Banking Supervision Report 2006

iGambaran Umum

iGambaran Umum

2006

Banking Supervision Report

BSR

ii Gambaran Umum

Vision:

≈To be recognized, domestically and internationally, as a credible central bank

through the strength of our values as well as the achievement of low, stable rates of inflation∆

Mission:

≈To achieve and maintain rupiah stability by maintaining monetary stability and

by promoting financial system stability for Indonesia»s long-term sustainable development∆

Strategic Values of Bank Indonesia:

≈Principles that represent the foundation of Bank Indonesia, its management and employees

are Competency, Integrity, Transparency, Accountability and Cohesiveness∆

iiiGambaran Umum

Chapter 1Chapter 1Chapter 1Chapter 1Chapter 1 OverviewOverviewOverviewOverviewOverview

Chapter 2Chapter 2Chapter 2Chapter 2Chapter 2 Development of the Banking SectorDevelopment of the Banking SectorDevelopment of the Banking SectorDevelopment of the Banking SectorDevelopment of the Banking Sector

The Number of Banks and Bank OfficesThe Number of Banks and Bank OfficesThe Number of Banks and Bank OfficesThe Number of Banks and Bank OfficesThe Number of Banks and Bank Offices

The Growth of Commercial Banks and Bank Offices

The Performance of BankingThe Performance of BankingThe Performance of BankingThe Performance of BankingThe Performance of BankingCommercial Banks Performance

Islamic Banks Performance

Rural Banks Performance

Chapter 3Chapter 3Chapter 3Chapter 3Chapter 3 Banking Policy and RegulationBanking Policy and RegulationBanking Policy and RegulationBanking Policy and RegulationBanking Policy and Regulation

Banking PolicyBanking PolicyBanking PolicyBanking PolicyBanking PolicyStrengthen the Banking Intermediary

Strengthen the Banking Structure

Strengthen the Banking Capital StructureEnhance the Linkage Program

Establishment of the Rural Bank Joint Service Facility (Apex Bank)Establishment of the Regional Loan Insurances Scheme

Strengthen the MSM Scale- Enterprise

Prepare the Implementation of Basel IIImprove the Compliance of the 25 Basel Core Principles

Accelerate the Banking Consolidation Program

Strengthen the Internal Banking ManagementImprove the Banking Industry Infrastructure

Improve the Protection and Empower Bank Customers

Provide Bank MediationImplement Public Education in Banking

Islamic Banking PolicyIslamic Banking PolicyIslamic Banking PolicyIslamic Banking PolicyIslamic Banking Policy

Rural Banking PolicyRural Banking PolicyRural Banking PolicyRural Banking PolicyRural Banking Policy

Chapter 4Chapter 4Chapter 4Chapter 4Chapter 4 Banking SupervisionBanking SupervisionBanking SupervisionBanking SupervisionBanking Supervision

Commercial BanksCommercial BanksCommercial BanksCommercial BanksCommercial Banks

Islamic BanksIslamic BanksIslamic BanksIslamic BanksIslamic Banks

Rural BanksRural BanksRural BanksRural BanksRural Banks

Banking Investigation and MediationBanking Investigation and MediationBanking Investigation and MediationBanking Investigation and MediationBanking Investigation and Mediation

The Fit and Proper TestThe Fit and Proper TestThe Fit and Proper TestThe Fit and Proper TestThe Fit and Proper Test

Improve the Banking Sector Management Information SystemImprove the Banking Sector Management Information SystemImprove the Banking Sector Management Information SystemImprove the Banking Sector Management Information SystemImprove the Banking Sector Management Information System

The Credit BureauThe Credit BureauThe Credit BureauThe Credit BureauThe Credit Bureau

Bank Indonesia Credit Liquidity (KLBI) and Two Step Loan (TSL) ExaminationBank Indonesia Credit Liquidity (KLBI) and Two Step Loan (TSL) ExaminationBank Indonesia Credit Liquidity (KLBI) and Two Step Loan (TSL) ExaminationBank Indonesia Credit Liquidity (KLBI) and Two Step Loan (TSL) ExaminationBank Indonesia Credit Liquidity (KLBI) and Two Step Loan (TSL) Examination

Improve the Law EnforcementImprove the Law EnforcementImprove the Law EnforcementImprove the Law EnforcementImprove the Law Enforcement

Table of Contents

iv Gambaran Umum

Chapter 5 Banking Outlook and Policy Direction for 2007Chapter 5 Banking Outlook and Policy Direction for 2007Chapter 5 Banking Outlook and Policy Direction for 2007Chapter 5 Banking Outlook and Policy Direction for 2007Chapter 5 Banking Outlook and Policy Direction for 2007

Banking OutlookBanking OutlookBanking OutlookBanking OutlookBanking Outlook

Banking Policy DirectionBanking Policy DirectionBanking Policy DirectionBanking Policy DirectionBanking Policy Direction

Islamic Banking

Rural Bank

List of AppendicesList of AppendicesList of AppendicesList of AppendicesList of Appendices

1.1.1.1.1. Progress of Indonesian Banking Architecture: Realization and TargetProgress of Indonesian Banking Architecture: Realization and TargetProgress of Indonesian Banking Architecture: Realization and TargetProgress of Indonesian Banking Architecture: Realization and TargetProgress of Indonesian Banking Architecture: Realization and Target

2.2.2.2.2. List of Banking Regulation 2006List of Banking Regulation 2006List of Banking Regulation 2006List of Banking Regulation 2006List of Banking Regulation 2006

3.3.3.3.3. Banking Key Indicators as of September 2006Banking Key Indicators as of September 2006Banking Key Indicators as of September 2006Banking Key Indicators as of September 2006Banking Key Indicators as of September 2006

4.4.4.4.4. Banking Key Financial Ratio as of September 2006Banking Key Financial Ratio as of September 2006Banking Key Financial Ratio as of September 2006Banking Key Financial Ratio as of September 2006Banking Key Financial Ratio as of September 2006

List of BoxesList of BoxesList of BoxesList of BoxesList of Boxes

3.1 The Consultative Paper of Basel II3.2 The Compliance of the 25 Basel Core Principles

3.3 Building the Capacityof of Rural Banks

4.1 Bank Supervisory Strategy

4.2 Reorganization : Enhancing the Effectiveness of Banking Supervision

4.3 Certification and Capacity Building for Bank Supervisors4.4 Mediation of Customer and Bank Disputes

4.5 KLBI and TSLs Examination

vGambaran Umum

List of Tables and Figures

1.1 Banking Key Indicator 2003 - 2006

2.1 Growth of Total Banks and Bank Offices2.2 Number of Banks based on Ownership

2.3 Share of Banks Ownership based on Total Assets

2.4 Share of Foreign Banks Ownership based on TotalAssets

2.5 Growth of Islamic Banks and Islamic Bank Offices

2.6 Growth of Rural Banks and Rural Bank Offices2.7 Banking Key Indicator December 2005 - 2006

2.8 Growth of MSM Scale- Enterprise Loans

2.9 Growth of Islamic Banks Investment based on Type2.10 Islamic Rural Banks Performance

2.11 Rural Banks Performance

4.1 Commercial Bank Risk Profiles

4.2 Commercial Bank Ratings

4.3 Commercial Banks KYC/AML Ratings4.4 Commercial Banks Compliance of The Tier 1 Capital

4.5 Islamic Commercial Bank Risk Profiles and Ratings

4.6 Rural Banks Planned and Actual Examination4.7 Rural Banks Licensing

4.8 Number of Banking Investigation

4.9 Number of Customer and Bank Dispute4.10 Fit and Proper Test for Prospective Commercial

Banks Managers and Owners/Ultimate Shareholders

4.11 Fit and Proper Test of Rural Banks Managers andOwners/Ultimate Shareholders

Table

2.1 MSMEs Loans

2.2 Growth of MSMEs Loans2.3 Growth of Islamic Banks Deposits, Profit Sharing Rate

and Interest Rate

4.1 Modus of Bank Fraud

Figures

vi Gambaran Umum

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viiGambaran Umum

Let us offer our praise and thanksgiving to ALLAH SWT, God Almighty for the blessing of His compassion, protection

and grace that made possible of this 2006 Bank Supervision Report, which is fulfilled the obligations of Bank Indonesia

for transparency and accountability as the bank supervisory authority to all stakeholders and the public, has published.

Great challenges were faced by the banking system, especially in the first half of the year 2006 as a result of

unfavourable economic conditions. It has produced a slowing growth in banking intermediary function. Responding to

these developments, Bank Indonesia issued a series of policies in an effort to maintain banking system stability. In essence,

the policies adopted in 2006 followed from the policies set out in the Indonesian Banking Architecture (API) and were

designed to respond to the unfolding situation, particularly regarding the intermediary function. Taken as a whole, the

year 2006 saw considerable progress in the API programmes designed to reinforce the institutional foundations, financial

structures and operations of the banking industry.

The hard work of the banking system support by proactive policy response and buoyed also by improvement in

economic conditions, brought positive results. Total assets of commercial bank and Islamic bank was growth, CAR and

assets quality were improved, and ROA was stable. Also rural banks (BPR) showed positive growth, indicated by its assets

expansion and deposits growth. This is and indicator that banking confident still maintained.

Bank Indonesia requires rural banks to possess the following characteristics: operate offices in one province with a

limited scope of business; achieve optimum use of technology in their operations; and maintain indirect/restricted

participation in the payment system under the management of the Apex institution.

Looking forward, Bank Indonesia will face mounting challenges in its role in promoting the intermediary function

and safeguarding financial and banking stability. For 2007, Bank Indonesia has adopted policy actions to maintain the

enhancement of banking industry role in accelerating growth and real sector development

There is no diamond without a flaw. We welcome comments and suggestions for improvement of the Bank Supervision

Report so that in the future, we can respond more effectively to the needs of Bank Indonesia»s stakeholders. Not the least,

I express my gratitude to all units in the banking sector at Bank Indonesia for their contribution to this report. May God

Almighty bestow His grace and blessing upon us.

FOREWORD

DEPUTY GOVERNOR

BANK INDONESIA

Muliaman D. HadadMuliaman D. HadadMuliaman D. HadadMuliaman D. HadadMuliaman D. Hadad

viii Gambaran Umum


1Overview


Chapter 1: Overview

2 Overview


3Overview


The Indonesian banking system faced dauntingThe Indonesian banking system faced dauntingThe Indonesian banking system faced dauntingThe Indonesian banking system faced dauntingThe Indonesian banking system faced daunting

external challenges in 2006. external challenges in 2006. external challenges in 2006. external challenges in 2006. external challenges in 2006. Economic conditions,

especially in the first half of the year, continued to reflect

the impact of the fuel price hike and mounting interest

rates in the fourth quarter of 2005. These two factors

were the consequence of the fiscal and monetary policy

adjustments essential to mitigate the potential

macroeconomic instability during 2005, which resulted in

slow bank lending due to sluggish demand in the midst

of uncertainties. On one hand, weak consumption brought

about by declining purchasing power sapped demand for

bank financing, while rising costs for business pushed up

production costs. From all this, banks held the view that

Chapter 1: Overview

the repayment capacity of debtors and prospective debtors

was in decline. On the other hand, efforts to improve the

investment climate and infrastructure were hindered by

various technical obstacles, which also held up the

disbursement of major loans. In response, banks adjusted

their portfolio management strategies, adopting a more

cautious stance.

Credit expansion declined while depositor fundsCredit expansion declined while depositor fundsCredit expansion declined while depositor fundsCredit expansion declined while depositor fundsCredit expansion declined while depositor funds

continued to rise.continued to rise.continued to rise.continued to rise.continued to rise. Credit expansion slowed to 14.1% (y-o-y),

with total bank lending reaching RpΩ832.9 trillion at end-

December 2006. The slower pace of bank lending

prompted a downward revision in the targeted credit

expansion in bank business plans for 2006. Despite this,

The year 2006 represented a period of dynamic struggle for the Indonesian banking industry.

Despite the seriousness of challenges faced during the year, banks generally managed to sustain

positive levels of performance. Commercial banks and rural banks reported adequate levels of

profitability, liquidity and solvability. Likewise, the islamic banking industry again demonstrated

remarkable progress with robust expansion in financing and profitability. Despite this, the intermediary

function was hampered by adverse changes in economic conditions, especially in the second half

of 2006. This prompted banks to exercise greater caution in managing their risk portfolios, and in

response, banks shifted towards placing their funds in low-risk earning assets.

To address the situation, Bank Indonesia introduced new policies in the January and October

Banking Policy Packages (Pakjan 2006 and Pakto 2006), designed to encourage banks to expand

their intermediation activities, and embarked on cautious easing in the BI Rate. This was

complemented by further action to strengthen the foundations of Indonesia’s banking sector as

envisaged in the Indonesian Banking Architecture (API).

The improvement in economic conditions brought on by a series of policy actions and the risk

management put into place at banks has brought positive results. In the second half of 2006, bank

performance steadily improved. By Restructured of some major corporate debts helped to improve

the NPLs ratio Bank financing began to flow faster, enabling banks to demonstrate healthy

performance at end of year. Following from the results of 2006, Indonesia’s banks are predicted to

achieve even stronger performance in 2007. The continue of macroeconomic stability and prudential

regulations designed to stimulate a more active role for bank financing within prudent limits will be

the key factors.

4 Overview


depositor funds held at banks continued to mount in excess

of credit expansion, with growth at Rp 159.1 trillion

(14.1%). The loan to deposit ratio reached 64.7%,

reflecting the surplus of accumulated funds that banks

were unable to channel into financing.

Banks leaned more towards caution, preferring toBanks leaned more towards caution, preferring toBanks leaned more towards caution, preferring toBanks leaned more towards caution, preferring toBanks leaned more towards caution, preferring to

channel funds into low-risk forms of credit. channel funds into low-risk forms of credit. channel funds into low-risk forms of credit. channel funds into low-risk forms of credit. channel funds into low-risk forms of credit. The banking

system adjusted strategy by focusing more on business

with manageable risks, including short-term loans with

modest ceilings. Credit to the trade sector recorded strong

growth, largely from robust demand in the retail trade

sub sector. On the other hand, banks were generally more

cautious in lending to manufacturing enterprises, with

lending growth down from the preceding year.

Economic growth momentum again received supportEconomic growth momentum again received supportEconomic growth momentum again received supportEconomic growth momentum again received supportEconomic growth momentum again received support

from proactive policy responses.from proactive policy responses.from proactive policy responses.from proactive policy responses.from proactive policy responses. With monetary policy aimed

consistently at achievement of the inflation target, inflation

was brought down from 17.03% in January to 6.60% at

end of year. Supporting this was the fiscal stimulus, which

included direct cash transfers to poor households, an

increase in the tax-free income allowance and accelerated

disbursement of budget expenditures. On the other hand,

despite the ongoing stagnation in investment growth,

improvement became evident in indicators for private

investment. Bank Indonesia then embarked on a cautious

easing in the BI Rate, with the rate lowered a cumulative

300 basis points to 9.75% at end of year. This rate reduction

led to a decline in domestic interest rates. Economic growth

improved during the year to 5.5%. At the same time, the

exchange rate maintained a stable trend but was also

managed flexibly to enable proactive management of

market risks by the banking sector.

Banking policy was again focused on structuralBanking policy was again focused on structuralBanking policy was again focused on structuralBanking policy was again focused on structuralBanking policy was again focused on structural

improvement of the banking system and promoting theimprovement of the banking system and promoting theimprovement of the banking system and promoting theimprovement of the banking system and promoting theimprovement of the banking system and promoting the

intermediary function within prudent limitations. intermediary function within prudent limitations. intermediary function within prudent limitations. intermediary function within prudent limitations. intermediary function within prudent limitations. The

policies adopted in 2006 followed from the policies set

out in the Indonesian Banking Architecture (API) and were

designed to respond to the unfolding situation, particularly

regarding the intermediary function. These policies were

placed within an integrated, systematic policy framework

in the January Banking Policy Package (Pakjan) and October

Banking Policy Package (Pakto), both released in 2006. In

addition, the Government and Bank Indonesia jointly issued

the Financial Sector Policy Package on 5 July 2006 with

the objective of developing Indonesia»s financial

infrastructure by ensuring greater access to corporate

financing and strengthening financial market structures.

Improvement in macroeconomic conditions and theImprovement in macroeconomic conditions and theImprovement in macroeconomic conditions and theImprovement in macroeconomic conditions and theImprovement in macroeconomic conditions and the

launching of the banking policy packages brought positivelaunching of the banking policy packages brought positivelaunching of the banking policy packages brought positivelaunching of the banking policy packages brought positivelaunching of the banking policy packages brought positive

results. results. results. results. results. The key factors of the healthy financial performance

is risk mitigation strategies pursued by banks Total

commercial bank assets, including those held by islamic

banks, mounted 15.2% to Rp 1,693 trillion. The CAR

reached 20.5%, up slightly from the end-2005 position.

Earning assets quality, particularly for loan assets, maintained

an improving trend reflected in lower NPLs. NPLs gross and

net, recorded at 8.3% and 4.8% at end-2005, eased to

7.0% and 3.6% at the end of 2006. Bank liquidity continued

to improve as indicated by the substantial rise in the ratio of

liquid instruments to non-core deposits to 147.3%.

Profitability was up with the ROA relatively stable at 2.6%

alongside a slight improvement in efficiency. The ratio of

operating expenses to operating income fell to 86.4% while

NII strengthened from Rp 6.2 trillion to Rp 7.7 trillion.

Expressed in another way, bank net earnings climbed from

an average of Rp 2.1 trillion per month (2005) to Rp 2.

trillion per month (2006). Improved profitability resulted in

internal growth of bank capital, which enabled the CAR to

climb from 19.5% to 20.5%.

The sharia banking system was marked by optimumThe sharia banking system was marked by optimumThe sharia banking system was marked by optimumThe sharia banking system was marked by optimumThe sharia banking system was marked by optimum

performance in the intermediary function.performance in the intermediary function.performance in the intermediary function.performance in the intermediary function.performance in the intermediary function. During the

second half of 2006, sharia banking regained momentum.

Financing extended by sharia banks at the end of 2006

was up by Rp 5.2 trillion (y-o-y), producing a rise in the

5Overview


Financing to Deposit Ratio (FDR) for sharia banks from

97.8% to 98.9%. During the same period, depositors

funds mounted by Rp 5.1trillion, indicating that sharia

banks were able to channel all funds mobilised from the

public. In other words, the intermediary function for these

banks was operating at an optimum level.

Rural banks again achieved positive performance.Rural banks again achieved positive performance.Rural banks again achieved positive performance.Rural banks again achieved positive performance.Rural banks again achieved positive performance. At

the end of December 2006, rural banks recorded total

assets of Rp 23 trillion, representing an increase of 13%

(y-o-y). Total loans and deposits were up in keeping with

positive trends. Depositor funds accumulated by rural

banks reached Rp 15.8 trillion, up 19.7%, while the

customer base expanded from 6 million to 6.6 million.

This demonstrates that rural banks still hold promise and

command increasing levels of public confidence. Lending

by rural banks reached Rp 16.9 trillion, an increase of

15.7%, with debtors totalling 2.5 million.

Performance of sound banking was reflected in.Performance of sound banking was reflected in.Performance of sound banking was reflected in.Performance of sound banking was reflected in.Performance of sound banking was reflected in.

During 2006, most banks were rated sound or fairly sound,

reflecting improved effectiveness in bank risk management.

Similarly, more prudent lending strategies supported by

efforts to strengthen good corporate governance within

banks brought positive results.

The supervision function at Bank Indonesia sawThe supervision function at Bank Indonesia sawThe supervision function at Bank Indonesia sawThe supervision function at Bank Indonesia sawThe supervision function at Bank Indonesia saw

continued improvement. continued improvement. continued improvement. continued improvement. continued improvement. The supervision methods

employed by Bank Indonesia were constantly revised and

updated. Using dedicated teams, supervisors were able to

obtain a comprehensive risk profile and decide on the

supervision strategy for the banks under their oversight

within a relatively short time. During the year,

improvements were made to the quality of risk-based

supervision. Bank supervision focused on the inherent risks

in major business lines, risk control systems and a forward-

looking approach. These risks cover the major business

lines of credit, treasury and investment, operations and

services, trade financing, funding and debt instruments,

in addition to IT systems and management information

systems (MIS) and human resources management.

Table 1.1.Banking Key Indicator 2003 - 2006

Key IndicatorKey IndicatorKey IndicatorKey IndicatorKey Indicator Dec - 03Dec - 03Dec - 03Dec - 03Dec - 03 Dec - 04Dec - 04Dec - 04Dec - 04Dec - 04 Dec - 05Dec - 05Dec - 05Dec - 05Dec - 05 Dec - 06Dec - 06Dec - 06Dec - 06Dec - 06

Total Assets 1,196.2 1,272.3 1,469.83 1,693.52

Third Party Funds (Deposits) 888.6 963.1 1,127.94 1,287.0

Loans 477.19 595.1 730.2 832.9

Earning Assets 1,072.4 1,146.8 1,353.2 1,556.2

Net Interest Income 3.2 6.3 6.2 7.71

Loan to Deposit Ratio (%) 53.7 61.8 64.7 64.7

Return on Assets (%) 2.5 3.5 2.6 2.6

Non Performing Loans - Gross (%) 8.2 5.8 8.3 7.0

Non Performing Loans - net (%) 3.0 7.1 4.8 3.6

Capitals Adequency Ratio (%) 19.4 19.4 19.5 20.5

Loan to Earning Asset (%) 44.5 51.9 54.0 53.5

Net Interest Margin (%) 0.3 0.6 0.5 0.5

Liquid Asset to Total Asset (%) 15.1 14.9 15.8 22.0

Core Deposits to Total Asset (%) 0.5 0.5 0.5 0.5

Operating Cost to Operating Income (%) 88.8 76.7 87.7 86.4

6 Overview


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7Overview


The fit and proper test is designed to promote theThe fit and proper test is designed to promote theThe fit and proper test is designed to promote theThe fit and proper test is designed to promote theThe fit and proper test is designed to promote the

creation of a sound banking system. creation of a sound banking system. creation of a sound banking system. creation of a sound banking system. creation of a sound banking system. This will come into

being through management and control by competent

officers of high integrity. The fit and proper test for

candidate managers and prospective controlling

shareholders serves as an initial selection involving an

evaluation of integrity, competence and/or financial

standing/reputation.

Bank Indonesia has and will continue to respond toBank Indonesia has and will continue to respond toBank Indonesia has and will continue to respond toBank Indonesia has and will continue to respond toBank Indonesia has and will continue to respond to

banking violations with law enforcement actions.banking violations with law enforcement actions.banking violations with law enforcement actions.banking violations with law enforcement actions.banking violations with law enforcement actions.

Nevertheless, Bank Indonesia does not have legal powers

to investigate cases of suspected banking violations. Bank

Indonesia»s mediation role became effective on 1 June 2006

and will be continued until the establishment of an

independent banking mediation institution by 31

December 2007.

In 2007, Bank Indonesia will pursue further policies forIn 2007, Bank Indonesia will pursue further policies forIn 2007, Bank Indonesia will pursue further policies forIn 2007, Bank Indonesia will pursue further policies forIn 2007, Bank Indonesia will pursue further policies for

strengthening the banking industry and promoting growthstrengthening the banking industry and promoting growthstrengthening the banking industry and promoting growthstrengthening the banking industry and promoting growthstrengthening the banking industry and promoting growth

in the real sector. in the real sector. in the real sector. in the real sector. in the real sector. Increased lending is needed for the real

sector especially for medium small and micro enterprises

(MSMEs) and non-MSMEs alongside availability of long-term

financing. This will enable banks, which represent the leading

intermediary institution, to place the formal sector and

especially MSMEs on a higher growth track amid various micro

structural risks. To this end, Bank Indonesia will: (1) play a

more active catalytic role in promoting the bank intermediary

process; (2) take action to strengthen cooperation and

coordination with the Government in the restructuring of

the banking industry, including revitalisation of the state-

owned bank role; (3) provide facilitation for the merger

process and promote the bank intermediary function; (4) issue

guidelines on foreign-owned banks to play a more optimum

role in the intermediation process and a special regulation

restricting the employment of expatriates in middle

management positions and requiring transfer of knowledge;

(5) play an active role in the deepening of financial markets;

(6) launch a programme to accelerate the growth of Islamic

banking in Indonesia; (7) review the regulatory framework

for rural banks in order to strengthen and expand their role

and contribution in support of the MSME sector throughout

Indonesia.

The outlook for the banking system is even strongerThe outlook for the banking system is even strongerThe outlook for the banking system is even strongerThe outlook for the banking system is even strongerThe outlook for the banking system is even stronger

performance in 2007. It was supported by the continuingperformance in 2007. It was supported by the continuingperformance in 2007. It was supported by the continuingperformance in 2007. It was supported by the continuingperformance in 2007. It was supported by the continuing

of macroeconomic stability and prudential regulationsof macroeconomic stability and prudential regulationsof macroeconomic stability and prudential regulationsof macroeconomic stability and prudential regulationsof macroeconomic stability and prudential regulations

which designed to stimulate a more active role for bankwhich designed to stimulate a more active role for bankwhich designed to stimulate a more active role for bankwhich designed to stimulate a more active role for bankwhich designed to stimulate a more active role for bank

financing within prudent limitations.financing within prudent limitations.financing within prudent limitations.financing within prudent limitations.financing within prudent limitations. In their plans, banks

envisage average 18% credit expansion. Strong lending

growth is predicted for the trade, construction,

transportation and telecommunications sectors and for

infrastructure development. Supporting this will be low

interest rates, a stable exchange rate and renewed growth

in domestic and global demand.

