INDONESIA: An Introduction to Banking & Finance

General Information 

The Financial Omnibus Law 

In early 2023, the Indonesian government enacted Law No 4 on Financial Sector Development and Reinforcement (Pengembangan dan Penguatan Sektor Keuangan) (“P2SK Law”). It amends 17 laws in the financial sector, including the Banking Law, Capital Market Law, Futures Trading Law, Sovereign Debt Instruments Law, Insurance Law, and Currency Law, as well as the laws regarding Bank Indonesia and the Financial Services Authority (Otoritas Jasa Keuangan – OJK).

Financial Services Authority (OJK) 

Expansion of OJK authority 

Prior to the P2SK Law, OJK regulated and supervised financial services operations in only three sectors:

1. banking;
2. capital markets; and
3. insurance, retirement funds, financial institutions, and other financial services institutions.

However, OJK’s duties have now expanded to include supervising and regulating financial activities involving:

1. digital financial assets, including cryptocurrencies;
2. securities-related financial derivatives; and
3. the carbon market, which was previously supervised by the Commodity Futures Trading Supervisory Agency (Badan Pengawas Perdagangan Berjangka Komoditi – “Bappebti”).

OJK authority over financial services institutions

The P2SK Law grants the OJK additional powers for its supervision of a new raft of financial activities which includes issuing written orders to financial services institutions to perform mergers, amalgamations, takeovers, integrations, and/or conversions. These orders will be mandatory and institutions that fail to comply may incur criminal sanctions ranging from 4 to 12 years’ imprisonment, and fines from IDR10 billion to IDR300 billion for an individual or IDR500 billion to IDR1 trillion for a corporation or business entity, whether or not they are in the form of a legal entity.

OJK authority over bankruptcy and suspension of debt payment obligations

The P2SK Law makes the OJK the only party with the authority to apply for bankruptcy and/or suspension of debt payment obligations (PKPU) against debtors such as banks, securities companies, stock exchanges, clearing and guarantee institutions, insurance and Sharia insurance companies, reinsurance and Sharia reinsurance companies, or other financial services institutions registered and supervised by the OJK.

Bank Indonesia 

Supervision over financial derivatives 

Under the P2SK Law, supervisory authorities over financial derivatives related to the money market and foreign currencies market will shift from the Bappebti to Bank Indonesia. The P2SK Law retains Bank Indonesia’s authority to supervise and regulate payment systems, and expands the central bank’s authority to establish and implement macroprudential policy, in addition to a previous regulation.

Bank Indonesia’s authority over bankruptcy and PKPU

Bank Indonesia is the only party authorised to apply for a bankruptcy statement and/or postponement of debt payment obligations from debtors including payment service providers and payment infrastructure providers, cash management service providers, and other institutions granted licences and/or stipulations by Bank Indonesia.

Banking Regulatory Framework 

Banking activities 

The P2SK Law amends the scope of financial activities that can be carried out by commercial banks, allowing them to conduct activities beyond those expressly stipulated under the P2SK Law, by obtaining approval from the OJK. In the Sharia banking sector, the P2SK Law delineates business activities that can be carried out by Sharia banks and Sharia business units (UUS), with the business activities for both Sharia banks and UUS being strictly limited to Sharia principles.

Digital banks 

The P2SK Law allows commercial and Sharia banks to carry out their business activities through information technology networks. Commercial banks and Sharia commercial banks can both operate as digital banks, as long as they have a single physical location that serves as their headquarters. For further information, digital banks have been regulated under Bank Indonesia Regulation No 12/POJK.03/2021 on Commercial Banks prior to the enactment of the P2SK Law.

Banking business licence 

Prior to the enactment of the P2SK Law, Bank Indonesia held the authority to issue licences to commercial banks, people’s credit banks (BPR), Sharia banks, and UUS. Under the P2SK Law, the authority for issuing such business licences now shifts to the OJK. Specifically for Sharia banking, the P2SK Law maintains a prohibition on the conversion of a Sharia commercial bank into a conventional commercial bank. However, a conventional commercial bank is allowed to convert into a Sharia commercial bank by obtaining the OJK’s permission.

