOD) or executive officer at another bank, company or institution, and from holding shares in other companies.
There is a compliance director in the BOD that is nominated from among the members of the BOD. This person is responsible for ensuring the bank’s compliance with the applicable laws and regulations, and has the following tasks and duties:
- a to formulate the strategy to support the bank’s compliance culture;
- b to propose the compliance policy or compliance principle to be stipulated by the BOD;
- c to stipulate the system and procedure of compliance that will be used for arranging the terms and guidance internally;
- d to ensure that all policies, terms, systems and procedures, and therefore the line of business carried out by the bank, comply with the applicable Bank Indonesia provisions and the applicable regulations;
- e to minimise the risk of bank compliance; and
- f to conduct any other task related to the compliance function.
In executing the above tasks, the compliance director must prevent the BOD from adopting policies and decisions deviating from regulations of the OJK (or Bank Indonesia, as the case may be) and other prevailing laws and regulations.
The compliance director can only be designated and dismissed by both the BOC and president director of the bank concerned with the prior approval of the OJK.
A member of the BOD or member of the management of the branch office of a foreign bank designated as a compliance director shall comply with at least the following requirements:
- a he or she concurrently does not hold a position as president director of a bank or head of the branch office of a foreign bank;
- b he or she is not in charge of operational activities, accounting or the internal audit unit;
- c he or she has knowledge of banking law and regulations, including the OJK’s regulations (or the applicable Bank Indonesia’s regulations) and other prevailing laws and regulations; and
- d he or she is capable of working independently.
Authorities and responsibilities
The responsibility of the BOC is to ensure the implementation of good corporate governance in each of the bank’s business activities on all organisational levels. The BOC must ensure that the BOD has taken follow-up actions on audit findings and recommendations from the bank’s internal audit work unit, external auditor, the OJK supervision result or other authorities’ supervision results.
Requirements and qualifications for commissioners
The following are the procedure and requirements for the nomination of a commissioner:
- a any nomination for a replacement of or appointment to the BOC at the shareholders’ meeting must observe the recommendation from the remuneration and nomination committee. If there is any conflict of interest from such nomination, the remuneration and nomination committee must disclose such conflict of interest;
- b at least 50 per cent of the total number of BOC members must serve as independent commissioners. Independent commissioners are members of the BOC who are not associated financially with, and also in terms of shares ownership, management or family relationship are not associated with, other BOC members, BOD members or the controlling shareholder. Persons who formerly served as BOD members or bank executive officers or any parties associated with the bank whose positions may interfere their capability of acting independently may not be appointed as independent commissioners until a one-year cooling-off period has lapsed;
- c they must pass the ‘fit and proper test’ conducted by the OJK; and
- d the majority of BOC members must not have any family relationship (up to the second degree) with other members of the BOC or with BOD members.
Upon their appointment, BOC members must ensure that the BOC complies with the following requirements:
- a at least one commissioner must reside in Indonesia;
- b in the report of implementation of good corporate governance, the BOC members must disclose the following:
• their share ownership in the bank concerned, or in other local or overseas banks and companies, if their shareholding reaches 5 per cent or more of the total capital in the bank or company concerned; and
• any financial association or family relationship with other BOC members, BOD members and the controlling shareholder of the bank concerned; and
- c the BOC must form an audit committee, a risk management committee, and a remuneration and nomination committee.
Holding concurrent positions and holding shares in other companies
Unlike BOD members, BOC members may concurrently hold a position as a member of the BOD or as an executive officer in one non-financial institution or company (local or overseas), or as a member of the BOD or an executive officer performing a supervisory function at one non-bank affiliate that is controlled by the bank.
Construction of the BOD and the BOC
The rules concerning the structure of the BOD pursuant to banking regulations are as follows: the BOD shall comprise at least three members; the BOD is chaired by a president director who must come from any party that is independent from the controlling shareholder; and at least one member of the BOD shall be appointed to serve as compliance director.
As for the BOC, the structure thereof must meet the following requirements: the BOC shall comprise at least three persons, but shall not exceed the number of BOD members; the BOC shall be chaired by a president commissioner; and the BOC shall consist of commissioners and independent commissioners comprising at least half of the total number of BOC members.
iii Regulatory capital and liquidity
A commercial bank in Indonesia must have authorised capital of at least 3 trillion rupiah. A bank conducting business based on shariah principles must have authorised capital of at least 1 trillion rupiah.