8 Overview



9Development of the Banking Sector


Chapter 2:Development of theBanking Sector

10 Development of the Banking Sector




THE NUMBER OF BANKS AND BANK OFFICES

The Growth of Commercial Banks and Bank Offices1

The overall number of commercial banks and ruralThe overall number of commercial banks and ruralThe overall number of commercial banks and ruralThe overall number of commercial banks and ruralThe overall number of commercial banks and rural

banks declined as a result of mergers, but the public gainedbanks declined as a result of mergers, but the public gainedbanks declined as a result of mergers, but the public gainedbanks declined as a result of mergers, but the public gainedbanks declined as a result of mergers, but the public gained

more extensive access to banking services. more extensive access to banking services. more extensive access to banking services. more extensive access to banking services. more extensive access to banking services. In 2006, the

number of commercial banks fell from 131 to 130 following

the merger of PT Bank UFJ Indonesia with the Bank of Tokyo

Mitsubishi branch office in Jakarta. The merger took place

after the merger in Japan between Bank of Tokyo Mitsubishi

Ltd with UFJ Bank Ltd, with the new bank named Bank of

Tokyo-Mitsubishi UFJ. In Jakarta, Bank of Tokyo-Mitsubishi

UFJ operates as a branch office. Despite the slight reduction

in the total number of banks, bank services continued to

improve with the expansion in bank branch office networks

to 874 offices in 2006. On the other hand, the breakdown

of total banks by ownership in December 2006 was largely

unchanged (See Table 2.1 and 2.2).

Chapter 2:Development of the Banking Sector

The number of banks including Islamic banks reduced to 130 attributable to merger.

Nevertheless, the service coverage of banking industry has continued to increase owing to the

branch network expansion by 874 units in 2006. In addition, banks achieved remarkable progress

with improvement in various financial and operational indicators over the preceding year, albeit

intermediary function remained a daunting challenge. Adverse changes in macroeconomic

conditions, especially in the first half of 2006, put serious limitations on banks for expansion in

financing, with the exception of Islamic and rural banks. Demand for credit slackened in the face of

deteriorating purchasing power, while on the supply side, banks exercised greater prudence in

lending because of changes in risk expectations.

1 Act number 7 of 1992 concerning banking as amended by Act number 10 of 1998categorises banks into commercial banks and rural banks. Both may conduct conven-tional business and/or business based on islamic principles. Islamic banks include com-mercial banks, islamic rural banks and units based in (conventional) commercial banksthat conduct business based on Islamic principles.

Table 2.1Growth of Total Banks and Bank Offices

* Tidak termasuk kantor BRI Unit Desa

Commercial BanksCommercial BanksCommercial BanksCommercial BanksCommercial Banks Total Banks 138 133 131 130 Total Bank Offices 7.730 7.939 8.236 9.110State Owned BanksState Owned BanksState Owned BanksState Owned BanksState Owned Banks

Total Banks 5 5 5 5Total Bank Offices 2.072 2.112 2.171 2.548

Regional Development BanksRegional Development BanksRegional Development BanksRegional Development BanksRegional Development BanksTotal Banks 26 26 26 26Total Bank Offices 1.003 1.064 1.107 1.217

Foreign Exchange Commercial BanksForeign Exchange Commercial BanksForeign Exchange Commercial BanksForeign Exchange Commercial BanksForeign Exchange Commercial BanksTotal Banks 36 34 34 35Total Bank Offices 3.829 3.947 4.113 4.395

Non-Foreign Exchange Commercial BanksNon-Foreign Exchange Commercial BanksNon-Foreign Exchange Commercial BanksNon-Foreign Exchange Commercial BanksNon-Foreign Exchange Commercial BanksTotal Banks 40 38 37 36Total Bank Offices 700 688 709 759

Joint Venture BanksJoint Venture BanksJoint Venture BanksJoint Venture BanksJoint Venture BanksTotal Banks 20 19 18 17Total Bank Offices 57 59 64 77

Foreign Owned BanksForeign Owned BanksForeign Owned BanksForeign Owned BanksForeign Owned BanksTotal Banks 11 11 11 11Total Bank Offices 69 69 72 114

20032003200320032003 20042004200420042004 20052005200520052005 20062006200620062006BanksBanksBanksBanksBanks

PositionPositionPositionPositionPosition



No.No.No.No.No. BanksBanksBanksBanksBanksDecemberDecemberDecemberDecemberDecember

20042004200420042004

NominalNominalNominalNominalNominal %%%%%

Table 2.2Number of Banks based on Ownership

NominalNominalNominalNominalNominal %%%%% NominalNominalNominalNominalNominal %%%%%

DecemberDecemberDecemberDecemberDecember20052005200520052005

DecemberDecemberDecemberDecemberDecember20062006200620062006

1 State Owned Banks 5 3,7 5 3,8 5 3,8

2 Foreign exchange

commercial banks 35 26,1 34 26,0 35 26,93 Non Foreign

exchangecommercial banks 38 28,4 37 28,2 36 27,7

4 Regional

development banks 26 19,4 26 19,9 26 20,0

5 Joint Venture banks 19 14,2 18 13,7 17 13,1

6 Foreign owned

banks 11 8,2 11 8,4 11 8,5

TotalTotalTotalTotalTotal 134134134134134 100100100100100 131131131131131 100100100100100 130130130130130 100100100100100

Islamic banks expanded their outreach through theIslamic banks expanded their outreach through theIslamic banks expanded their outreach through theIslamic banks expanded their outreach through theIslamic banks expanded their outreach through the

opening of more offices and vigorous growth in provisionopening of more offices and vigorous growth in provisionopening of more offices and vigorous growth in provisionopening of more offices and vigorous growth in provisionopening of more offices and vigorous growth in provision

of sharia banking services under by the office channellingof sharia banking services under by the office channellingof sharia banking services under by the office channellingof sharia banking services under by the office channellingof sharia banking services under by the office channelling

policy.policy.policy.policy.policy. The public gained significantly increased access to

sharia banking services with the addition of 1 (one) Islamic

Banking Unit, opened at the East Kalimantan Regional

Development Bank, opening out of 40 units offices, and

Islamic Services at 456 conventional bank offices under

the office channelling scheme. Under the office channelling

policy, Islamic service units based at conventional banks

may open services for accepting sharia deposits at

conventional branch offices. The office channelling policy,

introduced in early 2006, resulted in considerable

expansion in the coverage of Islamic banking services,

which were brought within easy reach of all levels of society

in urban and rural areas throughout Indonesia.

Geographical coverage by Islamic banking networks

widened to more than 70 regencies and municipalities in

31 provinces. The future holds enormous potential for

OwnershipOwnershipOwnershipOwnershipOwnershipDecember 2005December 2005December 2005December 2005December 2005 December 2006December 2006December 2006December 2006December 2006

TotalTotalTotalTotalTotal Total AssetsTotal AssetsTotal AssetsTotal AssetsTotal Assets ShareShareShareShareShare TotalTotalTotalTotalTotal Total AssetsTotal AssetsTotal AssetsTotal AssetsTotal Assets ShareShareShareShareShare

State Owned bank 31 671 45,7% 31 940 55,5%

Local 63 215 14,6% 58 43 2,6%

Foreign 37 583 39,7% 41 710 41,9%

Industry 131 1.469 100,0% 130 1.693 100,0%

1) Termasuk Bank BUMN dan BPD2) Termasuk kantor cabang bank asing, bank campuran dan bank akuisisi asing

Table 2.3Share of Banks Ownership based on Total Assets

December 2005December 2005December 2005December 2005December 2005 December 2006December 2006December 2006December 2006December 2006

Table 2.4Share of Foreign Banks Ownership based on Total Assets

TotalTotalTotalTotalTotal Total AssetsTotal AssetsTotal AssetsTotal AssetsTotal Assets(trillion Rp)(trillion Rp)(trillion Rp)(trillion Rp)(trillion Rp)

Share toShare toShare toShare toShare toforeignforeignforeignforeignforeign

owned banksowned banksowned banksowned banksowned banks

ShareShareShareShareSharetototototo

IndustryIndustryIndustryIndustryIndustryTotalTotalTotalTotalTotal Total AssetsTotal AssetsTotal AssetsTotal AssetsTotal Assets

(trillion Rp)(trillion Rp)(trillion Rp)(trillion Rp)(trillion Rp)

Share toShare toShare toShare toShare toforeignforeignforeignforeignforeign

owned banksowned banksowned banksowned banksowned banks

ShareShareShareShareSharetototototo

IndustryIndustryIndustryIndustryIndustry

Branch offices of foreign banks 11 141 24,1% 9,6% 11 156 22,0% 9,2%

Joint venture banks 17 59 10,1% 4,0% 17 64 9.1% 3,8%

Foreign Acquisitioned banks 9 383 65.7% 26,1% 13 490 69,0% 28,9%

* Jumlah bank campuran turun disebabkan akuisisi oleh investor lokal

Foreign investment in Indonesian banks showedForeign investment in Indonesian banks showedForeign investment in Indonesian banks showedForeign investment in Indonesian banks showedForeign investment in Indonesian banks showed

upward trend. upward trend. upward trend. upward trend. upward trend. Divestiture of government holdings in some

banks led to a change in the ownership map of the

Indonesian banking system, with foreigners holding an

increased stake in Indonesian-incorporated banks. This

trend indicated that Indonesia»s banking industry holds

great attraction for foreign investment (Table 2.3 and 2.4)



expansion of Islamic banking to areas outside provincial

capitals.

The more extensive territorial coverage by IslamicThe more extensive territorial coverage by IslamicThe more extensive territorial coverage by IslamicThe more extensive territorial coverage by IslamicThe more extensive territorial coverage by Islamic

banks also means that more members of the public arebanks also means that more members of the public arebanks also means that more members of the public arebanks also means that more members of the public arebanks also means that more members of the public are

informed of the existence of Islamic banking. informed of the existence of Islamic banking. informed of the existence of Islamic banking. informed of the existence of Islamic banking. informed of the existence of Islamic banking. Similarly,

office network expansion had a positive effect on the

operation of the Islamic bank social function through more

extensive mobilisation and channelling of funds for

charitable purposes. In this way, more of the public are

becoming acquainted with the benefits of Islamic banks.

This, of course, will build a dynamic industry image and

generate multiplier effects for the growth of the Islamic

banking industry.

Islamic rural banks increased in number.Islamic rural banks increased in number.Islamic rural banks increased in number.Islamic rural banks increased in number.Islamic rural banks increased in number. Thirteen new

Islamic rural banks opened for business, including 4 former

conventional rural banks: BPRS Lantabur, BPRS Haji Miskin,

BPRS Artha Mas Abadi, BPRS Al Salaam Amal Salman, BPRS

PNM-BINAMA, BPRS Jabal Tsur, BPRS Dinar Ashri, BPRS Bumi

Rinjani Kepanjen, BPRS Bumi Rinjani Probolinggo, BPRS Dana

Hidayatullah, BPRS Kota Bekasi, BPRS Bumi Rinjani and BPRS

Arta Leksana. This brought the total number of Islamic rural

banks at end of year to 105 (Table 2.5).

In contrast, the numbers of conventional rural banksIn contrast, the numbers of conventional rural banksIn contrast, the numbers of conventional rural banksIn contrast, the numbers of conventional rural banksIn contrast, the numbers of conventional rural banks

diminished as a result of mergers and liquidation. Like before,diminished as a result of mergers and liquidation. Like before,diminished as a result of mergers and liquidation. Like before,diminished as a result of mergers and liquidation. Like before,diminished as a result of mergers and liquidation. Like before,

rural banks were concentrated in Java and Bali.rural banks were concentrated in Java and Bali.rural banks were concentrated in Java and Bali.rural banks were concentrated in Java and Bali.rural banks were concentrated in Java and Bali. At end-

December 2006, the total number of rural banks eased to

1,880 following the merger of 134 banks into 14 larger

entities and the liquidation of a further 6 banks. Of this

total, 1,327 were incorporated as limited liability companies

(70.6%), 504 as regional government enterprises (26.8%)

and 48 as cooperatives (2.6%). One rural bank is

incorporated as an MAI. Rural banks remain concentrated

in Java and Bali. These two islands are home to 1,451 rural

banks (77.2%), while the other 429 (22.8%) are based

outside Java and Bali. This can be explained by disparities in

population and levels of economic activity (Table 2.6).

Table 2.5Growth of Islamic Banks and Islamic Bank Offices

KeteranganKeteranganKeteranganKeteranganKeterangan 20022002200220022002 20032003200320032003 20042004200420042004 20052005200520052005 20062006200620062006

Islamic Commercial Banks 2 2 3 3 3

Islamic Banking Units 6 8 15 19 20

Rural Islamic Banks 83 84 86 92 105

Total Islamic Bank Offices 127 299 401 504 531

Total Islamic Offices Channeling - - - - 456

Catatan : data di atas tidak termasuk gerai (45) dan layanan syariah (456)

Table 2.6Growth of Rural Banks and Rural Bank Offices

KeteranganKeteranganKeteranganKeteranganKeterangan 20002000200020002000 20012001200120012001 20022002200220022002 20032003200320032003 20042004200420042004 20052005200520052005 20062006200620062006

Head Offices 2.419 2.355 2.141 2.141 2.158 2.009 1.880

Branches 62 76 140 140 163 311 502

Cash Offices 1 1 466 1.018 1.186 790 791

TotalTotalTotalTotalTotal 2.4822.4822.4822.4822.482 2.4322.4322.4322.4322.432 2.7472.7472.7472.7472.747 3.2993.2993.2993.2993.299 3.5073.5073.5073.5073.507 3.1103.1103.1103.1103.110 3.1733.1733.1733.1733.173



THE PERFORMANCE OF BANKING

Encouraging levels of commercial bank performance

were reflected in strong capital, improving quality of

earning assets, stable profitability and high liquidity.

However, intermediation remains a daunting challenge.

Commercial Banks Performance

Amid the array of external challenges of 2006,Amid the array of external challenges of 2006,Amid the array of external challenges of 2006,Amid the array of external challenges of 2006,Amid the array of external challenges of 2006,

commercial banks achieved positive results.commercial banks achieved positive results.commercial banks achieved positive results.commercial banks achieved positive results.commercial banks achieved positive results. Expansion in

business volume was reflected in aggregate 15.2% asset

growth to Rp 1,693 trillion. Capital was maintained at a

high level with the capital adequacy ratio (CAR) reaching

20.5% in 2006, up from 19.5% in 2005 as a result of

earnings growth. Earning assets quality improved,

especially for credit, following the successful debt

restructuring for major debtors at state banks. As a result,

NPLs fell from 8.3% (gross) and 4.8% (net) to 7.0% (gross)

and 3.6% (net) in 2006. Banks maintained high levels of

liquidity, with the ratio of liquid instruments to non-core

deposits at 147.3%. Efficiency was up, reflected in the

decline in ratio of operating expenses to operating income

to 86.4% at end-2006. While banks recorded increased

assets, higher efficiency kept ROA largely stable at 2.6%.

Net interest income (NII) climbed from Rp 6.2 trillion to Rp

7.7 trillion, contributing to the significant internal growth

in bank capital. Bank performance is detailed in Table 2.7.

Despite this, commercial banks were restrained inDespite this, commercial banks were restrained inDespite this, commercial banks were restrained inDespite this, commercial banks were restrained inDespite this, commercial banks were restrained in

their credit expansion, mainly due to adverse economictheir credit expansion, mainly due to adverse economictheir credit expansion, mainly due to adverse economictheir credit expansion, mainly due to adverse economictheir credit expansion, mainly due to adverse economic

conditions in the first half of 2006.conditions in the first half of 2006.conditions in the first half of 2006.conditions in the first half of 2006.conditions in the first half of 2006. During 2006, bank

lending expanded by Rp 102.7 trillion (14.1%), but this

was far below the 22.7% credit expansion recorded in

2005. Adverse macroeconomic conditions during the first

half of 2006 brought on by the fuel price hike in October

2005 bore down heavily on the banking system throughout

the first half and early in the second half of the year despite

a lifting in pressure from an upturn in economic conditions.

The change in macroeconomic conditions affected bank

strategy in the operation of the intermediary function and

Table 2.7Banking Key Indicator December 2005 √ 2006

Main Indicators Dec2005

2006

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Total Assets (T Rp) 1,469.8 1,465.6 1,466.3 1,465.3 1,466.9 1,514.9 1,519.4 1,517.1 1,551.4 1,578.2 1,605.2 1,635.0 1,693.5

Third Party Funds (T Rp) 1,127.9 1,116.2 1,123.7 1,123.9 1,123.2 1,160.6 1,168.3 1,161.0 1,188.2 1,205.5 1,233.6 1,251.0 1,287.0

Credit (T Rp) 730.2 714.2 714.7 722.7 733.4 747.6 757.3 758.4 769.2 787.7 796.1 808.4 832.9

Earning Assets (T Rp) 1,353.2 1,354.5 1,346.1 1,346.6 1,360.6 1,400.5 1,406.0 1,400.8 1,432.6 1,458.4 1,475.0 1,510.5 1,556.2

Net Interest Income (T Rp) 6.2 6.9 5.6 6.8 6.5 7.2 7.6 6.5 7.4 6.2 7.2 7.4 7.7

Certificate of Bank Indonesia (T Rp) 54.3 79.1 88.7 97.9 113.3 142.4 139.8 139.6 152.3 150.7 136.6 176.5 179.0

FASBI (T Rp) 53.1 45.7 33.5 15.8 17.2 14.5 14.0 7.9 13.0 16.5 34.9 21.7 38.6

Government Bonds (T Rp) 289.6 245.6 248.6 246.2 245.2 245.0 245.7 243.6 242.3 246.6 247.7 245.1 243.9

LDR (%) 64.7 64.0 63.6 64.3 65.3 64.4 64.8 65.3 64.7 65.3 64.5 64.6 64.7

ROA (%) 2.6 2.4 2.5 2.6 2.4 2.6 2.5 2.5 2.6 2.6 2.6 2.6 2.6

NPLs Gross (%) 8.3 8.7 9.3 9.4 9.2 8.8 8.7 8.9 8.8 8.5 8.8 8.6 7.0

NPLs net (%) 4.8 5.1 5.7 5.6 5.6 5.1 5.1 5.2 5.0 4.9 4.9 4.8 3.6

CAR (%) 19.5 21.5 21.2 21.7 21.5 20.8 20.5 20.7 20.8 21.0 20.8 20.6 20.5

Credit/AP (%) 54.0 52.7 53.1 53.7 53.9 53.4 53.9 54.1 53.7 54.0 54.0 53.5 53.5

NIM (NII/AP) (%) 0.5 0.5 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.5 0.5

Liquid Assets/TA (%) 15.8 16.5 16.2 16.7 17.4 19.1 18.9 18.6 19.4 19.3 19.9 20.9 22.0

Core Deposits/TA (%) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

BOPO (%) 87.7 93.3 95.3 92.2 92.2 90.5 83.2 83.2 83.3 88.8 88.6 87.5 86.4



management of potentially increased risks. This was the

underlying factor in the restraint applied to bank lending.

On the other hand, demand for credit slowed because of

high interest rates and declining purchasing power. Internal

factors also played in role. Banks responded to expectations

of high risks brought on by these economic conditions by

exercising greater caution in lending, preferring to allocate

their portfolios to low-risk earning assets such as SBIs.

Aside from these challenges, banks proved capableAside from these challenges, banks proved capableAside from these challenges, banks proved capableAside from these challenges, banks proved capableAside from these challenges, banks proved capable

of managing their risks.of managing their risks.of managing their risks.of managing their risks.of managing their risks. Subdued credit risk was reflected

in the decline in NPLs, as explained above. Similarly, market

risk from volatility in the exchange rate was also held within

manageable limits because of the very modest NOP for the

banking system (averaging 3%-5%) that enabled banks to

absorb exchange rate shocks. Concerning liquidity risk, bank

liquidity was stable at high levels. The overnight rate for

rupiah funds on the inter bank money market was relatively

low at about 5%, reflecting conditions of flush liquidity. In

addition, the steep 102% growth in SBIs and the FASBI

(represent one form of liquid instruments) over the end-

2005 position produced an increase in the ratio of liquid

instruments to non-core deposits from 105.7% to 141.8%.

At this level, the ratio reinforced confidence in the resilience

of the banking system to liquidity risk.

Amid slow pace intermediation, MSME loans againAmid slow pace intermediation, MSME loans againAmid slow pace intermediation, MSME loans againAmid slow pace intermediation, MSME loans againAmid slow pace intermediation, MSME loans again

represented an attractive market segment for the bankingrepresented an attractive market segment for the bankingrepresented an attractive market segment for the bankingrepresented an attractive market segment for the bankingrepresented an attractive market segment for the banking

system. system. system. system. system. In 2006, MSME loans accounted for about 52.9%

of total bank lending,2 up slightly from 51.2% in 2005

despite more modest growth. Credit expansion for MSMEs

during 2006 reached Rp 58.0 trillion, down from Rp 86.7

trillion in 2005. Nevertheless, the increased share of MSME

loans demonstrates that banks regard MSMEs as

creditworthy and commercially viable businesses. At 51.2%,

the majority of MSME loans were extended for productive

uses, with the remaining 48.8% allocated to consumption

credit. Credit for productive uses consisted of working capital

credit (43.3%) and investment credit (8.9%).

2 Credit excluding channelling.

Table 2.8Growth of MSM Scale- Enterprise Loans

Main Indicators20042004200420042004

Type of useWorking Capital 118,7 151,5 180,9 27,6 19,4 41,9 40,9 42,3Investment 28,9 33,7 38,2 16,6 13,6 10,2 9,1 8,9Consumption 135,6 184,8 208,9 36,3 13,0 47,9 50,0 48,8TotalTotalTotalTotalTotal 283,2283,2283,2283,2283,2 370,0370,0370,0370,0370,0 428,0428,0428,0428,0428,0 30,030,030,030,030,0 15,715,715,715,715,7 100100100100100 100100100100100 100100100100100

Economic SectorEconomic SectorEconomic SectorEconomic SectorEconomic SectorAgricultur 12,8 13,5 15,0 5,5 10,5 4,5 3,7 3,5Mining 0,9 1,0 1,3 11,1 35 0,3 0,3 0,3Industrial 26,7 32,7 36,9 22,5 12,8 9,4 8,8 8,6Electricity, Water and gas 0,1 0,2 1,5 100,0 504,9 0,0 0,1 0,3Construction 5,9 7,7 10,1 30,5 31,4 2,1 2,1 2,4Trade 72,2 93,8 114,3 29,9 21,9 25,5 25,3 26,7Transportation 6,0 6,5 6,6 8,3 1,9 2,1 1,8 1,5Business Services 16,8 22,2 25,4 32,1 14,3 5,9 6,0 5,9Social Services 4,3 5,3 6,0 23,3 13,8 1,5 1,4 1,4Others 137,4 187,0 210,9 36,1 12,8 48,5 50,5 49,3TotalTotalTotalTotalTotal 283,2283,2283,2283,2283,2 370.0370.0370.0370.0370.0 428,0428,0428,0428,0428,0 30,630,630,630,630,6 15,715,715,715,715,7 100100100100100 100100100100100 100100100100100

Ratio of SMEs/totalRatio of SMEs/totalRatio of SMEs/totalRatio of SMEs/totalRatio of SMEs/totalBank Credits 49,6 52,1 52,9

20052005200520052005 20062006200620062006 20052005200520052005 20062006200620062006 20042004200420042004 20052005200520052005 20062006200620062006

Position ( Triliun Rupiah )Position ( Triliun Rupiah )Position ( Triliun Rupiah )Position ( Triliun Rupiah )Position ( Triliun Rupiah ) Growth (%)Growth (%)Growth (%)Growth (%)Growth (%) Share (%)Share (%)Share (%)Share (%)Share (%)



Disaggregated by ceiling, micro credit (up to Rp 50Disaggregated by ceiling, micro credit (up to Rp 50Disaggregated by ceiling, micro credit (up to Rp 50Disaggregated by ceiling, micro credit (up to Rp 50Disaggregated by ceiling, micro credit (up to Rp 50

million per loan) again accounted for the largest share.million per loan) again accounted for the largest share.million per loan) again accounted for the largest share.million per loan) again accounted for the largest share.million per loan) again accounted for the largest share.

