1 Bank Finance and Regulation Survey INDONESIA Ali Budiardjo, Nugroho, Reksodiputro I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1) Applicable laws and regulation. Provide a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them. Main laws and regulations referring to the supervision and control of banks and financial institutions are as follows: 1. Law No. 7 of 1992 as amended by Law No 10 of concerning Banking ( Law No. 7 ). This Law No. 7 regulates conventional banking and also Syria (Islamic) principles in banking, including its authorization and operational requirements, obligations, permitted and prohibited activities. This Law No. 7 also establishes penalties in connection with violations of the law which include warning, fines, disqualifications and revocation of the bank s license to operate as a financial institution. 2. Law Number 23 of 1999 as amended by Law Number 3 of 2004 concerning Bank Indonesia ( Law No. 23 ). This Law No. 23 regulates the purposes, powers, and functions of Bank Indonesia, as the central bank of the Republic of Indonesia. 3. Presidential Decree Number 61 of 1988, concerning Financial Institutions ( Presidential Decree ). This Presidential Decree regulates Financial Institutions which are entities that carry out finance activities in the form of provision of funds or capital goods by indirectly collecting funds from the public, such as leasing, venture capital, securities trading, factoring, credit card business and consumer financing. Specifically, this Presidential Decree regulates business fields and establishment of Financial Institutions, restriction and supervision of Financial Institutions. 4. Law Number 2 of 1992 concerning Insurance Business ( Law No. 2 ). This Law No. 2 regulates the general requirements for insurance company, such as scope of insurance business, types of insurance business, ownership and licenses of insurance business, etc. 5. Law Number 8 of 1995 concerning Capital Market ( Law No. 8 ). This Law No. 8 regulates and extends the authority of Capital Market Supervisory Agency (Badan Pengawas Pasar Modal or Bapepam ) in the fields of regulation, development, supervision and law
2 enforcement. This Law No. 8 also clarifies the authority and responsibilities of self-regulatory organizations, capital market institutions and professionals and firms conducting business in capital markets. 6. Law Number 11 of 1992 concerning Pension Funds ( Law No. 11 ). This Law No. 11 regulates employer s pension funds and pension funds of financial institutions, including its establishment and procedure, management of pension funds, contribution of pension funds, rights of participants, dissolution and settlement of pension funds, development and supervision, also penalties in connection with violation of this Law. 2) Entities/Authorities in charge of the control and supervision. Purposes, powers and functions of each of them- their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc). Entity/Authority in charge of the control and supervision: 1. Bank Indonesia ( BI ) is the central bank of the Republic of Indonesia. Its goal is to achieve and maintain the stable value of the Rupiah. To achieve this goal, BI conducts monetary policy on a sustained, consistent, and transparent basis, taking into account the general economic policies of the Indonesian Government. The tasks of BI are to prescribe and to implement the monetary policy, to regulate and safeguard the smoothness of the payment system, and to regulate and supervise banks. In establishing and implementing money policy, BI has the powers to establish monetary targets, taking into account the inflation target and exercise monetary control. BI is an independent state institution, which is free from any interference of the Government and/or other parties. 2. Bapepam is granted the authority and responsibilities to provides guidance, regulates and performs day-to-day supervision of the capital market. Bapepam reports and is responsible to the Minister of Finance of the Republic of Indonesia. In providing the guidance, regulation and supervision, Bapepam acts with the purpose of ensuring that the capital market is orderly, fair, and efficient and that the interests of investors and the public are protected. 3. Ministry of Finance, in this case represented by the Minister of Finance, is in charge of Financial Institutions*, Insurance Companies, and Pension Funds. a. On Financial Institutions*, the Minister of Finance has the authority to supervise and guide the business operations of Financial Companies, and grant business license to the Financial Institutions. b. On Insurance Companies, the Minister of Finance has the authority to grant business license for Insurance Companies, and impose sanction, in the form of warning, restriction of business activity, or revocation of business license of Insurance Company. c. On Pension Funds, the Minister of Finance has the authority to ratify the establishment of Pension Funds and regulate such other matters, such as, stipulating the requirements for person or business entity which can be appointed as management of Pension Funds, providing guidance and supervision of the employer s pension funds and pension funds of financial institutions and imposing administrative sanctions. *Note: As part of the ongoing reorganization of the Ministry of Finance, and in effort to centralize regulation and strengthen oversight of the non-bank financial sectors, the Government has approved a merger of Bapepam with the Ministry of Finance s Directorate General of Financial Institutions. The new agency (which is still in process) will assume the responsibilities currently held by the Directorate General of Financial Institutions and Bapepam.
