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Banking Supervision Report
2005
BSR
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Table of Contents iii
Foreword vii
Executive Summary xi
Chapter 1 Banking System Overview 1
A. Banking Structure 3
B. Commercial Banks 3
1. Growth of Total Commercial Banks and Bank
Offices 3
2. Composition of Commercial Banks based on
Ownership 4
3. Share of Large Banks 4
4. Share of Foreign Acquisition Banks 4
C. Sharia Commercial Banks 5
D. Rural Banks 6
Table of Contents
Chapter 3 Banking Supervisory Framework 27
A. Objective and Strategy of
Bank Supervisory 29
B. Enhance the Effectiveness of
Commercial Bank Supervisory 29
1. Risk Management Implementation 30
2. Good Corporate Government Implementation 31
3. CAMELS Rating System Implementation 34
4. Know Your Customer Implementation 34
5. Commercial Bank Business Plan Implementation 36
6. The Impact of Mutual Fund 40
C. Enhance the Effectiveness of
Sharia Bank Supervisory 44
D. Enhance the Effectiveness of Rural BankSupervisory 45
E B ki Li i d I f ti S t 46
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Chapter 5 Strengthen the Banking
Infrastructure 69
A. Establishment of the Financial Sector Safety Net 69
B. Establishment of the Deposit Insurance Institutions 72
C. Establishment of the Credit Bureau 73
Chapter 6 Banking Policy Direction 2006 75
A. Commercial Banking 77
B. Sharia Banking 78
C. Rural Banking 81
Banking Policy and Regulation
2.1 The 25 Basel Core Principle Compliance 11
2.2 Consolidation of The Banking
List of Boxes
List of Appendices
1. Indonesian Banking Architecture 85
2. List of Banking Regulation 2005 91
3. Banking Key Indicators as of September 2005 97
4. Banking Key financial Ratio as of September 2005 102
Strengthen the Banking Infrastructure
5.1 The Facility of Emergency Fund Facility 70
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List of Tables and Figures
1.1 Commercial Bank Ownership
1.2 Share of Commercial Bank based on Ownership
1.3 Share Commercial Bank Ownership based on Foreign
Ownership
1.4 Growth of Sharia Banks and Sharia Banks Offices
1.5 Growth of Rural Banks Offices
1.6 Growth of Sharia Rural Banks
2.1 The Basel II Implementation Roadmap
3.1 Commercial Banks Ratings
3.2 Plan and Actual Examination Progress of Rural Banks
3.3 Fit and Proper Test for Prospective Commercial Banks
Managers and Owners/Ultimate Share Holders
3.4 Fit and Proper Test for Prospective Rural Banks
Managers and Owners/Ultimate Share Holders
Tables
1.1 Number of Commercial Banks
1.2 Share of 15 Largest Banks
4.1 Loan to Deposit Ratio
4.2 Earning Assets
4.3 Growth of Credit
4.4 Growth of MSM Scale - Enterprise Loan
4.5 MSM Scale - Enterprise NPL
4.6 Growth of Bank Loan based on Ownership
4.7 Growth of Loan based on Economic Sector
4.8 Share of Loan based on Economic Sector
4.9 Growth of NPL
4.10 NPL and Loan
4.11 Loan , NPL and Productive Asset Write-off Reserve
4.12 Liquidity to NCD4.13 Growth Deposit based on in Rupiah and Foreign
Figures
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Praise the Lord for His blessing such that the Banking Supervision Report 2005, which is the second edition of
Bank Indonesias performance report in regulating and supervising banks, is successfully published as evidence of
Bank Indonesias transparency and accountability to its stakeholders and the public.
This report details all of Bank Indonesias efforts in performing its duty in setting the rules, issuing and
retracting permits for bank institutions and certain banking activities, supervising and imposing sanctions on
banks, albeit commercial banks, Rural Banks (BPR) or Sharia Banks. In general, the main aspects covered in this
report are as follows: (1) Structure and Development of the Banking Network; (2) Banking Policy and Regulation;
(3) Banking Supervision; (4) Banking Performance; (5) Improvements in Banking Infrastructure; and (6) Direction
of Banking Policy in 2006. Furthermore, pertinent information and relevant issues concerning banking supervision
and regulation are presented effectively in boxes.
Various steps and measures taken by Bank Indonesia to facilitate the restoration of post-crisis banking conditions,
which include programs to recover public trust, recapitalization, credit restructuring and the improvement of bankingterms, along with enhancement of bank supervision, have shown significant progress. Therefore, Bank Indonesia
Foreword
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In spite of this, however, banking industry performance in general has shown improvements in intermediation,
which is supported by the profitability ratio, liquidity and adequate capital. Furthermore, confidence in bankinghas been retained due to the narrowing of the insurance range since April 2005 and the establishment of the
Deposit Insurance Corporation in September 2005.
Finally, this report is expected to provide useful information, in particular to stakeholders and the general
public.
DEPUTY GOVERNOR
BANK INDONESIA
Maman H. SomantriMaman H. SomantriMaman H. SomantriMaman H. SomantriMaman H. Somantri
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Executive Summary
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Despite this past year of 2005 being replete with
challenges, the banking industry maintained positive
performance. The year was filled with external turbulence,
in particular stemming from hikes in the global oil price,
which aggravated inflation and disturbed macroeconomic
stability. Against this backdrop, domestic interest rates
climbed, which inevitably placed additional pressure on
the growth of banking services.
To overcome such difficulties, Bank Indonesia
consistently improves the banking sector through four
main policies: (1) Accelerate the consolidation process; (2)
Strengthen infrastructure; (3) Improve prudential banking
principles; and (4) Enhance the role of banking
intermediation. These four policies are contained within
the Indonesian Banking Architecture (IBA) program, which
has achieved satisfactory progress in 2005. In the
implementation of all stated policies, Bank Indonesia
Executive Summary
Subsequently, to set the development policy and
strategy of rural banks, Bank Indonesia has focused on
five steps underscoring the usage and rise of BPR
competitive advantage in conjunction with Pillar I of
Indonesian Banking Architecture: (1) Improve BPR
arrangement; (2) Enhance supervision effectiveness; (3)
Reinforce institution building; (4) Augment capacity
building; and (5) Encourage the expansion of rural banks
beyond Java and Bali. Against this backdrop, in 2004, Bank
Indonesia refined its terms regarding institutions, human
resources, and BPR operations.
In terms of supervision and examination, in 2005,
Bank Indonesia improved the implementation intensity of
on-site and off-site, risk-based supervision and
examination, which have been carried out effectively since
2003. The development of the supervision system has
conformed to international best practices and standards
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of Bank Indonesia changed its status to the Directorate of
Banking Investigation and Mediation (DBIM). In line with
such status and name changes, and in addition to DBIMs
responsibility for investigating criminal conduct in banking,
DBIM has undertaken a new duty; that is to carry out
banking mediation, which represents an alternative dispute
remedial action to customers, especially customers of
MSMEs.
In general, banking performance continued to show
positive progress regardless of prevalent risk pressure
stemming from unfavorable economic conditions,
especially during the second half of 2005. The amount of
fund disbursals and deposits continued to rise for
commercial banks, rural banks, and sharia banks, which isalso supported by adequate capital. A slight drop in
profitability was recorded during the reporting year due
to rising operational costs driven by the mounting interest
rate in the third quarter of 2005.
In 2005, total assets of commercial banks amounted
to Rp197.5 trillion, followed by a credit increase of Rp135.1
trillion or around 22.7%, which exceeded the target growth
Sharia banking also remained relatively buoyant. Firstly,
intermediation of sharia banking, whose portfolio is
dominated by funding small and medium enterprises,
strengthened and the Financing-to-Deposit Ratio (FDR) stood
at 97.8%. However, this condition was followed by
heightened financing risk as shown by the climbing of Non-
Performing Financing Ratio, which stood at 2.8%. Despite
the increased risk remaining within relatively safe limits, tight
monitoring was required due to the lack of enjoyable growth
shown in economic conditions. Secondly, reported 36.2%
growth in total assets expanded sharia banks total asset
share of national banks total assets by 1.3% at year end.