Micro credit accounted for 42.5% of MSME lending,

followed by medium-scale credit at 30.4% and small-scale

credit at 27.1%. These positions were relatively unchanged

from 2005. Analysed by economic sector, the largest share

of MSME loan disbursements during the year under review

was allocated to trade and industry. This composition has

seen little change in recent years. Private domestic banks

were the most active in MSME lending with 41.7% of

total loan value, followed by state banks at 33.9% and

regional development banks at 12.3%.

growth in financing during the period under review

expanded the share of financing to total assets from 75%

in 2005 to 79%, while other asset categories and especially

inter bank placements recorded decline. While Islamic

commercial banks were the main industry players, the share

of assets held by Islamic Banking Unit mounted from

18.2% in 2005 to 20.8% in 2006.

Albeit keener competition in fund raising, depositAlbeit keener competition in fund raising, depositAlbeit keener competition in fund raising, depositAlbeit keener competition in fund raising, depositAlbeit keener competition in fund raising, deposit

base of Islamic banks significantly expanded.base of Islamic banks significantly expanded.base of Islamic banks significantly expanded.base of Islamic banks significantly expanded.base of Islamic banks significantly expanded. Mobilisation

of depositor funds for Islamic banks during 2006 was

affected from the escalating competition for depositor

funds within the banking industry as a whole, and

especially by the growing attractiveness of investment

alternatives on the capital market. Prevailing conditions

of high interest rates eroded the attractiveness of Islamic

bank funding products compared to conventional banking

products. The effect of this bore down on growth in

depositor funds during the first half of 2006, which reached

only 5.5% (y-t-d). However, with interest rates in decline

during the second half of 2005, depositor funds held by

Islamic banks mounted by a significant 32.7%. Key to this

was the 80.8% increase in depositor funds held by Islamic

Banking Unit. This funding growth surpassed the 31.4%

growth achieved in 2005 (Graph 2.2), and thus widened

the share of Islamic bank deposit funds in the national

banking system from 1.4% to 1.6%.

Graph 2.1MSMEs Loan - 2006

MSME non-produktive

26%

26%

48%Non-MSME

MSME produktive

Islamic Banks Performance

Alongside the acceleration of networks supported

by office chanelling policy, Islamic banking industry

suceeded in expanding its asset base.

During the course of 2006, industry share of IslamicDuring the course of 2006, industry share of IslamicDuring the course of 2006, industry share of IslamicDuring the course of 2006, industry share of IslamicDuring the course of 2006, industry share of Islamic

banking to total banking industry in Indonesia increased.banking to total banking industry in Indonesia increased.banking to total banking industry in Indonesia increased.banking to total banking industry in Indonesia increased.banking to total banking industry in Indonesia increased.

The growth of business volume Islamic banking industry

recorded Rp 5.8 trillion to 26.7 trillion at end of year. The

increased business volume widened the share of Islamic

banking assets to total banking assets in Indonesia from

1.4% at end-2005 to 1.6% at end-2006. Financing was

the dominant asset held by Islamic banks. Significant

Graph 2.2Growth of MSMEs Loans

12.4%

25.6%

32.5%

21.8%

8.0%

23.1%

-20%

0%

20%

40%

60%

2000 2001 2002 2003 2004 2005 Nov-06

MSMEs Loans

Non MSMEs Loans



Funds channelling by Funds channelling by Funds channelling by Funds channelling by Funds channelling by IIIIIslamic banks using variousslamic banks using variousslamic banks using variousslamic banks using variousslamic banks using various

standard financing contracts (akad) operated at an optimumstandard financing contracts (akad) operated at an optimumstandard financing contracts (akad) operated at an optimumstandard financing contracts (akad) operated at an optimumstandard financing contracts (akad) operated at an optimum

level.level.level.level.level. Financing growth reached 34.2% (y-o-y), above the

rate of funding growth in 2006 and also financing growth in

the preceding year. Financing growth was especially strong

at Islamic Banking Unit, which recorded 52% expansion (y-

o-y). Islamic commercial banks, however, recorded a more

modest 29.7% (y-o-y), despite vigorous efforts reflected in

the improvement in the FDR from 90.8% in 2005 to 93.6%.

In other words, the intermediary function for these banks

was operating at an optimum level. The efforts by Islamic

banks to maintain an optimum level of financing spread across

different production sectors amidst the difficulties for funds

channelling by the banking system had a significant effect

on improvement in the bank intermediary function. With this

expansion, the proportion of Islamic bank financing widened

from 2.2% in 2005 to 2.6% during the year under review.

Ijarah financing recorded the fastest growth area.Ijarah financing recorded the fastest growth area.Ijarah financing recorded the fastest growth area.Ijarah financing recorded the fastest growth area.Ijarah financing recorded the fastest growth area.

Analysed by type of agreement used, financing growth

was strongest in the ijarah category at 164.7% (Table 2.9).

In contrast, growth in mudharabah and musyarakah

financing based on profit sharing eased from 33% to

31.5%. Similarly, murabahah-based financing, while still

dominating financing portfolios, eased from 62.3% to

61.7%. The factor thought to have fuelled the rapid

growth in ijarah financing (including ijarah muntahia

bittamlik) is the flexibility enjoyed by banks in setting the

leasing rates payable by customers over different periods.

The flexibility is seen as extremely helpful to Islamic banks

in maintaining the competitiveness of long-term financing

products, such as financing of production machinery

purchases and property ownership.

Like for commercial banks and Islamic Banking Unit,Like for commercial banks and Islamic Banking Unit,Like for commercial banks and Islamic Banking Unit,Like for commercial banks and Islamic Banking Unit,Like for commercial banks and Islamic Banking Unit,

Islamic rural banks also showed improved performance.Islamic rural banks also showed improved performance.Islamic rural banks also showed improved performance.Islamic rural banks also showed improved performance.Islamic rural banks also showed improved performance.

Business volume for Islamic rural banks expanded by Rp

0.3 trillion (49.8%) during 2006, which widened the

proportion of Islamic rural bank activity in the national

rural bank industry to 3.8%. This achievement resulted

mainly from Rp 0.2 trillion or 46% expansion in financing

from the previous year. Total depositor funds mobilised by

Islamic rural banks were up by Rp 0.18 trillion (49.9%)

indicating that all depositor funds accepted by these banks

were duly channelled. In other words, the intermediary

function was operating at an optimum level, particularly

Graph 2.3 Growth of Islamic Banks Deposits,Profit Sharing Rate and Interest Rate

0

2

4

6

8

10

12

Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06

Percent

Deposits RateRate DIM% Third Party Fund (Right Axist)

-

20

40

60

80

100

120

Percent

Table 2.9Growth of Islamic Banks Investment based on Type

Musyarakah 1,898 2,335 49.4 23.0 12.5 11.4

Mudharabah 3,124 4,062 51.5 30.0 20.5 19.9

Murabahah 9,487 12,624 24.2 33.1 62.3 61.7

Istishna 282 337 (10.0) 19.6 1.8 1.6

Qard 125 250 26.2 100.6 0.8 1.2

Ijarah 316 836 201.8 164.7 2.1 4.1

TotalTotalTotalTotalTotal 15,23215,23215,23215,23215,232 20,44520,44520,44520,44520,445 32.632.632.632.632.6 34.234.234.234.234.2 100.0100.0100.0100.0100.0 100.0100.0100.0100.0100.0

Type of FinancingTotal (Million) Growth (%) Share (%)

2005 2006 2005 2006 2005 2006



in local communities in which the primary market segments

are micro and small enterprises in both rural and urban

areas. Also reflecting this was the financing to deposit ratio,

which reached 120%.

To support expansion and capabilities in mitigatingTo support expansion and capabilities in mitigatingTo support expansion and capabilities in mitigatingTo support expansion and capabilities in mitigatingTo support expansion and capabilities in mitigating

risks, some Islamic rural banks increased their capital. Therisks, some Islamic rural banks increased their capital. Therisks, some Islamic rural banks increased their capital. Therisks, some Islamic rural banks increased their capital. Therisks, some Islamic rural banks increased their capital. The

capital addition capital addition capital addition capital addition capital addition was sourced from funds set aside from

earnings, additional paid up capital and increases in

authorised capital. As a result, industry-wide, Islamic rural

banks in 2006 recorded a 26.5% increase in paid up capital

over the preceding year. Additional paid up capital and

reserves set aside from profit also mounted by 160% and

80%.

Rural Banks Performance

Although rural banks account for a small proportion

of the banking industry and have declined in total numbers,

performance levels have consistently been positive. This is

borne out in the substantial growth achieved by rural banks

in total assets, depositor funds and lending, which has

fuelled profitability.

Total rural bank assets increased significantly in 2006Total rural bank assets increased significantly in 2006Total rural bank assets increased significantly in 2006Total rural bank assets increased significantly in 2006Total rural bank assets increased significantly in 2006

compared to preceding years.compared to preceding years.compared to preceding years.compared to preceding years.compared to preceding years. At the end of December

2006, rural bank assets were recorded at Rp 23 trillion,

having climbed 13% (y-o-y). This asset growth was the

product of increased loan disbursements drawing on the

broader funding base of depositor funds held at rural

banks. In addition, rural banks maintained stable growth

in depositor funds with a positive trend. Mobilisation of

depositor funds at the end of December 2006 reached Rp

15.8 trillion, an increase of 19.7% (y-o-y). Rural bank

customers also increased from 6 million to 6.6 million by

end of December 2006. This demonstrates that rural banks

still hold market promise and command rising levels of

public confidence.

Rural bank lending recorded further expansion byRural bank lending recorded further expansion byRural bank lending recorded further expansion byRural bank lending recorded further expansion byRural bank lending recorded further expansion by

the end of 2006, consistent with the growth in depositorthe end of 2006, consistent with the growth in depositorthe end of 2006, consistent with the growth in depositorthe end of 2006, consistent with the growth in depositorthe end of 2006, consistent with the growth in depositor

funds.funds.funds.funds.funds. Lending in December 2006 reached Rp 16.9 trillion,

an increase of 15.7% (y-o-y), with debtors totalling 2.5

million. The credit expansion boosted the LDR from 82%

to 87.4%. Despite this, credit quality at rural banks

weakened, with the NPLs ratio up 1.7% at end-December

2006 to 9.7%. Reasons for loss of credit quality included

slow implementation of the debt restructuring programme

and the deteriorating business climate that impacted public

purchasing power, particularly in the wake of natural

disasters that devastated the livelihoods of rural bank

debtors, most of which are MSEs. During this period, ROA

and ROE eased by 0.8% and 6%.

Indicator 2005 2006 ∆∆∆∆∆ 2006

Table 2.10Islamic Rural Banks Performance

Funds DistributionFunds DistributionFunds DistributionFunds DistributionFunds Distributiona. Financing 436 636 46.0%b. Inter Bank placement 105 188 178.0%

Sources of FundsSources of FundsSources of FundsSources of FundsSources of Fundsa. Third Party Fund 353.6 530.1 49.9%

Saving Wadiah 49.1 72.1 47.0%Saving Mudharabah 116.8 162.4 39.0%Time Deposit Mudharabah 187.7 295.7 57.5%

b. Inter Bank Liabilities 37.7 97.4 158.4%Capital ComponentCapital ComponentCapital ComponentCapital ComponentCapital Component

a. Paid in Capital 121.8 154.1 26.5%b. Current Profit/Loss 17.1 22.3 30.3%

Financial RatioFinancial RatioFinancial RatioFinancial RatioFinancial Ratioa. FDR 123.3% 120.0%b. NPF 10.9% 8.3%c. ROA 2.8% 3.0%



1 Total Assets 9.080 12.635 39,2 16.707 32,2 20.393 22,06 23,045 13.00

2 Denominated Credit 6.683 8.985 34,4 12.149 35,2 14.654 20,62 16,948 15.65

Loans Account *) 1.825 1.993 9,2 2.167 8,7 2.478 14,35 2,471 (0.280

3 Third Party Fund 6.126 8.868 44,8 11.161 25,9 13.178 18,07 15,771 19.68

Third Party Fund Account *) 5.329 5.535 3,9 5.761 4,1 6.004 4,22 6.555 9.18

- Saving 2.002 2.617 30,7 3.301 26,1 3.757 13,81 4.581 21.93

Saving Account *) 4.891 5.046 3,2 5.439 7,8 5.672 4,28 6,190 9.13

- Time Deposit 4.124 6.251 51,6 7.860 25,7 9.421 19,86 11,190 18.78

Time Deposit Account*) 438 489 11,6 32 (34,2) 332 3,11 365 9.94

4 Current Year Profit/Loss 338 429 26,9 539 25,6 604 12,06 509 (15.73)

5 LDR 77,0% 74,5% 80,7% 82,0% 87.4%

6 NPLs Gross 8,7% 8,0% 7,6% 8,0% 9.7%

7 ROA 3,7% 3,4% 3,2% 3,0% 2.2%

8 ROE 24,7% 25,0% 25,4% 25,3% 19.3%

9 CAR 18,1% 16,9% 17,2% 19,3% 10,5%

10 BOPO 82,4% 81,01% 80,1% 81,4% 85,6%

No

*) Accounts are specified in thousands**) Only covers Conventional BPR data

Particular Accountsin Balance Sheet

Dec02

Dec03

∆ Dec 03- Dec 02

%

Dec04

∆ Dec 04- Dec 03

%

Dec05**)

∆ Dec 05- Dec 04

%

Table 2.11Rural Banks Performance

Dec06**)

∆ Dec 06- Dec 05

%

in billion Rp

21Banking Policy and Regulation


Chapter 3:Banking Policy andRegulation

22 Banking Policy and Regulation




BANKING POLICY

All banking policies are laid down within theAll banking policies are laid down within theAll banking policies are laid down within theAll banking policies are laid down within theAll banking policies are laid down within the

framework of the IBA.framework of the IBA.framework of the IBA.framework of the IBA.framework of the IBA. Launched in 2004, IBA was fully

implemented in 2006 and is projected to fully completed

in 2013. IBA is a comprehensive, basic framework that

sets forth the direction, outline and working structures

for the banking industry. With vision to achieve of a sound,

strong, and efficient banking system for achieving financial

system stability in support of national economic growth;

accordingly, all banking policies issued by Bank Indonesia

in 2006 were established within the API policy framework.

The weakening economic activties drove upward riskThe weakening economic activties drove upward riskThe weakening economic activties drove upward riskThe weakening economic activties drove upward riskThe weakening economic activties drove upward risk

expectation by banks, and consequently, intermediationexpectation by banks, and consequently, intermediationexpectation by banks, and consequently, intermediationexpectation by banks, and consequently, intermediationexpectation by banks, and consequently, intermediation

was being hampered.was being hampered.was being hampered.was being hampered.was being hampered. Various pressures confronted by

banks attributable to weakening economic acivities

particularly in the first half of 2006 drove risk expecation

of banks up, trigerred by the raise in domestic interest

rates as repose of ascending inflation expectation following

the fuel price hike. As a result, banks were trending toward

short-term financing including consumer financing and

placed funds in financial instrumetns. On the other side,

demand for credits was hampered due to weakening

Chapter 3:Banking Policy and Regulation

porchasing power and repayment capacity. Consequently,

intermediation was impeded.

Banking policies in 2006 were aimed many intiativesBanking policies in 2006 were aimed many intiativesBanking policies in 2006 were aimed many intiativesBanking policies in 2006 were aimed many intiativesBanking policies in 2006 were aimed many intiatives

to stimulate intermediation within prudential corridor asto stimulate intermediation within prudential corridor asto stimulate intermediation within prudential corridor asto stimulate intermediation within prudential corridor asto stimulate intermediation within prudential corridor as

well as to bolster banking stucture. well as to bolster banking stucture. well as to bolster banking stucture. well as to bolster banking stucture. well as to bolster banking stucture. A Considering

intermediation has been major challenge for banks,

banking policies in 2006 were aimed to stimulate financing

within prudence as well as to bolster the stucture of

banking industry in an economic condition that was

experiencing bearish trend. The policy measures were

exercised with respect to prudential principles.

Strengthen the Banking Intermediary

Launching of the January Policy Package (Pakjan) andLaunching of the January Policy Package (Pakjan) andLaunching of the January Policy Package (Pakjan) andLaunching of the January Policy Package (Pakjan) andLaunching of the January Policy Package (Pakjan) and

October Policy Package (Pakto).October Policy Package (Pakto).October Policy Package (Pakto).October Policy Package (Pakto).October Policy Package (Pakto). Pakjan 2006 was aimed

at securing the bank role in the operation of the

intermediary function while strengthening the foundations

of the banking system under the faltering economic

conditions of the time. Pakjan 2006 consists of seven

regulations: (1) Amendment to Asset Quality Rating for

Commercial Banks; (2) Phased Introduction of Uniform

Classification for Earning Assets; (3) Amendment to

The pressures bearing down on the banking system from weakening economic activity that

exacerbated credit risk also necessitated various adjustments in the strengthening of the banking

industry. For this rationale, Bank Indonesia policy in 2006 sought to provide banks with greater

leeway in the intermediary function while strengthening the foundations of the banking system

in line with the direction laid down in the Indonesian Banking Architecture (IBA). The policy

actions in the Islamic banking industry pursued by Bank Indonesia is sought to reinforce the

industry growth. The rural bank supervision and regulatory policies are aimed at creating a

sound, strong, productive and trusted rural bank industry to serve the needs of MSEs and the

public in rural areas in order to support regional economic growth.



Commercial Banks meeting the standards for HighCommercial Banks meeting the standards for HighCommercial Banks meeting the standards for HighCommercial Banks meeting the standards for HighCommercial Banks meeting the standards for High

Performing Banks will be given opportunity to becomePerforming Banks will be given opportunity to becomePerforming Banks will be given opportunity to becomePerforming Banks will be given opportunity to becomePerforming Banks will be given opportunity to become

Anchor Banks or acquire other banksAnchor Banks or acquire other banksAnchor Banks or acquire other banksAnchor Banks or acquire other banksAnchor Banks or acquire other banks. The opportunity to

the high performing banks will provided if the following

criteria are met:

(1) minimum CAR of 12% and minimum tier 1 capital

ratio of 6%;

(2) minimum Return on Assets (ROA) of 1.5%;

(3) real credit expansion at a minimum of 22% per

annum or minimum 50% LDR and non-performing

loans ratio below 5% (net);

(4) is a publicly-listed company or plans to become listed

in the near future; and

(5) Has the resources and capacity to act as a

consolidating party while still meeting the criteria for

High Performing Bank.

Enhance the Linkage Program

The lingkage program is the action to enhance the

role of commecial banks, rural banks, and Islamic banks

in order to improve the function of banking intermediary

and also to support the Micro, Small and Medium

Enterprises programs.

The linkage program has brought remarkable results, The linkage program has brought remarkable results, The linkage program has brought remarkable results, The linkage program has brought remarkable results, The linkage program has brought remarkable results,

marked by the substantial number of collaborativemarked by the substantial number of collaborativemarked by the substantial number of collaborativemarked by the substantial number of collaborativemarked by the substantial number of collaborative

agreements concluded by banks with rural banks.agreements concluded by banks with rural banks.agreements concluded by banks with rural banks.agreements concluded by banks with rural banks.agreements concluded by banks with rural banks. More

agreements were signed as additional participants joined

the program during the year. In the first phase on 24 August

2005, 10 commercial banks signed agreements worth Rp

104 billion with 37 rural banks. This was followed by the

second phase on 26 January 2006, when 13 commercial

banks joined forces with 41 rural banks for Rp 199 billion in

lending and attended a workshop on the linkage program.

In the third phase on 20 September 2006, 14 commercial

banks concluded agreements with 117 rural banks for loan

funds of Rp 355 billion.«On 27 December 2006, Bank

Indonesia again provided facilitation for the signing of third

Calculation of Risk-Weighted Assets for Small-Scale

Business Credit, Home Mortgages and Credit to Civil

Servants/Government Pensioners; (4) Application of

Consolidated Risk Management for Banks Exercising

Control over Subsidiaries; (5) Implementation of Good

Corporate Governance (GCG) for Commercial Banks; (6)

Banking Mediation; and (7) Conversion of Conventional

Commercial Bank Business to Commercial Banks

Conducting Business Based on Sharia principles and

Establishment of Bank Offices Conducting Business Based

on Sharia principles by Conventional Commercial Banks.

Pakto 2006, on the other hand, sought to enhance

bank intermediation by allowing banks greater leeway in

their lending activities within the limits of prudential

banking, in addition to further measures to promote

completion of the bank consolidation process by 2010.

Strenghten the Banking Structure

Strenghtrening of the banking structure policy is

within the IBA framework. The policy was consist of

strengthening the strucure of commercial bank capital and

enchancing the linkage program between commercial

bank, rural bank and Islamic bank.

Strengthen the Banking Capital Structure

Bank Indonesia urges commercial banks to complyBank Indonesia urges commercial banks to complyBank Indonesia urges commercial banks to complyBank Indonesia urges commercial banks to complyBank Indonesia urges commercial banks to comply

with the criteria of High Performing Bank. with the criteria of High Performing Bank. with the criteria of High Performing Bank. with the criteria of High Performing Bank. with the criteria of High Performing Bank. Capital is the

fundamental of the sound banking operations and the

key for evaluating the banking performance. The

opportunity will provided to the banks with tier 1 capital

above Rp 100 billion, if the following criteria are met:

(1) tier 1 capital greater than Rp 100 billion;

(2) rated sound overall (composite rating at least 2) with

the management factor rated good;

(3) capital adequacy ratio (CAR) of 10%; and

(4) Sound good governance.



phase financing cooperation agreements between 14

commercial banks and 50 rural banks and Islamic rural banks

previously engaged in the linkage program during the

October-December 2006 period. The value of loan funds

extended under the new agreements was Rp 549 billion.

At the end of December 2006, total agreements worth

Rp.3.03 trillion with Rp.1.91 trillion outstanding.

The support of Bank Indonesia for promoting the

Linkage Program was provided as follows:

(1) Holding of Business Workshops to support Linkage

Program expansion, in which business and banks were

brought into contact with each other at workshops

in Jakarta and the regions.

(2) Building public understanding and improving access

for the public to Islamic banks and MSMEs.

(3) More equitable development of the MSME sector by

development of a generic model linkage program that

provides a framework for lending cooperation

between commercial banks and rural banks.

(4) Advancements in the operation of the Linkage

Program, including disclosure of rural/Islamic rural

bank performance to commercial banks, participation

in workshops and presentation of the Linkage

Program Award to the best performing commercial

banks in MSME sector development.

(5) Developing the roles of rural bank and Islamic bank

in promoting bank intermediation through

establishment of the Generic Model Linkage Program

for provision of working capital (executing) and loan

channelling from commercial banks to rural banks

and a joint financing model between commercial

banks and rural banks.

Establishment of the Rural Banks Joint Service

Facility for (APEX Bank)

The establishment of joint services facility for rural

banks in the form of the APEX Bank is expected to help

rural banks to operate more efficient according to improve

the availability of lower-cost credit, particularly for MSMEs.

Bank Indonesia provided the establishment of jointBank Indonesia provided the establishment of jointBank Indonesia provided the establishment of jointBank Indonesia provided the establishment of jointBank Indonesia provided the establishment of joint

services facility for rural banks in the form of the APEXservices facility for rural banks in the form of the APEXservices facility for rural banks in the form of the APEXservices facility for rural banks in the form of the APEXservices facility for rural banks in the form of the APEX

Bank. Bank. Bank. Bank. Bank. In a pilot project of 7 Indonesian provinces, have

established three models of APEX Banks for 5 areas. The

model is Apex Commercial Bank, Apex BPR and Apex BPR

Supported by PNM. Commercial bank acting as Apex Bank

was established in West Sumatra by its Regional Bank (BPD

Sumatra Barat) and West Java (Bank Mandiri). BPR acting

as Apex Bank was established in Jogjakarta, and BPR

supported by PNM was established in Central Java. Bank

Indonesia will provide further facilitation for the

establishment of APEX Banks in other provinces by inviting

participation from other commercial banks.

Establishment of the Regional Loan Insurance

Schemes

Bank Indonesia has established a loan insurance

scheme to strengthen bank confidence in lending with

the aim of securing improved access to bank credit for

MSMEs in the regions.

The loan insurance scheme brings together BankThe loan insurance scheme brings together BankThe loan insurance scheme brings together BankThe loan insurance scheme brings together BankThe loan insurance scheme brings together Bank

Indonesia as facilitator with PT Askrindo, regionalIndonesia as facilitator with PT Askrindo, regionalIndonesia as facilitator with PT Askrindo, regionalIndonesia as facilitator with PT Askrindo, regionalIndonesia as facilitator with PT Askrindo, regional

governments and Regional Development Banks (BPDs).governments and Regional Development Banks (BPDs).governments and Regional Development Banks (BPDs).governments and Regional Development Banks (BPDs).governments and Regional Development Banks (BPDs). A

series of Memorandum of Understanding (MOUs) have been

signed by PT Askrindo, Regional Development Banks and

regency/municipality governments in several provinces since

2004. On 26 January 2006, a further 5 (five) regencies/

municipalities in West Java, Central Java and East Java

provinces signed MoUs on the loan insurance scheme. Bank

Indonesia and PT Askrindo subsequently held information

dissemination sessions on the loan guarantee scheme in

South Kalimantan and Bali during the second quarter of

2006. Over time, this dissemination is envisaged for other

areas, eventually reaching all provinces in Indonesia.

