BANKING

THE INDONESIA BANKING For the last two years, Bank Indonesia has been working towards a better future for the Indonesian banking industry through implementation of the programs under the Indonesian Banking Architecture (API). In this role, Bank Indonesia has both initiated programs and provided facilitation. Related Info Publication of API (in Bahasa) Frequently Asked Questions of API for Small-Scale Enterprise Development SI-PUK The development of SI-PUK is closely related to the policy and strategy of Bank of Indonesia in promoting the development of small enterprises, which has been carried out since 1978 until the implementation of Act No. 23/999. It is a mean for small enterprises development through the provision of useful information. According to Act No. 23/1999 Bank of Indonesia is not allowed to provide direct financial supports in term of KLBI to business entities including small enterprises. The role of Bank of Indonesia is to provide indirect supports through maintaining the stability of exchange rate, establishing healthy banking including BPR, supporting an Islamic banking system, regulating loan policy, and providing technical supports and facilities. The following activities are conducted to support small enterprises: 1. Training Training for banks is intended to introduce, motivate, and develop the capacity of banks to facilitate and finance micro or small enterprises as well as to develop a synergic relationship between banks and micro or small enterprises. For micro enterprises, the training is focused on the group lending system through a bank and community group relationship project (PHBK). For small enterprises, the training is tailor-made according to the needs of banks for small enterprise development. 2. Research The scope of researches includes all banking aspects for increasing loan to small or micro enterprises as regulated by Bank of Indonesia. The research object is determined annually according to the work plan and needs. 3. Provision of information Types of information provided include loan data, potential commodities to be developed in district and sub district levels, potential export commodities, lending model for small enterprises, loan-obtaining procedure, and other information related to loan for small enterprises. Dissemination of information is carried out through mass media, electronic media and seminar or workshop. The success of a program depends on the supporting information. SI-PUK is a set of internet-based information systems, which designed by Bank of Indonesia to support banks and financial institution to provide loan for small enterprises. It is an integrated and user-friendly system, which consists of the following sub system : Information system of Baseline Economic Survey (SIB) Information system of export-oriented agroindustry (SIABE) Information system of Lending Model for small enterprises (SI-LMUK) Decision support system for investment (SPKUI) Information system of loan obtaining procedure (SI-PMK) The development of SI-PUK is encouraged by the fact that small enterprises have a strategic role to the national development, particularly in providing job opportunity and distributing equally the products of development. The characteristics of small enterprises includes : High number and widely distributed in various economic sectors Large potency for job opportunity Ability to utilize local resources and to produce goods needed by community at reasonable price. As a commitment of Bank of Indonesia, since 1978 BI has been conducting activities to support the development of small enterprises. Through a Small Enterprises Development Project (PPUK), BI provides technical supports to banks for increasing access of banks in financing small enterprises. One of the supports is the provision of information resulted from researches conducted by BI in collaboration with university research centers. It includes (1) Baseline economic survey, (2) research on export-based agroindustry, and (3) research on lending model for small enterprises. The information is provided in an integrated system to make easy for users that related to the development of small enterprises to use it. The system is called SI-PUK, which accessible through web site of BI and provided both in Bahasa Indonesia and English. To initiate improvements, Bank Indonesia has issued regulations to enable the banking industry to operate prudently, bring itself into line with international standards, and pay greater attention to customer rights. In the area of facilitation, Bank Indonesia has sought to build constructive cooperation with the relevant stakeholders in the API programs in order to create a stimulus for the development of a sound, strong, and efficient banking industry. Following its launching on January 9, 2004, the API has met with a wide range of suggestions and constructive criticisms for better integration of the API programs into programs of the national economy. Global developments in banking also require various changes to be made to the API programs so that in time, the national banking industry will be capable of holding its own in international competition with the support of competent human resources, adequate information technology, and appropriate supporting infrastructure. In response to these needs, Bank Indonesia has redesigned the API programs, which are set out in this second edition of the API booklet. In essence, the revised API programs set out a more concrete direction and strategy for the consolidation of the banking system, long-term development of sharia banking, expansion in financing for small, medium, and micro enterprises (SMMEs), and the institutional strengthening of rural banks (BPRs). Overall, the improvements to the API have resulted in additional programs and activities. These programs and activities, which are to be progressively implemented until 2013, have increased from initially 19 programs covering 34 activities to 20 programs set out in 55 activities. Crucial to the successful implementation of the API programs will be strong coordination and cooperation with stakeholders. Bank Indonesia therefore expresses its highest appreciation to all those who have extended their support to the implementation of the API programs thus far. Bank Indonesia also looks forward to further strengthening of the existing cooperation so that the new structure for the national banking system can soon be put into place, enabling the banking industry to deliver a greater contribution to national economic growth. :: Indonesian Banking Architecture The Indonesian Banking Architecture (API) is a comprehensive basic framework for the Indonesian banking system, outlining the direction, outline, and structure of the banking industry for the next five to ten years. The policy direction