The performance of rural banks (BPR) remained
positive. BPR total assets grew by as much as 22.1% withthe largest allocation for credit disbursals. Financing
continued to show steady growth following a positive trend
accumulating to 18.1%. This shows that the advancement
of BPR credit primarily stemmed from deposits. The number
of customers rose from 5.8 million to 6 million, which
indicates that the BPR market remains promising and public
trust in rural banks continues to strengthen.
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If the coordination of these policies is performed well,
it is expected that, commencing in the second half of 2006,
economic growth will be buoyed not only by consumption
but also investment, and overall, GDP growth in 2006 will
optimistically achieve 5.0 to 5.7%. With regards to
financing, economic growth is anticipated, providing banks
are capable of maintaining their credit disbursals rate
similar to the previous year.
The year 2006 represents the start of a five-year
program of full-implementation of all organized IBA
concepts. In the short term, the policy to bolster the
banking structure will focus on banking expansion to
maintain its contribution in financing development. In the
interim, over the medium-to-long term, policy will
concentrate on improving banking foundations and further
exploring several IBA programs, including the application
of Basel II concepts.
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Banking Supervision Report
Chapter 1Banking System Overview
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A. BANKING STRUCTURE
Based on the prevailing Law1, Indonesian banking
consists of two systems: conventional bank activities and/
or activities based on sharia principles. Based on the
categories, conventional banks comprise of commercial
banks, including their overseas representatives and branch
offices, and rural banks (BPR). The most significant aspects
that distinguish commercial banks from rural ones are their
activities, legal formation and ownership.Based on their activities, commercial banks may
perform activities conventionally and/or based on sharia
principles, whereas rural banks specialize in one particular
activity only. Furthermore, in the course of their activities,
commercial banks may issue cheques and provide services
involving foreign currencies, while rural banks perform no
such activities in view of their limited operational coverage
Chapter 1
Banking System Overview
and branch offices, or regional government (Regional
Development Banks). In contrast, rural banks can solely
be owned by Indonesian citizens, Indonesian legal entities
whose owners are all Indonesian citizens, regional
governments or a combination of the three.
B. COMMERCIAL BANKS
1. Growth of Total Commercial Banks and Bank
OfficesThe commercial banks office network has grown
enormously, particularly since banking the deregulation
package issued in 1988 (October Package 88). Post October
Package 88, the number of commercial banks rose from
11 banks with 1,957 offices to 239 banks with 7,314
offices at year end 1996, dominated by the establishment
of Foreign Exchange and Non-Foreign Exchange National
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3. Share of Large Banks
The banking industry is dominated by 15 banks that
have significant effects on banking system stability. Their
share of total assets reached 73.9%, of credit 70.0%, and
73.4% of deposits in December 2005.
2. Composition of Commercial Banks based on
Ownership
Based on the ownership of commercial banks, thereare six categories of commercial banks: State-Owned Banks
(Banks owned by government), Foreign Exchange National
Private Commercial Banks (BUSN Devisa), Non-Foreign
Exchange National Private Commercial Banks (BUSN Non-
Devisa), Regional Development Banks (BPD - banks owned
by regional governments), Joint-Venture Banks (National
and foreign-owned banks), and Foreign Banks. Regardless
Graph 1.2
Share of 15 Largest Banks
Graph 1.1
Number of Commercial Banks
4. Share of Foreign Acquisition Banks
The implementation of a Divestment Program
conducted by the government on several National Private
Total Bank Total Offices
1957
7314
7878 7661
7113
6547
7001
6765
7730
7939 8236
111 239 222 206 162 151 145 141 138 138 131
1988 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
9000
80007000
6000
5000
4000
3000
2000
1000
0
Credit Total Assets Third Party Funds
15 Large st Banks Other Ba nks
Billion Rp
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
-
200,000,000
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C. SHARIA COMMERCIAL BANKS
Throughout 2005, the number of commercial banks
conducting their activities conventionally and based on
sharia principles, or Conventional Commercial Banks that
established Islamic Banking Units (UUS) increased by as
many as four banks: State Savings Bank, BPD of West Nusa
Tenggara, BPD of West Kalimantan, and BPD of South
Sumatra. Along with the growth in the number of active
sharia banks, the sharia bank office network also expanded
significantly. During the reporting period, the number of
sharia bank offices (including cash offices, sub-branch
offices, and Sharia Service Units) jumped by 103 offices;
from 355 offices at the end of 2004 to 458 offices at year
end 2005 (Table 1.4)
In terms of expansion, at the end of 2005, the sharia
bank office network was able to service the public in 68
districts/municipalities in 27 provinces. This is congruent
with the efforts of Bank Indonesia in supporting the
expansion of the sharia bank office network beyond the
province, as research in the potential of publics preferencefor sharia banks over the past 5 years has suggested.
Table 1.3
Share Commercial Bank Ownership based on Foreign
Ownership
BanksBanksBanksBanksBanks
Brand Offices of
Foreign Banks 11 140,679,024 24,1% 9,6%
Joint Venture Banks 17 58,975,657 10,1% 4,0%
Foreign Acquisitioned
Banks 9 383,161,705 65,7% 26,1%
Total 37 582,816,386 100,0% 39,7%Industry 131 1,469,827,372 39,7% 100,00%
Total AssetsTotal AssetsTotal AssetsTotal AssetsTotal Assets
( in million Rp)( in million Rp)( in million Rp)( in million Rp)( in million Rp)% total to% total to% total to% total to% total to
Foreign BankForeign BankForeign BankForeign BankForeign Bank% total to% total to% total to% total to% total to
Industry BankIndustry BankIndustry BankIndustry BankIndustry Bank
* Jumlah bank campuran turun disebabkan akuisisi oleh investor lokal
1) Termasuk Bank BUMN dan BPD
2) Termasuk kantor cabang bank asing, bank campuran dan bank akuisisi asing
Table 1.2Share of Commercial Bank based on Ownership
TotalTotalTotalTotalTotal Total aset (Rp)Total aset (Rp)Total aset (Rp)Total aset (Rp)Total aset (Rp) % to total industry% to total industry% to total industry% to total industry% to total industry
State Owned Banks 31 671,996,246 45,7%
Local 63 215,014,740 14,6%
Foreign 37 582,816,386 39,7%
Industry 131 1,469,827,372 100,00%
Total AssetsTotal AssetsTotal AssetsTotal AssetsTotal Assets
( in million Rp)( in million Rp)( in million Rp)( in million Rp)( in million Rp)
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D. RURAL BANKS (BPR)
The number of rural banks as of December 2005
reached 2,009, which comprised of 1,293 (64.4%) Limited
Liability Companies (PT), 663 (33%) Regional Enterprises
(PD), and 53 (2.6%) Corporations.
The unevenness of the population distribution and
economic growth constitute reasons why the distribution
of rural bank offices is uneven. As many as 2,572 offices
or 82.8% of all BPR offices are concentrated on Java and
Bali. On the basis of participating in the distribution of
economic development, Bank Indonesia encourages
investor candidates to establish rural banks beyond Java
and Bali, especially in East Indonesia, as stated in one of
its policies. Investors have responded positively due to theeconomic potential in such areas, as indicated by the
number of requests for founding rural banks in Sumatra,
Sulawesi, Kalimantan and Papua. The establishment of
rural banks in Sumatra, Sulawesi, Kalimantan and West
Nusa Tenggara has contributed towards growth in the
number of rural banks. However, this figure decreased by
2.1% compared to the previous year.
E. SHARIA RURAL BANKS (BPRS)
The number of Sharia rural banks continued to
increase throughout 2005. Seven Sharia rural banks that
have obtained permits, and six have sought agreement in
principles. One permit of an inoperative Sharia rural bank
was revoked , such that at the end of the reporting period,
there were 92 active Sharia rural banks.
Table 1.5
Growth of Rural Banks Offices
KeteranganKeteranganKeteranganKeteranganKeterangan 20002000200020002000 20012001200120012001 20022002200220022002 20032003200320032003 20042004200420042004 20052005200520052005
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Chapter 2Banking Policy andRegulation
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A. BANKING POLICY DIRECTION
Banking management and supervision policy is aimed
at establishing continuous economic stability through
stronger and more effective banking system and
institutions, which is congruent to the direction and
purpose of IBA. In 2005, Bank Indonesia endeavored to
bolster the banking sector through four key steps: expedite
the consolidation process, buttress infrastructure, improve
prudent principles, and enhance the role of bankintermediation.