Regarding the capacity of the existing loan guarantee



institution (PT Askrindo), accelerated expansion of the loan

insurance programme was still constrained by limited capital.

Furthermore, full support of parliament and government in

passing the new Loan Insurance Law is seen as key to the

strengthening of the loan insurance programme.

Strengthen the Micro, Small and Medium Scale-

Enterprises (MSMEs)

In the Indonesian Banking Architecture programme

for reinforcing the structure of the national banking system

and promoting the bank intermediary function, MSME

development is prioritised through the linkage programme

for expanding the role for commercial banks, rural banks

and Islamic banks in this key area. Furthermore in the new

Bank Indonesia law, Act No. 23 of 1999 concerning Bank

Indonesia as amended by Act No. 3 of 2004, Bank

Indonesia»s role in MSME development is centred more

around facilitation, promotion, research and development,

surveys and development of innovations. This takes place

by: (1) provision of technical assistance; (2) institution

building; (3) establishing and improving bank credit policy;

and (4) strengthening cooperation with the Government

and other relevant agencies.

Bank Indonesia»s technical assistance includesBank Indonesia»s technical assistance includesBank Indonesia»s technical assistance includesBank Indonesia»s technical assistance includesBank Indonesia»s technical assistance includes

training, provision of information and also research.training, provision of information and also research.training, provision of information and also research.training, provision of information and also research.training, provision of information and also research.11111

During the year under review, Bank Indonesia organised

training sessions for MSME-related institutions on the

empowerment of these businesses.

A total of 132 training sessions were held for banksA total of 132 training sessions were held for banksA total of 132 training sessions were held for banksA total of 132 training sessions were held for banksA total of 132 training sessions were held for banks

and Business Development Service Providers (BDSPs), withand Business Development Service Providers (BDSPs), withand Business Development Service Providers (BDSPs), withand Business Development Service Providers (BDSPs), withand Business Development Service Providers (BDSPs), with

these sessions generating Rp 160.732 billion in newthese sessions generating Rp 160.732 billion in newthese sessions generating Rp 160.732 billion in newthese sessions generating Rp 160.732 billion in newthese sessions generating Rp 160.732 billion in new

lendinglendinglendinglendinglending. The training sessions attracted broad participation,

with 2,535 bank officers and 1,736 BDSP party capons

attending. During this period, BDSPs brought 5,432 MSME

participants into contact with banks. In addition,

information was disseminated at a total of 207

intermediation bazaars, seminars, talk shows, public

education sessions and many other activities for MSME

development throughout Indonesia. Intermediation

bazaars, designed to build communication between banks

and MSMEs, were held in numerous localities in almost all

Bank Indonesia Regional Office working areas.2

Various research activities were carried out to ensureVarious research activities were carried out to ensureVarious research activities were carried out to ensureVarious research activities were carried out to ensureVarious research activities were carried out to ensure

research based policy and strategies for MSMEresearch based policy and strategies for MSMEresearch based policy and strategies for MSMEresearch based policy and strategies for MSMEresearch based policy and strategies for MSME

developmentdevelopmentdevelopmentdevelopmentdevelopment, focus on improving MSME access to bank focus on improving MSME access to bank focus on improving MSME access to bank focus on improving MSME access to bank focus on improving MSME access to bank

creditcreditcreditcreditcredit. First, the Study on ≈Financing through Partnerships

between MSMEs and Medium/Large Enterprises∆ emerged

as a vital topic, given that the partnership programme is

one strategy for ensuring market certainty for MSMEs while

the large enterprises will benefit from raw materials

availability and product marketing. Second was the Study

on ≈Financing Schemes for Cluster Development.∆ The

cluster approach has gained strategic value in MSME

development, as the clusters strengthen the bargaining

position of MSMEs in regard to economic resources. Third

was the Basic Research on Regional Economic Potential

for Development of MSME Mainstay Commodities. This

research sought to identify the various investment

opportunities in the regions in order to provide information

on economic potential and particularly the mainstay

commodities of individual regions. Fourth was the research

on Export Oriented Commodities that examined export

commodity growth in individual regions. Fifth was the

Research on Small Enterprise Financing focused on

conversion from conventional financing to Islamic-based

financing for 17 commodities? Sixth was the Research on

Nucleus-Smallholder Conflicts aimed at identifying

problems and potential problems leading to tensions

between nucleus companies and smallholders and

recommending conflict resolution models? Seventh was

1 Bank Indonesia Regulation No.7/39/PBI/2005 concern Technical Assistance for Develop-ing Micro, Small and Medium Enterprises.

2 Based on Recapitulation of Technical Assistance for MSME Development, July-December2006, from 36 out of a total of 38 Bank Indonesia Regional Offices.



the Study on Business Incubators for MSME Development,

aimed at studying the presence of business incubators

expected to foster the emergence of new, resilient

entrepreneurs and serve as an effective instrument in

MSME development.

Technical assistance was also provided in other forms,Technical assistance was also provided in other forms,Technical assistance was also provided in other forms,Technical assistance was also provided in other forms,Technical assistance was also provided in other forms,

one of which was facilitation for organisation of the Bankone of which was facilitation for organisation of the Bankone of which was facilitation for organisation of the Bankone of which was facilitation for organisation of the Bankone of which was facilitation for organisation of the Bank

Intermediation BazaarsIntermediation BazaarsIntermediation BazaarsIntermediation BazaarsIntermediation Bazaars. In February 2006, Bank Indonesia

joined forces with the Indonesian Businesswomen»s Holding

Cooperative (INKOWAPI) to hold the ≈Pro-Cooperative,

Pro-MSE Banking Clinic.∆ The purpose of this activity was

to bring together MSME actors (Women»s Cooperatives),

banks and non-bank financial institutions (Knifes). At this

event, banks would provide information and consultation

to cooperatives and MSMEs on micro, small and medium-

scale credit products, including loan terms and conditions.

To strengthen policy and improve bank lendingTo strengthen policy and improve bank lendingTo strengthen policy and improve bank lendingTo strengthen policy and improve bank lendingTo strengthen policy and improve bank lending

regulations related to MSME development, Bank Indonesiaregulations related to MSME development, Bank Indonesiaregulations related to MSME development, Bank Indonesiaregulations related to MSME development, Bank Indonesiaregulations related to MSME development, Bank Indonesia

issued two Bank Indonesia Regulations related to nationalissued two Bank Indonesia Regulations related to nationalissued two Bank Indonesia Regulations related to nationalissued two Bank Indonesia Regulations related to nationalissued two Bank Indonesia Regulations related to national

disastersdisastersdisastersdisastersdisasters. Firstly was the regulation of Bank Indonesia No.

8/10/PBI/2006 dated 7 June 2006 concerning Special

Treatment for Bank Credit Following the Natural Disaster

in Yogyakarta and Nearby Areas in Central Java, and

secondly was No. 8/15/PBI/2006 date 7 June 2006

concerning Special Treatment for Bank Credit in Disaster-

Hit Areas in Indonesia. The two regulations specify that

quality of credit and other provision of funds to MSME

debtors is be based solely on promptness of repayment of

loan principal and/or interest.

In follow up to Bank Indonesia Regulation No. 8/10/In follow up to Bank Indonesia Regulation No. 8/10/In follow up to Bank Indonesia Regulation No. 8/10/In follow up to Bank Indonesia Regulation No. 8/10/In follow up to Bank Indonesia Regulation No. 8/10/

PBI/2006 dated 7 June 2006, an agreement was signedPBI/2006 dated 7 June 2006, an agreement was signedPBI/2006 dated 7 June 2006, an agreement was signedPBI/2006 dated 7 June 2006, an agreement was signedPBI/2006 dated 7 June 2006, an agreement was signed

by Bank Indonesia and the State Minister of Housing forby Bank Indonesia and the State Minister of Housing forby Bank Indonesia and the State Minister of Housing forby Bank Indonesia and the State Minister of Housing forby Bank Indonesia and the State Minister of Housing for

building coordination and synergy in the implementationbuilding coordination and synergy in the implementationbuilding coordination and synergy in the implementationbuilding coordination and synergy in the implementationbuilding coordination and synergy in the implementation

of the Credit for the Self-Help Construction/Repairof the Credit for the Self-Help Construction/Repairof the Credit for the Self-Help Construction/Repairof the Credit for the Self-Help Construction/Repairof the Credit for the Self-Help Construction/Repair

Programme for Low Cost HousingProgramme for Low Cost HousingProgramme for Low Cost HousingProgramme for Low Cost HousingProgramme for Low Cost Housing. In this collaborative

arrangement, the contribution of Bank Indonesia as

banking authority was to improve access to bank financing

for self-help construction/repair of low-cost homes and

also supervise the disbursement of these loans. To

accelerate the implementation of this cooperation, Bank

Indonesia signed an agreement with PT BTN on Allocation

of Bank Indonesia Liquidity Credit for Re lending and Ex-

Re lending to Credit for Self-Help Construction/Repair for

Low Cost Housing in Earthquake-Hit Areas of Yogyakarta

and Central Java. Related to the MOUs, a seminar was

also held on the theme of ≈One Small Contribution to the

Revival of MSMEs in Yogyakarta and Central Java∆,

attended by local government officials, academics, business

associations and banks.≈During the seminar, PT BRI, Bank

Mandiri and BNI signed and handed over loan agreements

to MSMEs worth a total of Rp 3.2 billion.

To promote access to banking services for maritimeTo promote access to banking services for maritimeTo promote access to banking services for maritimeTo promote access to banking services for maritimeTo promote access to banking services for maritime

and fisheries MSMEs, in January 2006 the Governor ofand fisheries MSMEs, in January 2006 the Governor ofand fisheries MSMEs, in January 2006 the Governor ofand fisheries MSMEs, in January 2006 the Governor ofand fisheries MSMEs, in January 2006 the Governor of

Bank Indonesia and the Minister of Maritime Affairs andBank Indonesia and the Minister of Maritime Affairs andBank Indonesia and the Minister of Maritime Affairs andBank Indonesia and the Minister of Maritime Affairs andBank Indonesia and the Minister of Maritime Affairs and

Fisheries signed a MOUs on Development of Maritime andFisheries signed a MOUs on Development of Maritime andFisheries signed a MOUs on Development of Maritime andFisheries signed a MOUs on Development of Maritime andFisheries signed a MOUs on Development of Maritime and

Fisheries Business Development Service ProvidersFisheries Business Development Service ProvidersFisheries Business Development Service ProvidersFisheries Business Development Service ProvidersFisheries Business Development Service Providers. The

objective of this agreement is to build the knowledge,

capacity and skills of the BDSPs, disseminate information

on financing schemes to improve access to banking services

and provide training on preparation of feasibility studies

and credit proposals. The provision of information by the

Ministry of Maritime Affairs and Fisheries on mainstay

commodities will be useful for the banking industry in their

risk management related to decisions concerning the credit

portfolio for the maritime and fisheries sector.

Prepare the Implementation of Basel II

Basel II has been adopted as a project at the initiative

of Bank Indonesia and will be phased in for all banks during

2008. It will commence with the least sophisticated

approaches, i.e. the Standardised Approach for credit risk

and the Basic Indicator Approach for operational risk.

Once all preconditions and requirements have been

met, banks that have completed the necessary preparations



may change over to more advanced approaches, subject

to approval from the bank supervising authority. All pillars

of Basel II are expected to be fully implemented by 2010.

Bank Indonesia is working hard to provide the

required infrastructure and has prepared a road map to

prepare the way for implementation of Basel II as follows:

(1) Organizational preparations, HR, budgeting,

improvements to risk-based bank supervision and the

consolidation process and improvement and

development of databases.

(2) Completion of the gap analysis to ascertain bank

compliance with the Basel II requirements.

(3) Completion of the first consultative paper (CP √ I),

which specifies various national discretions for credit

risk that need to be adapted to actual conditions in

the national banking system. In addition, some issues

in market risk, including matters concerning the

trading book, operational risks for the definition of

gross income and key aspects related to market

discipline are discussed in the CP.

(4) Revision of bank accounting standards based on IAS

rules (IAS 32 and IAS 39).

Box 3.1 The Consultative Paper Of Basel II

Bank Indonesia will launch Basel II for all

commercial banks in 2008. Implementation of Basel II

will be phased in, commencing with the least

sophisticated approaches of the Standardised Approach

for calculation of credit risk and market risk and the

Basic Indicator Approach for operational risk. Once

ready, banks may change over to more complex

approaches, subject to banking supervisor approval.

The full implementation of all pillars of Basel II is

envisaged for 2010.

The selection of these approaches naturally has

consequences for the formulation of policies and

regulations that must be adopted by Bank Indonesia.In

this regard, Bank Indonesia has published consultative

paper (CP √ I)document, which for the most part sets out

the various national discretions for credit risk that need

to be adapted to actual conditions in the national banking

system. In addition, some issues in market risk, including

matters concerning the trading book, operational risks

for the definition of gross income and key aspects related

to market discipline are discussed in the CP.

CP - I was published to elicit responses and

suggestions from stakeholders especially from banks.

Following this, in view of the highly comprehensive

content of Basel II, some CPs will be published at regular

intervals to address various regulatory

recommendations relevant to implementing Basel II in

Indonesia. Issues in the CP-I are described below.

Claims Trading book Definition of operational risk Scope of information

Risk mitigation techniques Trading book valuation Basic Indicator Approach Policy on publication

Rating agency Specific risks Definition of gross income Validation of information

Internal rating approach Equity risk Other approaches Materiality

Option price risk Confidentiality

Internal models Publications media

Compliance with

accounting standards

Frequency

Sanctions

Credit RiskCredit RiskCredit RiskCredit RiskCredit Risk Market RiskMarket RiskMarket RiskMarket RiskMarket Risk Operational RiskOperational RiskOperational RiskOperational RiskOperational Risk Market DisciplineMarket DisciplineMarket DisciplineMarket DisciplineMarket Discipline



Improve the Compliance of the 25 Basel Core

Principles

The Basel Committee in October 2006 published a newThe Basel Committee in October 2006 published a newThe Basel Committee in October 2006 published a newThe Basel Committee in October 2006 published a newThe Basel Committee in October 2006 published a new

document on the 25 BCPs setting out various improvements.document on the 25 BCPs setting out various improvements.document on the 25 BCPs setting out various improvements.document on the 25 BCPs setting out various improvements.document on the 25 BCPs setting out various improvements.

Following this, Bank Indonesia is now performing a new self

assessment applying the new criteria for the 25 BCPs. The

self assessment is slated for completion in mid-2007 and is

expected to provide the basis for future improvements in

bank supervision quality.

The improvement is as follows:

a. Addition of new criteria with greater emphasis on

application of consolidated bank supervision.

b. Some CPs in the previous document was combined

with other CPs to minimise overlapping.

c. Three new CPs on Interest Rate Risk, Liquidity Risk

and Operational Risk.

d. Changes to essential criteria (EC) in almost all CPs,

including the addition of new ECs, more descriptive

narration for each EC and upgrading of additional

criteria (ACs) to ECs.

As is widely known, the 25 Basel Core Principles

for Effective Banking Supervision (BCP) document has

become a reference for supervisory authorities around

the world, including Indonesia, in assessing the quality

of supervision in their individual banking industries. The

documents states a number of principles that include

the prerequisites for effective bank supervision, licensing

and structures, regulations and prudential requirements,

methods for continuous supervision, information needs,

formal powers of supervisors and cross border

regulation of banking.

Box 3.2 The Compliance of the 25 Basel Core Principles

Indonesia has undergone several assessments for

compliance with the 25 BCP. The latest assessment

was performed by Mr. Alan Ball (IMF Assessor) in

October 2005. The average score for overall BCP

compliance was 1.76. This represented an

improvement over the previous 2.32 score. A

disaggregating of CPs for each compliance level is

presented as follows:

CompliantCompliantCompliantCompliantCompliant Largely CompliantLargely CompliantLargely CompliantLargely CompliantLargely Compliant Materially Non-CompliantMaterially Non-CompliantMaterially Non-CompliantMaterially Non-CompliantMaterially Non-Compliant Non-CompliantNon-CompliantNon-CompliantNon-CompliantNon-Compliant

10 CPs 12 CPs. 2 CPs. 1 CPs

Core PrincipleCore PrincipleCore PrincipleCore PrincipleCore Principle 20032003200320032003 May 2005May 2005May 2005May 2005May 2005 October 2005October 2005October 2005October 2005October 2005

1. Objectives, autonomy, powers 11111 11111 111112. Permissible activities 11111 11111 111113. Licensing criteria 22222 22222 222224. Ownership 33333 22222 222225. Investment criteria 22222 22222 222226. Capital adequacy 22222 22222 222227. Credit policies 33333 11111 11111



Accelerate the Banking Consolidation Program

Bank consolidation is one of the available alternatives

for strengthening the banking industry in anticipation of

global competition and future developments in the banking

business. To accelerate the consolidation process, Bank

Indonesia has adopted the following incentive policies:

(1) Partial reimbursement of consultant fees incurred for

due diligence

(2) Simplified licensing for establishment of branch offices

(3) Extended time for resolution of the exceeding Legal

Lending Limit (LLL)

(4) Simplified licensing for upgrading to foreign exchange

bank

(5) Relaxation of the statutory reserve requirement.

Strengthen the Internal Banking Management

Bank Internal management is the abilitiy of bank

manajemen to minimize risk and to implement Basel II.

According with it, Bank Indonesia keep motivated banks

in strengthening bank internal management through the

implementation of GCG, and risk management

certification programme continuously.

Bank Indonesia has issued a regulation onBank Indonesia has issued a regulation onBank Indonesia has issued a regulation onBank Indonesia has issued a regulation onBank Indonesia has issued a regulation on

Implementation of Good Corporate Governance forImplementation of Good Corporate Governance forImplementation of Good Corporate Governance forImplementation of Good Corporate Governance forImplementation of Good Corporate Governance for

Commercial BanksCommercial BanksCommercial BanksCommercial BanksCommercial Banks. The regulation, which takes effect in

2007, requires the banking industry to comply with 5 (five)

fundamental principles: transparency, accountability,

responsibility, independence and fairness. This compliance

must cover at least the following:

Core PrincipleCore PrincipleCore PrincipleCore PrincipleCore Principle 20032003200320032003 May 2005May 2005May 2005May 2005May 2005 October 2005October 2005October 2005October 2005October 2005

8. Loan evaluation 33333 11111 111119. Large exposures 22222 22222 22222

10. Connected lending 33333 22222 2222211. Country risk 44444 44444 2222212. Market risks 22222 11111 1111113. Other Risks 22222 22222 2222214. Internal control and audit 22222 11111 1111115. Money laundering 22222 11111 1111116. On-site and off-site supervision 22222 22222 2222217. Bank management contact 22222 22222 2222218. Off-site data 33333 33333 2222219. Validation supervisory information 22222 22222 2222220. Consolidated supervision 33333 33333 4444421. Accounting standard 22222 22222 1111122. Remedial measures 33333 33333 2222223. Globally consolidated supervision 33333 33333 3333324. Cooperation with host country supervisors 22222 22222 1111125. Supervision of foreign banks» establishment 22222 22222 11111

AverageAverageAverageAverageAverage 2.322.322.322.322.32 1.961.961.961.961.96 1.721.721.721.721.72

1 = Fully Compliant2 = Largely Compliant3 = Materially Non Compliant4 = Non Compliant



(1) the tasks and responsibilities of the Board of

Commissioners and Board of Directors;

(2) membership and performance of tasks by committees

and units in charge of the bank internal control function;

(3) operation of the compliance, internal auditor and

external auditor functions;

(4) application of risk management, including the

internal control system;

(5) provision of funds to related parties and high value

provision of funds;

(6) the bank corporate plan; and

(7) Financial and non-financial transparency of the bank.

In addition, banks are also required to maintain public

transparency by reporting on the operation of good

corporate governance and their self-assessment of good

corporate governance as implemented by the bank. In

preparation for this self assessment and to assess bank

readiness for implementation of GCG principles, banks

have conducted a pre-self assessment. The interim results

of the pre-self assessment indicate that 97% of banks have

applied at least 50% of the GGC principles referred to in

the Bank Indonesia regulation.

Bank Indonesia has issued a regulation on RiskBank Indonesia has issued a regulation on RiskBank Indonesia has issued a regulation on RiskBank Indonesia has issued a regulation on RiskBank Indonesia has issued a regulation on Risk

Management Certification for Managers and Officers ofManagement Certification for Managers and Officers ofManagement Certification for Managers and Officers ofManagement Certification for Managers and Officers ofManagement Certification for Managers and Officers of

Commercial Banks. Commercial Banks. Commercial Banks. Commercial Banks. Commercial Banks. This regulation which will effective in

August 2010, become one of the administrative

requirements for the fit and proper test for managers and

executive officers of commercial banks. By introducing the

risk management certification programme for banks,

Indonesia became the first country to require banking

professionals to hold risk management certification.

Improve the Banking Industry Infrastructure

To assist in minimising bank credit risk, BankTo assist in minimising bank credit risk, BankTo assist in minimising bank credit risk, BankTo assist in minimising bank credit risk, BankTo assist in minimising bank credit risk, Bank

Indonesia set up the Credit Information Bureau (BIK) onIndonesia set up the Credit Information Bureau (BIK) onIndonesia set up the Credit Information Bureau (BIK) onIndonesia set up the Credit Information Bureau (BIK) onIndonesia set up the Credit Information Bureau (BIK) on

29 June 200629 June 200629 June 200629 June 200629 June 2006. The BIK is responsible for collection and

storage of lending data from all institutional providers of

funds, i.e. commercial banks, rural banks, multi finance

companies and non-bank credit card operators. The

developing of BIK is to achieve standard of World Class

Credit Bureau.

Improve the Protection and Empower Bank

Costumer

To provide greater protection and empowerment forTo provide greater protection and empowerment forTo provide greater protection and empowerment forTo provide greater protection and empowerment forTo provide greater protection and empowerment for

bank customers, Bank Indonesia issued two new regulationsbank customers, Bank Indonesia issued two new regulationsbank customers, Bank Indonesia issued two new regulationsbank customers, Bank Indonesia issued two new regulationsbank customers, Bank Indonesia issued two new regulations.

First was the regulation on transparency of bank product

information and use of customer personal data. The second

regulation dealt with resolution of customer complaints,

specifying the mechanism for bank customer relations. This

was regarded necessary in view of the proliferation of

unresolved customer disputes with banks.

Provide Bank Mediation

Following the issuance of the regulation on Bank

Mediation in January 2006, Bank Indonesia began

assuming the function of mediation in the banking system.

Bank Indonesia will retain this function until the end of

2007 before passing it on to an Independent Bank

Mediator to be established by banking associations. This

institution is expected to facilitate simple, economical and

quick resolution of disputes between customers and banks.

Implement Public Education in Banking

Bank Indonesia in 2006 established the Forum ofBank Indonesia in 2006 established the Forum ofBank Indonesia in 2006 established the Forum ofBank Indonesia in 2006 established the Forum ofBank Indonesia in 2006 established the Forum of

Public Education for refining the strategy of public financialPublic Education for refining the strategy of public financialPublic Education for refining the strategy of public financialPublic Education for refining the strategy of public financialPublic Education for refining the strategy of public financial

education. education. education. education. education. The forum membership consists of Bank

Indonesia, bank representatives, non-government

organisations, academics and other agencies concerned

with formal and non-formal education. Its task is to

coordinate financial education for the public in order to

empower members of the public in their financial

transactions. Bank Indonesia also plans to issue a regulation

on Public Education in 2007.



ISLAMIC BANKING POLICY

The policy actions in the Islamic banking industry

sought to reinforce the industry structure by strengthening

compliance with Sharia principles and prudential

regulations, improving operating efficiency and

competitiveness and enhancing system stability and its

benefits for the economy.

The development of the Islamic banking system

represent one part of the fulfilment of Bank Indonesia»s

functions mandated in Act Number 23 of 1999 concerning

Bank Indonesia as amended by Act Number 3 of 2004. To

promote the development of the Islamic banking industry

as required by this function, Bank Indonesia formulated a

development strategy in the form of a blue print formally

published in 2002. The Blue Print is based on key principles

that are believed to offer potential for a more optimum

role for the banking industry through the operation of the

Islamic banking system in support of national economic

development. The policies adopted in 2006, representing

the second phase in the implementation of the blue print,

are focused on reinforcing the structure of the Islamic

banking industry. These policies are also aimed at

anticipating challenges and developments at the national

and international level in order to sustain the growth

momentum of the Islamic banking industry.

One of the key steps in clarifying the position and

strategy for development of Islamic banking within the

national financial system involved the synchronisation of

development policy for Islamic banks in the blue print with

the Bank Indonesia strategic plan for development of the

banking and financial industry as set out in the Indonesian

Banking Architecture (API) and the Indonesian Financial

System Architecture (ASKI). The synchronisation included

the addition of strategic objectives and development

phases focused on promoting the integration of the Islamic

banking industry with other industries within the Islamic

financial system. The policy focus in the strategic objectives

for Islamic banking development was sharpened by adding

two areas of focus to the existing four in the development

scope, bringing the total to six. These areas are described

as follows: (1) compliance with Sharia principles, (2)

prudential regulations, (3) operating efficiency and

competitiveness, (4) system stability and benefit for the

economy,(5) improved professionalism and (6) optimum

social function for Islamic banks in facilitating the voluntary/

social aid sector through programmes for grassroots

economic empowerment.