Under the Banking Law, a bank’s capital consists of core capital (Tier 1) and complementary capital (Tier 2). In its turn, core capital consists of:
- a common equity Tier 1, which encompasses:
• paid-up capital (which shall be subordinated over other capital components):
• that is issued and paid in full;
• that is permanent in nature;
• that is available to absorb losses that incurred before or during liquidation;
• the gain of which from compensation yields cannot be ascertained and cannot be accumulated inter-period;
• that is not protected or guaranteed by the bank or its subsidiaries; and
• that has the following characteristic of dividend or yield payment: it is derived from profit balance or profit of the current year, or both; has no exact value and is not related to the paid value or capital instrument; and has no preference feature; and
• the source of which is not the issuer bank, either directly or indirectly;
• disclosed reserve (i.e., losses incurred due to required periodic recalculations of compulsory employee benefit pension programmes are now to be deducted from the disclosed reserved amount), consisting of:
• additional factors, including agio, contribution capital, capital general reserve, profit from previous years, profit for the current year, surplus arrears of the description of financial statement, capital deposit fund, warrants issued as an incentive for the bank’s shareholders, stock options issued through employee compensation programmes and other comprehensive income (e.g., profit potency, surplus balance from revaluation of fixed assets); and
• deductible factors, including damna, losses from previous years, current year losses, shortage arrears of the description of financial statement, other comprehensive income (loss potency, shortage arrear between allocation of assets disposal (PPA) and allowance for impairment losses over the productive assets, shortage arrear between the adjustment total of the valuation result of the financial instruments in the trading book and based on the financial accounting standards and non-productive PPAs); and
- b additional Tier 1 (where the repurchase or principal payment of the Tier 1 capital is subject to the approval of the bank’s supervisors), which encompasses paid-up capital:
• that must be issued and paid in full;
• that has no duration and no conditions that require repayment by the bank in the future;
• that has no step-up feature;
• that has no share-conversion feature or write-down mechanisms in the event that the business of the bank is potentially disturbed (which must be clearly stated in the written agreement);
• that is subordinate in its nature at the time of liquidation (which must be clearly stated in the written agreement);
• the gain of which from compensation yields cannot be ascertained and cannot be accumulated inter-period;
• that is not protected or guaranteed by the bank or its subsidiaries;
• that has no dividend or yield payment feature that is sensitive to credit risk;
• that if attached with the call option feature must fulfil the following requirements: it can only be executed as early as five years after the issuance of capital instrument; and documentation of the issuance must state that the option can only be executed upon the approval of Bank Indonesia;
• that cannot be bought by the issuer bank or its subsidiaries;
• the source of which is not the issuer bank, either directly or indirectly;
• that has no feature that could inhibit the process of capital increase in future; and
• that is approved by Bank Indonesia as being counted as a capital component.
Complementary capital (Tier 2) cannot be higher than the core capital, and encompasses capital:
- a that is issued and paid in full;
- b that has five years’ duration or more and can only be repaid after obtaining approval from Bank Indonesia;
- c that has a share-conversion feature or write-down mechanism in the event that the business of the bank is potentially disturbed (which must be clearly stated in the written agreement);
- d that is subordinate in nature (which must be clearly stated in the written agreement);
- e the payment of principal or yield of which is suspended and accumulated inter-period if such payment results in the ratio of minimum capital, either individually or in consolidation, not fulfilling the requirement;
- f that is not protected or guaranteed by the bank or its subsidiary;
- g that has no dividend or yield payment feature that is sensitive to credit risk;
- h that has no step-up feature;
- i that if attached with the call-option feature fulfils the following requirements: it can only be executed as early as five years after the issuance of capital instrument; and documentation of the issuance states that the option can only be executed upon the approval of Bank Indonesia;
j that has no requirement on interest or principal payment acceleration that is stated in the documentation of issuance;
k that cannot be bought by the issuer bank or its subsidiaries;
l the source of which is not the issuer bank, either directly or indirectly; and
m that is approved by Bank Indonesia as being counted as a capital component.
As of 31 December 2010, the bank was required to maintain core capital (Tier 1) of at least 100 billion rupiah.
The 2016 OJK Regulation concerning minimum capital adequacy requirements adds requirements in relation to the characteristic of capital components as mentioned above. Capital instruments that have met the required capital adequacy ratio as at 31 December 2013 but that have yet to satisfy the above requirements will be treated as follows: any instruments that do not have an expiry date will be deemed complying capital components until 31 December 2018. After this date, such instruments may not be included in adequacy ratio calculations. Any instruments that have an expiry date will be deemed complying capital components and will be included in adequacy ratio calculations until their expiry date.