In inst i tut ing the bank management and
supervisory functions, Bank Indonesia holds in high
regard consistent and prudential principles. As a result,
over the past few years, Bank Indonesia has focused its
banking policy direction to protect and maintain
economic stability through a stronger and more effective
Chapter 2
Banking Policy and Regulation
2) Strengthen financial system infrastructure;
3) Enhance the adherence to prudential principles; and
4) Improve the role of banking intermediation.
Efforts to further strengthen national banking
structure play a critical role in developing a banking system
that is capable of fulfilling future public needs in the
globalization era. To this end, Bank Indonesia has
consistently taken steps to drive the banking consolidation
process in 2006, as stated in IBA.To reinforce banking infrastructure, Bank Indonesia,
the Indonesian Department of Finance and the Deposit
Insurance Corporation (DIC) have signed an agreement
which includes the roles and task allocation to preserve
financial system stability. In addition, to enhance the
coordination between institutions, the Finance System
Stability Forum (FSSF) was established.
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a. Internal Consolidation
To achieve this vision, 7 out of 19 IBA initiatives relate
to the internal consolidation of Bank Indonesia to attain
high quality management as well as an effective and
independent banking supervision system, including
improving the effectiveness of legal enforcement.
1) Establishment of panel banking experts in Bank
Indonesia and preparation of the blueprint to develop
banking research institutions to the end of formulating
more comprehensive regulations
As part of its efforts towards research based policy
principles, Bank Indonesia formed an expert banking panel
comprising of local and foreign experts from their
respective fields; prepared the blueprint for regional
banking research institutions; as well as planned to
establish banking research institutions at four sites
including KBI, universities and regional banks.
2) Improvement of the 25 Basel Core PrinciplesCompliance
banking fields, and also developed a supervision scheme
adopting risk-based management.
Bank Indonesia prioritized activities in support of
government policy to develop the micro, small and medium
enterprises (MSME) sector in its efforts to improve banking
intermediation. The coverage of such activities is contained
in the MSME Roadmap, drafted by Bank Indonesia in
collaboration with the government.
IBA initiatives to support the development of
MSME include: enhancing the roles of commercial
banks, rural banks (BPR), and sharia banks (linkage
program); forming a guarantee scheme; and establishing
banking research institutions on a regional basis.
Furthermore, Bank Indonesia continuously strives to
consult businesses and banks seeking opportunities to
build economic capacity by regularly conducting
international workshops. Bank Indonesia also fiercely
endeavors to improve technical support in the form of
providing information, research and training to banks.
Cooperation among related departments andinstitutions to develop MSME is well maintained at both
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To realize an effective national supervision
system, it is believed that 25 BCP, prepared by Basel
Committee together with supervisory authorities from
15 developing countries as well as input and intensive
consultation from other supervisory authorities around
the globe, must be applied. These principles consist
of the basic elements for an effective supervision
system. In general, they cover preconditions for
effective banking supervision, licensing and structure,
prudential regulations and requirements, methods for
ongoing banking supervision, information
requirements, formal powers of supervisors, and cross-
border banking.
The 25 BCP are intended to form the foundation
for supervisory authorities around the world to be
Box 2.1 The 25 Basel Core Principles Compliance
applied in the supervision of all banks within their
respective legal framework. Supervisory authorities
around the world are invited to employ Basels main
principles by October 1998 at the latest. The expected
implementation comes in the shape of a review that
compares the current conditions of the supervision
system against those stipulated in the principles. The
transformation pace varies depending on whether the
supervisory authority has the required legal authority.
If amendments to the law are necessary, legislators
from each country are immediately asked to offer
advice concerning the required changes to advocate
applicable principles. The document containing the
before aforementioned principles is available on the
BIS web site http://www.bis.org.
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1. Objectives, autonomy, powers 11111 11111 11111
2. Permissible activities 11111 11111 11111
3. Licensing criteria 22222 22222 22222
4. Ownership 33333 22222 222225. Investment criteria 22222 22222 22222
6. Capital adequacy 22222 22222 22222
7. Credit policies 33333 11111 11111
8. Loan evaluation 33333 11111 11111
9. Large exposures 22222 22222 22222
10. Connected lending 33333 22222 22222
11. Country risk 44444 44444 22222
12. Market risks 22222 11111 1111113. Other Risks 22222 22222 22222
14. Internal control and audit 22222 11111 11111
15. Money laundering 22222 11111 11111
16. On-site and off-site supervision 22222 22222 22222
17. Bank management contact 22222 22222 22222
18. Off-site data 33333 33333 22222
19. Validation supervisory information 22222 22222 22222
20. Consolidated supervision 33333 33333 4444421. Accounting standard 22222 22222 11111
22 Remedial measures 33333 33333 22222
Core PrincipleCore PrincipleCore PrincipleCore PrincipleCore Principle
Grading ByGrading ByGrading ByGrading ByGrading By
Self-AssessmentSelf-AssessmentSelf-AssessmentSelf-AssessmentSelf-Assessment IMF BCP AssessmentIMF BCP AssessmentIMF BCP AssessmentIMF BCP AssessmentIMF BCP Assessment
May 2005May 2005May 2005May 2005May 2005IMF BCP AssessmentIMF BCP AssessmentIMF BCP AssessmentIMF BCP AssessmentIMF BCP Assessment
Oct 2005Oct 2005Oct 2005Oct 2005Oct 2005
Table Box 2.1.1
The 25 of BCP Compliance
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4) The consolidation program for the banking sector of
Bank Indonesia
The consolidation program includes the ratification
of the High-Level Organization Structure (HLOS); the
consolidation of supervision and audit units; the
improvement and consolidation of the Directorate of
Rural Bank Supervision and Credit Bureau; as well as the
enhancement of the corresponding Directorate of Sharia
Banking. Such improvements are to be carried out
concurrently through the consolidation of the supervision
and audit units into a dedicated team structure.
Consequently, using this approach, off-site supervision,
on-site supervision, and an on-site supervisory presence
(OSP) will all be performed by the same team. This method
aims to raise the effectiveness of risk-based supervision.
(Box 2.2)
Box 2.2 Consolidation of the Banking Sector Program
Mounting supervisory duties and rising pressure
from stakeholders, coupled with banking growth as
well as the diversification of banking tasks from timeto time, require an improved supervisory function at
Bank Indonesia. The organizational structure has been
enhanced through internal consolidation in order to
more effectively enhance supervision through a risk-
based approach. Such improvements have lead to a
dedicated organization at the team level. The separated
supervisory and audit tasks will become unified and,
Supervisory documents are now centralized at
each Administration Department of each directorate
to ensure tighter control and an application programto better supervise related documentation is also being
developed by a third party.
An Implementation Task Force has been
organized to prepare the implementation of the
banking audit and supervisory unit consolidation
program to be performed by 1st March 2006, which
comprises of the Information Technology; Banking
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5) Bank Indonesia Certification Program for Supervisors
and Auditors
This program intends to boost the competency of
Bank Indonesias supervisors and auditors to enable them
to perform their supervisory role more effectively and
efficiently, and concomitantly, enable them to proportion
themselves with bank supervisors of supervisory authorities
in developed countries. In order to meet such a demand,
Bank Indonesia has taken various steps including, among
others, holding systematic, regular and continuous training
programs with the guidance of competent and credible
trainers (Box 2.3).
Box 2.3 Banking Sector Human Resources Development
Demand for improvements in the quality of
banking-sector human resources grew in line with the
development of the banking industry and its products
as well as the development of international banking
regulations. To satisfy such demand, Bank Indonesia
has undertaken various endeavors including, among
others, organizing a systematic, regular and continuous
training program taught by competent and credible
trainers. Through this training program, bank
supervisors are expected to gain high-level competency
and integrity to equate them with bank supervisors of
supervisory authorities in developed countries
is provided to produce bank supervisors with special
expertise.
Previously, education and training activities were
conducted by the Focus Group (FG) of Bank Supervision
Development; however, commencing 1st September
2005, these activities are currently conducted by the
Banking School FG under the Directorate of Banking
Research and Regulation. The Banking School FG is
considered as the embryo of a future Banking
Supervision School (BSS) of Bank Indonesia.