for the future development of the banking industry set out in the API is based on the vision of building a sound, strong, and efficient banking industry in order to create financial system stability for promotion of national economic growth. The API is urgently needed for the strengthening of the fundamentals of the banking industry. The economic crisis of 1997 exposed the institutional weaknesses in the banking industry and lack of adequate supporting infrastructure. In so doing, it also demonstrated the need for reinforcing the fundamentals of the system in order to build resilience against internal and external shocks. The weaknesses in the fundamentals of the national banking system not only pose challenges for the banking industry as a whole, but also for Bank Indonesia as the authority responsible for bank supervision. Because of the absence of a formal policy direction communicated to the public on the future direction and strategy for the banking industry, it was unclear as to what direction the banking industry would take in the long term. Before the launching of the API, many questions had arisen over the future structure of the Indonesian banking industry, the long-term development strategy for sharia banking, promotion of lending to small, medium, and micro enterprises (SMMEs), and the institutional strengthening of rural banks. In addition, the inadequate supporting infrastructure for the banking system and lack of consumer protection also emerged as issues of importance to stakeholders in the banking industry. The need for a long-term direction and development strategy for the banking industry has become a global trend and this process is well advanced in other countries such as Malaysia, Thailand, Singapore, and Hongkong. This clearly demonstrates that a banking system blue print is an essential requirement, one that must urgently be put together to meet the needs of the national banking industry. In response to the need for the blue print and to consolidate the gains achieved since 1998 under the bank restructuring program, Bank Indonesia launched the API on January 9, 2004, as a comprehensive policy framework for the future development of the Indonesian banking industry. The launching of the API was also integrally linked to the publication of the Government white paper under Presidential Instruction No. 5 of 2003, in which the API is one of the key programs for promoting national economic recovery. Driven by the overriding desire for the banking system to have stronger fundamentals, Bank Indonesia sees the need for various revisions to the programs set out in the API. These improvements also take into account the feedback from implementation of the API during the past two years and are closely related to the various changes that have taken place in the national and international economy. The improvements include more specific strategies for development of sharia banks, rural banks, and SMMEs. The API Programs are thus expected to acquire a more comprehensive scope covering the full extent of the banking system as it pertains to commercial banks and rural banks, both conventional and sharia-based, and the development of SMMEs. Information System of Export-Oriented Agroindustry SIABE Information system of export-based agroindustry was developed by Bank of Indonesia (BI) in 1999. It is intended to support national economic recovery. More specifically, it is designed to provide information on potentially exported commodities to the community including banks, and foreign importers. This covers: Commodity profile, technology process, industry three, origin of raw materials, export volume, export value, country of export destination, name of exporter, and regulation on tariff Volume and value of export by destination country and province List of exporters, includes name, address, contact person, telephone/ facsimile, type of commodity and province. Potential Province and district to produce export commodities Quality standard, tariff barrier, export regulation. It is expected that this system will be useful for foreign importers to collaborate with local exporters, which in turn it will increase volume and value of export and increase foreign exchange. To date, SIABE covers 16 clusters of commodity, namely leather, cassava, oil palm, cashew nut, shrimp, rubber, cacao, coffee, tea, furniture, cassiavera, patchouli, fish, pepper, tobacco and coconut, each including its derivatives of about 500 commodity in 31 provinces. WHAT IS FINANCIAL STABILITY Financial System Stability (FSS) does not in fact have any standard international definition. Instead, multiple definitions are in use essentially stating that a financial system becomes unstable when economic activity is hindered and the system is endangering the economy itself. The following are examples of definitions quoted from various sources: FSS means that the financial system has the capability to allocate funds efficiently and absorb shocks as they arise, thus preventing disruption of real sector activities and the financial system. FSS is a condition represented by a strong financial system capable of withstanding economic shocks, one that is able to ensure intermediary function, settlement of payments and diversification of risk. FSS is a condition in which the economic mechanisms of price formation, funds allocation and risk management operate properly in support of economic growth. Despite the absence of a uniform definition, a deeper understanding of FSS can be gained by looking at the factors likely to disrupt stability. Financial system instability can be triggered by turmoil and many other causes. In most cases, instability results from combination of market failures caused by structural factors or behavior of market players. Market failure itself can be brought on by external and domestic conditions. In a financial system built on markets, institutions and infrastructure, the predominant risks include credit risk, liquidity risk, market risk and operational risk. The technology-driven trend towards financial sector globalization has led to the emergence of an integrated, borderless financial system operating in real time. Innovative financial products have mushroomed, creating an added dimension of complexity. These developments have not only vastly expanded the possible sources of financial system instability, but may also increase the challenge of bringing such instability under control. As a rule, the sources of financial system instability are identified through a forward looking process to ascertain the potential risks that could influence the future condition of the financial system. Once identified, these risks are analysed for their potential for heightened threat, contagion effect and systemic impact that could devastate the economy.