Permitted maximum shareholding in a local commercial bank
In 2012, Bank Indonesia introduced a regulation to limit the shareholding in a local commercial bank based on the category of shareholders and the relationship between the shareholders. Updated regulations were issued by the OJK in December 2016 and March 2017. The maximum shareholding that each category of shareholder may hold shall be as follows: an individual may hold up to 20 per cent of a commercial bank’s capital (while in a shariah bank’s capital, individuals may hold up to 25 per cent); a non-financial institution (legal entity) may hold up to 30 per cent of a bank’s capital; and a bank or non-bank financial institution may hold up to 40 per cent of a bank’s capital.
Another parameter to determine a maximum shareholding permitted to be held by shareholders is the relationship between the shareholders, which may take any of the following forms: relation of ownership between the shareholders; relationship by blood within the second degree between the shareholders; or if there is any cooperation or any acting in concert to exercise control of the bank with or without a written agreement with another party, with the result of a jointly owned option right or other rights to own shares in the bank.
If any of the above conditions exist between the shareholders in a bank, those shareholders will be regarded as ‘one party’. As a consequence, the maximum shareholding permitted to be held by ‘those parties being regarded as one party’ shall be as follows: the total shareholding of the ‘one party’ must be up to the permitted maximum shares ownership of one shareholder having the highest shareholding among those parties; and the highest share ownership permitted to be held by those shareholders or any of those shareholders must be within the permitted maximum shareholding for the respective shareholders. Further, the OJK regulations concerning controlling shareholder or shareholders will also apply to any shareholders of the bank that meet the criteria as controlling shareholder or shareholders.
Shares ownership by a bank-shareholder
A bank-investor may own shares above the 40 per cent maximum threshold (after initially acquiring 40 per cent shares) so long as it has secured approval from the OJK after all of the following conditions have been satisfied:
- a it maintains bank soundness level 1 or 2, or its equivalent for an overseas bank;
- b it has complied with the mandatory minimum capital regulations in accordance with its risk profile;
- c its core capital must be at least 6 per cent;
- d it is a publicly listed bank;
- e for overseas bank only: it has obtained a recommendation from the appropriate authorities where the overseas bank is domiciled;
- f it commits to buying commercial paper (convertible commercial paper) issued by the target bank;
- g it commits to own the target bank for at least a certain period of time; and
- h it commits to support economic development in Indonesia through its ownership in the target bank.
In addition to the above, overseas companies or parties that are potentially becoming controlling shareholders must have rating of at least:
- a for a bank: one notch above the lowest investment grade;
- b for a non-bank financial institution: two notches above the lowest investment grade; and
- c for a non-financial institution: three notches above the lowest investment grade.
The criteria of the target bank where the investor bank can own more than 40 per cent are as follows: within five years of the investor bank owning the target bank as permitted by the OJK, the target bank must go public so that 20 per cent of its capital will be owned by the public; and it is required to have an approval for the issuance of convertible (into equity) commercial paper.
Transition provision for the mandatory enforcement of maximum shareholdings
Until 1 January 2019, all the shareholders of a local commercial bank must adjust their shareholding to the permitted maximum threshold if the result of an assessment of their bank soundness or good corporate governance (GCG) during the period of assessment to December 2013 shows that their bank soundness level is 3, 4 or 5.
All shareholders currently obliged to adjust their shareholding to the permitted maximum threshold based on a bank soundness level of 1 or 2 during the period of assessment of the bank soundness level or GCG to December 2013 where, as of 1 January 2014 until the date prior to the effectiveness of these current OJK regulations, (1) the result of the bank’s soundness level or GCG assessment goes down to 3, 4 or 5 for the third consecutive period of assessment, or (2) where the shareholders concerned, at their own initiative, sell their shares to a third party, such shareholders remain obliged to adjust their shareholding to the permitted maximum threshold within five years as of the last assessment or after such shares sale. The bank is required to prepare and submit an action plan and a report of the implementation thereof with respect to such adjustment.
Failure to comply with the maximum shareholding requirement
The consequences of a commercial bank whose shareholders fail to comply with the maximum shareholding requirement are as follows:
- a it must only record the maximum shareholding that is permitted to be held by such shareholders;
- b it must ensure that the voting right of the respective shareholders and the quorum requirement at the shareholders’ meeting will represent only up to their permitted maximum shareholding (i.e., X will only be permitted to have voting rights for a maximum of 40 per cent of the total shares);
- c distribution of dividend for any ‘excess shares’ must be postponed until the shareholders concerned have adjusted their shareholding; and
- d it is prohibited from providing or revolving the term of fund facilities to the shareholders concerned, including to a party associated with such shareholders.