Banking Sector Human Resources Training in
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through October 2005, commencing from the
foundation level up to the most advanced level,
attended by 596 banking sector employees from Head
Office and the branch offices. Selective training,
covering Consolidated Supervision, Market Risk and
Basel II aspects were attended by 168 banking sector
employees. Cooperation with international institutions
involved 25 banking sector employees.
Box Table 2.3.1.
Training Realization in 2005
Type of trainingType of trainingType of trainingType of trainingType of training Participants (persons)Participants (persons)Participants (persons)Participants (persons)Participants (persons)
Regular/Certification TrainingRegular/Certification TrainingRegular/Certification TrainingRegular/Certification TrainingRegular/Certification Training
1. Foundation Level 270
2. Intermediate Level 174
3. Advanced Level 142
Special TrainingSpecial TrainingSpecial TrainingSpecial TrainingSpecial Training
1. Consolidated Supervision 28
2. Market Risk 40
3. Basel II 100
Cooperation with International InstitutionsCooperation with International InstitutionsCooperation with International InstitutionsCooperation with International InstitutionsCooperation with International Institutions
1. BI-SEACEN-OSFI Seminar on Consolidated Supervision 15
2. BI-SEACEN-IMF Workshop on Financial Soundness Indicatorsand Stress Testing 10
TotalTotalTotalTotalTotal 779779779779779
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Box 2.4 Risk-Based Supervision
Among the factors conducive in creating a
healthy and stable banking system and considered as
having an important role is the implementation of an
effective banking supervisory system. The Basel
Committee on Banking Supervision has issued
fundamental, effective principles, which are used as a
reference by the bank supervisory authority to create
effective banking supervision. Included in such
fundamental principles is risk-based supervision. In
relation to this, since 20041 Bank Indonesia has applied
a risk-based supervisory system.
In terms of international banking supervision
practices, risk-based supervision is regarded as a
comprehensive and dynamic supervisory concept
because it considers both current and future banking
conditions, which includes evaluating banks ability to
deal with the potential risk, be it individual risk or
systemic risk.In principle, risk-based supervisionis a monitoring
2. Requires understanding of the types of risks2 and
the managements ability to manage risks (internal
and external), especially the risks beyond
management control, like systemic risk and risks
within the business environment; and
3. Uses the framework and terminology designated
especially to evaluate risks, policies, procedures
and risk-management practices.
With improvements in the supervisory
organization of Bank Indonesia, the implementation
of risk-based supervision is expected to generate
superior quality supervision results. This is reflected by
the completed stages of the risk-based supervision
cycle, for example, a bank supervisor can immediately
take a supervisory action based on off-site analysis
without waiting for the on-site supervision result. Adept
and rapid action will enable a supervisor, as early as
possible, to take the necessary enforcement proceduresto prevent further complications at the problematic
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7) Effectiveness of legal enforcement Improvement
Bank Indonesia enriched the Special Banking
Investigation Unit by transforming the organization into
the Directorate of Banking Mediation and Investigation,
and also renewing the joint decree concerning cooperation
for the criminal handling of illegal banking activities
between Bank Indonesia, the Police Department and
Prosecution Office on 20th December 2004. Beyond the
central level, the joint decree has also been applied
throughout Bank Indonesia regional territories. Hence, law
enforcement in the banking sector is expected to run more
efficiently and effectively.
b. Strengthen The Banking Structure
The banking structure advocated by the Indonesian
Banking Architect re (IBA) incl des banks ith strong
management, internal supervision, operational capability,
credit and the intermediary function. Accordingly, Bank
Indonesia has issued a regulation that obliges managers
and banking officers to earn certificates for the following:
improving their risk-management quality; driving the
implementation of good governance to improve internal
supervision; enhancing cooperation to boost HR quality;
encouraging operational cost efficiency to improve the
operational capacity; as well as establishing the CreditBureau for banking institutions to augment their credit
quality and intermediary function.
c. Develope The Micro and Medium Enterprises
(MSME)
In line with government policy direction to develop
micro, small and medium enterprises, the IBA initiative to
balance. Nevertheless, the early developmental stage
(since 2005) of risk-based supervision is directed
towards consolidated supervision, more specifically
concerned with the implications of the subsidiaries
risk profile on the risk profile of the bank as parent
company (down-stream supervisory).
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promote research and surveys, as well as foster innovation.
This is achieved by: (1) providing technical assistance; (2)
developing institutions; (3) defining policies and improving
credit regulations; and (4) enhancing cooperation between
the government and other relevant institutions.
In terms of providing MSME technical development
assistance, Bank Indonesia has adjusted the rules governing
technical assistance, enhancing the information supply to
micro, small and medium enterprises; as well as researching
and providing training to banking institutions and Business
Development Services Providers (BDSP). Cooperation
between relevant departments and institutions to develop
micro, small and medium enterprises is ongoing both at
the central and regional levels. In parallel, Bank Indonesia
continues to address the business community and bank
institutions, through regular workshops, seeking ways of
developing new economic activities.
d. Improve The Customer Protection
The customer protection initiative includes newregulations which define a customer complaint mechanism
G10 country central banks.
The application of the Basel II framework requires
thorough preparation by Bank Indonesia, the banking
industry and other related parties, because of the various
aspects demanded including effective risk-management
practices, competent HR, appropriate information
technology and database support, as well as the availability
of other supporting infrastructure, like an accounting
standard that refers to International Accounting Standard
(IAS) and credible ranking institutions.
To this end, Bank Indonesia has defined the following
implementation stages:
1) Basel II application in Indonesia from 2008 onwards,
for all banks, beginning with the simple approaches,
namely Standardized Approach for credit-risk
calculation and the Basic Indicator Approach to
estimate operational risk;
2) Upon the completion of all requirements and subject
to approval by Bank Indonesia, a bank may shift to
the more advanced approaches; and3) Basel II is expected to be fully implemented by 2010.
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- Provide a clearer and more explicit plan for
preparations toward the implementation of
Basel II. For example, providing supporting
infrastructure, supervisory organizational
structure and Human Resources);
f) Establishment of the Basel II Working Group with
members consisting of representatives from Bank
Indonesia, banking institutions and banking
associations. Banking institutions have also
established a Task Force for Basel II implementation
along with the Basel II Implementation Monitoring
Team;
g) Translation of Basel II documentation;
h) Quantitative Impact Study (QIS) 4 and QIS 5 of 40
banks (representing approximately 80% of total assets
in the banking system);
i) Gap analysis to identify the existing availability of
infrastructure and preparedness in accordance with
Basel II requirements;
j) Completion of 9 national discretion studies; and
k) A revision of banking accountancy standards referring
to IAS (IAS 32 and IAS 39).
Table 2.1
The Basel II Implementation Roadmap
PILLAR 1PILLAR 1PILLAR 1PILLAR 1PILLAR 1 PILLAR 2PILLAR 2PILLAR 2PILLAR 2PILLAR 2 PILLAR 3PILLAR 3PILLAR 3PILLAR 3PILLAR 3
Application of RiskApplication of RiskApplication of RiskApplication of RiskApplication of Risk
Calculation ApproachCalculation ApproachCalculation ApproachCalculation ApproachCalculation ApproachPBIPBIPBIPBIPBI
IssuanceIssuanceIssuanceIssuanceIssuance
Parallel RunParallel RunParallel RunParallel RunParallel Run
Standard sizedStandard sizedStandard sizedStandard sizedStandard sized 1)1)1)1)1) ororororor
Validation ProcessValidation ProcessValidation ProcessValidation ProcessValidation Process
(Internal Model)(Internal Model)(Internal Model)(Internal Model)(Internal Model)
EffektiveEffektiveEffektiveEffektiveEffektive
CalculationCalculationCalculationCalculationCalculation
CARCARCARCARCAR
LBULBULBULBULBU
ImprovementImprovementImprovementImprovementImprovementOther risksOther risksOther risksOther risksOther risks 4)4)4)4)4) TransparencyTransparencyTransparencyTransparencyTransparency
On line SystemOn line SystemOn line SystemOn line SystemOn line SystemPBIPBIPBIPBIPBI
IssuanceIssuanceIssuanceIssuanceIssuance
EffektiveEffektiveEffektiveEffektiveEffektive
CalculationCalculationCalculationCalculationCalculation
CARCARCARCARCAR
PBIPBIPBIPBIPBI
IssuanceIssuanceIssuanceIssuanceIssuance
Market RiskMarket RiskMarket RiskMarket RiskMarket Risk
Standardized2)
Q3 2007 Q1 2008 - Q4 2008 Q1 2009 Q4 2008 Q1 2009Internal-Model 3) Q3 2007 begin Q3 2007 Q2 2008 Q2 2008 Q1 2009
Credit RiskCredit RiskCredit RiskCredit RiskCredit Risk
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B. SHARIA BANKING POLICY DIRECTION
Regulations and supervisory policy for sharia banking
are directed toward strengthening the sharia banking
structure by focusing on adherence to sharia principles,
prudential regulations, operational efficiency,
competitiveness, system stability and benefit to the
economy.