3 3) Describe briefly the activities under supervision and give a list the different types of licenses available. 1. The activities under the supervision of Bank Indonesia ( BI ): a. The establishment of a Bank: BI grants and revokes the business license of banks. BI grants the license on the opening, closing, and the changing of the address of a bank s office. BI provides the approval on ownership and management of banks, and it also grants license to banks to conduct certain business activities. b. Foreign exchange transactions: BI implements the exchange rate policy in accordance with the prescribed exchange rate system; c. Payment system services: BI shall, in regulating and safeguarding the smoothness of the payment system, be authorized to implement and grant approval and license of the arrangement of the payment system service, to require the operator of the payment system service to submit reports on its activities, and to determine the use of payment instruments; and d. Interbank clearing systems. BI has the authority to grant business licenses to banks to operate as a commercial bank, rural bank or syrah bank and moneychangers. 2. The activities under the supervision of Bapepam: In general, Bapepam provides guidance, regulations and perform day-to-day supervision of the capital market activities. Such supervision may be preventive in the form of regulations, guidelines, guidance and directions, or remedial in the form of inspections, investigations and the imposition of sanctions. In order to carry out such tasks, Bapepam shall have authority to grant: a. business licenses to Securities Exchanges, Clearing Guarantee Institutions, a Central Securities Depository, Investment Funds, Securities Companies, Investment Advisors, and Securities Administration Agencies; b. individual licenses to Underwriter s Representatives, Broker-Dealer s Representatives, and Investment Manager s Representatives; and c. approvals to Custodian banks. 3. The activities under the supervision of the Minister of Finance*: The Minister of Finance supervises and provides guidelines of the business operations carried out by the Financial Institutions, which are, among others: leasing, venture capital, securities trading, factoring, credit card business and consumer finance. To carry out the above business operations, the respective party must first obtain a business license from the Minister of Finance. The Minister of Finance also ratifies and supervises the establishment and business operation of Insurance Companies and Pension Funds. Such supervision covers the supervision of management of pension funds assets and implementation of pension s programs.
4 *Note: With the merger of Bapepam and Directorate General of Financial Institutions, the supervision of Financial Institutions, Insurance Companies and Pension Funds business would be under the new merged agency. 4) Describe briefly non regulated financial and banking activities. In principle, financial and banking activities are regulated as described in item 1 above. 5) Describe briefly non-permitted financial and banking activities and/or government monopolies. Based on Article 10 of Law No. 7, banks are prohibited (i) to have capital participation in other banks or companies other than in the field of finance, such as leasing, venture capital, stock companies, insurance, clearing/settlement and depository agencies, (ii) to be engaged in the insurance business; (iii) to undertake business activities other than those stated in article 6 and 7 of Law No. 7 (for reference, each of Article 6 and 7 of Law No. 7 basically regulates permitted activities of banks which include mobilizing funds from society in the form of deposits, time deposits, deposit certificates, savings, and or others of similar types, to be engaged in foreign currency business activities by observing the provisions laid down by Bank Indonesia). It is, however, important to note here that banks are permitted to market insurance products by entering into a cooperation agreement with insurance companies. A finance company (an entity other than Banks and Non-Bank Financial Institutions) carrying out the activities as described in item 3.3 above is prohibited from collecting funds directly from the public in the form of giro, deposit, savings or promissory note. II. BANKING ACTIVITIES 6) Different types of banking licenses. Activities permitted under each of them. Activities prohibited. According to Law No. 7, there are two types of banking