The OJK, however, at its sole discretion, may approve that shareholders can own shares above their maximum permitted shareholding for a certain period of time. Further, the OJK may require the shareholder or shareholders concerned to ensure that the bank carries out a merger or consolidation.
Single presence policy (SPP)
The Indonesian banking system SPP provides that any party is only allowed to be the controlling shareholder in one bank, either a commercial bank or shariah bank, excluding a branch of a foreign bank. The new amendment of the Bank Indonesia Regulations on Single Presence Policy, which was issued in December 2012, provides an exemption to certain parties: controlling shareholders in two banks with different banking principles (a conventional bank and a shariah bank); and controlling shareholders in two banks, one of which is a joint-venture bank.
The above-mentioned Regulations stipulate that those parties that have become the controlling shareholder in more than one bank are required to adjust their ownership structure in the following manner: by merging or consolidating the banks under their control; setting up a bank holding company; or by forming a holding function where the controlling shareholder has to function as a bank to directly consolidate or control all activities of the banks under their control.
A bank holding company must be in the form of a limited liability company established in Indonesia and subject to Indonesian laws, and can be either a bank holding company or a financial holding company. A bank holding company can only engage in participation business activities, which includes providing management services. In the organisational structure, it must be one level above the banks under its direct control.
The holding function can only conducted by a controlling shareholder as a bank established as an Indonesian legal entity or by the government. The holding function must be led by one member of the BOD of a bank being a controlling shareholder or an official appointed by the highest governmental authority.
The amended SPP was issued for the purpose of harmonising the SPP with the current Bank Indonesia regulations on share ownership in commercial banks and the banking activities and network expansion based on capital.
IV CONDUCT OF BUSINESS
Under the Indonesian Banking Law and regulations, banks in Indonesia are prohibited from disclosing any information on their customers to third parties. The exception to this banking secrecy is where such disclosure needs to be made for certain purposes (i.e., tax purposes, settlement of a bank’s receivables, criminal proceedings, civil proceedings involving a bank and its customers, interbank exchange of information, or by virtue of application, approval or power of attorney from the respective customer, or on application of the legal heirs of a deceased customer).
A bank is required to obtain written consent from customers if it intends to provide or distribute personal customer data to other parties for commercial purposes, unless otherwise stipulated in the applicable laws and regulations. In requesting such consent, the bank must first explain the purpose and consequences of the provision or distribution of the customer’s personal data to other parties. The bank may request written consent before or after the customer has conducted a transaction pertaining to a bank product. If the bank intends to use the personal data of an individual or a group of persons obtained from another party for commercial purposes, the bank must obtain a written guarantee from such other party containing the written consent of the individual or group of persons for distribution of their personal data.
Further, regarding card-based payment instrument activities, the applicable banking regulations provide that in the event the principal,9 the issuer,10 the acquirer,11 and the clearing and settlement operator have a cooperation arrangement with any third party, then the principal, the issuer, the acquirer, and the clearing and settlement operator must:
- a utilise a secure and efficient system;
- b maintain and enhance the security of their technology;
- c produce standard procedures for their card-based payment instrument activities;
- d ensure the security and secrecy of data;
- e perform information technology audits regularly; and
- f ensure that parties they are cooperating with are also secure and efficient, provable by IT audit reports and relevant certification.
Issuers are prohibited from providing any information or data of cardholders to another party without their written consent. The issuer may exchange information or data with all other issuers provided that such data or information are related to a cardholders’ blacklist, and such exchange of information can only be made through an information management centre. Further, the acquirer exchanges information or data with all other acquirers concerning merchants performing actions inflicting losses, and proposes the inclusion of such merchants in a merchants’ blacklist.
Outsourcing and offshoring often involves transfers of personal data to third-party service providers, thus making an analysis of relevant data privacy laws and regulations necessary. Bank secrecy law adds a further layer of potential complexity to outsourcing and offshoring involving the disclosure of customer information to service providers. With respect to the enhancement of security for card-based payment instruments, the OJK provides that the use of chip technology standards as an effort to enhance card security must be conducted under the following provisions:
- a for credit cards that use international networks (global networks), the chip technology standard and system or application used must refer to the applicable standard and system or application of those required by the principal, as the network holder of the card;
- b for credit cards that use the domestic network, the chip technology standard for the card can refer to the applicable standard for cards that use international networks (global networks) as intended in (a) above, whereas the utilisation of a standard system or application (such as electronic data capture) must be adjusted so that it can process such cards with chip technology; and
- c ATM or debit cards that are issued in Indonesia must use chip technology that refers to a standard that has been agreed by the industry.