Entering the second year of the second-stage
implementation (2004-2008) of the strategic Blueprint for
Sharia Banking Development in Indonesia, sharia banking
policy remains a continuation of the development policy
conducted during the first stage. The initiative is divided
equally into the following four areas of focus:
1) Compliance to Sharia Principles
Bank Indonesia is standardizing the industry through
the issuance of PBI No. 7/46/PBI/2005 dated 14 th
November 2005 on the Agreement for Fund Collection
and Distribution for Sharia Banks after conducting studies
in line with research-based policy principles. The presence
of this standard provides market operators and regulators
support sharia banking using high expertise and dedicated
operators in running sharia banking operations.
Furthermore, an evaluation of the 25 BCP
implementation for Effective Banking Supervision within
sharia banking has been completed to gauge how far
Indonesian sharia banking can be evaluated using 25 BCP
and how large the implementation value is.
3) Operational Efficiency and Competitiveness
Bank Indonesia has been trying to create a strategic
alliance among sharia banks through the linkageprogram
pilot project, specifically between Sharia Commercial
Banks/Sharia Business Units with Sharia Rural Banks (BPRS)
to serve the micro and small enterprise customers. In order
to support this pilot project, Bank Indonesia will compile a
cooperation framework with related organizations, which
will effectively improve the sharia banking operational
efficiency.
Furthermore, a survey was conducted on the
Potentials, Preferences, and Perceptions of the public on
sharia banks in NTB province, which basically represents a
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of Trainers, particularly academic instructors of economics
and sharia concepts.
Seeking insight to the enhancement activities of HR,
at the end of 2005, Bank Indonesia together with IRTI-
IDB, The International Association for Islamic Economics
(IAIE), University of Indonesia and ISEI held an International
Conference on Islamic Economics and Finance in Jakarta.
The topics discussed at the conference related to sharia
banking and financing, and initiatives for the betterment
of their development.
4) System Stability and Benefit to the Economy
To realistically expand sharia bankings role in the
economy, a communication forum for sharia banking
development was established, namely the Sharia Economic
Communication Center (PKES) along with a feedback
mechanism. In addition, cooperation with related parties
to activate alternative funding sources (voluntary sector)
was also conducted.
C. RURAL BANKING POLICY DIRECTION
particularly eastern Indonesia, to provide more
extensive services nationwide.
3) A more distinct role in funding micro and small
enterprises as well as rural people for their
involvement in micro and small enterprises, both
geographically and psychologically.
To achieve the said goals, Bank Indonesia focused
on five measures to empower and strengthen BPR
competitiveness in line with IBA Pillar I as follows:
1) Improving the BPR arrangement
To create sound management in rural banks capable
of contributing positively to national banking activities,
particularly in funding the micro financial sector, Bank
Indonesia improved a number of regulations and
institutions in line with international best practices.
Furthermore, in 2005 a regulation was also ratified to
support supervisory effectiveness in the form of a BPR
database to be used as an early detection tool.
Correspondingly, Bank Indonesia is currently reviewing a
regulation concerning the minimum capital requirement,
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2006); and an inspection strategy based on potential risks.
In addition, Bank Indonesia continuously builds upon
supervisory quantity and quality through certification for
bank supervisors, periodic non-certificate training to
encourage information building and knowledge sharing,
as well as increasing the number of supervisors.
3) BPR Institutional Building
To foster a buoyant BPR industry, Bank Indonesia
continued its restructuring policy by aiding salvageable rural
banks through capitalization, mergers and acquisitions,
as well as encouraging the entry of new investors capable
of boosting capital and strengthening management. In
addition, Bank Indonesia encouraged cooperation between
rural banks and commercial banks by allocating credits to
micro and small enterprises through the linkage program.
Bank Indonesia also facilitated the establishment of Apex
for rural banks.
Linkage Program
The linkage program between rural banks,
The members include Bank Indonesia (Directorate of
Banking Research and Regulation, and Directorate of Rural
Bank Supervision), BPR Association (Perbarindo), 3 non-
Perbarindo BPR committees and commercial banks.
The agenda of the working group was to define a
Generic Model Linkage Program, to specify the Linkage
Programs terms and conditions, and to establish joint
agreements/recommendations/regulations with Bank
Indonesia concerning Linkage Program implementation.
The working group has hitherto compiled a Generic Model
Linkage Program, which contains minimum terms and
conditions for rural bank participation; interest rates, a
ceiling limit and guarantees for each type of linkage
program; namely executing, joint financing, and
channeling, ethic codes of linkage program participants;
and Bank Indonesia policy to encourage linkage program
implementation.
Subsequently, on 24th August 2005, the Lending
Agreement Notification Letter involving 10 commercial
banks and 38 rural banks with a credit ceiling of Rp104
billion was signed. To encourage the linkage program to
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Apex institution, including the payment system and
the types of documents to be used by rural banks to
interact with the Apex Institution and BPR clients.
Deciding upon the business format of the Apex
institution for an ideal rural bank based on research
and study results as well as input obtained during
seminars. As suggested, it is in the form of a
commercial bank owned by the BPR industry.
However, problems arose when establishing a new
commercial bank for apex, which requires substantial
funding besides the prevailing Banking Law prohibits
rural banks from acting as shareholders. Therefore,
supporting regulations for institutions, operations and
ownership, are required.
Establishing an Apex Working Group comprising of
members from rural banks, the
Perbarindo Association, three commercial banks and
Bank Indonesia in August 2005. The Apex Working Group
has agreed to execute Pilot Projects for Apex institutions
in seven regions following three patterns, namely the Apex
Institution conducted by BPR Leaders (in Yogyakarta and
Facilitating Focus Group Discussions on BPR
Development Direction
To consolidate inputs and views from various parties,
particularly external parties such as academicians,
practitioners, observers, associations and other stakeholders,
with regards to policies and the efforts necessary to create
a sound, robust and productive BPR industry, highly
competitive in serving micro and small enterprises and rural
residents, Bank Indonesia held a Focus Group Discussion
on 1st December 2005. The input obtained was subsequently
used to improve the BPR development blueprint.
4) BPR Capacity Building
To build BPR capacity, several measures were taken,
including: conducting a Professional Certificate Program
(CERTIF) for BPR directors, providing technical assistance
for manager-level BPR human resources to improve their
technical competency, and developing BPR information
technology to enhance efficiency.
The BPR Professional Certification Program
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September 2005 the fifth ToT was held and attended
by 27 teacher candidates.
(3) By the end of 2005, BPR director certification training
had been conducted 52 times throughout Indonesia,
attended by 1,312 persons; 3 certification tests of
BPR directors, attended by 1,252 participants have
taken place with 1,038 newly certified directors,
exceeding the specified target of 1,000 persons. In
support of CERTIF implementation, Bank Indonesia
subsidized 50% of the training costs to one BPR
director who already had a business license when PBI
No. 6/22/PBI/2004 dated 9th August 2004 regarding
the rural banks was promulgated. As of year end
2005, Bank Indonesia had provided subsidies to 1,082
certification participants.
Technical Assistance for Human Resources and BPR
IT Development
Technical assistance and IT development is as follows:
a. Providing technical assistance for manager-level BPR
human resources, in particular the Account Officer
(AO), to enhance technical competency in the form
5) Encouraging Rural Banks to Spread Beyond Java
and Bali
To enhance the role of rural banks and their
contribution to micro and small enterprises as well as
rural communities in Indonesia, rural banks are expected
to mushroom throughout Indonesia. Permits for rural
banks in Java and Bali are allocated very selectively;
however, rural banks are actively encouraged outside Java
and Bali.