license: (1) license to operate as a commercial Bank, and (2) license to operate as a rural bank. 1. Activities permitted under a commercial bank license: Commercial banks shall cover the following business activities: a. mobilizing funds from society in the form of deposits like giro, time deposits, deposit certificates, savings, and or others of similar types; b. providing credits; issuing acknowledgement of indebtedness; c. buying, selling or underwriting at their own risk as well as in the interest and at the order of their customers: bills including those with bank acceptances of which the validity periods are not longer than those normally effective in the transaction of such papers; acknowledgement of indebtedness and other commercial papers of which the validity periods are not longer than those normally effective in the transaction of such documents; state treasury papers and government guarantee certificates; Bank Indonesia certificates (SBI); Bonds; Commercial letters with periods of up to 1 (one) year; Other with periods of up to 1 (one) year; d. transferring money for their own interest or their customer s interests;
5 e. placing funds at, borrowing funds from, or lending funds to other banks, both by using letters, telecommunications facilities, and by using order bills, cheques or other facilities; f. receiving payments from claims on securities and making calculations with or between third parties; g. allowing space for keeping goods and securities; h. undertaking custody in the interest of other parties based on contracts; i. making placement of funds from some customers to others in the form of securities not listed at the stock exchange; j. undertaking the business of factoring, credit cards and trust agents; k. providing financing or undertaking other activities based on the principle of Syariah, in accordance with the provisions stipulated by Bank Indonesia; l. being engaged in other business activities normally conducted by banks as long as they are not contrary to this law and the relevant laws in force. In addition to the business activities mentioned above, commercial banks are also allowed: a. to be engaged in foreign currency business activities by observing the provisions laid down by Bank Indonesia; b. to have capital participation in other banks or companies in the field of finance, such as leasing, venture capital, stock companies, insurance, clearing/settlement and depository agencies, by observing the provisions laid down by Bank Indonesia; c. to undertake provisional capital participation activities to overcome the consequences of failure in credits or failure in financing based on the Syariah principle, on the condition that the participation shall be withdrawn, by observing the provisions stipulated by Bank Indonesia; and d. to act as founders of pension funds and management agencies of pension funds pursuant to the provisions in the laws on pension funds in force. According to article 10 of Law No. 7, commercial banks are prohibited (i) to have capital participation in other banks or companies other than in the field of finance, such as leasing, venture capital, stock companies, insurance, clearing/settlement and depository agencies, (ii) to be engaged in the insurance business; (iii) to undertake business activities other than those stated in article 6 and 7 of Law No. 7 (for reference, each of Article 6 and 7 of Law No. 7 basically regulates permitted activities of banks which include mobilizing funds from society in the form of deposits, time deposits, deposit certificates, savings, and or others of similar types, to be engaged in foreign currency business activities by observing the provisions laid down by Bank Indonesia). It is, however, important to note here that banks are permitted to market insurance products by entering into a cooperation agreement with insurance companies. 2. Activities permitted under a rural bank license: Rural banks shall cover the following business activities:
6 a. mobilizing funds from society in the form of deposits like time deposits, savings, and/or others of similar types; b. providing credit; c. providing financing and placement of funds based on the Syariah principle, in accordance with the provisions stipulated by Bank Indonesia; d. placing their funds in the form of Bank Indonesia Certificates (SBI), time deposits, deposit certificates, and/or savings at other banks. A rural bank is prohibited (i) to receive deposits in the form of giro and participate in payments; (ii) to be engaged in foreign currency business activities; (iii) to have capital participation; (iv) to be engaged in the insurance business; and (v) to undertake business activities other than those as meant in Article 13 of Law No. 7. 7) Procedures to be followed and requirements to be met to obtain each of the different licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc. In order to obtain the business permit/licenses for commercial banks and rural banks, documents on the following requirements must be fulfilled: - organizational and executive board structures; - capital; - ownership; - expertise in banking affairs; - feasibility of working plans; Every Commercial bank and rural bank may only be established and conduct business operations pursuant to a license granted by the Board of Governors of Bank Indonesia. The granting of the license shall take place in two stages: - principle approval, meaning approval to conduct preparations for establishing a commercial bank or a rural bank; and - operating license, meaning a license to conduct operations as a commercial bank or rural bank after the preparations referred to in letter (a) above have been completed. 8) Legal structure admitted/requested for each of the different licenses. a) Different types of legal structures that may be used, i.e. corporations, limited liability partnerships, branches, subsidiaries, etc. b) Capital requirements and own fund rules. c) Transfer of control and ownership regime. Is it regulated? d) Personal requirements and restrictions that may apply in each case for officers, directors, shareholders, etc. e) Special requirements/restrictions for foreigners either individuals or legal entities (including short description of WTO/GATS commitments and exemptions). a. Different types of legal structures that may be used: 1. According to Law No. 7, commercial banks can only be established by: - Indonesian citizens and or Indonesian statutory bodies; or - Indonesian citizens and or Indonesian statutory bodies with foreign citizens and or foreign statutory bodies in partnership.
7 Further requirements for establishment to be met by the parties as meant in the paragraph above are stipulated in implementing regulations issued by Bank Indonesia. According to Article 2 Bank Indonesia Regulation dated 2/27/2000 Concerning Commercial Banks, the form of commercial bank incorporated would be as a: - Limited Liability Company; - Cooperative; or - Regional Government Enterprise. 2. According to Law No. 7, rural banks can only be established and owned by Indonesian citizens, Indonesian statutory bodies wholly owned by Indonesian citizens, regional administrations, or can be jointly owned by the three parties mentioned above. b. Capital requirements and own fund rule: The minimum paid up capital for establishing a commercial bank shall be Rp 3,000,000,000,000 (three trillion Rupiah). Ownership by a foreign citizen and/or foreign legal entity shall not exceed 99% (ninety-nine percent) of the paid up capital of a bank. c. Transfer of control and ownership regime Transfer of control and ownership regime is regulated. d. Personal requirements and restrictions that may apply in each case for officers, directors, shareholders Based on Article 20 Bank Indonesia Regulation dated 2/27/2000 Concerning Commercial Banks, members of the Boards of Commissioners and Board of Directors shall comply with the following requirements: - not included on the list of persons prohibited from becoming shareholders and/or management of banks and/or Rural Banks in accordance with provisions stipulated by Bank Indonesia; and - deemed by Bank Indonesia to possess competence and high integrity. Members of the Boards of Commissioners and Board of Directors of a Bank deemed to be of high integrity b are parties who: - possess good character and strong moral values; - comply with the prevailing laws and regulations; - are strongly committed to the development of sound Bank operations; and - have capacity to execute their duties. e. Special requirements/restrictions for foreigners either individuals or legal entities A bank whose shares are owned in part by a foreign party may appoint foreign citizens as members of the Board of Commissioners or Board of Directors. Among the members of the Board of Commissioners and the members of the Board of Directors, not less than 1 (one) member of the Board of Commissioners and 1 (one) member of the Board of Directors shall be an Indonesian citizen.