Besides the foregoing, the enhancement of card-based payment instruments also takes place through the utilisation of personal identification numbers (PINs) with a minimum of six digits. Issuers of credit cards in Indonesia had to implement PIN technology no later than 31 December 2015, and all ATM or debit cards issued in Indonesia must use PIN technology.
Further, as for cards that are part of the network of international principals, personalisation of cards must be carried out at companies certified by such principals.
The acquirer must possess proof of the reliability and security of the system used by other parties, as evidenced by, inter alia, the result of an audit on information technology from an independent auditor; or the result of certification made by the principal, if required by the principal.
i Restrictions on the functions that may be outsourced
In principle, ‘core functions’ cannot usually be outsourced, whereas ‘non-core functions’ can be outsourced subject to OJK (formerly Bank Indonesia) restrictions. Back-office functions such as information technology, infrastructure, human resources and finance and accounting are likely to be characterised as ‘non-core’ activities. Bank Indonesia allows the outsourcing of non-core functions such as card moulding, card personalisation, document distribution, marketing, invoicing and system operation activities. In using the services of third parties (switching companies, sales agents, debt collectors, etc.), the principal, the issuer, the acquirer and the clearing and settlement operator must:
- a report their plan or the realisation or implementation of their plan of cooperation with such third parties within 10 working days as of the date when the cooperation agreement is signed to Bank Indonesia (now the OJK);
- b possess proof on the reliability and security of the system used by the other party as evidenced by, inter alia, results of an audit on information technology from an independent auditor, and results of certification made by the principal, if required by the principal; and
- c require such third parties to maintain data confidentiality.
Further, a bank that outsources its functions must make a report on such outsourcing to the OJK, which consists of a report on the outsourcing plan, or a report on an amendment or addition to an outsourcing plan. A report on the outsourcing plan must be submitted every 31 December, whereas a report on an amendment or addition to an outsourcing plan must be submitted on 30 June of the current year.
A report on outsourcing problems must be submitted no later than seven working days after any problem is identified.
ii Potential sources of civil, criminal and regulatory liability, and sanctions imposed by the OJK for violation of banking confidentiality
There are no specific laws covering data protection. In general, the Indonesian Human Rights Law12 protects individuals from interference with their correspondence, including electronic communications, unless required by court order or governmental authority in accordance with the applicable laws.
Law No. 36 of 1999 on Telecommunications requires that a telecommunications service operator is obliged to keep confidential the information transmitted and received by a telecommunications services subscriber through telecommunications networks and telecommunications services that it is providing, except for the purposes of criminal proceedings.
Further, the Electronic Information and Transactions Law13 provides that the use of any information through electronic media that involves personal data of a person must be made with the consent of the person concerned, unless provided otherwise by laws and regulations. Personal data (e.g., the rights to enjoy one’s personal life and be free from any invasion, to communicate with other persons without surveillance, and to inspect access to information about the personal life of and data on individuals) are part of the privacy rights to be protected. Any person whose privacy rights are infringed may lodge a claim for damages incurred under this Law.
The Indonesian Code of Criminal Procedure14 gives the police permission to open private mail sent via post and telecommunications offices, with a special permit of the chief justice of the district court (Article 47). Article 49 of the Code states that the investigator is required, on oath of office, to keep the contents of such letter strictly confidential.
Under the Banking Law, if a person intentionally forces a bank or its affiliated companies to disclose secret information without written approval from Bank Indonesia (now the OJK), the offending person may be sentenced to imprisonment for two to four years with a fine of between 10 billion rupiah and 200 billion rupiah. Members of the BOC, a bank’s employees and other affiliated parties who intentionally disclose any secret information will be sentenced to imprisonment for two to four years with a fine of between 4 billion rupiah and 8 billion rupiah.
To support a smooth functioning payment system in Indonesia, in the past Bank Indonesia implemented a Bank Indonesia – real-time gross settlement system (BI-RTGS system) and Bank Indonesia national clearing system. To avoid gridlock in the BI-RTGS system, which might jeopardise the stability of the financial system, Bank Indonesia provides an intraday liquidity facility (FLI) for commercial banks that are BI-RTGS system participants. Further, to anticipate the possibility of banks failing to fulfil their obligations as participants in the Bank Indonesia national clearing system, the provision of the FLI also provides for final settlement of debit clearing to commercial banks.
Further, to overcome liquidity problems having systemic impacts, in the performance of its function as the lender of last resort and based on the applicable banking law and regulations, Bank Indonesia is authorised to provide emergency funding facilities to commercial banks to prevent a financial crisis.