Six policies launched by Bank Indonesia for

strengthening the Islamic banking industry.

1) Adoption of standard contractual terms (akad) and

strengthened cooperation and coordination with the

fatwa issuing institutions and other institutional

stakeholders for compliance with Sharia principles in

Islamic bank operations.

2) Amendments to regulations on earning asset quality

for Islamic commercial banks, good corporate

governance for Islamic banks and the rating system

for Islamic rural banks to uphold prudential principles

in Islamic banking operations.

3) Development of the Islamic financial market,

encompassing structures, instruments and contractual

terms in order to create a competitive and efficient

Islamic banking system and support the creation of an

efficient Islamic financial system. This will involve the

broad-based creation of Islamic monetary instruments

and financial instruments issued by the government

and private sector on the local and global market.

4) Launching of linkage pilot project for Islamic financial

institutions in order to create systemic stability and

deliver benefits to the general public. Implementation

of the linkage pilot project for Islamic financial

institutions with involvement from Islamic banks and

supporting institutions to assist in technical training,

management and spiritual guidance. The pilot project



is expected to become an example that can be

replicated across the Islamic banking system.

5) Implementation of a systematic, focused and

continuous education programme to build the

professional competence of bank staff and improve

the understanding of Islamic bank personnel and the

public on the operations of Islamic banks. The program

for HR quality improvement at Islamic rural banks will

be implemented under a Islamic Rural Bank certification

programme. The development of a textbook on Islamic

economics, commenced in 2004, attracted the

attention of IRTI-IDB, which brought the issue of

textbook completion to an international forum.

6) Conduct a study on the voluntary sector for

promoting the Islamic bank social function in

facilitating linkages between the voluntary sector and

empowerment of the people»s economy. There is

significant potential in Islamic funds from the

voluntary sector, i.e. zakat, infak, shadaqah and wakaf

in Indonesia»s majority Islamic community. However,

only a small proportion has been mobilised by zakat

fundraising institutions. Islamic banks, which have a

social responsibility function, are expected to play a

catalyst role between zakat-paying citizens, those

entitled to zakat assistance and the institutions

managing zakat funds.

RURAL BANKING POLICY

The rural bank supervision and regulatory policies

are aimed at creating a sound, strong, productive and

trusted rural bank industry to serve the needs of MSEs

and the public in rural areas in order to support regional

economic growth

The sustained, robust expansion of the rural bank

industry measured by total assets, mobilisation of depositor

funds and lending is an indication that rural banks are

expanding their outreach. It also reflects growing needs

among members of the public for rural bank services. This

growth is unstoppable, as it is operating according to

market forces and reflects an expanding role

commensurate with public needs.

For rural banks to keep expanding in line with their

original objective for establishment, i.e. as a bank serving

the needs of MSEs and rural communities, it is essential to

have guidelines that lay out the strategic direction for the

future expansion of rural banks to ensure that they retain

the specific characteristics that distinguish them from

commercial banks.

To achieve the rural bank vision and mission, Bank

Indonesia has formulated a policy framework and strategic

actions that set out a clear direction for future rural bank

policy for sustaining and enhancing the strategic role of

these banks. This policy framework is set out in the Blue

Print for Rural Banks.

The vision is to create a sound, strong, productive

and trusted rural bank industry to serve the needs of MSEs

and the public in rural areas in order to support regional

economic growth. The rural bank mission is to create

conducive conditions for enhancing rural bank

performance and services to MSEs and local communities,

with focus on rural areas.

In the future, regulation of rural banks will seek to

maintain their distinctive features, described as follows:

1. Local banks having offices within one province withLocal banks having offices within one province withLocal banks having offices within one province withLocal banks having offices within one province withLocal banks having offices within one province with

limited scope of businesslimited scope of businesslimited scope of businesslimited scope of businesslimited scope of business

Rural bank office networks will continue to be

restricted to a single province. This restriction is

intended to guide rural banks towards becoming a

pillar for local economic development with emphasis

on mobilisation and channelling of funds from local

communities.

Rural banks will retain their limited scope of business

as stipulated in the Banking Law. Despite these

restrictions, the scope of business is still relevant to



the services required by MSEs, the primary customer

base for rural banks.

2. Focus on MSEs and the rural populationFocus on MSEs and the rural populationFocus on MSEs and the rural populationFocus on MSEs and the rural populationFocus on MSEs and the rural population

As rural banks steadily build their capacity as financial

service providers, their focus will continue to be MSEs

and rural communities. Underscoring this is the vast

potential market in this segment, hitherto untouched

by banking services. This emphasis is also consistent

with the spirit of the Banking Law.

3. Equitable distribution throughout IndonesiaEquitable distribution throughout IndonesiaEquitable distribution throughout IndonesiaEquitable distribution throughout IndonesiaEquitable distribution throughout Indonesia

Bank Indonesia will take active measures to promote

the establishment of rural banks outside Java and Bali

to meet the needs of MSEs and rural communities in

these more remote regions, which currently lack

access to banking services. Nevertheless, there is no

denying that the rural bank presence will follow the

principle of ≈banks follow the trade.∆ There will be a

need for regulatory support that can effectively

stimulate interest in establishing rural banks outside

Java and Bali in keeping with economic growth, as

well as to tighten the regulatory requirements for

establishment of new rural banks in Java and Bali.

4. Strong capital resourcesStrong capital resourcesStrong capital resourcesStrong capital resourcesStrong capital resources

Although rural banks are not encouraged to become

commercial banks, they will nevertheless be

encouraged to acquire the strong capital resources

necessary to mitigate risks, develop more competitive

services for MSEs, improve service outreach to MSEs

and achieve an economy of scale that will support

business sustainability.

5. Leverage technology to enhance customer servicesLeverage technology to enhance customer servicesLeverage technology to enhance customer servicesLeverage technology to enhance customer servicesLeverage technology to enhance customer services

The growth of the rural bank industry has been

influenced to a great extent by the development of

banking products; customer demand for easy,

convenient and secure services; and the need for

greater operating efficiency to support

competitiveness.

To promote more efficient management, rural banks

are encouraged to make optimum use of the vitally

needed technology in their operations for transactions

and reporting, internal control and faster services.

6. Permit indirect participation in clearing paymentPermit indirect participation in clearing paymentPermit indirect participation in clearing paymentPermit indirect participation in clearing paymentPermit indirect participation in clearing payment

systemssystemssystemssystemssystems

To keep pace with advancements in technology and

customer demands for quick, convenient and secure

transaction services, rural banks are expected to begin

participating in the payment system on an indirect or

restricted basis. This participation will be managed

by the Apex institution, an umbrella entity for rural

banks, once it is established.

Rural Banking Industry Policy and Strategy

The policy direction and strategy for a strengthened,

enhanced rural bank role in providing services to MSEs

and members of rural communities encompasses the

following:

1. Strengthen the Institutional buildingStrengthen the Institutional buildingStrengthen the Institutional buildingStrengthen the Institutional buildingStrengthen the Institutional building

To build the competitiveness and outreach of rural

banks to MSEs and rural communities, the rural bank

industry needs to undergo an institution building

process involving reinforcement of capital, service

coverage throughout Indonesia, opening of branch

offices and operation of the linkage programme for

collaboration with other financial institutions and

agencies. Efforts are also being pursued to promote

merger and consolidation among rural banks so that

rural banks have strong capital resources, more

integrated office networks and greater efficiency in

their operations.

2. Improve the regulatory qualityImprove the regulatory qualityImprove the regulatory qualityImprove the regulatory qualityImprove the regulatory quality

The regulatory framework is to be upgraded in line

with developments in the banking system and the

economy and with reference to international best

practices. This is expected to create a better climate



for the emergence of highly competitive rural banks.

In this regard, future regulation of rural banks will

consider stratification by total assets for the purposes

of supervision and expansion of services to the public.

3. Improve the effectiveness of supervisory systemImprove the effectiveness of supervisory systemImprove the effectiveness of supervisory systemImprove the effectiveness of supervisory systemImprove the effectiveness of supervisory system

One key element in a sound, robust and productive

rural bank industry that enjoys public trust is the

supervision system operated by Bank Indonesia. An

effective supervisory system is expected to detect

irregularities and violations at the earliest opportunity

and ensure compliance with the applicable regulations.

4. Improve the governance, and professionalImprove the governance, and professionalImprove the governance, and professionalImprove the governance, and professionalImprove the governance, and professional

managementmanagementmanagementmanagementmanagement

The expectation for the future is that rural banks will

apply good governance principles under competent

management by personnel of high integrity. To this

end, it is necessary to work steadily to build the

qualifications and competence of human resources

in order to achieve a satisfactory quality standard in

rural bank management. Sound, professional rural

bank management will raise the credibility of these

banks in the eyes of the public.

5. Improve the effective support of rural bankingImprove the effective support of rural bankingImprove the effective support of rural bankingImprove the effective support of rural bankingImprove the effective support of rural banking

infrastructureinfrastructureinfrastructureinfrastructureinfrastructure

Effective supporting infrastructure is essential to the

expansion of the rural bank industry. This strategy

includes actions to put the umbrella institutions into

place, improve the effectiveness of professional

certification institution and strengthen cooperation

and coordination with various agencies in creating a

better climate for rural bank expansion.

6. Empower and protect the rural banks costumersEmpower and protect the rural banks costumersEmpower and protect the rural banks costumersEmpower and protect the rural banks costumersEmpower and protect the rural banks costumers

This development strategy is intended to encourage

rural banks to consider the public interest in their

operations by providing quality services and product

information. In this way, customers will have better

understanding of the products offered by rural banks

and their interests will be protected.

Box 3.3 Building the Capacity of Rural Banks (BPR)

In order to establish sound, robust and productive

rural banks that are entrusted to serve MSEs and the

public, especially to support regional economic growth

in the villages, Bank Indonesia has undertaken several

activities as follows:

TheTheTheTheThe BPRBPRBPRBPRBPR Apex Institution Pilot Project showed Apex Institution Pilot Project showed Apex Institution Pilot Project showed Apex Institution Pilot Project showed Apex Institution Pilot Project showed

positive results.positive results.positive results.positive results.positive results. Based on an evaluation of the pilot

project»s implementation in collaboration with DPD

Perbarindo in seven regions using three models from

December 2005 to July 2006, the following salient

points can be noted:

• There are currently five pilot project regions (West

Java, Central Java, DIY, Bali and West Sumatera)

in progress and/or with the potential to be

established.

• Two pilot project regions (DKI Jakarta and East

Java) have not progressed satisfactorily due to a

lack of agreement between the Leader of

commercial banks and DPD Perbarindo regarding

rural bank member participation in the pilot

project.

• In 2007, the establishment of BPR Apex

Institutions will continue through technical

supervision and meetings with Apex adminis-

trators in seven regions and also through the

expansion of Apex implementation into other

regions.

The facilitation of various workshops hasThe facilitation of various workshops hasThe facilitation of various workshops hasThe facilitation of various workshops hasThe facilitation of various workshops has

expanded the role of BPR financing.expanded the role of BPR financing.expanded the role of BPR financing.expanded the role of BPR financing.expanded the role of BPR financing. A recent

Presidential Decree stated that funding will be made



available for Indonesian Overseas Laborers (TKI) to be

placed in banks in six regions (Semarang, Medan,

Mataram, Surabaya, Cilacap and DKI), therefore, in

2006 TKI financing workshops have been held by rural

banks in coordination with Direktorat Pemberdayaan

Tenaga Kerja Luar Negeri (Depnakertrans), PD BPR

Bank Pasar Kulon Progo, which has extensive

experience in funding TKI overseas, and PJTKI.

Following the workshops in 2006, rural banks have

sponsored 2,365 TKI totaling Rp14.08 billion. BPR

financing workshops for the agricultural sector were

held on 23rd and 24th September 2005 in East Java,

attended by representatives from 49 rural banks. Such

workshops will be expanded in 2007 to rural banks in

other regions. The workshops help develop the role

of BPR financing. For example, a rural bank that had

previously never extended credit to the agricultural

sector currently has 29% of its credit portfolio

extended to the agricultural sector (NPL 0%). In

addition, there are 17 rural banks that have

experienced a 2.03% rise, on average, in the value of

credit extended to the agricultural sector.

By the end of 2006, to certify the competenceBy the end of 2006, to certify the competenceBy the end of 2006, to certify the competenceBy the end of 2006, to certify the competenceBy the end of 2006, to certify the competence

of BPR Directors, 89 classes for BPR Directorof BPR Directors, 89 classes for BPR Directorof BPR Directors, 89 classes for BPR Directorof BPR Directors, 89 classes for BPR Directorof BPR Directors, 89 classes for BPR Director

Certification had been held with a total of 2,212Certification had been held with a total of 2,212Certification had been held with a total of 2,212Certification had been held with a total of 2,212Certification had been held with a total of 2,212

participants.participants.participants.participants.participants. Eight national Competence Tests have

also been held with 2,115 rural bank directors already

certified as competent. On 20th December 2006,

competence certificates for rural bank directors were

awarded by the director of DPBPR, in the presence of

the Chairman of Badan Nasional Sertifikasi Profesi.

By 31st December 2006 1,642 rural banks (87.3%)

could boast a certified director; however, 238 rural

banks (12.7%) remain without one.

A survey was conducted on the LinkageA survey was conducted on the LinkageA survey was conducted on the LinkageA survey was conducted on the LinkageA survey was conducted on the Linkage

Program for Commercial Banks and Rural Banks toProgram for Commercial Banks and Rural Banks toProgram for Commercial Banks and Rural Banks toProgram for Commercial Banks and Rural Banks toProgram for Commercial Banks and Rural Banks to

improve the effectiveness of Linkage Programimprove the effectiveness of Linkage Programimprove the effectiveness of Linkage Programimprove the effectiveness of Linkage Programimprove the effectiveness of Linkage Program

implementation.implementation.implementation.implementation.implementation. To evaluate and subsequently

improve the Linkage Program based on a generic

model, whilst simultaneously boosting the

effectiveness of the Linkage Program itself, a survey

was performed on all rural banks that have received

financing from commercial banks. The results

indicated the following key points:

• The Linkage Program has yielded positive results

in the development of rural banks and in terms

of increasing credits extended to MSE customers.

The most commonly used model is the

≈executing model.∆

• Some commercial banks still use rules and

regulations for credit extension that do not match

the generic model such as LHP, total collateral

that burdens the rural banks, as well as

regulations for frozen savings and credit diversion

should a customer»s collectability decline (for

channeling and the executing model).

• The lending rate offered by commercial banks

to rural banks remains relatively high.

37Banking Supervision


Chapter 4Banking Supervision

38 Banking Supervision




COMMERCIAL BANKS

In view of the mounting complexities in the

advancement of the banking system and the increasing

diversity of risks to banks, Bank Indonesia operates a system

of risk-based supervision. The overall outcome of bank

supervision is expressed in assessments that include rating,1

risk profile2 and designation of bank supervision status.

Based on the risk profile and rating, Bank Indonesia

determines the supervision strategy for the individual bank,

whether it should be placed under normal or intensive

supervision or special surveillance.

Commercial banks demonstrated adequate resilienceCommercial banks demonstrated adequate resilienceCommercial banks demonstrated adequate resilienceCommercial banks demonstrated adequate resilienceCommercial banks demonstrated adequate resilience

to risk. to risk. to risk. to risk. to risk. In 2006, Bank Indonesia carried out risk-based

supervision and examination for all banks, with some banks

even examined more than once. In the end-of-year

assessment, 82% of 130 commercial banks had a

moderate risk profile. Thirteen percent were found to have

a low risk profile, and for 5% the risk profile was high.

This shows that in aggregate terms, Indonesia»s banking

institutions possess adequate capacity to mitigate the

various risks that they face in the course of their business.

Nevertheless, improvement in quality of risk management

Chapter 4Banking Supervision

is a key factor enabling banks to strengthen their risk

profile. Bank Indonesia instructed banks with high risk

profiles to submit action plans to deal with significant

problems at the banks, including targeted timeframes for

resolution. All of these banks submitted action plans and

so far Bank Indonesia has followed through with active

supervision.

Commercial banks were in sound condition. Commercial banks were in sound condition. Commercial banks were in sound condition. Commercial banks were in sound condition. Commercial banks were in sound condition. Each

quarter, Bank Indonesia conducted a rating of capital, asset

quality, management, earnings, liquidity and sensitivity to

market risk. In the results for December 2006, the majority

of banks were rated Sound (57%) and Fairly Sound (35%).

The banks rated Poor and Unsound were ordered by Bank

Indonesia to submit action plans detailing remedial actions

and proceed with these actions so that significant problems

would be resolved within specified deadlines.

In the composite ratings for the banking industry in 2006, most banks were assessed as Sound

and Fairly Sound. This attests to improvements in bank supervision effectiveness, aimed at building

a sound, strong and efficient banking system in support of national economic growth. The

improvement is also as envisaged in the programmes launched in the Indonesian Banking Architecture

and the internal revamping of the bank supervision function at Bank Indonesia using the dedicated

team approach.

1 Rating of banks is classified into 5 composite rating : PK-1 (Excellent), PK-2 (Sound),PK-3 (Fairly Sound), PK-4 (Poor), and PK-5 (Unsound)

2 Risk profite of bank is classified into: low, moderate, and high

Table 4.1.Commercial Bank Risk Profiles December 2006

Risk ProfileRisk ProfileRisk ProfileRisk ProfileRisk Profile %%%%%

1. Low 13%

2. Moderate 82%

3. High 5%

TotalTotalTotalTotalTotal 100%100%100%100%100%

Note: Including 3 Islamic commercial banks.



Commercial banks generally maintained complianceCommercial banks generally maintained complianceCommercial banks generally maintained complianceCommercial banks generally maintained complianceCommercial banks generally maintained compliance

with prudential banking regulationswith prudential banking regulationswith prudential banking regulationswith prudential banking regulationswith prudential banking regulations. Bank Indonesia

monitored bank compliance with prudential regulations,

encompassing the legal lending limit (LLL), net open

position (NOP), capital adequacy ratio (CAR), rating and

non-performing loans. In 2006, no banks were found in

violation of the LLL, NOP and capital adequacy regulations.

This provides a strong basis for the Indonesian banking

industry to maintain resilience against potential instability.

However, aside from this compliance, some banks were

unable to keep their NPLs within the maximum 5% limit.

Bank Indonesia ordered these banks to implement action

plans to bring their NPLs to no more than 5% with progress

reports to be submitted each month.

banking industry faces money laundering risk from illegal

inflows of proceeds of crime into the financial system. To

protect the reputation of the banking system and promote

compliance with the Anti-Money Laundering Law, the KYC/

AML rating is included as a management factor in the

overall commercial bank rating with the following scope:

active oversight by management; policy and procedures;

internal control and the internal audit function;

management information system; and human resources

and training. The rating scores range from 1 to 5, i.e.

excellent, sound, fairly sound, poor and unsound. Based

on examination of all commercial banks, the rating profile

for implementation of the KYC/AML regulations indicated

a reasonable level of compliance, with 73% of banks rated

1 until 3. During 2006, Bank Indonesia worked tirelessly

to persuade banks to strengthen their individual KYC

compliance and in so doing benefit from improved bank

rating.Composite RatingComposite RatingComposite RatingComposite RatingComposite Rating PersentagePersentagePersentagePersentagePersentage

1. Excellent 1%

2. Sound 57%

3. Fairly Sound 35%

4. Poor 6%

5. Unsound 1%

TotalTotalTotalTotalTotal 100%100%100%100%100%

Table 4.2Commercial Bank Ratings December 2006



Table 4.3Commercial Banks KYC/AML Rating

December 2006

Bank RatingBank RatingBank RatingBank RatingBank Rating %%%%%

Rating 1 - Excellent 1

Rating 2 - Sound 13

Rating 3 - Fairly sound 59

Rating 4 - Unsound 27

Total BanksTotal BanksTotal BanksTotal BanksTotal Banks 100100100100100

No commercial banks were under special surveillanceNo commercial banks were under special surveillanceNo commercial banks were under special surveillanceNo commercial banks were under special surveillanceNo commercial banks were under special surveillance.

At the end of 2006, none of Indonesia»s 130 banks,

including Islamic banks, were under special surveillance.

However, 16 banks (13%) were under intensive supervision

and the remaining 114 banks (87%) under normal

supervision. Measures were pursued to prevent further

deterioration in the condition of banks under intensive

supervision or placement of these banks under special

surveillance.

Improvements were noted in the implementation ofImprovements were noted in the implementation ofImprovements were noted in the implementation ofImprovements were noted in the implementation ofImprovements were noted in the implementation of

the Know Your Customer/Anti Money Laundering (KYC/the Know Your Customer/Anti Money Laundering (KYC/the Know Your Customer/Anti Money Laundering (KYC/the Know Your Customer/Anti Money Laundering (KYC/the Know Your Customer/Anti Money Laundering (KYC/

AML) regulationsAML) regulationsAML) regulationsAML) regulationsAML) regulations, which form part of the bank ratingwhich form part of the bank ratingwhich form part of the bank ratingwhich form part of the bank ratingwhich form part of the bank rating. The

The Minimum Capital Requirement of Tier 1 for

Commercial Banks

So far, the banking system has not been seen as

playing an optimum role in providing the expected level

of support for economic growth. At the same time, banks

face mounting potential for risk from the growing diversity

and complexity of the banking business. This escalation in



risk must be countered by an increase in the bank capital

needed to cover potential losses. The need for increased

capital is also in line with the planned future launching of

the Basel II Accord, which prescribes bank capital adequacy

commensurate to the level of risk faced by each bank.

Bank Indonesia has established deadlines andBank Indonesia has established deadlines andBank Indonesia has established deadlines andBank Indonesia has established deadlines andBank Indonesia has established deadlines and

minimum requirements for tier 1 capitalminimum requirements for tier 1 capitalminimum requirements for tier 1 capitalminimum requirements for tier 1 capitalminimum requirements for tier 1 capital. All commercial

banks are required to comply with the minimum tier 1

capital as of Rp 80 billion by 31 December 2007 and Rp

100 billion minimum by 31 December 2010. Thus on 1

January 2011, all commercial banks in operation will have

the minimum capital as of Rp 100 billion.

Commercial banks not meeting the required level ofCommercial banks not meeting the required level ofCommercial banks not meeting the required level ofCommercial banks not meeting the required level ofCommercial banks not meeting the required level of

tier 1 capital submitted action plans for compliance withtier 1 capital submitted action plans for compliance withtier 1 capital submitted action plans for compliance withtier 1 capital submitted action plans for compliance withtier 1 capital submitted action plans for compliance with

the required minimum. So far, 6 banks have paid upthe required minimum. So far, 6 banks have paid upthe required minimum. So far, 6 banks have paid upthe required minimum. So far, 6 banks have paid upthe required minimum. So far, 6 banks have paid up

additional capitaladditional capitaladditional capitaladditional capitaladditional capital. Based on the action plans submitted to

Bank Indonesia, the measures to be taken by banks to

comply with the capital requirement are generally the

payment of additional capital by existing shareholders or

new investors, merger with another bank (or several

banks), issuance of new shares in a secondary offering on

the capital market and reliance on the internal growth of

the bank. In an evaluation of progress on action plans

submitted by banks, six banks had increased their paid up

capital in stages and from internal growth, bringing capital

to more than Rp 80 billion. The number of banks with tier

1 capital below Rp 100 billion as of end-2006 is presented

in Table 4.4.

Bank Indonesia actively encouraged commercialBank Indonesia actively encouraged commercialBank Indonesia actively encouraged commercialBank Indonesia actively encouraged commercialBank Indonesia actively encouraged commercial

banks to comply with the minimum tier 1 capitalbanks to comply with the minimum tier 1 capitalbanks to comply with the minimum tier 1 capitalbanks to comply with the minimum tier 1 capitalbanks to comply with the minimum tier 1 capital

requirement.requirement.requirement.requirement.requirement. This took place by:

1. Requesting banks to strengthen their tier 1 capital by

raising paid up capital from existing shareholders or

new investors (acquisition);

2. Evaluating action plans prepared by banks and their

progress in compliance with tier 1 capital;

3. Encouraging banks to conduct mergers.

Banks unable to meet the minimum tier 1 capitalBanks unable to meet the minimum tier 1 capitalBanks unable to meet the minimum tier 1 capitalBanks unable to meet the minimum tier 1 capitalBanks unable to meet the minimum tier 1 capital

requirement within the deadline will be designated asrequirement within the deadline will be designated asrequirement within the deadline will be designated asrequirement within the deadline will be designated asrequirement within the deadline will be designated as

limited scope banks.limited scope banks.limited scope banks.limited scope banks.limited scope banks. This restriction covers the following:

• May not conduct business as a foreign exchange

bank;

• Provision of funds per debtor and/or debtor group

limited to ceilings or loans outstanding of no more

than Rp 500 million;

• Maximum depositor funds mobilised by the bank

restricted to 10 (ten) times tier 1 capital; and

• Close the entire office network of the bank outside

the province of the bank head office.