8 9) Is there a Deposits Insurance? Is it mandatory or based on self-regulation? Provide a brief explanation of how it operates. Yes There is. Deposit Insurance (or commonly known as Penjaminan Simpanan ) is mandatory, based on Law Number 24 of 2004 concerning the Agency for Guarantee of Deposits (or commonly known as Lembaga Penjamin Simpanan) ( Law No. 24 ). Based on Law No. 24, all banks that operate within the jurisdiction of the Republic of Indonesia are obliged to insure the money deposited by the public into its bank. For this purpose, the regulator also incorporated this requirement in Article 37B of Law No ) Interest rate. Is it regulated? Should the answer be affirmative, explain briefly its regulatory framework. Interest rate is not regulated. Nevertheless, Bank Indonesia in its tasks prescribing and implementing monetary policies performs among other things the controlling of circulated money and interest rate. The interest rate set by Bank Indonesia would be the benchmark for the commercial banks to set their interest rates as it is the maximum limit of the interest rates guaranteed by Bank Indonesia under Bank Indonesia Regulation No. 6/11/PBI/2004 on Blanket Guarantee Interest Rate for Deposits and Interbank Money Market ( BI Regulation No. 6 ). 11) Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions. According to Law No. 23, whoever or whatever parties accumulate funds from society in the form of accounts without business permit from executives of Bank Indonesia as meant in Article 16 shall be liable to imprisonment of 5 (five) years at the minimum and 15 (fifteen) years at the maximum as well as a fine of Rp (ten billion Rupiah) at the minimum and Rp (two hundred billion Rupiah) at the maximum. The Law further states that in case the activities as meant in paragraph above are carried out by statutory bodies in the form of limited liability companies, partnerships, foundations or cooperatives, the prosecution of these bodies shall be directed at those ordering such activities or those acting as executives in such activities, or at both parties. III. BANK SECRECY LAWS 12) Is clients information protected? Are there any restrictions for its use? Yes. Based on Law No. 7 and Regulation of Bank Indonesia No. 2/19/PBI/2000 dated September on Requirements and Procedures for Giving an Instruction or Written Permit to Open a Bank Secret, bank secrecy shall be everything connected with information on depositor and their accounts. Furthermore, banks shall keep the secrecy of information on depositors and their deposits, except for certain cases as stipulated by Law No. 7 (please see explanation in item 13 below). 13) Should the answer to number 12 be affirmative, please describe the legal framework, i.e. scope, limitation, exceptions. The restrictions: 1. For taxation purposes, executives of Bank Indonesia based on the request of the Minister of Finance shall have authority to issue a written instruction to banks to provide information and
9 show written evidences as well as documents on the financial condition of certain depositors to taxation officials; 2. In order to settle receivables of banks already transferred to the Agency for State Receivership and Auction Affairs/the Committee of State Auction Affairs, executives of Bank Indonesia shall give a license to officials of the Agency for State Receivership and Auction Affairs/the Committee of State Auction Affairs to obtain information on deposits of certain debtors from banks; 3. For court proceedings in criminal cases, executives of Bank Indonesia can grant licenses to policemen, prosecutors and judges to obtain information from banks on deposits of suspects at banks 4. In civil cases between banks and their customers, the boards of directors concerned can give information to the court on the financial condition of the relevant customers and provide other explanations connected with the said cases. 5. Within the framework of exchanges of information between banks, the board of directors of one bank can inform the financial condition of its customers to another. 6. Based on the written request, agreement or power of attorney from depositors, banks shall provide information on deposits of the depositors at the relevant banks for parties appointed by the depositors. 7. A request of legitimate heirs of saving customers who have died. 14) Sanctions (civil, administrative, or criminal) for violations. According Law No. 7: Whoever intentionally forces banks and their affiliates to provide information as meant in Article 40 (bank secrecy), without having written request or permit from executives of Bank Indonesia, shall be liable to imprisonment of 2 (two) years at maximum as well as a fine of Rp (ten billion Rupiah) at minimum and Rp (two hundred billion Rupiah) at maximum. Members of the Board of Commissioners, Directors and the employees of banks or other affiliates intentionally providing information which must be kept in secrecy shall be liable to imprisonment of 2 (two) years at minimum and 4 (four) years at maximum as well as a fine of Rp (four billion Rupiah) at minimum and Rp (eight billion Rupiah) at maximum. The Law No. 7 further states that members of the Board of Commissioners, Directors, or employees of the banks who intentionally refuse to provide information which must be made available shall be liable to imprisonment of 2 (two) years at minimum and 7 (seven) years at maximum as well as a fine of Rp (four billion Rupiah) at minimum and Rp (five billion Rupiah) at maximum.