During the 1997 financial crisis, Bank Indonesia provided liquidity support (i.e., funding provided by Bank Indonesia to banks suffering a liquidity shortfall as a result of negative net cash flow) to many banks experiencing difficulties. Liquidity support can be extended on varying terms depending on the precise nature of the liquidity problems the banks face.15 As lender of last resort and guardian of the payments system, Bank Indonesia had introduced various schemes of liquidity support.
Bank Indonesia liquidity support includes all lending by Bank Indonesia to the banking sector other than Bank Indonesia liquidity credits (KLBI). KLBI are loans provided to commercial banks at subsidised interest rates to support government programmes, such as finance for small and medium-sized enterprises, cooperatives and the National Logistics Agency.
Bank Indonesia employs numerous facilities to provide liquidity to banks, which can be grouped into the following categories:16
- a liquidity support to banks suffering shortfalls due to unexpected net cash outflows;
- b liquidity support through open market operations. This facility involved Bank Indonesia rediscounting promissory notes or other debt instruments of commercial banks (known collectively as Surat Berharga Pasar Uang or ‘SBPU’) either through periodic auctions or through direct deals with banks in need;
- c liquidity support in the context of bank rescues or ‘nursing programmes’. This involved emergency and subordinated loans from Bank Indonesia to problem banks that are in the process of being restructured through mergers or acquisitions;
- d liquidity support to banks facing runs, provided to stabilise the banking industry and the payments system. This facility allows banks to overdraw their accounts with Bank Indonesia without being excluded from the clearing (the daily process of adjusting each bank’s balance in its clearing account with Bank Indonesia after recording the impact of all cheques and other payment orders drawn against it or in its favour); and
- e liquidity support provided to defend market confidence in the banking sector. These facilities are in the form of advances by Bank Indonesia (on behalf of the government) to compensate banks for taking over deposits previously held at other banks that were to be liquidated, and to pay Indonesian banks’ arrears to their foreign counterparts in relation to trade financing and interbank debt exchange offers.
i Intraday liquidity facility
FLI is a fund provision by Bank Indonesia for banks participating in the BI-RTGS system and participants in the Bank Indonesia national clearing system, which is executed by way of a repurchase agreement of securities that is to be settled on same day as the day of use.
A bank can obtain FLI in the form of FLI – RTGS (i.e., FLI to overcome liquidity problems of the bank that occurred during operational hours of BI-RTGS system) and FLI – clearing (i.e., FLI to overcome liquidity problems of the bank that occurred during final settlement on the debit clearing outcome) after signing an agreement on the use of FLI and submitting required supporting documents to Bank Indonesia. A bank is entitled to use FLI if it meets the following requirements:
- a it is in possession of securities that can be repurchased to Bank Indonesia in the form of an SBI, government bond or other securities stipulated by Bank Indonesia;
- b a sanction is not being imposed in the form of suspension as a bank participant of BI-RTGS or dismissal as a bank clearing participant; and
- c having the status of an active participant of Bank Indonesia – scripless securities settlement system.
ii Emergency funding facility (FPD)
An FPD is provided by Bank Indonesia as a funding source for crisis prevention and handling. FPD will be provided in the event that the bank is unable to acquire funds to overcome liquidity difficulties from other fund sources. A liquidity difficulty is a difficulty in short-term funding encountered by a bank caused by a smaller inflow of cash compared with cash outflow (mismatch), resulting in a negative account balance.
Banks can submit a proposal to get FPD from Bank Indonesia. The bank that submits the FPD proposal must deliver the main collateral and additional collateral. The main collateral shall be in the form of available bank assets prioritised from the most liquid assets and having a certain quality. The additional collateral shall be in the form of assets of controlling shareholders. A bank receiving FPD is obliged to submit an action plan, realisation of action plan and daily liquidity report to Bank Indonesia.
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
‘Acquisition’ is defined under banking regulations as ‘any action to take over the shares of a commercial bank, which causes transfer of control to the acquiring party’. A transfer of control is deemed to have occurred when the share ownership of the acquiring party is higher than 25 per cent of the total shares of the banks that have been issued and have valid voting rights; or when the share ownership of the acquiring party is equal to or less than 25 per cent of the total shares of the bank, which have been issued and have valid voting rights, but the acquiring party has the power and authority to directly or indirectly determine the management and policy of the bank. Acquisitions require prior approval from the OJK.
