Indonesian Financial Regulation: A Year in Review

The Financial Services Authority (Otoritas Jasa Keuangan or OJK), the financial services supervisory body in Indonesia, issued more than 30 regulations in 2014 covering capital markets, banks and non-bank financial institutions. Muliaman Hadad, the chairman of the Board of Commissioners of the OJK, issued a statement that the enactment of the regulations supported the goals of the OJK in developing the financial sector in Indonesia.

Banking Sector

The OJK issued seven regulations in the banking sector in 2014, three of which were new regulations and four that amended previous regulations. Two of the new regulations - OJK Regulation No. 17/POJK.03/2014 and OJK Regulation No. 18/POJK.03/2014 - concern the implementation of integrated risk management and corporate governance for financial conglomerates. The third, OJK Regulation No. 19/POJK.03/2014, concerns non-office financial services (branchless banking), which is further discussed below.

Those regulations that amend previous regulations are focused on sharia banks and sharia business units. In particular, OJK Regulation No. 16/POJK.03/2014 concerns the assessment of quality assets OJK Regulation No. 21/POJK.03/2014 stipulates provisions on minimum capitalization and OJK Regulation No.8/POJK.03/2014 concerns the assessment of soundness level.

The OJK also amended regulations on rural banks (OJK Regulation No. 20/POJK.03/2014), which revoked Bank Indonesia Regulation No. 8/26/PBI/2006 on rural banks.

Branchless Banking

Branchless banking is being introduced by the Indonesian government as the implementation of its commitment as a member of the G20 to improve access for lower-income consumers.

OJK Regulation No. 19/POJK.03/2014 authorizes banking agents (such as village heads or head of neighborhood units) to reach out to micro-customers in their respective areas. These banking agents are able to assist micro-consumers to open a bank account, to receive customer savings, to distribute micro-credits and to act as sales agents for micro-insurance. Since this system is addressed to lower-income customers, requirements for such activities are looser than for other customers, e.g., no monthly administrative fee, no minimum balance and no minimum deposit.

Non-Bank Financial Institutions

The major development in 2014 for the non-bank financial sector was the issuance of the long-awaited new Insurance Law (Law No. 40 of 2014). This law revokes the previous insurance law, i.e., Law No. 2 of 1992, but the implementing regulations under the old insurance law still prevail as long as they do not contradict provisions of the new Insurance Law.

One of the most significant changes introduced by the new Insurance Law is the local shareholding requirement for insurance and reinsurance companies, as well as insurance intermediary companies. The new law requires any local shareholder of an insurance business entity to be ultimately owned by Indonesian individuals. This is a drastic change from the previous regime, which allowed local shareholders in insurance business entities to be ultimately owned by foreigners.

Insurance business entities have five years from the enactment of the new Insurance Law to comply with this new requirement, either by selling the shares currently held by the foreign party to an Indonesian individual/entity or through an initial public offering.

Other changes worth noting under the new Insurance Law include the single presence policy, which limits a party to be a controlling shareholder in one insurance or reinsurance company, the requirement to appoint a controller who will be responsible for any losses of the insurance/reinsurance company under its control, and the requirement to separate the sharia unit of an insurance/reinsurance company to be a stand-alone sharia entity.

As a result of the above changes, we would expect to see an increase in restructuring activities among insurance and reinsurance companies, particularly to fulfill the requirements on local shareholding, single presence policy, controller and separation of sharia units. We note that the Insurance Law mandates the OJK and the government to prepare Government Regulations and OJK Regulations with regard to foreign ownership of insurance companies and OJK Regulations on licensing and reporting procedures, good corporate governance, fit and proper tests, controller provisions and financial soundness.

In addition to the above, we note that in 2014 the OJK issued 15 regulations on the non-banking financial sector, focused mainly on the micro-financing and multi-finance sectors. The newly enacted regulations on the micro-financing sector consist of the general business implementation of micro-financial institutions (OJK Regulation No. 13/POJK.05/2014) and guidance and supervisory provisions (OJK Regulation No. 14/POJK.05/2014).

The newly enacted regulations on the multi-finance business concern general provisions (OJK Regulation No. 29/POJK.05/2014), sharia multi-finance business (OJK Regulation No. 31/POJK.05/2014), good corporate governance (OJK Regulation No. 30/POJK.05/2014) and licensing provisions (OJK Regulation No. 28/POJK.05/2014).