The Legal 500

Indonesia is on the verge of passing a new law on banking, which will replace Law No. 7 of 1992, as amended by Law No. 10 of 1998. The driving force behind the new law is the creation of the OJK (Financial Service Authority), and the resulting allocation of regulatory and supervisory powers from the central bank (Bank Indonesia) to the OJK. The current draft of the new law (this newsletter refers to the third draft available as of 14 May 2012) provides the OJK with wide scope to regulate the banking sector, which is a departure from the earlier drafts that sought to set out more of the key provisions within the text of the law itself.

The specific notable changes from the present regime that are proposed under the current draft are the requirement for branch offices of foreign banks to incorporate as Indonesian limited liability companies (PT) and the way foreign ownership of banks is regulated. 

The requirement for branch offices of foreign banks to be incorporated as a PT stems from a desire to bring all banking activities more firmly within the regulatory and supervisory authority of the regulators. How this requirement will interact with the broader regulations and oversight of the banking sector remains unclear, and it remains to be seen whether the OJK elects to tighten the regulation of branch offices.

Earlier drafts on the law sought to restrict foreign ownership to 49%, leaving it unclear whether such a restriction would apply retroactively and whether there would be an adjustment period. The current draft sidesteps the issue by delegating to the OJK, who will have the authority to set any restrictions, both foreign and domestic, on bank ownership.

Relating to restrictions on ownership, there has been a nearly continuous stream of commentary from Bank Indonesia regarding imposing restrictions on ownership in banks. Early comments suggested a plan for a limit on foreign ownership, which later shifted to an intention to regulate any ownership, with planned limits of 40% for financial institutions, 30% for companies and families, and 20% for individuals. The latest comments (by Muliaman D. Hadad, the Deputy Governor of Bank Indonesia, who is in charge of banking regulation, on 20 June 2012) suggest that higher levels of ownership, including by foreign parties, will be allowed as long as certain financial health and corporate governance criteria are met. State owned banks would be exempt.

Furthermore, Muliaman D. Hadad has been appointed as the Chairman of the OJK on 19 June 2012. Considering this, it would appear likely that the above-described restrictions are likely to continue after the shift in regulatory power from Bank Indonesia to the OJK following the passage of the new law. 

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