In this respect, it should be noted that in the event there is a transaction where a purchaser acquires between 5 and 25 per cent of the bank’s issued shares and such share acquisition is not aimed at having control over the target bank, then such transaction, including data on the purchaser, has to be reported to the OJK (but does not necessarily require an approval from the OJK) through the BOD of the bank within 10 days as of the registration of the shares in the bank’s share registrar. Note that, pursuant to the 2012 Bank Indonesia regulation on the permitted maximum shareholding in a local commercial bank, the maximum shareholding that each category of shareholder may hold is as follows: an individual may hold up to 20 per cent of the bank’s capital; a non-financial institution (legal entity) may hold up to 30 per cent of the bank’s capital; and a bank or non-bank financial institution may hold up to 40 per cent of the bank’s capital. Any party wishing to hold more than the foregoing permitted shareholding must first obtain an approval from the OJK after certain requirements have been satisfied.
Any sale and purchase of shares of a bank that is not intended to be registered in the bank’s share registrar (i.e., purchase of shares for trading only (portfolio investment)) does not require reporting to or approval from the OJK.
ii Transfers of banking business
A bank acquisition usually includes a transfer of all or part of the banking business comprising deposits, and possibly also loan arrangements and other assets to the acquirer.
There are basically three main types of assignment under Indonesian law: novation, cessie and subrogation. As Indonesian law recognises freedom of contract, other methods of assignment are also possible to the extent that such assignment does not breach the existing regulatory regime, public order or good morals.
In principle, a novation is a three-party (tripartite) agreement, replacing an old agreement with a new one. Novation may be chosen out of the following three forms, with the new agreement replacing:
- a the old agreement itself (without changing the debtor or creditor, and only changing several terms and conditions);
- b the creditor (creating a new creditor); or
- c the debtor (creating a new debtor).
A novation under (b) or (c) requires the involvement of all parties, both old and new. As for novation that involves a new agreement, any related agreements made under the old agreement disappear at the moment of the crystallisation of the new agreement unless expressly stated otherwise.
Based on the Indonesian Civil Code, any assignment by way of cessie must meet the following requirements: a delivery of debts (receivables) on name and other intangibles by means of an authentic or private deed; and the debtor must be notified or has accepted or acknowledged the transfer in writing.
The delivery of debts (receivables) on bearer instruments must be by transfer, and for debts on order by transfer and endorsement of the document.
Subrogation is the substitution of one party by another whose debt the party pays. The initiative for a subrogation may come from either the creditor or debtor. The creditor may appoint another party to replace his or her position as creditor, or the debtor may designate a party to pay the debt (creating a new relationship between the new debtor and the original creditor).
VII THE YEAR IN REVIEW
A new bank ownership structure was initially introduced in mid-2012 that basically limits the shareholding in local banks based on the category of shareholders and the relationship between the shareholders. The maximum shareholding that each category of shareholder may hold shall be as follows: an individual may hold up to 20 per cent of the bank’s capital; a non-financial institution (legal entity) may hold up to 30 per cent of the bank’s capital; and a bank or non-bank financial institution may hold up to 40 per cent of the bank’s capital.
At the end of 2012, Bank Indonesia introduced a new rule to regulate activities and bank networks’ expansion on the basis of capital or the multi-licensing regime, which was later updated and complemented by a set of new regulations issued by OJK. Under this regulation, which came into force early January 2013, commercial banks are categorised into four types depending upon their core capital (or Tier 1 capital) size. The larger the core capital, the wider the scope of the activities and network outreach of the banks. Further, the amendment of the SPP was issued by Bank Indonesia to harmonise the policy with newly issued regulations concerning share ownership in a commercial bank and banking activities and network expansion based on capital. With the amended SPP, strategic investors currently holding positions as controlling shareholders in a particular bank are permitted to become controlling shareholders in other banks without the obligation to exercise the merger and consolidation of banks under their control.
Since 2016, the OJK has issued and updated policy directions and new regulations concerning, inter alia, shares ownership in commercial banks, good governance, a fit and proper test for prospective controlling shareholders, directors and commissioners of a bank, financial services without offices (virtual offices), capital adequacy ratio for shariah banking, and asset quality of shariah banks and shariah business units. Regulations on consumer protection in the financial sector were issued in 2013 and 2014.
A draft Banking Bill has been on the House of Representative’s agenda since 2016; however, the Bill has not made significant progress since. The Bill will be discussed again and is expected to be passed in 2017. The discussion will probably focus on material provisions in the banking sector, such as bank establishments, permitted activities of commercial and rural banks, bank secrecy and exemptions thereto, and consumer protection.