To foster BPR expansion, Bank Indonesia and the
management institution PPM conducted a scientific study,
the BPR Establishment Feasibility Study, to design a formula
for evaluating the potential and feasibility of appropriate
and accountable rural banks. Based on the study, BPR
Establishment Feasibility Study Evaluation Guidelines have
been drawn up. The guidelines will be socialized in the
form of training of Bank Indonesia staff/officers, which
are in charge of BPR permits, in January 2006.
6) Designing a BPR Blueprint
To design a BPR Blueprint, Bank Indonesia conducted
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2. Two PBIs; one to bolster banking institutions in terms
of capital and the other to augment the quality of
risk-management in commercial banks;
3. Three PBI revisions to ameliorate the effectiveness of
the reporting system and boost commercial bank
transparency;
4. PBI revision to raise the quality of collateral related to
the Short-term Funding Facilities of Commercial
Banks;
5. PBI revision to develop the supervisory follow-up
action mechanism and commercial bank status
determination, through ratifying laws regarding the
Saving Guarantee Institution;
6. PBI revision on rupiah exchange rate stability in the
form of regulations pertaining to the Minimum
Reserve Requirement of commercial banks, both in
rupiah and foreign currency, and on the Net Foreign
Exchange Position of commercial banks;
7. Seven PBI special regulations on sharia banking
stipulating capital issues, agreement standards,
enhancement of BPRS monthly reporting
effectiveness, a short-term financing facility for sharia
banks and transparency;
8. Four PBI for rural banks detailing special treatment
and post natural disaster protocol for rural banks in
Nangroe Aceh Darussalam, Nias and North Sumatra,
abolishment of the blanket guarantee and BPR follow
up in terms of new laws concerning the
Savings Guarantee Institution, and BPR monthly
reporting effectiveness; and
9. PBI outlining technical assistance to micro, small and
medium enterprises.
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Chapter 3Banking Supervisory
Framework
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A. OBJECTIVE AND STRATEGY OF BANKING SUPER-
VISORY
Bank Indonesia implements banking supervision
through on-site supervision and off-site supervision. On-
site and off-site supervision aims to provide a picture of
the banking financial situation, monitor the compliance
level towards prevailing regulations, and detect the
presence of unhealthy practices that may threaten banking
business continuity. The goal of banking supervision is to
create a healthy, strong and efficient banking system to
support national economic growth.
In reality, off-site supervision is conducted through
monitoring periodic reports submitted to Bank Indonesia
of inspection results and other kinds of reports. In terms
of on-site supervision, if required, Bank Indonesia performs
inspection on the bank, including its related parties such
Chapter 3Banking Supervisory Framework
improvement plan. In determining the banks status, a bank
may be categorized as: a bank under general supervision;
a bank under intensive supervision; a bank under special
surveillance; a bank with systemic impact; and a bank with
non-systemic impact.
In exercising supervision, the Directorate of Banking
Supervision conducts cross coordination among work units,
including:
UKIPthat later became DIMPin the case of following
up on inspection results indicating criminal actions;
The Credit Bureau to deliver Bank Indonesia Liquidity
Credit and its banking administration;
Directorate of Monetary and Economic Statistics to
oversee the Commercial Bank Monthly Report;
Directorate of Payment System and Accounting to
implement BI-Real Time Gross Settlement (RTGS); and
B ki S i i R t
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Indonesia has, among others, taken the following
measures:
1) Bank Supervisor Certification for Risk Management;
2) Calculation of bank CAR by calculating market risk;
3) CAMELS evaluation;
4) Bank risk profile compilation;
5) Individual Supervisory Strategy (ISS) compilation;
6) Bank internal control system effectiveness evaluation;
and
7) Basel II preparation with national banking institutions.
Furthermore, to ameliorate supervisor competency,
specialist supervisory groups have been established, namely
the Treasury, Information System Technology, Know Your
Customers/Anti-Money Laundering (KYC/AML), Aqua/
Trade Finance, and Risk-based Supervision (RBS). The
specialist groups mentioned employ the services of
inspectors with relevant expertise and experience.
1. Risk Management Implementation
Rapid change in internal and external banking
environments has been accompanied by more complex
(v) individual banks supervisory strategy; and (vi)
implementation of tailor made banking supervision and
supervisory follow up. Based on the mentioned cycles, close
coordination between off-site and on-site supervisors is
crucial to create an effective and efficient supervisory
system.
In addition, to enhance numerous facets of the
supervisory system, various program applications have been
implemented, including risk management, good corporate
governance,an evaluation system of a banks health based
on CAMELS, and the application of Know-Your-Customer
(KYC) rules. The practice of such programs is expected to
strengthen the supervisory system to create a sound, robust
and efficient banking system to support national economic
growth.
In the evaluation of risk-management
implementation, in particular related to internal control, a
supervisor shall conduct several measures, including:
1) Evaluating the internal control system guidelines
submitted by a bank. If considered inappropriate, the
supervisor shall present a letter of guidance to the
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amongs the board of commissioners and directors; policy,
procedure and limit determination adequacy; an
identification process, measurement, monitoring and risk
control, as well as risk-management IS adequacy; and a
thorough internal control system. Monitoring risk-
management application is conducted by classifying
banking risks into eight categories, viz. Credit Risk, Market
Risk, Operational Risk, Liquidity Risk, Legal Risk, Reputation
Risk, Strategic Risk and Compliance Risk.
The evaluation of those mentioned risks is very much
determined by the complexity of a banks business. A bank
with high business complexity, despite being classified as
a small or medium bank, will be evaluated using eight
risks in total. On the other hand, a bank with medium or
regular business complexity will only be evaluated using
five risks, namely Credit Risk, Market Risk, Operational Risk,
Liquidity Risk and Compliance Risk
Different banks are at different stages of
preparedness in terms of risk management
implementation. Large-scale banks, in general, already
have their own risk-management special work units,
develop parameters and models that really reflect their
business activity risks. In addition, banks also commonly
have a problem with data availability and adequacy, both
internally and externally (national banking).
The application of banking risk management requires
attention on the following issues:
1) Relatively uneven credit distribution will potentially
raise credit risk;
2) The domination of short-term core depositors and
deposits will potentially increase liquidity risk;
3) Inappropriate bank operational guidelines, with no
updating and no periodic evaluation will potentially
increase operational risk;
4) More integrated banking products and insurance, as
well as capital market products without proper
disclosure of information from banks personnel and
without clear explanation to customers, will potentially
intensify reputation, legal and compliance risks; and
5) Data availability and adequacy both internally and
externally (national banking).
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Box 3.1 Good Corporate Governance
The application of GCG should include the
ownership factor because of its specific uniqueness
and the underlying difference of issues. As we know,
a bank can be categorized as a state-owned bank; a
private-owned bank and a public-owned bank when
ownership is diffused (diffused nature of shareholder
base).
Moral hazard of a state-owned bank and a
diffused-ownership bank normally occurs in the
centralized power of top management or the bank
executives. The lack of a dominant shareholder role
may increase the role and power of the management
executives. On the other hand, for an individual or
group-owned private bank, moral hazard may occur
in the centralized power of the owners or controlling
shareholders that act as commissioners.
Nevertheless, in general, PSP influence to
distribute a banks money to their own companies has
been greatly reduced in line with growing awareness
is the most common fraud. This kind of fraud is
relatively easy to identify and detect as it is in the
form of a theft of a tangible asset.
2. Financial Misrepresentation or misleading financial
reporting that may misinform the financial report
user and lead to inaccurate decision making.
3. Corruption & Bribery, misuses office power for
mutual benefit, which is difficult to prove due to
the mutual benefit factor. For example,
cooperation between a company officer and
supplier in the form of cost or expense mark-up is
difficult to prove.