In 2006, Bank Indonesia also monitored theIn 2006, Bank Indonesia also monitored theIn 2006, Bank Indonesia also monitored theIn 2006, Bank Indonesia also monitored theIn 2006, Bank Indonesia also monitored the

implementation of good corporate governance (GCG).implementation of good corporate governance (GCG).implementation of good corporate governance (GCG).implementation of good corporate governance (GCG).implementation of good corporate governance (GCG). It

is crucial that banks operate on a sound footing in order

to safeguard the interests and confidence of stakeholders.

In this regard, although new regulations will be introduced

in 2007, Bank Indonesia commenced the monitoring of

good corporate governance (GCG). All commercial banks

have been requested to undertake a GCG self-assessment

and submit this report to Bank Indonesia for evaluation.

Based on evaluation of these self-assessments, the majority

of commercial banks have met their targets for preparation

for GCG.

CapitalCapitalCapitalCapitalCapital Number of BankNumber of BankNumber of BankNumber of BankNumber of Bank

Under Rp 80 billion 30

Rp 80 billion to Rp 100 billion 9

TotalTotalTotalTotalTotal 3939393939

Table 4.4Commercial Bank Compliance with Tier 1 Capital

December 2006



Box 4.1 Bank Supervisory Strategy

Bank Indonesia conducts risk-based supervision

through on-site supervision and off-site supervision,

the latter using reports sent in by banks. Risk-based

supervision focuses on monitoring inherent risks in the

major business lines involving high risk, the risk-control

system and the forward looking aspect. These major

business lines include credit, treasury and investment,

operations and services, trade financing, funding and

debt instruments, technology and information systems

and human resources management. This supervision

is used to obtain a picture of the bank financial

condition that is ultimately reflected in the bank rating

and risk profile. The rating and risk profiles are then

used to determine and implement individual bank

supervision strategies. In addition, supervision is

conducted to monitor bank compliance and detect any

unsound practices that could endanger the survival of

the bank. The bank risk profile is then updated

quarterly or at more frequent intervals if the bank is

distressed or the risk profile analysis for the quarter

indicates the need for more frequent updating of the

risk profile. Examination will take place in the event of

any indications requiring Bank Indonesia to reassess

the bank risk profile and to instruct the bank to take

remedial actions, or if Bank Indonesia launches stricter

supervisory actions.

Bank supervision status is then grouped into three

levels as follows: a) Normal Supervision; b) Intensive

Supervision; and c) Special Surveillance. Designation of

Bank Under Intensive Supervision is based on the

following criteria: (i) bank rating is Poor (PK-4) or

Unsound (PK-5); (ii) there are some exceeding of the

Legal Lending Limit (LLL) and in the opinion of Bank

Indonesia the corrective actions proposed by the bank

are unacceptable or impossible to achieve; (iii) there

are fundamental problems with profitability; (iv) non-

performing loans (net) exceed 5% of total credit; and

the bank has actual and/or potential problems, based

on assessment of composite risk. Intensive supervision

takes place by asking the bank to take corrective actions

that may include the following: a) prepare action plans

and progress reports appropriate for the problems faced;

b) report specific information to Bank Indonesia

(including the daily liquidity report); c) increase the

frequency of updating and assessment of the business

plan with adjustments to the targets to be achieved;

and d) prevent the bank from engaging in equity

participation in other institutions. To assess progress in

actions taken by a bank under intensive supervision,

Bank Indonesia may conduct on-site examination and

monitor the actions taken by the bank to resolve its

problems. Bank Indonesia will then urge the bank to

complete work on its action plan for correction of its

problems so that its status may be restored to normal

supervision. Intensive supervision is a tightened process

of oversight of a bank with the objective of preventing

the bank from being placed under special surveillance.

A bank is placed under Special Surveillance if the CAR

falls below 8% and it has violated the statutory reserves

requirement. These preventive actions require a range

of timely corrective actions for bank soundness to be

restored as quickly as possible.



TO ENHANCE RISK MANAGEMENT PROCESS OF THE BANKS

O B J E C T I V E S

SUPERVISORY ACTION

SUPERVISORY ENFORCEMENT /RECOMMENDATION

MISI

PROCESS

INFRASTRUCTURE

Risk VissionObjectivesStrategies

AnalysiesEvaluaties

Strategies

Communicate

Data

Monitor

Implement Decisions

BUSINESS / SUPPORTING ACTIVITIES

- Organizational Framework- Operational Framework- Analytical Framework- Technological Framework- Regulatory Compliance

MO

NITO

RIN

G &

CO

NTR

OLS

B A N K

R I S K M A N A G E M E N T SYSTEM

RISK BASED SUPERVISION

KNOWYOURBANK

CAMELS RATING

RISK PROFILE

INDIVIDUALSUPERVISORYSTRATEGIESQUARTERLY RISK

ASSESSMENT

EXAMINATION PLAN

Risk

Con

trol

Syst

em

Inhe

rent

Ris

k

Preliminary Risk Assessment

Audit Working Plan

Examination

REPORT

Bank :-Report

- MeetingManagement

etc

Data /Information

Eksternal :-Report

- Meeting- Complaint

-MarketAnalysis,etc

Eksternal Party- Kantor Akuntan Publik- Lembaga Pemeringkat- Otoritas Lain- Pemerintah- Masyarakat- dll

BANK INDONESIA

DAILYANALYSIS

Bank Indonesia is constantly working to improve

bank supervision. To this end, on 1 March 2006, Bank

Indonesia merged the Directorate of Bank Examination

with the Directorate of Bank Supervision. Previously,

there had been two Directorates of Bank Examination

and two Directorates of Bank Supervision, which Bank

Indonesia then merged into three Directorates:

Directorates of Bank Supervision 1, 2 and 3. Under

this structure, a supervision team has full responsibility

for all bank supervision functions, including off-site

supervision and on-site examination. This approach

was taken because it was seen as the most appropriate

for support for risk-based supervision (RBS). The

reorganisation was based on the following principles:

1. Establishing a single point of accountability in the

operation of the bank supervision function at

Bank Indonesia in order to build effective

coordination and consistent implementation of

bank supervision policies.

2. Consistency among units in the operation of

supervision. Under this principle, the organisation

should be able to create lines of control and

coordination enabling consistency in the operation

of bank supervision, even for banks under

different supervision units.

3. Effective operation of risk-based supervision (RBS)

and consolidated supervision. Under this principle,

the supervision organisation is structured to

support the effective operation of RBS as the main

approach used in the bank supervision function,

while also supporting consolidated supervision

aimed at enabling bank supervisors to look at bank

Box 4.2 Reorganization: Enhancing the Effectiveness of Banking Supervision



Box 4.3 Certification and Capacity Building for Bank Supervisors

A robust supervision system requires highly

competent bank supervisors to operate effectively in

the face of the ongoing rapid expansion in the banking

industry. For this reason, the Bank Supervisor

Certification Programme, mandatory for all bank

supervisors at the Bank Indonesia Head Office and

Regional Offices, has been held since mid-2004. The

certification programme is organised on an ongoing

basis year by year to equip bank supervisors with

knowledge and skills in bank supervision. The training

programme is organised into stages ranging from

foundation to master level. Special training sessions

were also held for participants selected on the basis of

their competence in certain fields for training as bank

supervisors with specialist expertise. During 2006, the

certification training was attended by 960 supervisors

of commercial banks, Islamic banks and rural banks.

LevelLevelLevelLevelLevel Jumlah Peserta (Realisasi)Jumlah Peserta (Realisasi)Jumlah Peserta (Realisasi)Jumlah Peserta (Realisasi)Jumlah Peserta (Realisasi)

FoundationFoundationFoundationFoundationFoundation

a. Grade 1 340

b. Grade 2 96

InternediateInternediateInternediateInternediateInternediate

a. Grade 3 233

b. Grade 4 98

AdvancedAdvancedAdvancedAdvancedAdvanced

a. Grade 5 51

b. Grade 6 49

MasterMasterMasterMasterMaster

a. Grade 7 93

TotalTotalTotalTotalTotal 960960960960960

problems not only from the standpoint of a single

entity, but also within the context of ties to the

business conglomerate of which the bank is a

part. The RBS approach itself demands an in-

depth, comprehensive understanding of the

conditions and problems which is faced by the

bank and is followed by a supervisory cycle of

actions, all of which must be carried out quickly

and accurately. The use of dedicated teams will

improve coordination between lines of supervision

while enabling faster information flows and earlier

detection of bank problems.

Organisational improvements were also made to

Islamic bank supervision. The Islamic banking

supervision team was divided into two as follows: (i)

Bank Supervision Team 1, responsible for supervision

and examination of Islamic commercial banks and

some Islamic divisions; and (ii) Bank Supervision Team

2, responsible for supervision and examination of

Islamic rural banks and some Islamic divisions. To

anticipate the brisk growth in Islamic banking in both

numbers of banks and bank offices, additional

supervision personnel were hired in 2006, while

existing personnel were rotated.

Box 4.3 Certification and Capacity Building for Bank SupervisorsBox 4.3 Certification and Capacity Building for Bank Supervisors



Table 4.5.Islamic Commercial Banks Risk Profiles and Rating

December 2006

%%%%% Risk ProfilRisk ProfilRisk ProfilRisk ProfilRisk Profil %%%%%

Sound 100% 1. Low 0%

Fairly Sound 0% 2. Moderat 100%

Poor 0% 3. High 0%

Unsound 0%

TotalTotalTotalTotalTotal 100%100%100%100%100% TotalTotalTotalTotalTotal 100%100%100%100%100%

RatingRatingRatingRatingRating

ISLAMIC BANKS

The Islamic banking system saw the launching of risk-The Islamic banking system saw the launching of risk-The Islamic banking system saw the launching of risk-The Islamic banking system saw the launching of risk-The Islamic banking system saw the launching of risk-

based supervisionbased supervisionbased supervisionbased supervisionbased supervision. The various initiatives pursued in 2006

for the development of risk-based supervision were

followed by risk profile assessment, functioning as an

accurate, timely and comprehensive supplementary

indicator for the quality of Islamic banking activities. Other

tasks in 2006 include the development of the Islamic bank

rating system, information systems and the applications

necessary for long-term improvement in the quality of

analysis by Islamic bank supervisors.

at the beginning of the year. The overall results from

examination of Islamic banks show that the Islamic

banking industry is in good form, as evident from the

average level of non-performing financing (NPF) at below

5% and the healthy operation of the intermediary function

as indicated by the outcome from implementing the

regulations on earning assets quality rating and the

financing to deposit ratio.

Further efforts were pursued to build theFurther efforts were pursued to build theFurther efforts were pursued to build theFurther efforts were pursued to build theFurther efforts were pursued to build the

competency of Sharia Supervisory Boards (DPS).competency of Sharia Supervisory Boards (DPS).competency of Sharia Supervisory Boards (DPS).competency of Sharia Supervisory Boards (DPS).competency of Sharia Supervisory Boards (DPS). In regard

to oversight of the operation of Sharia Principles, Sharia

Supervisory Boards have a vital role as partner of Bank

Indonesia in the integrated supervision of Islamic banks.

Given the importance of these Boards in ensuring

compliance with Sharia Principles in bank operations,

further efforts were pursued to strengthen their

competence, among others by adopting requirements for

appointment as member of a Sharia Supervisory Board.

This regulation covers the requirement for Sharia

Supervisory Board candidates to take the fit and proper

test, which covers key areas of knowledge and experience

in Islamic legal affairs and banking and/or finance in

general. To strengthen the role of Sharia Supervisory

Boards in oversight of compliance with Islamic laws, the

Boards are required to submit semi-annual reports on

oversight of Islamic legal compliance to Bank Indonesia

and the National Islamic Council.

RURAL BANKS

Efforts to improve effectiveness in rural bankEfforts to improve effectiveness in rural bankEfforts to improve effectiveness in rural bankEfforts to improve effectiveness in rural bankEfforts to improve effectiveness in rural bank

supervision was intensified in 2006supervision was intensified in 2006supervision was intensified in 2006supervision was intensified in 2006supervision was intensified in 2006. To achieve this

objective and improve the effectiveness of rural bank

supervision, actions included the launching of a nation-

wide Rural Bank Supervision Information System, design

of rural bank online reporting and formulation of an

examination strategy based on potential risk. The rural

bank monthly reports submitted to Bank Indonesia online

Measured by rating and risk profile, Islamic banksMeasured by rating and risk profile, Islamic banksMeasured by rating and risk profile, Islamic banksMeasured by rating and risk profile, Islamic banksMeasured by rating and risk profile, Islamic banks

performed remarkably well.performed remarkably well.performed remarkably well.performed remarkably well.performed remarkably well. Rating of Islamic banks

continued to apply the 4 (four) categories of Sound, Fairly

Sound, Poor and Unsound. Following the introduction of

risk-based supervision, Islamic banks also perform a regular

assessment of their risk profile. In the results for supervision

conducted in 2006, all Islamic commercial banks were rated

Sound with a moderate risk profile. This shows that the

Islamic banking system is capable of operating on a sound

footing in compliance with prudential regulations.

From the results obtained from examination, theFrom the results obtained from examination, theFrom the results obtained from examination, theFrom the results obtained from examination, theFrom the results obtained from examination, the

Islamic banking system is in strong shapeIslamic banking system is in strong shapeIslamic banking system is in strong shapeIslamic banking system is in strong shapeIslamic banking system is in strong shape. During 2006,

general examination and special examinations were

conducted for all Islamic commercial banks, Islamic Banking

Units and Islamic rural banks according to the plan adopted



are expected to provide timely, accurate and truthful

information on the financial and business condition of rural

banks and in so doing support the supervision system.

Bank Indonesia worked constantly to improve theBank Indonesia worked constantly to improve theBank Indonesia worked constantly to improve theBank Indonesia worked constantly to improve theBank Indonesia worked constantly to improve the

quality of supervisionquality of supervisionquality of supervisionquality of supervisionquality of supervision by organising certification for bank

supervisors and non-certified training to improve the

knowledge and skills of rural bank supervisors and

examiners. In addition, manuals were developed for rural

bank supervisors on Guidelines for Focused Rural Bank

Supervision, Rural Bank Case Studies and Guidelines for

Feasibility Study Assessment for Establishment of Rural

Banks.

From the results of supervision, in overall terms theFrom the results of supervision, in overall terms theFrom the results of supervision, in overall terms theFrom the results of supervision, in overall terms theFrom the results of supervision, in overall terms the

rural bank industry showed positive trendsrural bank industry showed positive trendsrural bank industry showed positive trendsrural bank industry showed positive trendsrural bank industry showed positive trends, but still facesbut still facesbut still facesbut still facesbut still faces

some hurdlessome hurdlessome hurdlessome hurdlessome hurdles explained as follows:

a) Inadequate human resources capacity at the

managerial and technical levels, resulting in high

overhead costs for rural bank operations, poor credit

analysis and consequently high NPLs ratios, persistent

errors in bookkeeping and reporting and lack of

product innovation for building market share.

b) Rural banks do not fully conduct their business on

the basis of good governance principles supported

by adequate systems and procedures, resulting in

weak control in the management of rural bank

business operations and inefficiency.

c) Continued interference from owners in rural bank

operations in ways detrimental to the bank.

Findings from examinations conducted at rural banksFindings from examinations conducted at rural banksFindings from examinations conducted at rural banksFindings from examinations conducted at rural banksFindings from examinations conducted at rural banks

indicate that unsound banking practices persistindicate that unsound banking practices persistindicate that unsound banking practices persistindicate that unsound banking practices persistindicate that unsound banking practices persist. During

2006, Bank Indonesia conducted examinations for 1,952

rural banks. The examination consisted of regular general

examination conducted once each year, while special

examination would depend on the nature of problems

faced by the individual rural bank. Examinations uncovered,

among others, the following unsound practices:

a) Fraudulent lending to related parties and non-related

parties to circumvent the Legal Lending Limit.

b) Internal disputes within management and between

management and owners with possible impact on

bank operations.

c) Reporting to Bank Indonesia marred by inaccuracies.

d) Cases of bank-within-bank practices for the personal

gain of the rural bank management and/or owners.

Table 4.6Rural Banks Plan and Actual Examination

DescriptionDescriptionDescriptionDescriptionDescription 20052005200520052005 20062006200620062006

General ExaminationGeneral ExaminationGeneral ExaminationGeneral ExaminationGeneral Examination- Planned 2.054 1.965- Conducted 2.069 1.952

Special ExaminationSpecial ExaminationSpecial ExaminationSpecial ExaminationSpecial Examination- Planned 211 158- Conducted 593 402

In these cases of banks involved in unsound bankingIn these cases of banks involved in unsound bankingIn these cases of banks involved in unsound bankingIn these cases of banks involved in unsound bankingIn these cases of banks involved in unsound banking

practices, corrective actions were takenpractices, corrective actions were takenpractices, corrective actions were takenpractices, corrective actions were takenpractices, corrective actions were taken. These banks were

requested to take the necessary actions to resolve their

problems and/or faced imposition of sanctions. Most of

the problem rural banks were classified under special

surveillance. Nevertheless, it was possible to resolve the

problems through acquisition and/or payment of additional

capital by the owners to achieve the minimum 4% CAR

and minimum 3% cash ratio. In addition, Bank Indonesia

ordered the replacement of managers and/or owners

proven responsible for the problem condition of these rural

banks. Further actions were pursued in cases of

irregularities suspected of involving criminal acts.



Jakarta 1 Jakarta 1 West Java 4West Java 4 West Java 1 DI Yogyakarta 1Central Java 3 Central Java 5 Central Java 1East Java 2 East Java 2Sumatera 10 Sumatera 7Sulawesi 4 Sulawesi 2Kalimantan 2 Kalimantan 4Nusa Tenggara 2 Nusa Tenggara 1

TotalTotalTotalTotalTotal 2828282828 TotalTotalTotalTotalTotal 2323232323 TotalTotalTotalTotalTotal 66666

Table 4.7Rural Banks Licensing 2006

Issuance of Approvals in Principle Issuance of Operating Licences Revocation of Operating Licences

Region No. of Rural Bank Region No. of Rural Bank Region No. of Rural Bank

During 2006, Bank Indonesia issued licenses andDuring 2006, Bank Indonesia issued licenses andDuring 2006, Bank Indonesia issued licenses andDuring 2006, Bank Indonesia issued licenses andDuring 2006, Bank Indonesia issued licenses and

approvals in principle for new rural banks and for mergersapprovals in principle for new rural banks and for mergersapprovals in principle for new rural banks and for mergersapprovals in principle for new rural banks and for mergersapprovals in principle for new rural banks and for mergers

and revoked operating licences for some rural banksand revoked operating licences for some rural banksand revoked operating licences for some rural banksand revoked operating licences for some rural banksand revoked operating licences for some rural banks.

Approvals in principle were issued for 23 rural banks while

134 rural banks were approved for merger into 14 larger

entities. Bank Indonesia also revoked the operating licences

of 6 rural banks (see Table 4.7).

In most cases, rural banks continue to face difficultiesIn most cases, rural banks continue to face difficultiesIn most cases, rural banks continue to face difficultiesIn most cases, rural banks continue to face difficultiesIn most cases, rural banks continue to face difficulties

in their provision of services to MSEsin their provision of services to MSEsin their provision of services to MSEsin their provision of services to MSEsin their provision of services to MSEs. These issues include

the following:

a. The lack of strong capital support for the funding

held by rural banks and the constraints in mobilizing

depositor funds has limited the ability of these banks

to expand and achieve a desired economy of scale in

their operations.

b. Rural banks have inadequately trained human

resources in both managerial and operational

positions, and as a result, overhead costs are high.

c. The concentration of rural banks on Java and Bali

has produced wide disparities in rural bank services

to MSEs throughout Indonesia.

d. Because of the lack of supporting infrastructure for

the rural bank industry, such as an institution capable

of providing liquidity support to rural banks facing

liquidity mismatch, rural banks are compelled to

maintain large reserves of cash and are therefore

unable to put their funds to optimum use.

e. A substantial portion of total rural bank credit is

extended for consumptive purposes (39%), although

most credit (72%) is micro credit with ceilings below

Rp 50 million. For the future, rural banks will be

guided towards a stronger focus on financing for

productive sectors, most importantly the informal

sector and micro enterprises in rural areas.

In In In In In rrrrresponse to the current condition of rural banks,esponse to the current condition of rural banks,esponse to the current condition of rural banks,esponse to the current condition of rural banks,esponse to the current condition of rural banks,

Bank Indonesia provided technical assistance and tookBank Indonesia provided technical assistance and tookBank Indonesia provided technical assistance and tookBank Indonesia provided technical assistance and tookBank Indonesia provided technical assistance and took

measures for improvement in the quality and capacity ofmeasures for improvement in the quality and capacity ofmeasures for improvement in the quality and capacity ofmeasures for improvement in the quality and capacity ofmeasures for improvement in the quality and capacity of

rural bank personnelrural bank personnelrural bank personnelrural bank personnelrural bank personnel. To build properly qualified human

resources possessing high integrity and adequate

competence for upholding good corporate governance

in rural banks, Bank Indonesia provided rural banks with

ongoing technical assistance. In addition, Bank Indonesia

implemented certification and training programmes for

continual improvement in the quality and capabilities of

rural bank personnel. Bank Indonesia also conducted the

fit and proper test for individuals deemed to exercise

major influence in the control and management of rural

banks.



Table 4.8Number of Banking Investigation

60 42 100 44 3 2 163 88

43 33 91 39 1 1 135 73

10 6 9 3 0 0 19 9

13 7 82 36 1 1 96 4420 20 0 0 0 0 20 20

17 9 9 5 2 1 28 15

1. Cases reported for investigation

2. Investigation completed2.1 Cases handed over to law enforcement

investigators2.2 Cases recommended to Bank Indonesia

Regional Offices for further action **)2.3 Cases not taken forward **)

3. Cases still under investigation

*) Including cases in the regions reported/handed over by BI Regional Offices under the Joint Decree for Cooperation in Regions andcases reported by PPATK.

**) Reasons for closing case files on investigations:- Case involved no element of crime, or- Already handled by law enforcement authorities, or- Involved the competency of another agency (e.g., taxation), or- Expiration of statute of limitations or other reason satisfying criteria for becoming legally void.

DescriptionDescriptionDescriptionDescriptionDescription

Commercial BanksCommercial BanksCommercial BanksCommercial BanksCommercial Banks Rural BanksRural BanksRural BanksRural BanksRural Banks TOTALTOTALTOTALTOTALTOTAL

No. ofNo. ofNo. ofNo. ofNo. ofCasesCasesCasesCasesCases

No. ofNo. ofNo. ofNo. ofNo. ofBanksBanksBanksBanksBanks


No. ofNo. ofNo. ofNo. ofNo. ofBanksBanksBanksBanksBanks CasesCasesCasesCasesCases BanksBanksBanksBanksBanks



NON BANKNON BANKNON BANKNON BANKNON BANK

BANKING INVESTIGATION AND MEDIATION

As in previous years, during 2006 Bank Indonesia

conducted special investigations or forensic examinations

in cases of suspected banking crimes, mediated in civil

disputes between customers and banks and performed

analysis and enhancement of banking investigations and

mediation.

Bank Indonesia pursued various actions for resolutionBank Indonesia pursued various actions for resolutionBank Indonesia pursued various actions for resolutionBank Indonesia pursued various actions for resolutionBank Indonesia pursued various actions for resolution

of cases involving suspected banking crimes.of cases involving suspected banking crimes.of cases involving suspected banking crimes.of cases involving suspected banking crimes.of cases involving suspected banking crimes. Bank

Indonesia recorded 163 incoming cases during 2006,

bringing the cumulative number of incoming cases since

1999 to 671. Nineteen cases of suspected banking

violations involving elements of crime were handed over/

reported to law enforcement investigators in 2006,

bringing the cumulative total to 320 such cases since 1999.

Ninety-six cases in Indonesia»s regions during 2006 were

delegated to the local Bank Indonesia Regional Offices

under the mechanism of the Joint Decree for Cooperation

on Enforcement against Banking Crimes and Internal

Circular Letter concerning Guidelines for Implementation

of Cooperation in Enforcement against Banking Crimes at

the Regional Level.

The most popular modus operandi of banking crimesThe most popular modus operandi of banking crimesThe most popular modus operandi of banking crimesThe most popular modus operandi of banking crimesThe most popular modus operandi of banking crimes

involved creditinvolved creditinvolved creditinvolved creditinvolved credit. Banking crimes varied in complexity,

depending on the scope of business of the bank itself.

According to data for 1999-2006, the modus operandi of

30% of banking crimes involved credit operations.



Graph 4.1Modus Bank Fraud

30% Credit (loan swaps, pass through; risk sharing; paper/shell companies;fictitious debtors, loans for fictitious purposes; guarantee/endorsementof securities; trade finance; circumvention of LLL).

17% Funding (drawdown of BLBI for related parties; use of bank funds forrelatives of bank commissioners; conversion of interbank liabilities to thirdparty liabilities chargeable to BLBI).