With regard to Indonesia’s banking consolidation policy, in the past three years, the trend of banking consolidation was dominated by the acquisition of local banks by foreign investors, followed by the merger of the acquired two local banks. Recently, the OJK approved the acquisitions of local banks by foreign investors, and the merger of the local banks. Such trend will likely to continue this year, and culminate in line with the financial authorities’ policy to reduce the number of banks, and to encourage major banks, including state-owned banks, to consolidate in 2017.
VIII OUTLOOK and CONCLUSIONS
As mentioned in Section I, supra, due to various problems and challenges in the economy in the past Bank Indonesia, when it was responsible for the supervision of all banks, was called upon to immediately make efficient every aspect of the economy to improve competitiveness. Improvements in the ease of doing business, harmonisation of regulation and reforms of bureaucracy were important aspects that Bank Indonesia, as the central bank, addressed. During 2012 and early 2013, Bank Indonesia launched a number of policy measures. Further, in an effort to develop an efficient and innovative economy with sustainable growth, the Governor of Bank Indonesia suggested that the banking industry must not neglect the need for equal access to opportunities for every layer of society (inclusiveness).
Since January 2014, the OJK has been the pre-eminent institution controlling the banking industry, the capital market, and insurance and pension-financing agencies. In the banking sector, the OJK has the function, duty and authority to regulate and supervise the banking sector, which includes controlling and managing approvals for the establishment and operation of all banks.
The OJK may face many challenges, as it will control a vast number of companies and institutions. In addition, the OJK has much work to do, inter alia, to harmonise regulations (new and old) and make them up to date in relation to the current state of the financial and banking sectors. The OJK’s main function is to promote and organise a system of regulations and supervision that is integrated into the overall activities of the financial services sector.
To facilitate and optimise cooperation and coordination between Bank Indonesia and the OJK, in 2013 Bank Indonesia and the OJK signed the Joint Decree on Cooperation and Coordination to Support Task Implementation of Bank Indonesia and the OJK on 18 October 2013.17 Further, a number of cooperation fora have been established, such as the Macroprudential and Microprudential Coordination Forum (FKMM) and the Coordination Forum for Exchange of Information and Reporting System, while the Joint Implementation Guidelines on the Mechanism of Cooperation and Coordination of Bank Indonesia and the OJK have also been issued.
According to the executive director of Bank Indonesia’s communications department, the Joint Decree is the foundation for optimising the coordination of the performance of the functions, duties and authorities of the two institutions resulting from the transfer of regulation and supervision of the banking sector from Bank Indonesia to the OJK, which began on 31 December 2013. Through successful cooperation between the two institutions, it can be expected that various measures can be implemented in a systematic and harmonised way. This is important in maintaining the resilience and stability of the monetary and financial system in Indonesia.
1 Yanny M Suryaretina is a partner at Ali Budiardjo, Nugroho, Reksodiputro.
2 The Indonesian Banking Architecture, Bank Indonesia, www.bi.go.id/web/en/Perbankan/Arsitektur+
3 Miranda Gultom, Senior Deputy Governor, Bank Indonesia: ‘Indonesia’s banking industry: progress to date’. Country paper for BIS Deputy Governors’ Meeting, Basel, 8–9 December 2005, p. 243.
4 Structural Reinforcement of the National Banking System Program, the Indonesian Financial Service Authority: www.ojk.go.id/en/kanal/perbankan/arsitektur-perbankan-indonesia/Pages/Struktur-Perbankan.aspx.
6 Indonesia Banking Booklet 2016, Vol. 3 (March 2016), The Indonesia Financial Services Authority (Banking Licensing and Information Department), pp. 183–4.
7 Upon Law No. 21 of 2011 concerning the Financial Services Authority coming into effect, the Banking Law and its implementing regulations, including Bank Indonesia regulations, remain valid to the extent that they are not in contravention of and not yet replaced by this Law.
9 A bank or non-bank institution responsible for the management of the system or the network of its members (issuer or acquirer), or both, in card-based payment instrument activities.
10 A bank or non-bank institution that issues card-based payment instruments.
11 A bank or non-bank institution that has cooperation arrangements with merchants who are able to process data of card-based payment instruments issued by another party.
12 Law No. 39 of 1999.
13 Law No. 11 of 208.
14 Act No. 8 of 1981.
15 Djiwandono, Soedradjad, ‘Liquidity Support to Banks during Indonesia’s Financial Crisis’, Bulletin of Indonesian Economic Studies, Vol. 40, No. 1, 2004: 59–75.
17 ‘Anticipating Global Challenges, BI and OJK Strengthen Cooperation’, 18 October 2013. Minister of Finance, Republic of Indonesia, www.kemenkeu.go.id/en/Berita/anticipating-global-challenges-bi-and-ojk-