Against this backdrop, Bank Indonesia as
supervisor will continue to encourage all banks under
its supervision to keep improving GCG application
actively and proactively. Continuous improvement is
necessary of the banks internal control systems and
human resource development as human capital is
extremely important in GCG application. Yet, above all,
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g p p
No. of Banks %No. of Banks %No. of Banks %No. of Banks %No. of Banks %
1. Very good 2.3% 0.8%
2. Good 58.1% 53.1%
3. Adequate 36.5% 39.1%
4. Fairly good 3.1% 7.0%
5. Poor 0% 0%
TotalTotalTotalTotalTotal 100%100%100%100%100% 100%100%100%100%100%
Table 3.1Commercial Banks Ratings
Composite RatingComposite RatingComposite RatingComposite RatingComposite RatingDecember 2004December 2004December 2004December 2004December 2004 December 2005December 2005December 2005December 2005December 2005
3. CAMELS Rating System Implementation
Along with PBI No. 6/10/PBI/2004 dated 12th April
2004 regarding the Health Level Evaluation System of
Commercial Banks, Bank Indonesia has used an evaluation
system known as CAMELS (Capital, Asset Quality,
Management, Earning, Liquidity, and Sensitivity to Market
Risk) since the December 2004 evaluation period. Based
on the PBI, the bank health level is defined as a qualitative
evaluation result of various aspects influential to the
condition or performance of a bank through Quantitative
and/or Qualitative Evaluation of capital, asset quality,
management, profitability, liquidity and sensitivity factors
against market risk. For Foreign Bank Branch Offices, the
evaluation is only made on asset and management quality
factors.
Compared to the previous evaluation approach, there
are now several basic differences including: more emphasis
on qualitative evaluation, risk-management is calculated
in the management factor evaluation, and it is more risk
sensitive with the presence of a sensitivity evaluation
against market risk.
From the evaluation, Bank Indonesia may ask the
board of directors, commissioners and/or shareholders to
submit a follow-up plan containing improvement measures
to be taken by the bank within a specific time period.
A Comparison of Commercial Banks Composite
Ratings as of December 2004 and 2005 is presented in
Table 3.1.
4. Know-Your-Customer/Anti-Money Laundering
(KYC/AML)Principles Implementation
The banking industry is faced with money laundering
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Box 3.2
The Bank Indonesia regulation related to the KYC
or Know-Your-Customer principles has experienced a
number of improvements in line with prevailing best
practices. This means that Bank Indonesia now has
the tools applicable by supervisors to conduct its
enforcement function on banks under supervision. In
accordance with the issuance of PBI No. 6/37/PBI/2004
dated 10th September 2004 regarding the Evaluation
and Penalties concerning the Application of Know-
Your-Customerprinciples and other Obligations related
with the Money Laundering Criminal Law, the
evaluation of KYC and Money Laundering Criminal
Law application is included in the calculation of the
health level of commercial banks through management
factors covering Active Supervision by Management;
Policy and Procedures, Internal Control and Internal
Audit Function; Management Information System, and
Human Resources and Training with a rating from one
fi V G d G d Ad F i l G d P
Based on the inspection/supervision of KYC/AML
application, certain facets of implementation that
require enhancement are as follows:
- Support ing in fras truc ture for KYC/AML
application, such as information system
technology that supports banks efforts to monitor
financial transactions conducted by a banks client
(related to the Suspicious Transaction Report or
STR and Cash Transaction Report or CTR);
- Periodic adjustment/updating of customer data
Know Your Customer/Anti-Money Laundering and Anti Money Laundering
Criminal Law
BankBankBankBankBank KYC RatingKYC RatingKYC RatingKYC RatingKYC Rating %%%%%
Banks with a rating of 1 (Very Good) 4 3.13%
Banks with a rating of 2 (Good) 16 12.50%
Banks with a rating of 3 (Adequate) 68 53.13%
Banks with a rating of 4 (Fairly Good) 40 31.25%
Banks that are unrated 0 0%
Total Banks 128 100%
Source: Banking Supervision
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- KYC/AML policy and procedures; and
- Establishment of Know-Your-Customer Work
Units; with regards to the fact that the
organization will be more oriented towards costs,
particularly for small-scale and medium-scale
banks.
Supervision of KYC/AML application covers the
examination of KYC/AML Application Guidelines
submitted by banks, including any revisions/
improvements/adjustments. Based on such
weaknesses, continuous guidance must be provided,
for example by conducting special meetings with the
bank; meeting with the banks management to discuss
inspection results; sending a supervisory letter to
remind the bank to immediately follow-up on
outstanding issues; consider the importance of KYC/
AML implementation, for the sake of the bank, the
people and the country.
In addition, there is an information exchange
cooperation between bank supervisors and the
Financial Transaction Analysis Examination Center
particularly concerning Suspicious Financial Transaction
Reports, which may or may not have been submitted
by a bank that must be followed up by supervisors
based on inspection results.
In this case, it is the banking supervisors duty
to encourage and reinforce efforts to truly exert
preventive measures against money laundering
practice, among others through the Know-Your-
Customer (KYC) principle application. Subsequently,
in this case, a supervisor training on money
laundering will also be continuously conducted
periodically.
Several factors that require attention to enhance
KYC/AML application quality in the future included:
an internal control support; internal audit function
optimization; an adequate management information
system (MIS), and law enforcement enhancement
regarding the rules of KYC/AML. In addition it is
equally important to enhance bank officers
awareness in timely reporting of the Suspicious
Transaction Report
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The Business Plan should cover the upcoming three-
year period, however, the bank must submit it to Bank
Indonesia annually every January. For example, in January2005, a bank must submit its 2005-2008 plans, whereas
in January 2006, the bank must submit its 2006-2008
plans. The Bank Supervisor shall evaluate whether the
Business Plan submitted by bank has complied with
prevailing rules, namely being realistic, measurable,
responsive to internal and external factors, taking into
consideration prudential and sound banking principles. The
evaluation of whether or not the Business Plan projection
figures are realistic shall be conducted by a Bank Supervisor
using stress testingon the base casescenario and historical
data. When the Business Plan is deemed not to satisfy
those criteria, Bank Indonesia can request the bank to make
adjustments. On the other hand, the bank is allowed to
make one-off revision to its Business Plan when there is a
significant change in internal or external factors that affect
the banks financial condition. The Business Plan revision
must be submitted in writing to Bank Indonesia by or
before the end of first semester of the current year,
Based on the Business Plan recapitulation of all
commercial banks in 2005, total commercial bank assets
were projected to grow by 12.7%, namely from Rp1,272.1trillion at the end of 2004 to Rp1,434.0 trillion at the end
of 2005. By December 2005, commercial bank total asset
realization had exceeded the original target, more
specifically Rp1, 469.8 trillion, or 102.5% of the 2005 year
end target.
Commercial bank total assets surpassed their target
largely due to the realization of deposits. Total commercial
bank deposits (demand deposits, savings and time deposits)
reached Rp1,127.9 trillion by the end of December 2005;
or 102.4% of the 2005 year end target of Rp1,101.7
trillion. The relatively good realization of deposits cannot
be separated from the tremendous efforts of banks to
attract the publics money by offering higher interest rates
and many other incentives like prizes, bonuses and more.
The relatively good performance of deposits was
balanced by credit allocation realization. Until December
2005, total credit allocation from all commercial banks
totaled Rp730.2 trillion or 100.7% of the year-end target:
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Box 3.3 The Barriers of State-owned Bank Non Performing Loans Settlement
The relatively high NPL of State-Owned Banks, Finance includes self-managed state wealth/regional
8.3%, representing a hike compared to the year-end 2004
position of 5.8%. Meanwhile, despite remaining below
the maximum 5% level stipulated by Bank Indonesia, theNPL net ratio for commercial banks was 4.8% by the end
of December 2005, which was also higher compared to
the 2004 year-end figure of 1.7%.
For Micro, Small and Medium credit, gross NPL
remained relatively low, namely 3.2% at the end of
December 2004 and 3.7% at the end of December 2005.
Tighter competition between banks and the higher
deposit interest rate compared to the credit interest rate
narrowed the profit margin of banks. Overall, the total
net profit of commercial banks up to the end of December
2005 was Rp24.9 trillion; only 90.3% of the Rp27.6 trillion
target. The drop in banking profitability at the end of 2005
was also reflected by a falling Return-on-Assets (ROA) ratio
from 3.5% in 2004 to 2.6% at the end of December 2005.