17% Fraudulent reporting, bookkeeping and records

13% Other Fraud (violation of CDOs; takeover of assets; funds transfers;taxation; unlicensed funds mobilisation; capital; forex transactions; failureto submit reports; abuse of authority; cyberfraud; bank-within-bankpractices; commissions for personal gain.

11% Records not kept

7% Fictitious documents and expenses, cost markups

5% Embezzlement (use of funds/embezzling from the bank)

Others13%

Credit30%

Funding17%

Embezzlement5%

Fictitious Documents &Expenses, Cost Markups

7%

Fraudulent Reporting,Bookkeeping and

Records17%

Records not Kept11%

In addition, Bank Indonesia performed the functionIn addition, Bank Indonesia performed the functionIn addition, Bank Indonesia performed the functionIn addition, Bank Indonesia performed the functionIn addition, Bank Indonesia performed the function

of mediation in civil disputes between customers and banksof mediation in civil disputes between customers and banksof mediation in civil disputes between customers and banksof mediation in civil disputes between customers and banksof mediation in civil disputes between customers and banks.

The number of disputes brought by customers to DIMP at

Bank Indonesia during 2006 was relatively few, totalling

58 cases, with Bank Indonesia Regulation No. 8/5/PBI/2006

coming into force only on 1 June 2006. Data on these

disputes is presented in Table 4.9.

Most of the disputes brought to mediation wereMost of the disputes brought to mediation wereMost of the disputes brought to mediation wereMost of the disputes brought to mediation wereMost of the disputes brought to mediation were

related to the payment system, channelling of funds andrelated to the payment system, channelling of funds andrelated to the payment system, channelling of funds andrelated to the payment system, channelling of funds andrelated to the payment system, channelling of funds and

mobilisation of fundsmobilisation of fundsmobilisation of fundsmobilisation of fundsmobilisation of funds. Some complaints involved products

provided jointly by banks and other institutions, such as

mutual funds. Of the 58 disputes brought for mediation,

16 were settled by agreement between the parties

involved, either during pre-mediation (before the parties

sign the agreement to mediate) or during the mediation

process (after signing the agreement to mediate). Three

disputes could not be handled by mediation because of

failure to meet the criteria for eligible cases as stipulated

in Article 8 of Bank Indonesia Regulation No. 8/5/PBI/2006

concerning Banking Mediation.

Table 4.9Number of Customer and Bank Dispute

57 22 1 1 58 23

18 13 1 1 19 14

39 18 0 0 39 18

1. Disputes Received

2. Disputes Resolved through Mediation

3. Disputes Received and still in Process

DescriptionDescriptionDescriptionDescriptionDescription

Commercial BanksCommercial BanksCommercial BanksCommercial BanksCommercial Banks Rural banksRural banksRural banksRural banksRural banks TOTALTOTALTOTALTOTALTOTAL

No. ofNo. ofNo. ofNo. ofNo. ofDisputesDisputesDisputesDisputesDisputes


No. ofNo. ofNo. ofNo. ofNo. ofDisputesDisputesDisputesDisputesDisputes


No. ofNo. ofNo. ofNo. ofNo. ofDisputesDisputesDisputesDisputesDisputes BanksBanksBanksBanksBanks



Box 4.4 Mediation in Customer Civil Disputes with Banks

Actions by banks to resolve customer complaints

are not always to the customer»s satisfaction.

Dissatisfaction may arise when a bank fails to settle a

customer»s claim, whether in part or in full. This

dissatisfaction in turn can potentially lead to customer

disputes with banks which if not promptly resolved and

allowed to drag out could damage the bank reputation,

erode public confidence in banking institutions and

disadvantage customers.

Resolution of customer disputes with banks may

be pursued through negotiation, conciliation,

mediation or arbitration. However, dispute resolution

through arbitration or the judicial system is not a

convenient option for small-scale customers and micro

and small enterprises, given the considerable time and

expense involved. For this reason, there needs to be

simple, affordable and quick resolution of customer

disputes with banks involving low-income customers

and small and micro enterprises by means of banking

mediation to safeguard and uphold the rights of these

customers.

In view of the importance of banking mediation

to resolution of customer disputes with banks, banking

associations need to move quickly to establish an

independent banking mediation agency. However, it

is not possible for the independent banking mediation

agency to be set up within a short period, even in spite

of the urgent need. For this reason, bank mediation

will for the time being be provided by Bank Indonesia.

This arrangement is consistent with Bank Indonesia

Regulation No. 8/5/PBI/2006 dated 30 January 2006

concerning Banking Mediation, which came into force

on 1 June 2006. Mediation by Bank Indonesia will

continue until the establishment of an independent

banking mediation agency, targeted for no later than

31 December 2007.

As stipulated in the Bank Indonesia Regulation,

customer disputes with banks arising from failure by

the bank to settle customer financial claims may be

brought to banking mediation for resolution in cases

involving claims up to a limit of Rp 500 million. The

requirements that must be met are:

1) The application for mediation must be made in

writing to Bank Indonesia, attn: Directorate of

Banking Investigation and Mediation, enclosing

supporting documents;

2) The customer has previously approached the bank

to resolve the dispute;

3) The dispute is not before or has never been

adjudicated by an arbitration institution or court,

or there is no agreement facilitated by any other

mediation institution;

4) The dispute comes under civil law;

5) The dispute has never been handled in banking

mediation facilitated by Bank Indonesia;

6) Application for dispute resolution shall be

submitted no later than 60 (sixty) working days

after the date of the complaint resolution letter

from the bank to the customer.



THE FIT AND PROPER TEST

The fit and proper test is conducted to ensure that

banks are owned, managed and controlled by competent

parties of high integrity and not exploited for personal

gain or the benefit of business groups. The fit and proper

test is a requirement for licensing of a new bank and for

any change in the management and/or ultimate

shareholders of a bank. The process for the fit and proper

test for candidate managers and ultimate shareholders is

divided into two stages: administrative checks and the

interview stage.

Measured cumulatively, more than 2000 personsMeasured cumulatively, more than 2000 personsMeasured cumulatively, more than 2000 personsMeasured cumulatively, more than 2000 personsMeasured cumulatively, more than 2000 persons

have taken the fit and proper test. have taken the fit and proper test. have taken the fit and proper test. have taken the fit and proper test. have taken the fit and proper test. From the launching of

the test until 2006, testing was held for a total of 2,096

candidate managers and ultimate shareholders with 1,768

awarded a passing grade. Of these, 1,050 were bank

directors, 655 were commissioners/supervisory directors

and 63 represented ultimate shareholders.

During 2006, 222 persons were invited to take theDuring 2006, 222 persons were invited to take theDuring 2006, 222 persons were invited to take theDuring 2006, 222 persons were invited to take theDuring 2006, 222 persons were invited to take the

fit and proper test.fit and proper test.fit and proper test.fit and proper test.fit and proper test. Of this total, 219 persons took the test

at the interview stage. The interviewees consisted of 110

bank directors, 32 compliance directors, 70 commissioners/

supervisory directors and 7 ultimate shareholders.

Candidates for promotion to higher positions were not

required to attend interviews. In these cases, regulations

require only administrative checks to be made. The test

was successfully completed by 89 directors, 23 compliance

directors, 57 commissioners/supervisory directors and

ultimate 7 shareholders. Not passing the test were 21

directors, 9 compliance directors and 15 commissioners/

supervisory directors.

In the case of rural banks, 1,472 persons took theIn the case of rural banks, 1,472 persons took theIn the case of rural banks, 1,472 persons took theIn the case of rural banks, 1,472 persons took theIn the case of rural banks, 1,472 persons took the

fit and proper test during 2006fit and proper test during 2006fit and proper test during 2006fit and proper test during 2006fit and proper test during 2006. This number consisted of

1,122 new entries and 350 persons holding existing

positions. Only about 74% of the new entries passed the

test, while those holding existing positions were even less

successful with a pass rate of 70%. In most cases when

controlling shareholders and managers failed the test, the

reasons lay in failure to satisfy the administrative,

competency and/or integrity requirements established by

Bank Indonesia or the listing of these parties in the Failed

Candidates List or Bad Debt List. A breakdown of persons

taking the fit and proper test during 2006 is presented as

follows: (Table 4.11)

Table 4.10Fit and Proper Test for Prospective Commercial Banks Managers and Owners/Ultimate Shareholders

PassedPassedPassedPassedPassed

20052005200520052005 20062006200620062006 Cumulative until 2006Cumulative until 2006Cumulative until 2006Cumulative until 2006Cumulative until 2006

PersonsPersonsPersonsPersonsPersonsTestTestTestTestTest

PassedPassedPassedPassedPassed1)1)1)1)1)

FailedFailedFailedFailedFailed2)2)2)2)2)



FailedFailedFailedFailedFailed PassedPassedPassedPassedPassed FailedFailedFailedFailedFailed

Board of Directors: 231231231231231 176176176176176 5555555555 143143143143143 113113113113113 3030303030 12831283128312831283 10501050105010501050 233233233233233a. Directors 190 145 45 111 89 21 1000 840 160b. Compliance Directors 41 31 10 32 23 9 283 210 73

Commissioners/Supervisory Directors 133 113 20 72 57 15 745 655 90

UltimateShareholders 17 14 3 7 7 0 68 63 5

TotalTotalTotalTotalTotal 381381381381381 303303303303303 7878787878 222222222222222 174174174174174 4545454545 20962096209620962096 17681768176817681768 328328328328328



Table 4.11The Fit and Proper Test for Rural Banks Managers and Ultimate Shareholders

157 129 28 22 21 1 28 25 3 29 27 2 24 23 1 103 96 7

505 378 127 105 85 20 11 76 35 132 96 27 120 96 24 459 353 106

575 375 200 122 90 32 143 93 50 131 89 42 164 113 51 560 385 175

1,2371,2371,2371,2371,237 882882882882882 355355355355355 249249249249249 196196196196196 5353535353 282282282282282 194194194194194 8888888888 283283283283283 212212212212212 7171717171 308308308308308 232232232232232 7676767676 1,1221,1221,1221,1221,122 834834834834834 288288288288288

14 10 4 4 3 1 5 4 1 9 7 2 12 10 2 30 24 6

142 107 35 23 14 9 40 31 9 32 26 6 35 17 18 130 88 42

146 118 28 67 52 15 50 32 18 27 17 10 46 33 13 190 134 56

302302302302302 235235235235235 6767676767 9494949494 6969696969 2525252525 9595959595 6767676767 2828282828 6868686868 5050505050 1818181818 9393939393 6060606060 3333333333 350350350350350 246246246246246 104104104104104

DescriptionDescriptionDescriptionDescriptionDescription20052005200520052005

20062006200620062006

TTTTT P P P P P FFFFF TTTTT P P P P P FFFFF TTTTT P P P P P FFFFF TTTTT P P P P P FFFFF TTTTT P P P P P FFFFF PPPPP L L L L L TLTLTLTLTL

Q IQ IQ IQ IQ I Q IIQ IIQ IIQ IIQ II Q IIIQ IIIQ IIIQ IIIQ III Q IVQ IVQ IVQ IVQ IV TotalTotalTotalTotalTotal

New EntryNew EntryNew EntryNew EntryNew Entry

Ultimate

Shareholders

Commissioners

Directors

TotalTotalTotalTotalTotal

ExistingExistingExistingExistingExisting

Ultimate

Shareholders

Commissioners

Directors

JumlahJumlahJumlahJumlahJumlah

Notes: T : Persons Tested P : PassedF : Failed

IMPROVE THE BANKING SECTOR MANAGEMENT

INFORMATION SYSTEM (SIM-SPBI)

The SIM-SPBI is an integrated information system

supporting Bank Indonesia»s functions in bank supervision,

examination and regulation. The SIM-SPBI also functions

as an integrated information database in support of more

effective banking supervision, examination, research,

regulation and development. Over time, the SIM-SPBI has

developed to include several sub-systems.

The Bank Supervision Management InformationThe Bank Supervision Management InformationThe Bank Supervision Management InformationThe Bank Supervision Management InformationThe Bank Supervision Management Information

System (SIMWAS) has undergone continuous developmentSystem (SIMWAS) has undergone continuous developmentSystem (SIMWAS) has undergone continuous developmentSystem (SIMWAS) has undergone continuous developmentSystem (SIMWAS) has undergone continuous development

to improve the effectiveness of supervisionto improve the effectiveness of supervisionto improve the effectiveness of supervisionto improve the effectiveness of supervisionto improve the effectiveness of supervision. Launched in

May 2002, SIMWAS has been steadily expanded with the

aim of enhancing capacity to provide information in

support of tasks in banking supervision, research,

regulation and development. SIMWAS successfully

operates in providing complete, accurate and timely

information on the condition of individual banks. As of

end-2006, the available modules in the SIMWAS

application were grouped into the following broad

categories: (1) Key Bank Data; (2) Financial Data; (3) Bank

Rating; (4) CAMELS & RBS; (5) Regular Reports; (6) Non-

Regular Reports; (7) Early Warning System (EWS); (8)

Supervisor Analysis; (9) Research; (10) Indonesian Banking

Information; and (11) the Fit and Proper Test (FPT).

The development of the Bank InvestigationThe development of the Bank InvestigationThe development of the Bank InvestigationThe development of the Bank InvestigationThe development of the Bank Investigation

Information System (SIBADI) is aimed at strengthening theInformation System (SIBADI) is aimed at strengthening theInformation System (SIBADI) is aimed at strengthening theInformation System (SIBADI) is aimed at strengthening theInformation System (SIBADI) is aimed at strengthening the

effectiveness of investigation into banking crimes.effectiveness of investigation into banking crimes.effectiveness of investigation into banking crimes.effectiveness of investigation into banking crimes.effectiveness of investigation into banking crimes. The

SIBADI is designed to automate the administration of

investigation into banking crimes, covering the gathering

and presentation of data and information. It is also

intended as an integrated information database enabling

information to be retrieved at any time in support of

investigation of banking crimes and mediation in customer

disputes with banks involving sums of up to Rp 500 million.

The SIBADI supports monitoring of progress in investigation

of suspected criminal acts by a bank after receiving reports

of irregularities (from a bank supervision unit or the public),



investigation schedules, actions taken and the final

outcome of the investigation. As appropriate to the nature

of its functions and activities, the SIBADI application is

divided into two modules: Investigation and Mediation.

The purpose of the Investigation Module is to improve

administration and facilitate monitoring of tasks in the

investigation of banking crimes. The Mediation Module

stores information on outcomes of mediation in customer

disputes with banks, efforts pursued for mediation and

mediation outcomes in which the two parties reach

agreement, which represents an extension of the Bank

Indonesia tasks and functions in mediation between

customers and banks.

Developing information systems and applications ofDeveloping information systems and applications ofDeveloping information systems and applications ofDeveloping information systems and applications ofDeveloping information systems and applications of

bank supervisorybank supervisorybank supervisorybank supervisorybank supervisory To improve the efficiency and

effectiveness of supervision, an information system was

launched in 2006 to support supervision activities. The new

system, the online Islamic Rural Bank Monthly Report

Management application, complements the Islamic

Commercial Bank Report application developed in the

preceding year. To support the supervision of Islamic

commercial banks, development work began on the

SIMWAS SYARIAH application in 2006 as part of a phased

effort. In the initial stage, development commenced on

the bank rating and risk profile module expected to serve

as the forerunner of the fully-fledged SIMWAS SYARIAH.

The SIMWAS SYARIAH application is scheduled for

launching in 2007, and will become a system application

in its own right.

Bank Indonesia also developed the Data Mart forBank Indonesia also developed the Data Mart forBank Indonesia also developed the Data Mart forBank Indonesia also developed the Data Mart forBank Indonesia also developed the Data Mart for

Key Bank DataKey Bank DataKey Bank DataKey Bank DataKey Bank Data. The Data Mart for Key Bank Data

application is currently available, with launching to take

place in 2007. The system provides information pertaining

to the establishment and operating networks, ownership

and management, operations and supervision strategy

applied for any particular bank. The Data Mart application

is intended to 1) ensure optimum availability of information

for bank supervision purposes, 2) improve the speed,

accuracy and completeness to satisfy user needs for

information; 3) facilitate and expedite the performance of

tasks by users; 4) provide faster search capabilities for

information on the condition of individual banks and/or

data on bank management/owners.

THE CREDIT BUREAU

To minimise credit risk in the banking system, Bank

Indonesia established the Credit Bureau (BIK) on 29 June

2006. This action is also a fulfilment of the fifth pillar of

the Indonesian Banking Architecture (API) for establishment

of the necessary infrastructure for a sound banking

industry. The Credit Bureau is responsible for collection

and storage of lending data from all institutional providers

of funds, i.e. commercial banks, rural banks, multi finance

companies and non-bank credit card operators. This data

is then processed, exchanged and distributed by the Credit

Bureau in the form of debtor information.

A key objective in development of the managementA key objective in development of the managementA key objective in development of the managementA key objective in development of the managementA key objective in development of the management

information system is to provide rapid accessinformation system is to provide rapid accessinformation system is to provide rapid accessinformation system is to provide rapid accessinformation system is to provide rapid access. Initially, this

information system operated manually, using card updates,

and was later automated using web and extranet

technology enabling members to access the information

online and in real time. Furthermore, the system, which

could originally be accessed only for individual Bank

Indonesia Regional Office areas, now offers nationwide

access.

The scope of lending data has also been expandedThe scope of lending data has also been expandedThe scope of lending data has also been expandedThe scope of lending data has also been expandedThe scope of lending data has also been expanded.

Formerly, the system was restricted to lending data for

loans of at least Rp 50 million, but has since been expanded

to cover all loans extended by banks irrespective of amount.

In a further expansion, data for the Debtor Information

System is no longer sent in only by commercial banks, but

also by rural banks and finance companies.

The debtor information system contains a featureThe debtor information system contains a featureThe debtor information system contains a featureThe debtor information system contains a featureThe debtor information system contains a feature

for issuing each debtor an identification numberfor issuing each debtor an identification numberfor issuing each debtor an identification numberfor issuing each debtor an identification numberfor issuing each debtor an identification number. The scope



of debtor information includes debtor identity, owners and

management (in the case of business entities), provision

of funds received by debtors, collateral, guarantors and

loan classification. The scope of reported data is not

restricted to credit, but covers all types of provision of funds

and other claims. To ensure unique identity within the

system, an identification number is issued for each debtor

(Debtor Identification Number/DIN). The debtor

information can be used by reporting banks to assist in

credit risk management, expedite financing (provision of

funds) processes and ascertain debtor quality.

The Credit Bureau is envisaged as benefiting bothThe Credit Bureau is envisaged as benefiting bothThe Credit Bureau is envisaged as benefiting bothThe Credit Bureau is envisaged as benefiting bothThe Credit Bureau is envisaged as benefiting both

creditors and debtorscreditors and debtorscreditors and debtorscreditors and debtorscreditors and debtors. Among the expected benefits are:

1) for creditors, the system can enable faster processes for

analysis and lending decisions, assist in mitigating risk of

problem loans and also reduce creditor dependence on

conventional collateral by enabling creditors to assess the

borrowing reputation of prospective debtors; and 2) for

debtors, reduces the time needed to obtain credit

approvals, while debtors with good track records will

benefit from broad access to other lenders.

Product development is aimed at achieving theProduct development is aimed at achieving theProduct development is aimed at achieving theProduct development is aimed at achieving theProduct development is aimed at achieving the

standard of a world class credit bureaustandard of a world class credit bureaustandard of a world class credit bureaustandard of a world class credit bureaustandard of a world class credit bureau. The vision for Bank

Indonesia in the development of the Credit Bureau is to

establish a trusted credit information centre conforming

to international standards. The products to be developed

in the effort to become a world class credit bureau are:

a. credit reports presenting information on the negative

and positive aspects of individual debtors,

b. consumer reports in which credit reports can also be

accessed by individual debtors, and

c. other value added services, such as: credit scoring,

comprising a rating of creditworthiness for individual

debtors, e-alert serving as an early warning system

for changes in debtor files, credit risk management

and consultancy services.

The data made available by the Credit Bureau is notThe data made available by the Credit Bureau is notThe data made available by the Credit Bureau is notThe data made available by the Credit Bureau is notThe data made available by the Credit Bureau is not

only used by banks and financial institutions in Indonesia,only used by banks and financial institutions in Indonesia,only used by banks and financial institutions in Indonesia,only used by banks and financial institutions in Indonesia,only used by banks and financial institutions in Indonesia,

but also by Bank Indonesia in support of the bankbut also by Bank Indonesia in support of the bankbut also by Bank Indonesia in support of the bankbut also by Bank Indonesia in support of the bankbut also by Bank Indonesia in support of the bank

supervision functionsupervision functionsupervision functionsupervision functionsupervision function. From the perspective of Bank

Indonesia as regulatory authority, the comprehensive

information on credit quality, type and distribution

accumulated by the Credit Bureau is enormously useful in

monitoring the actions taken by the financial industry to

mitigate credit risk. In addition, through functional

enhancement of existing features, the information can be

aggregated as needed. This enables excessive credit

concentration or financing saturating in a particular

business sector or region to be avoided. Within this context,

it is possible to proceed immediately with policy measures

for strengthening the intermediary function and promoting

more equitable distribution of credit, most importantly for

ensuring greater access to prospective borrowers and

especially MSMEs, which represent the largest potential

credit market at this time. Furthermore, with this

information accessible by the public, members of the public

intending to borrow from financial institutions will exercise

greater watchfulness, caution and discipline in all their

decisions on use of their borrowings.

BANK INDONESIA LIQUIDITY CREDIT (KLBI) AND

TWO-STEP LOANS (TSLS) EXAMINATION

Weaknesses persist in the supervision of banks andWeaknesses persist in the supervision of banks andWeaknesses persist in the supervision of banks andWeaknesses persist in the supervision of banks andWeaknesses persist in the supervision of banks and

coordinating SOEs in the management of KLBI and TSLs.coordinating SOEs in the management of KLBI and TSLs.coordinating SOEs in the management of KLBI and TSLs.coordinating SOEs in the management of KLBI and TSLs.coordinating SOEs in the management of KLBI and TSLs.

From 2004 to 2006, Bank Indonesia conducted

examinations of the management of KLBI and TSLs at 2

coordinating SOEs, Bank Tabungan Negara and PT

Permodalan Nasional Madani (Persero), and 7 channelling

banks: Bank Mandiri, BRI, BNI, Bank Bukopin, Bank Jabar,

Bank Jatim and Bank Jateng. Almost all of the examinations

produced the following findings:

• Discrepancies between data and recording;

• Irregularities in interest calculations; and



• Banks did not report early repayment by debtors to

Bank Indonesia.

This indicated continued weaknesses in bank and

coordinating SOE management supervision of the

management of KLBI/TSL funds and the need for remedial

actions. The background to the examination of KLBI and

TSLs is presented in Box 4.5.

IMPROVE THE LAW ENFORCEMENT

To improve law enforcement in the banking system,

Bank Indonesia is continually engaged in collaboration with

other authorities in the following areas:

a.a.a.a.a. Action Against Banking CrimesAction Against Banking CrimesAction Against Banking CrimesAction Against Banking CrimesAction Against Banking Crimes

Collaboration in tackling banking crimes is set out in

the Joint Decree of the Attorney-General, National

Chief of Police and the Governor of Bank Indonesia

dated 6 November 1997 and renewed on 20

December 2004, including its implementing

regulations.

b.b.b.b.b. Enforcement of the Anti-Money Laundering LawEnforcement of the Anti-Money Laundering LawEnforcement of the Anti-Money Laundering LawEnforcement of the Anti-Money Laundering LawEnforcement of the Anti-Money Laundering Law

Collaboration in enforcement of the Anti-Money

Laundering Law is set out in the Memorandum of

Understanding between Bank Indonesia and the

Financial Transaction Reporting and Analysis Centre

(PPATK) dated 5 February 2003.

c.c.c.c.c. Eradication of CorruptionEradication of CorruptionEradication of CorruptionEradication of CorruptionEradication of Corruption

Collaboration in eradication of corruption is set out

in the Memorandum of Understanding between Bank

Indonesia and the Anti-Corruption Commission (KPK)

dated 8 December 2006.

Box 4.5 KLBI and TSLs Examination

The disbursement of Bank Indonesia Liquidity

Credit (KLBI) through the banking system began with

the launching of the BIMAS/INMAS programmes for

rice intensification in 1965. Later, this funding was

expanded with the introduction of the KIK/KMPK

scheme for small-scale investment and working capital

credit in 1973, the farmer credit scheme (KUT) in 1985,

the village cooperative credit scheme (KKUD) and the

credit for primary cooperative members scheme (KKPA)

in 1990 and lastly the SME credit scheme (KPKM) in

1998. In addition, Bank Indonesia acting on behalf of

the government arranged the channelling of Two Step

Loans (TSLs) from international lenders, such as KfW,

Bank Exim Japan and the World Bank. This lending

was extended in support of selected government

programmes insufficiently funded at the time. At end-

December 2006, the outstanding balances of KLBI and

TSLs managed by banks and coordinating SOEs were:

Following the promulgation of Act No. 23 of 1999

concerning Bank Indonesia as amended by Act No. 3

of 2004, Bank Indonesia no longer channels KLBI and

the management of existing KLBI was transferred to

coordinating SOEs appointed by the government. These

SOEs were Bank Rakyat Indonesia (BRI), PT. Bank

Tabungan Negara (BTN) and PT. Permodalan Nasional

Madani (PNM). Although management was transferred,

Bank Indonesia retained the right of claim to the KLBI,

meaning that the credit risk was still carried by Bank

Indonesia.

