Indonesia's New Banking Bill 

December, 2014 -

The Banking Bill governs commercial (Bank Umum) and rural (Bank Perkreditan Rakyat) banks (Banks), and provides the procedure and requirements for establishing Banks, the restrictions on foreign ownership in Banks, the criteria for being appointed as senior executives or being controlling shareholders of Banks, and requirements regarding Bank soundness levels. The Banking Bill will replace the current Banking Law No. 7 of 1992 (as amended).

The latest update is that the ratification of the Banking Bill as a Law is still pending. It is expected that the newly elected members of the House of Representatives together with Bank Indonesia, the Financial Services Authority (OJK), and other related parties will sit together to discuss its application and the consequences, in particular with respect to the limit on foreign ownership of commercial banks. The following is a brief summary of the provisions of the Banking Bill available to date, which may subsequently change of course.

1. Form and Ownership

In Indonesia, all commercial banks, including foreign owned banks, must be established as an Indonesian limited liability company (PT). Unlike commercial banks, a rural bank can be either a PT or a cooperative. Banks with offshore headquarters must establish an Indonesian limited liability company in order to do business in Indonesia. The OJK has authority to determine ownership thresholds for Indonesian citizens and legal entities in commercial banks.

Foreign ownership, on the other hand, is capped at 40%, and consequently, if the Banking Bill becomes law, if the foreign ownership in a commercial bank is more than 40%, the foreign held shares over this threshold will have to be divested to Indonesian citizens or legal entities within ten years of the enactment of the law. However, Banks with less than 40% foreign ownership will be reported to the Coordinating Forum for the Stability of the Financial System (Forum Koordinasi Stabilitas Sistem Keuangan/FKSSK), which will then provide a recommendation to the OJK with a deadline for the bank to increase its foreign ownership to 40%.

2. Licensing

To provide services to the public, Banks must hold an OJK license which will be issued to those Banks that satisfy certain requirements. To establish branch offices, Banks require approval from the OJK. Commercial Banks owned by regional governments may not establish branch offices outside their jurisdiction, unless they satisfy certain capital requirements set by the OJK. Similarly, rural Banks may only do business within one province.

3. Articles of Association

The Articles of Association of a Bank must cover at least:
  • OJK approval for the appointment of directors and commissioners;
  • the establishment by the Bank’s General Meeting of Shareholders of task management, the remuneration of commissioners and directors, the annual accountability report, the appointment and remuneration of public accountants, and the use of earnings;
  • the obligation to dismiss commissioners, directors, and executive officers of Banks who do not pass the OJK fit and proper test;
  • a prohibition against pledging shares owned by shareholders;
  • the obligation to transfer the controlling shareholder’s shares if the controlling shareholder does not pass the fit and proper test; and
  • other matters specified by the OJK Rules.
4. High-Ranking Officers and Controlling Shareholders
  • High-Ranking Officers
Commercial Banks must have at least three directors and three commissioners. Rural Banks must have at least two directors and two commissioners. The Board of Directors is chaired by the President Director who should be independent from the Controlling Shareholders. The Board of Commissioners is led by the President Commissioner. It is expected that all directors and commissioners are Indonesian nationals. Further, all directors and the President Commissioner must be domiciled in Indonesia.
If a director, commissioner, or other specific officer fails to comply with the prudential principles, risk management or good governance requirements, the OJK is authorized to order the individual to leave his/her post.
  • Controlling Shareholders
A “controlling shareholder” is defined as a legal entity, individual and/or business group that meets the following criteria:
- holding 25% or more of the shares issued with valid voting rights in the Bank; or
- holding less than 25% of the shares issued with valid voting rights in the Bank, if it can be proved that the shareholder has direct or indirect authority to control the Bank.
The controlling shareholders of Banks must also pass the OJK fit and proper test. If a controlling shareholder candidate fails the OJK fit and proper test, it must divest all of its shares in the Bank.

If the Controlling Shareholders engage in activities that do not comply with the prudential principles, risk management or good governance requirements, the OJK is authorized to order them to sell some or all of their shares to other parties or sell the Controlling Shareholders’ shares if the time limit for selling the shares set by the OJK expires.
5. Credit

Before providing any loans, Banks must analyse the debtor’s ability to settle the debt. For this, the OJK governs the information system creditors may use. Banks should adhere to the permitted loan threshold, ie 30% of the bank’s capital. In certain circumstances, the OJK may set the threshold below 30% of the bank’s capital.

6. Sanctions

Administrative sanctions from written warning to revocation of the Bank license may be imposed for violations of the law. For certain violations, criminal sanctions from fines to imprisonment may apply.


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