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Indonesia’s Banking Regulation Compliance: A Comprehensive Overview
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Indonesia’s banking system is regulated by several national authorities, including the Financial Services Authority (Otoritas Jasa Keuangan or OJK), the Ministry of Finance, and Bank Indonesia, the country’s central bank. The OJK is responsible for regulating and supervising commercial banks, Islamic banks, and non-bank financial institutions.
Licensing Requirements
To operate a banking business in Indonesia, an entity must obtain a banking license from the OJK. The type of activities that trigger the requirement for a banking license include:
- Accepting deposits
- Providing credit facilities
- Engaging in foreign exchange transactions
- Offering payment services
The OJK has introduced a “sandbox” or “license light” framework to encourage innovation in the financial sector. This framework allows fintech companies to test new products and services under a relaxed regulatory regime.
Capital Requirements
Licensed banks in Indonesia must hold capital requirements to cover risks related to crypto assets. The OJK has also introduced guidelines for banks to manage the risks associated with digital assets.
Application Process
The general application process for bank licenses in Indonesia involves submitting a comprehensive application to the OJK, which includes providing detailed information about the applicant’s business plan, ownership structure, and governance arrangements. The average timing for processing a banking license application is around 6-12 months.
Cross-Border Activity
Indonesia allows cross-border activity by banks, but there are certain requirements that must be met, including obtaining approval from the relevant regulatory authorities.
Organizational Requirements
In Indonesia, banks may take various legal forms, including limited liability companies (PT) and cooperatives. The organizational requirements for banks include:
- Maintaining a sound corporate governance structure, which includes a board of directors and an audit committee
The OJK has implemented restrictions on remuneration policies to ensure that they are fair and reasonable. Banks must also comply with capital adequacy requirements, including the Basel III framework.
Liquidity Requirements
Indonesia’s banking sector is subject to liquidity requirements, including:
- The Liquidity Coverage Ratio (LCR)
- The Net Stable Funding Ratio (NSFR)
Banks must also publish their financial statements on a quarterly basis.
Supervision and Regulation
The OJK exercises consolidated supervision over banks to ensure that they are operating safely and soundly. The regulator may impose conditions or restrictions on the acquisition of shareholdings in, or control of, banks.
Ownership Requirements
Indonesia’s regulatory regime imposes certain conditions on eligible owners of banks, including requirements related to major participations. Foreign shareholdings in Indonesian banks are subject to certain restrictions, including a cap on foreign ownership.
Resolution Regime for Banks
Indonesia’s resolution regime for banks is based on the Bank Resolution Framework, which aims to minimize the disruption caused by a bank failure. Client assets and cash deposits are protected through deposit insurance and segregation of funds.
The OJK has introduced a bail-in tool in bank resolution, which allows for the write-down or conversion of certain liabilities into common equity. The regime applies in situations where a bank is failing or likely to fail, rather than in cases of mere liquidity crises.
Gone-Concern Capital
Indonesia requires banks to hold gone-concern capital (TLAC) to ensure their ability to absorb losses in case of failure. The regulator has also implemented guidelines for banks to manage the risks associated with digital assets.
Threats to the Financial Sector
In recent years, Indonesia’s banking regulation landscape has been shaped by the implementation of Basel III and the introduction of new regulations related to fintech and digital payments. The biggest threat to the success of the financial sector is the risk of cyber attacks and data breaches, which could compromise the stability of the financial system.