Indonesia

Author: | Published: 1 Apr 2005
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In an effort to regain public trust after the Indonesia's banking crisis in 1998, the Indonesian government provided a blanket guarantee over all of a bank's obligations to its depositors. Regulations on the blanket guarantee were provided under Presidential Decree 26 (1998) on Guarantee of Commercial Banks Obligations, which was further amended on February 27 2004 by Presidential Decree 17 (2004).

This decree has rebuilt public trust in the banking industry, but the broadness of the government guarantee has placed a burden on state finance and has created a moral hazard for bankers and depositors. Bankers are not compelled to perform prudent banking business, and depositors pay less attention to a bank's condition. In addition, there is no adequate legal certainty, which makes implementing such a broad guarantee difficult. So the government plans to withdraw the blanket guarantee gradually.

Consequently a replacement is needed for the government's blanket guarantee to provide insurance on people's deposits. This replacement will be the deposits insurance agency (DIA). Other countries that have a reliable DIA in Asia are, among others, the Philippines (since 1963), Korea (since 1996), Taiwan (since 1985), and Japan (since 1971). DIAs have been recognized in the US since 1933 and in Canada since 1966.

Indonesian Banking Law 7 (1992) has been amended to include provisions on the DIA. The law now states that banks are obliged to insure people's deposits; and, for this insurance, a DIA must be established.

Since amending the Indonesian Banking Law, the government has conducted intensive follow-up action together with the Department of Finance, the Indonesian Bank Restructuring Agency (IBRA), and Bank Indonesia as the monetary authority. A draft DIA Law was submitted to the House of Representatives in late 2003 and was enacted as the Deposit Insurance Agency Law 24 (2004) on September 22 2004, which will only be effective by September 22 2005.

Once it is established, the Agency, which must have a starting capital of Rp4 trillion ($425 million) to Rp8 trillion, may impose administration sanctions upon banks that violate the requirements to pay premiums and provide periodical reports in the designated format. It can only provide a maximum Rp100 million insurance undertaking on one customer's deposit per bank.

To cover the gap between the dissolution of the IBRA and the enforcement of the new law, the government set up a Government Guarantee Implementing Unit within the Department of Finance to conduct deposit guarantees for ailing banks in situations such as the recent crisis of Bank Dagang Bali and Bank Global International.