The banking system of a country supports the economy of the country. If the banks of the country fail, this failure would create a problem for the people who live there as well as the companies which have placed much money in those banks. Banks may fail if the management of the banks makes poor financial decisions or if sufficient amounts of money do not circulate within the economy. These circumstances may in turn lead to an economic crash and subsequently a protracted recession in the country where the banks are located.
Therefore, in order to prevent such negative circumstances from taking place, regulation of banks is required. Regulation of banks oversee the investment decisions of banks. Regulations that govern banks in a given country also state the minimum or maximum capital required to be held by banks during a financial year. These regulations generally allow the banks to avoid any unexpected failures. The regular audits and economic changes required for the improvement of the banks’ condition also come from government regulations. Therefore, regulations help major banks to better serve account holders.
Laws Governing Indonesian Banks
Several laws govern the functioning of international and local banks alike in Indonesia. Bank Indonesia (BI) regulates the banking industry in Indonesia. It implements various monetary policies and maintains the stability of the rupiah.
Banks in Indonesia are governed by Law No. 7 of 1992 which has since been amended by Law No. 10 of 1998. Law No. 7 was created to support Islamic banking practices. Law No. 10 allows commercial banks and rural banks alike to operate on Islamic banking principles. Law No. 21 of 2011 oversees regulations concerning monetary policies. It also regulates and supervises the banking institutions, keeps a check on banks’ solvency status, and carries out examinations of banks.
BI has issued Regulation No. 14/24/PBI/2012 which addresses the Single Presence Policy (SPP). This regulation improves the competitiveness of the banking system in Indonesia by raising the standards of supervision while also streamlining the ownership of banks. There are certain criteria which banks in Indonesia must fulfill in order to comply with this regulation. One of these criteria is that any foreign exchange from exports must be received through a foreign exchange bank in Indonesia within three months of the receiving of the foreign exchange. Exporters are also to report all export declarations related to any export which is worth more than US$10,000. Any foreign exchange received through an offshore loan must also be withdrawn through a foreign exchange bank in Indonesia and reported to BI.
There are a few other new laws made which allow private banks to sell their shares to the public. These new laws also enable foreigners to purchase shares of the domestic banks listed on the Indonesia Stock Exchange.