October 20, 2022
JAKARTA – An omnibus bill finalized by the House of Representatives last month looks to bring sweeping changes to some 15 laws on the financial sector.
The draft of the financial sector development and strengthening (PPSK) law, which is pending formal discussions with the government, entails new rules on banking, insurance, the Financial System Stability Committee, fintech, carbon trading, a digital rupiah and much more.
“A country can make significant progress if its financial sector is strong. The financial sector is the backbone as well as the blood for the economy,” Finance Minister Sri Mulyani Indrawati told the audience at an event on Oct. 10, underlining the importance of the bill.
The bill has been in the making at the House since 2020. Emerging at a time when the coronavirus pandemic was causing widespread concern about economic stability, it has been endorsed by the government as a way to strengthen domestic financial industries and protect them against future crises.
Below are some noteworthy provisions of the bill.
Article 7 in the section to amend the Bank Indonesia (BI) Law expands the central bank’s purpose beyond the scope of financial system stability by including a mandate to “support economic growth.” In the prevailing law, the purpose is simply to stabilize the rupiah.
Article 39A in the section on the prevention and handling of financial system crises extends BI’s authority to purchase government bonds in the primary market under a so-called burden-sharing scheme.
The mechanism was introduced to finance the deficit resulting from the nation’s costly COVID-19 response and was supposed to end in 2022.
The International Monetary Fund has recommended that central banks limit direct bond purchases, warning that a prolonged practice may result in a weakened balance sheet that could affect the banks’ ability to fulfill their mandatory role and erode confidence in them because of pressure to pursue government goals.
Commission XI member Andreas Eddy Susetyo, who also sits on the working committee for the bill, defended the article, arguing it was necessary in the event of future crises and vowed it would not be misused.
The bill introduces supervisory bodies for both the Financial Services Authority (OJK) and the Deposit Insurance Corporation (LPS). The five members on each body will be elected by lawmakers and thus act as their arms to oversee those agencies. Currently, such a supervisory body exists only for BI under a 2004 law.
Moreover, the bill shifts the authority to select OJK and LPS leaders wholly to the House, while the process to screen and select candidates currently involves the government and BI.
The bill also revokes a ban for political party leaders to enter the race for LPS positions, resembling a revision of the 2004 BI Law that revoked a similar ban for central bank positions.
Commission XI’s Andreas said the article would not jeopardize the work of the institutions but would greatly help lawmakers in supervising them. He also questioned the need to distinguish between political party members and other candidates, implying that party membership should not be a problem.
Stronger authorities, stricter industry rules
The bill splits the OJK’s nonbanking industry supervision into two divisions, one for insurance firms and pension funds and the other for financing institutions, fintech, venture capital and cooperatives.
The LPS will receive a mandate to guarantee funds of insurance policyholders, though with the important exception of unit-linked products, which account for some two-thirds of all life insurance products.
The bill requires that banks looking to conclude mergers or acquisitions get approval from the OJK and the LPS, not as currently from BI and the Finance Ministry.
Other new banking rules oblige lenders to adjust their interest rates whenever BI changes its 7-Day Reverse Repo Rate and to ensure micro, small and medium enterprises (MSMEs) account for at least 20 percent of their loan portfolio.
The bill tightens regulation on insurance agents by putting them under OJK supervision and adds rules to prevent misselling and enforce transparency in insurance products.
The bill mandates the OJK to keep tabs on business conglomerates operating in financial services to spot financial system risks.
BI has remained silent over the bill, while the OJK said it was studying the changes and would provide feedback to the House, alongside the government.
Rules of fintech
The bill provides a legal basis for operations of financial technology firms, which currently are regulated under lower-level OJK rules.
For instance, peer-to-peer (P2P) lending is placed under the financing institutions section, the same group as multi-finance firms, while digital banking and insurance technology are to be placed under yet-to-be revised banking and insurance laws, respectively, where they must adhere to more stringent rules.
Indonesian Fintech Association (Aftech) chairman Pandu Sjahrir told The Jakarta Post on Oct. 10 that it supported the bill, adding it would provide a legal framework for the industry to strengthen its stature.
Venture capital firms also have their own chapter within the bill, which includes types of investment they can provide, sources of funds as well as what they must do when they find themselves in financial trouble.
Digital rupiah and cryptocurrency
The bill allows for the use of a digital rupiah as a legal form of currency in Indonesia alongside coins and banknotes by revising Article 2 of the 2011 Currency Law. Article 14A in the same section paves the way for BI to issue a digital rupiah.
Article 202 of the bill recognizes crypto asset activities as part of fintech innovation and mandates that it be regulated as such by being supervised and regulated by BI and the OJK.
Articles 23 to 26 provide a legal basis for a carbon market, including a carbon bourse to execute trades.