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Banking Regulations and Compliance in Indonesia: A Comprehensive Overview
Indonesia’s banking regulation and supervision are overseen by the Financial Services Authority (Otoritas Jasa Keuangan or OJK). The OJK is responsible for ensuring the stability and soundness of the financial system, as well as protecting the rights of depositors and investors.
Obtaining a Banking License
To operate a banking business in Indonesia, a license from the OJK is required. A banking license can be obtained by an entity that provides a range of financial services, including:
- Accepting deposits
- Making loans
- Providing payment services
The OJK issues different types of licenses for different banking services, such as commercial bank licenses and Shariah bank licenses.
Regulatory Regime
Indonesia’s regulatory regime has implemented a “sandbox” or “license light” for specific fintech activities, allowing new players to test innovative products and services under certain conditions. The OJK also places restrictions on the issuance or custody of cryptocurrencies in Indonesia, including a regulatory moratorium.
Cross-Border Banking Activities
Cross-border banking activities are permissible in Indonesia, but require approval from the OJK. Foreign banks can establish a presence in Indonesia through a subsidiary or branch, subject to certain conditions.
Organizational Requirements
In Indonesia, banks can operate as limited liability companies (PT) or cooperatives. Organizational requirements for banks include:
- Minimum paid-up capital
- Specific corporate governance structures
Remuneration Policies
Remuneration policies are restricted in Indonesia, with caps on bonus payments and restrictions on employee benefits.
Capital Requirements
Indonesia has implemented the Basel III framework for regulatory capital, with some deviations for certain categories of banks. The OJK also requires banks to maintain a minimum leverage ratio and adhere to liquidity requirements, including:
- Liquidity Coverage Ratio (LCR)
- Net Stable Funding Ratio (NSFR)
Financial Reporting
Banks in Indonesia are required to publish their financial statements on a quarterly basis.
Acquisition of Shareholdings
Reporting and approval requirements apply to the acquisition of shareholdings in or control of banks. Eligible owners of banks must meet certain conditions, including those related to major participations.
Foreign Shareholdings
Foreign shareholdings in Indonesian banks are subject to restrictions, which vary depending on the type of foreign investor and the level of ownership.
Systemically Important Banks (SIBs) and Globally Systemically Important Banks (G-SIBs)
A special regime applies to SIBs and G-SIBs, which are subject to more stringent capital requirements and oversight.
Sanctions for Violating Banking Regulations
Sanctions for violating banking regulations in Indonesia can include:
- Fines
- Suspension or revocation of licenses
- Criminal prosecution
The OJK has the power to order a range of sanctions, including restrictions on business activities and asset freezes.
Bank Failure Resolution
In the event of a bank failure, client assets and cash deposits are protected through deposit insurance and segregation of funds. A bail-in tool is also available in Indonesia, which allows for the conversion of certain liabilities into common equity.
Gone-Concern Capital (TLAC)
Indonesian banks are required to hold gone-concern capital (TLAC), with varying requirements depending on the type of bank.
Conclusion
In our view, the biggest threat to the success of the financial sector in Indonesia is the potential for increased cyber risk and the need for greater awareness and preparedness among financial institutions and regulators.