Form of bank entities 

Under the P2SK Law, commercial and commercial Sharia banks must now be in the form of a limited liability company (Perseroan Terbatas – PT). The same limitation is also applied to BPR, which can now be established only in the form of a PT or a co-operative. However, a commercial bank’s representative offices or branch offices located outside Indonesia must be structured in the same entity form as the Indonesian bank’s headquarters. Additionally, a Sharia BPR now has the option of being established in the form of a PT or a co-operative.

Rules on mergers and acquisitions of banks

Mergers, acquisitions, consolidations, and split-ups of both commercial and Sharia bank entities still require OJK approval and must still be done in accordance with the relevant prevailing laws and regulations. However, the P2SK Law stipulates that Sharia banks must remain Sharia banks after the merger or consolidation. Moreover, the P2SK Law allows BPRs to merge with micro financial institutions, provided the entity resulting from the merger is a BPR.

Assessment of controlling shareholders of Sharia banks

Previously, the potential controlling shareholders of a Sharia bank had to pass an ability and proprietary assessment conducted by Bank Indonesia. If they failed, they would be required to reduce their share ownership to a maximum of 10%. Authority for this assessment has now shifted to the OJK. Also, shareholders must obtain OJK approval to become the controlling shareholders of a Sharia bank.

Capital Market Regulatory Framework 

New capital market liabilities 

The P2SK Law establishes the application of personal liability, both individually and collectively, for members of the board of directors, board of commissioners, shareholders, or affiliated parties of a party/company that is granted a licence or approval by the OJK to conduct business on the stock market. They will be held responsible for any losses if those losses result from:

1. use of the party/company in bad faith for their personal benefit;
2. their collaboration in any unlawful act conducted by the party/company;
3. their spending of the party’s/company’s assets in bad faith; or
4. non-compliance or negligence in carrying out their duties according to the prevailing laws and regulations.

Indonesian Capital Market Law also explicitly prohibits an internal person of an issuer or a public company who has insider information to carry out security transactions including purchasing and selling securities:

of such issuer or public company; orof other companies conducting transactions with the relevant issuer or public company.

It is prohibited for the insiders to:

1. solicit other parties to buy or sell the relevant security; and
2. disclose insider knowledge to any other party who might use it to buy or sell a security.

Capital market providers and security brokerage intermediaries

Previously, all capital market activities had to be conducted on the stock exchange and only licensed securities companies were permitted to operate as securities brokerage intermediaries on the stock exchange. However, the P2SK Law allows parties that are not listed on the stock exchange to engage in capital market activities, while other parties now have the option of becoming securities brokerage intermediaries.

Mutual funds activities 

Prohibitions on mutual funds from directly borrowing and/or lending money, as well as purchasing shares or participation units in other mutual funds, are now revoked. A mutual fund is allowed to obtain or grant a loan with several requirements. However, all assets of a mutual fund must still be kept in a custodian bank.

Investment managers 

The P2SK Law prohibits investment managers from having a relationship with custodian banks unless there is government ownership or equity participation. Also, except for the government’s direct or indirect ownership of shares or participation in the equity of one or more futures companies, no entity is permitted to control more than one futures company directly or indirectly.

Publicly listed companies’ shareholders

If a company’s assets are dispersed as a result of liquidation, the P2SK Law adds a requirement that publicly listed companies treat their public shareholders as being positioned one tier down from concurrent creditors and above controlling shareholders. Hence, in the event of a liquidation, public shareholders will have a pre-emptive right over the controlling shareholders, subsequent to creditors’ debt settlement.

Securities crowdfunding under the Capital Market Law

Securities crowdfunding is now merged into the Capital Market Law in order to expand micro, small, and medium-sized enterprises’ access to acquire securities crowdfunding by utilising electronic system provider services. The P2SK Law also stipulates that the provision concerning the securities crowdfunding related to:

1. publicly listed company status;
2. transfer of shares;
3. the company’s organ structure; and
4. the implementation of the general meeting of shareholders,

can be exempted from the provisions of law governing limited liability companies.

The enactment of the P2SK Law strengthens and streamlines the financial sector by expanding the supervisory authority over the financial sector. P2SK Law serves as the umbrella regulation for the financial sector by amending several supervisory authorities, accommodating digital development in the financial sector and rectifying overlapping authorities and regulations in the financial sector as well as enhancing consumer protection.