The unfavorable net profits mentioned above, in
time, will affect capital realization. The Capital Adequacy
Ratio (CAR) of commercial banks was 19.5% at the endof December 2005; slightly below the target of 20.6%.
Deviation from the targeted CAR was less drastic than for
net profit as well as total capital because it was partially
compensated by the Weighed Asset According to Risk (as
a denominator component in the CAR calculation), which
was also below the stipulated target.
Against this backdrop, the realization of commercial
banks business plans in 2005 has not been fully
successfully in line with designated targets. Although the
realization of total assets and deposits was considerably
good, the economic condition during the last quarter of
2005 was not favorable and the interest rate hike reduced
commercial banks profit gain.
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Loans, among others specifies that government
loans will only cover central government loans.
The absolute annulment of state enterprise loans
can only be conducted after management is taken
over by the Branch of the Committee for
Managing Government Loans (article 3)
It is stated in Article 9, PMK No. 31/PMK.07/2005
that an absolute annulment is meant as the dissolution
of the government enterprise loan claim. Meanwhile,
the claim termination shall be conducted by:
a. Principle loan termination shall be decided by the
Minister of Finance;
b. Loan interest, penalty and or costs of the
annulment shall be decided by the concerned
government enterprises.
Hence, considering that state-owned banks must
follow the above mentioned loans/credit procedures,
therefore, they do not have any authority to terminate
loans against the principle loan to resolve non-
performing loans as conducted by private banks that
can sell the dissolved credit and/or credit collateral by
institution or enterprise... Further it was said that if
not successful, the resolution must be handed over to
the Committee for Managing Government Loans. The
sense/scope of the first level asset settlement is clarified
in the following implementation guidelines:
a. Article 2 paragraph 1 of Minister of Finance Decree
No. 300/KMK.01/2002 regarding the
Management of Government Loans emphasized
that the settlement of first level government loans
must be resolved by the concerned state
enterprises themselves in accordance with
prevailing rules of law.
b. Article 2 paragraph 2 of the mentioned Minister
of Finance Decree further regulates that in the
case of unsuccessful first level settlement, the
related state enterprise must hand over the
management of such government loans to the
Committee for Managing Government Loans
Based on these rules, there remains no clarity in
the scope of first level settlement that can be conducted
by state-owned banks. Considering the high NPL of
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6. The Impact of Mutual Funds
One of the barriers that affected national banking
system sustainability during 2005 was constraints in mutualfunds. Unlike 2002 and 2003, which saw the kindling of
mutual funds products, 2005 marked the turning point
with huge redemptions and withdrawal actions.
Meanwhile, the mutual funds heyday in 2002 and 2003
triggered the banking industry to join the party by acting
as mutual funds selling agents - with among others,
underlying government bonds - issued by investment
managers, from the banks subsidiaries (securities
companies).
Actually, investor funding withdrawal from mutual
funds products was not something extraordinary, because
as an investment product, it has major inherent market
risk stemming from fluctuating investment value, which
depends on existing market parameters against the
benchmark. Unlike traditional banking products, such as
savings and time deposits, mutual funds have specific
consequences. Consequently, investors must have
sufficient knowledge and understanding when involved
probably did not fully educate or socialize the risks to
prospective investors or only explained the potential profit
gain rather than any consequences of loss. Moreover, banksacting as selling agents spread through various areas of
the country instead of being concentrated in the head
office. This spread existing expertise thinly, which lead to
a lack of knowledge in the branch offices.
To combat these problems, the Deputy Governor
issued a circular addressed to all banks in the form of
Circular No. 5/13/DPG/DPNP dated 3rd October 2003
concerning Prudential Principles for Banks in Conducting
Activities related to Mutual Funds. Through this bill, in
essence, Bank Indonesia prohibited any banks involved in
mutual funds activities to act as standby buyers for bonds
portfolios available with the investment managers. As a
consequence, bonds transactions between banks and
investment managers (partly owned subsidiaries) must be
conducted transparently and should refer to mark to
market. Ergo, a bank must include its investment manager
logo and clearly explicate the inherent investment risks to
clients regarding mutual funds, which are not guaranteed
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Box 3.4 The Mutual Funds Case of Bank Global (Management Integrity as a Key Factor)
The criminal case of PT Bank Global in 2004
almost happened without warning; everything seemed
to be running fine. One of the rating agencies even
raised Bank Globals rating from BBB to A- in July 2003.
Beyond Bank Indonesias and Bapepams(Capital
Market Supervisory Authority) knowledge, banks
without valid permits/certification to act as selling
agents had, in fact, been selling mutual funds1 to the
public since 2003. This caused bank deposits to plunge
from Rp1.5 trillion in mid 2003 into Rp800 billion at
the end of 2004.
The funds collected from the sales of mutual
funds to the public were not used to actually buy
mutual funds, but were embezzled by corrupt
management for personal use This was a blatant
management. No matter how good the system is if
management has no integrity it is useless. Nevertheless,
all systems have flaws and this is what Bank Indonesia
strives to continually improve as the banking supervisor
authority.
In the Bank Global case, the weak point exploited
by the corrupt executives was poor coordination and
weak legal infrastructure that served as an umbrella
covering the banks activities in terms of financial
services. This was reflected by the following points:
(i) Reporting of financial services business activities.
The bank did not report/acknowledge its mutual
funds selling activities to Bank Indonesia. However,
the problem remained that mutual funds were not
a bank product and are regulated by Bapepam
b) Ensure that the respective mutual funds have obtained
an effective statement from the capital market
authority in accordance with prevailing rules of law;
c) Identify, measure, monitor and control risks stemming
from activities related to mutual funds; and
d) Provide complete and transparent information tocustomers.
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Based on mutual funds inspections of banks during
the 20042005 inspection period, the unhealthy banking
practices were found to be as follows:
submitted investor data to the custodian bank and
likewise the custodian bank never submitted any
report to the bank.
Coupled with risk-management imple-
mentation, Bank Indonesia issued Circular No. 7/19/
DPNP dated 14th June 2005 on Risk-management
Application for any Bank Conducting Activities related
to Mutual Funds. This circular obliged concerned
banks to provide complete and transparent
information to customers. In particular, to explain that
mutual funds are a capital market product for which
the bank has no responsibility for any risks incurred.
Also, that those mutual funds are not covered by the
Government Guarantee Program.
Whats next?
Financial services products have been developingso rapidly and the business conflict of interest between
non-bank financial institutions and banks is becoming
more intense. Against this backdrop, coordination with
the related financial services authority must be
continually enhanced. To this end, the idea of universal
banking in that financial services institutions can
conduct both banking and non-banking business
activities requires a clear legal umbrella. This would
enable due supervision to be executed more
comprehensively.
Bank Indonesia will also continue to monitor
financial services products that involve banking
activities. Despite awareness that legal infrastructure
development always lags behind societal dynamics (in
this case financial services products), Bank Indonesia
should have been alerted to this alarming condition asearly as possible in order to take immediate anticipative
measures.
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Box 3.5 The Mutual Funds Case of PT Bank Negara Indonesia Tbk.
The huge redemptions that occurred in 2005could basically have been resolved by mutual funds
players, but not the BNI Dana Plusmutual funds issued
by BNI Securities and marketed by PT Bank BNI (Persero)
Tbk (Bank).
The bank served as a mutual funds selling agent,
known as BNI Investment, since October 2002. BNI
Investment was the product link for selling BNI Dana
Plusmutual funds issued by BNI Securities (the banks
subsidiary). One of the banks objectives in marketing
the BNI Investment was not to lose its depositors.
Therefore, initially, BNI Investment was designed to look
like a deposit account, promising a fixed return of 2.5%
above the deposit interest rate within a certain time
frame.
The bank did not fully act as a BNI Dana Plus
mutual funds selling agent exposing the bank to
liquidity risk, market risk, legal risk and reputation risk.
If the bank had acted solely as a selling agent, it would
The banks mutual funds activities developedrapidly, as signified by an increase in NABand the number
of participating units. However, triggered by higher
interest rates that lowered the bond price, in early July
and September 2005, huge, rush redemptions from
customers followed. This was generated by a NABper
unit drop due to a falling government bonds price in the
investment portfolio of the BNI Dana Plusmutual funds.
The bank was trying to socialize and educate its
selling agents spread throughout the branches, but it
seems the socialization and education process falte