Bank Indonesia conducts the supervision and

examination of KLBI management by banks and

KLBI dan TSLKLBI dan TSLKLBI dan TSLKLBI dan TSLKLBI dan TSL Disbursed LoansDisbursed LoansDisbursed LoansDisbursed LoansDisbursed Loans

Existing KLBI in the banking system Rp 9.562.238.552.979,51

KLBI managed by coordinating SOEs Rp 2.416.609.722.567,25

TSLs in the banking system Rp 1.162.962.020.879,41



coordinating SOEs in order to secure its assets in the

form of these claim rights to KLBI and under its

responsibility for management of TSLs, as stipulated in

Bank Indonesia Regulation No. 5/20/PBI/2003 dated

17 September 2003 concerning Transfer of KLBI

Management for Programme Credit. This examination

is focused on compliance and data integrity. The

supervision of KLBI and TSL management by banks and

coordinating SOEs covers the processes of application,

approval, disbursement to debtors, routine reporting

and repayment of loan principal and interest until the

loans are repaid in full. If necessary, Bank Indonesia

may conduct on the spot examinations with priority

for schemes with loan balance still outstanding.

57Banking Outlook and Policy Direction for 2007


Chapter 5:Banking Outlook andPolicy Direction for 2007

58 Banking Outlook and Policy Direction for 2007




BANKING OUTLOOK

In view of the progress achieved in the bankingIn view of the progress achieved in the bankingIn view of the progress achieved in the bankingIn view of the progress achieved in the bankingIn view of the progress achieved in the banking

system in 2006, bank financing is predicted to expand insystem in 2006, bank financing is predicted to expand insystem in 2006, bank financing is predicted to expand insystem in 2006, bank financing is predicted to expand insystem in 2006, bank financing is predicted to expand in

line with improving economic conditions and support fromline with improving economic conditions and support fromline with improving economic conditions and support fromline with improving economic conditions and support fromline with improving economic conditions and support from

a series of proactive policiesa series of proactive policiesa series of proactive policiesa series of proactive policiesa series of proactive policies. Credit expansion in 2007 is

forecasted to reach about 18%, fuelled by rising

consumption and production. In its eight-track banking

policy, Bank Indonesia is seeking to provide all banks with

added room for expansion of their financing operations

within the limits established by prudential regulations. The

banking system is not expected to encounter difficulty in

seeking funding sources. The principal funding source, like

before, will be depositor funds. These funds are predicted

to keep mounting in 2007, albeit less vigorously than in

2006 due to the downward movement in deposit rates.

Growth in bank lending will also benefit from theGrowth in bank lending will also benefit from theGrowth in bank lending will also benefit from theGrowth in bank lending will also benefit from theGrowth in bank lending will also benefit from the

expected decline in bank NPLs.expected decline in bank NPLs.expected decline in bank NPLs.expected decline in bank NPLs.expected decline in bank NPLs. The ongoing debt

restructuring programme and the amendment of

Government Regulation No. 14 of 2005 concerning Write-

Off of State/Regional Government Claims in Government

Regulation No. 33 of 2006 will create a level playing field for

state-owned and private banks in the resolution of problem

loans. This will assist state-owned banks in restructuring

Chapter 5:Banking Outlook and Policy Direction for 2007

problem loans and supports the outlook for further reduction

in NPLs gross across the banking system. The reduction in

NPLs involves mainly corporate debt in the industry sector.

NPLs gross are therefore predicted to fall to below the 7%

mark and in the first few months of 2007, NPLs net

measured for individual banks were already below 5%.

Stronger credit expansion is predicted for almost allStronger credit expansion is predicted for almost allStronger credit expansion is predicted for almost allStronger credit expansion is predicted for almost allStronger credit expansion is predicted for almost all

industry sectors.industry sectors.industry sectors.industry sectors.industry sectors. Consistent with the forecast for increased

private consumption, the trade sector is predicted to remain

a primary target for bank lending. Credit in this sector is

driven mainly by loans for the retail trade. Following a

period of thin expansion in 2006, there is opportunity for

the industry sector to take the lead in lending growth. In

the mining sector, the outlook is for sustained high demand

for mining commodities which will drive expansion and in

turn stimulate demand for credit. Property lending is

expected to chart higher growth, with home mortgages

firmly established as the product of choice at most banks.

Assuming the absence of further obstacles and delays,

some major banks will be more involved in financing of

infrastructure, such as bridges and toll roads, rather than

home mortgages. Lending to other sectors, such as

telecommunications, will follow the trend in business

Indonesian banks are expected achieve higher levels of performance in 2007 as economic

conditions improve. More robust expansion is predicted for bank financing extended through

credit. Banks are set to achieve stronger financial performance, supported by an upward trend

in earning assets quality. In the wake of developments in 2006, Bank Indonesia is pursuing an

eight-track policy for strengthening the banking industry while promoting growth and

development in the real sector. Islamic banking policy will maintain its present course for

reinforcing the industry structure in keeping with the policies outlined in the Islamic Banking

Blue Print. Alongside this, Bank Indonesia will issue new guidelines on the role and functions

of rural banks to reinforce their contribution to the MSME sector.



expansion in those sectors.

These developments augur for sustained levels ofThese developments augur for sustained levels ofThese developments augur for sustained levels ofThese developments augur for sustained levels ofThese developments augur for sustained levels of

bank profitability with a slightly improving trend.bank profitability with a slightly improving trend.bank profitability with a slightly improving trend.bank profitability with a slightly improving trend.bank profitability with a slightly improving trend. The main

source of bank earnings, like before, will be loan interest

income, while interest income from SBIs is predicted to

decline. Expansion in bank financing is not expected to

moderate bank capital, which is forecasted to remain at a

stable, high level.

BANKING POLICY DIRECTION

In regard to the banking outlook, Bank Indonesia»s policy

direction and strategy for the banking system in 2007

encapsulated in the eighteighteighteighteight policy items is described as

follows:

FirstFirstFirstFirstFirst, Bank Indonesia will play a more active catalytic

role in promoting the bank intermediary process. To do

this, Bank Indonesia will position itself as a resource centre

for information, studies and databases on the economy

and industry at both the national and regional levels,

disaggregated by sector. These resources will be available

for all parties, including banks, MSMEs, regional

governments and the Central Government. In further

actions, Bank Indonesia will move quickly to revitalise the

role and functions of Bank Indonesia Regional Offices in

the regions.

SecondSecondSecondSecondSecond, Bank Indonesia will strengthen co-operation

and co-ordination with the Government in bank industry

restructuring focused on revitalisation of the role for state-

owned banks. Bank Indonesia strongly supports the policy

actions taken by the Government to strengthen current

levels of performance at state-owned banks.

ThirdThirdThirdThirdThird, Bank Indonesia will further its efforts to

facilitate mergers based on the principle of honest

brokering with neutrality, fairness, reasonableness and best

practice to ensure a more directed and focused

matchmaking process.

Fourth, Fourth, Fourth, Fourth, Fourth, Bank Indonesia will facilitate the smooth

operation of the bank intermediary function. In the near

future, while some policies will be issued to amend the

content of certain Bank Indonesia Regulations, others will

simply serve as written clarification of the interpretation

of some of the past regulations. Among these are:

1. Regulations on Loan Collectibility Assessment

Procedure. So far, assessment of earning asset quality

for assets valued more than Rp 500 million must be

based on 3 (three) criteria: prompt repayment,

business prospects and debtor financial condition,

subject to the following:

a. Earning assets of up to Rp 5 trillion may be

assessed solely on the criteria of prompt

repayment.

b. Exceptions to assessment by the three criteria

will also apply to financing for Government-

guaranteed debtors/projects that meet the

requirements set out in Bank Indonesia

Regulation No. 7/2/PBI/2005 concerning Asset

Quality Rating for Commercial Banks.

c. Bank Indonesia will give greater emphasis to

bank risk management capacity in lending and

loan assessment, rather than to fulfilment of

various secondary qualifications.

2. Amendment of various prudential regulations,

including the following:

a. The existing Rp 500 million limit on earning

assets subject to uniform classification will be

raised to Rp 5 billion and/or uniform classification

will be deemed sufficient if applied to the bank»s

50 largest debtors. Collateral eligible for

deduction from Allowance for Asset Losses will

be expanded to include machinery, warehouse

receipts and other items.

b. Renewed definition of the 30% Legal Lending Limit

(LLL) not only for SOEs operating in infrastructure,

but also in other development sectors.



c. Renewed definition and elucidation of provisions

on the meaning of related parties for the purpose

of the LLL in joint financing of several companies

(including banks) for the same project. In

essence, joint financing will not be categorised

as related party financing insofar as there are

no ties of control.

d. Reiteration that problem debtors will remain

eligible for credit as long as their problem loans

occurred for reasons outside the debtor»s control,

subject to a comprehensive analysis of feasibility.

FifthFifthFifthFifthFifth, Bank Indonesia will issue guidelines requiring

foreign-owned banks to play a more optimum role in the

intermediation process and a special regulation restricting

the employment of expatriates in middle management

positions and requiring transfer of knowledge. Expatriates

will be limited to 2 (two) at levels below the board of

directors, except for areas of work that cannot yet be filled

by domestic employees. In these specific areas, foreign

banks will be given 3 (three) years to complete the transfer

of knowledge.

SixthSixthSixthSixthSixth, Bank Indonesia will take on a proactive role in

financial market deepening. The limited availability of

financial products with diversified maturities, risks and

markets (primary and secondary) to support trading activity

has led to a concentration of portfolio placements in the

markets for SBIs, government securities and stocks. The

current liquidity overhang calls for a broader range of outlets

as an indirect means of promoting intermediation. Among

others, Bank Indonesia will promote the market for longer

tenor SBIs and enhance the operation of monetary policy in

support of this objective. In addition, BI will consider actions

to promote universal banking while maintaining close

attention to the bank consolidation process. The actions

described above will be formulated in greater detail in the

planned amendment to the Banking Law.

SeventhSeventhSeventhSeventhSeventh, Bank Indonesia will launch a programme

to accelerate the growth of Islamic banking in Indonesia.

This programme will be three-fold: a more intensive

programme to educate and familiarise the public with

Islamic banking; efforts to enrich the products and services

on offer and expand the available Islamic banking outlets

in order to provide greater outreach and assist in the

deepening of the national financial market; and provision

of support and an active role in sourcing foreign investment

funds through Islamic financial instruments.

EighthEighthEighthEighthEighth, Bank Indonesia will review the regulatory

framework for rural banks in order to strengthen and

expand their role and contribution in support of the MSME

sector throughout Indonesia. This policy will be pursued

through the operation of a more focused linkage

programme for empowerment of rural communities and

support for resolution of various local-specific micro

distortions on the market for goods resulting from lack of

broad-based economic participation at the grass roots.

Islamic Banking

The Islamic banking industry will be guided towardsThe Islamic banking industry will be guided towardsThe Islamic banking industry will be guided towardsThe Islamic banking industry will be guided towardsThe Islamic banking industry will be guided towards

building a more robust industry structure as envisaged inbuilding a more robust industry structure as envisaged inbuilding a more robust industry structure as envisaged inbuilding a more robust industry structure as envisaged inbuilding a more robust industry structure as envisaged in

the policy direction outlined in the Blue Print of Islamicthe policy direction outlined in the Blue Print of Islamicthe policy direction outlined in the Blue Print of Islamicthe policy direction outlined in the Blue Print of Islamicthe policy direction outlined in the Blue Print of Islamic

Banking Development in IndonesiaBanking Development in IndonesiaBanking Development in IndonesiaBanking Development in IndonesiaBanking Development in Indonesia. On a strategic level,

the current growth momentum in the Islamic banking

industry, which is running strong, needs to be maintained

to bring greater benefits to users of banking services and

respond to the challenge for strengthening the bank

intermediary function in helping to resolve the nation»s

economic problems. Within this framework, the policy and

strategy for Islamic banking development in 2007 will focus

on more rapid expansion of capacity for provision of Islamic

banking services on both the supply side and demand side.

In this way, Islamic banks are expected to achieve the

targeted 5% share of total domestic banking volume by

the end of 2008.



On the supply sideOn the supply sideOn the supply sideOn the supply sideOn the supply side, Islamic banking policy will be

directed towards institutional strengthening and efficiency

improvements in order to improve competitiveness and

mitigate the various economic shocks that may arise, as

elaborated in the four key policies.

FirstFirstFirstFirstFirst is improvement in the quality of Islamic bank

personnel through technical assistance programmes to

build knowledge and professionalism in application of

Sharia principles, risk management, project feasibility

assessment and application of service excellence and good

corporate governance. The improved knowledge and

professionalism is expected to boost the quality of Islamic

asset management and banking services, and in so doing

strengthen public confidence in making use of Islamic

banking. This can also work indirectly to strengthen the

overall bank intermediary function through the Islamic

banking role.

SecondSecondSecondSecondSecond, provide facilitation for expansion of the Islamic

banking network by promoting collaboration with other

institutions and the office channelling programme. This

policy seeks to ensure a more personal approach to

customers. The physical presence of these banks plays a

vital role, because the majority of Indonesians effectively

lack access to electronic financial services. This policy is

expected to enable access to Islamic banking products and

services through the branch office networks of conventional

banks and even other institutions operating with greater

geographical coverage. In a further move to maximise the

benefits of the office channelling programme, Bank

Indonesia will assess possibilities for expanding the scope

of services offered through office channelling.

ThirdThirdThirdThirdThird, promote diversification of Islamic banking

products in an effort to build the Islamic bank role as a

provider of alternative solutions to public needs for various

retail and corporate transactions. Product diversification is

essential to build real and effective demand for Islamic

banking services, and therefore ties in with other efforts

to accelerate realisation of the vast potential for Islamic

banking in mobilisation of depositor funds.

Fourth, Fourth, Fourth, Fourth, Fourth, promote inflows of foreign investment funds

into the Islamic banking industry and the real sector

through the use of Islamic financial instruments. This is

seen necessary because the scaling up of Islamic banking

will require strong capital backing to finance asset

expansion and build the capacity of Islamic banks to

mitigate risks from expansion and other risks from changes

in economic conditions. Larger inflows of investment funds

are necessary to support the development of a more

efficient Islamic financial market capable of contributing

more to the development of the real sector.

On the demand sideOn the demand sideOn the demand sideOn the demand sideOn the demand side, Islamic banking policy will focus

on building an expanded role for Islamic banking in society

and in so doing build a more significant role for Islamic

banks in promoting the bank intermediary function and

systemic stability. This focus is set out in four key policies.

First First First First First is intensified public education about Islamic

banking, targeting diversified groups in society. Public

education will no longer focus only on academics and

Islamic clerics, but will be expanded to business groupings

and industry associations. Public education will involve a

larger media role, particularly for the electronic media with

its broad outreach. Added to this will be active participation

by local governments and community leaders, including

Ulama, academics, economists and celebrities. The public

education and awareness programme is expected to

stimulate interest among bank customers in making greater

use of Islamic banking services. It is also envisaged as

bringing about a paradigm shift in society regarding the

relationship between customers, banks and the economy

that will make Islamic banking services a need in its own

right.

SecondSecondSecondSecondSecond is the scaling up of the linkage programme

to build stronger synergy between Islamic banks and the

business sector, with focus on micro, small and medium



scale enterprises. In specific terms, the Islamic bank linkage

programme is aimed at building the viability of customer

businesses while mitigating adverse selection and

minimising the potential for credit rationing in the financing

process. This can be achieved by the creation of binding

factors through ongoing technical and spiritual support.

ThirdThirdThirdThirdThird, promote Islamic bank participation in the

development of the voluntary sector, which has strategic

potential for use in poverty alleviation programmes and

improvement of the nation»s socio-economic structures.

As agents of intermediation, Islamic banks are expected

to function as a catalyst for mobilisation and management

of voluntary funds (zakat, shadaqah, infaq and wakaf) by

the amil zakat charitable institutions in order to support

more optimum levels of microeconomic empowerment and

poverty alleviation. This in turn will build public awareness

of the benefits of Islamic banks.

Fourth,Fourth,Fourth,Fourth,Fourth, support efforts to provide Islamic banks

greater opportunity to manage government funds and to

participate in financing schemes for various government

projects. This will help Islamic banking expand its share

within the national banking industry.

Even so, these polices for accelerated growth in

Islamic banking in order to expand the role of Islamic

banking in the national economy will be more effective

with regulatory support providing legal certainty for

investment in Islamic instruments. For this reason, Bank

Indonesia is pressing for the faster completion and passing

of the draft laws on Islamic Banking, Taxation and Islamic

Government Securities. These laws, when they come into

force, will not only provide legal certainly but also

strengthen the competitiveness of Islamic banking products

and Islamic financial market instruments, currently

hampered by imposition of multiple taxes. In a further move

to promote efficiency and competitiveness in the Islamic

banking industry, Bank Indonesia will amend and clarify

regulations on risk management and Islamic bank rating,

asset quality rating and contractual terms (akad) for funds

mobilisation and funds disbursement within the limits of

prudential banking and Sharia principles. These measures

are expected to support an even more robust outlook for

the Islamic banking industry.

Rural Bank

Rural bank policy will be focused on restoring theRural bank policy will be focused on restoring theRural bank policy will be focused on restoring theRural bank policy will be focused on restoring theRural bank policy will be focused on restoring the

rural bank function of provision of services to MSMEs andrural bank function of provision of services to MSMEs andrural bank function of provision of services to MSMEs andrural bank function of provision of services to MSMEs andrural bank function of provision of services to MSMEs and

low-income customers, particularly those engaged in thelow-income customers, particularly those engaged in thelow-income customers, particularly those engaged in thelow-income customers, particularly those engaged in thelow-income customers, particularly those engaged in the

informal sector and living in remote rural areasinformal sector and living in remote rural areasinformal sector and living in remote rural areasinformal sector and living in remote rural areasinformal sector and living in remote rural areas. In the

future, regulation of rural banks will seek to maintain their

distinctive features, described as follows:

1.1.1.1.1. Local banks operating offices in a single province withLocal banks operating offices in a single province withLocal banks operating offices in a single province withLocal banks operating offices in a single province withLocal banks operating offices in a single province with

limited scope of businesslimited scope of businesslimited scope of businesslimited scope of businesslimited scope of business

The purpose of this is for rural banks to serve as a

pillar for local economic development with emphasis

on funds mobilisation and lending within local

communities. Rural banks will retain their limited

scope of business as stipulated in the Banking Law.

Despite these restrictions, the scope of business is

still relevant to the services required by MSEs, the

primary customer base for rural banks.

2.2.2.2.2. Focus on MSEs and rural communitiesFocus on MSEs and rural communitiesFocus on MSEs and rural communitiesFocus on MSEs and rural communitiesFocus on MSEs and rural communities

As rural banks steadily build their capacity as financial

service providers, their focus will continually be

directed towards MSEs and rural communities.

Underscoring this is the vast potential market in this

segment, hitherto untouched by banking services. This

emphasis is also consistent with the Banking Law.

3.3.3.3.3. Distributed evenly throughout IndonesiaDistributed evenly throughout IndonesiaDistributed evenly throughout IndonesiaDistributed evenly throughout IndonesiaDistributed evenly throughout Indonesia

Bank Indonesia will take active measures to promote

the establishment of rural banks outside Java and Bali

to meet the needs of MSEs and rural communities in

these regions not presently covered by banking

services. Nevertheless, there is no denying that the

rural bank presence will follow the principle of ≈banks



follow the trade.∆ There will be a need for regulatory

support that can effectively stimulate interest in

establishing rural banks outside Java and Bali in

keeping with economic growth, as well as to tighten

the regulatory requirements for establishment of new

rural banks in Java and Bali.

4.4.4.4.4. Strong capitalStrong capitalStrong capitalStrong capitalStrong capital

While rural banks are not envisaged as developing

into commercial banks, they will nevertheless be

encouraged to acquire the high levels of capital

essential to mitigating risks, developing more

competitive services for MSEs, improving service

coverage for MSEs and achieving an economy of scale

that will assure their continuity of business.

5.5.5.5.5. Use of technology to achieve optimum service levelsUse of technology to achieve optimum service levelsUse of technology to achieve optimum service levelsUse of technology to achieve optimum service levelsUse of technology to achieve optimum service levels

for customers.for customers.for customers.for customers.for customers.

Growth in the rural bank industry will be strongly

influenced by the development of banking products;

customer demand for easy, convenient, quick and

secure services; and the need for greater operating

efficiency to support competitiveness.-To promote

more efficient management, rural banks are

encouraged to make optimum use of the vitally

needed technology in their operations for recording

of transactions and reporting needs, internal control

and reduction in service times.

6.6.6.6.6. Indirect participation in clearing payment systemsIndirect participation in clearing payment systemsIndirect participation in clearing payment systemsIndirect participation in clearing payment systemsIndirect participation in clearing payment systems

To keep pace with advancements in technology and

customer demands for easy, convenient, quick and

secure transaction services to support their business

activities, rural banks are expected to begin

participating in the payment system on an indirect or

restricted basis. This participation will be managed

by Apex institutions, which once established with

serve as umbrella entities for rural banks.

65Appendix – Progress of Indonesian Banking Architecture: Realization and Target


Appendix

66 Appendix – Progress of Indonesian Banking Architecture: Realization and Target




Apendix 1

Progress of Indonesian Banking Architecture: Realization and Target

No. PILAR/PROGRAM REALIZATION 2006 TARGET 2007

11111 STRUCTURAL REINFORCEMENT OF THE NATIONAL BANKING SYSTEMSTRUCTURAL REINFORCEMENT OF THE NATIONAL BANKING SYSTEMSTRUCTURAL REINFORCEMENT OF THE NATIONAL BANKING SYSTEMSTRUCTURAL REINFORCEMENT OF THE NATIONAL BANKING SYSTEMSTRUCTURAL REINFORCEMENT OF THE NATIONAL BANKING SYSTEM

1.1 Strengthening ofbank capitalization

1.2 Reinforce thecompetitiveness andinstitutional struc-tures of rural banksand Islamic ruralbanks

- The issuance of Bank Indonesia RegulationNo.8/17/PBI/2006 dated 5 October 2006concerning Incentives for BankConsolidation (Pakto 2006).

- Improved the criteria of High PerformingBank with regard to the currentdevelopment of the economy and bankingindustry condition.

- Implement the knowledge sharing oflinkage program

- Improved the Generic Model LinkageProgram.

- Facilitate the establishment of rural bankjoint services facility (APEX Bank). As apilot project, Apex Bank for rural bank inDKI, Jabar and Jatim is implemented byBRI, Mandiri and Bukopin.

- Facilitate the M o U of step IV financingbetween 14 commercial banks and 200BPR at amount Rp549 million, the totalamount of Linkage Program in 2006 isRp1, 2 trillion.

- Monitoring of 3 scheme of APEX pilotproject (between commercial bank andrural bank, rural bank and rural bank, andPNM and rural bank) which implementedin 7

- Set up the website of rural bank financialtransparency to improve the commercialbank lending to rural bank in linkageprogram

- The issuance of Bank Indonesia RegulationNo. 8/26/PBI/2006 dated 8 November2006 concerning Rural Banks to reinforcethe institutional structures of rural banks,relaxed the requirements concerningcapital and feasibility studies for opening

- Mapping the commercial bank capitalrequirement

- The issuance of Bank Indonesia Regulationconcerning High Performing Bank

- The issuance of Bank Indonesia external andinternal circular letter concerning incentivesfor bank consolidation

- Evaluating due diligence of commercial bankwhich plan to do merge and acquisition.

- Preparing regulation to support merge andacquisition.

- Strengthen of the Generic Model LinkageProgram

• The total amount of commercial banklending to rural bank as of Rp1 trillion;

• The total number of rural bank acceptedloan;

• The total number of rural bank managersjoints the knowledge sharing of linkageprogram.

- Facilitate establishment of joint servicesfacilities of APEX Bank.

- Establish the website of rural bank financialtransparency to improve the commercialbank lending to rural bank in linkageprogram.

- Facilitate establishment of joint servicesfacilities for rural bank and Islamic ruralbanks (including the APEX Bank)




of branch offices with due considerationfor prudential banking principles

- Sign a Memorandum of Understanding(MoU) regarding the Deposit InsuranceScheme between 5 (five) regencies/citiesin West Java, Central Java and East Javawith Askrindo on 26th January 2006.

- Educate the public in South Borneo and Baliin collaboration with PT Askrindo. Over timeit is expected that public educationconcerning the Deposit Insurance Schemewill be offered by Bank Indonesia in allprovinces of Indonesia

- Implementation of the MoU for the DepositInsurance Scheme in regencies/cities inNorth Sulawesi, Riau, North Sumatera, EastBorneo, Maluku & Bengkulu.

- Sign MoU regarding the Deposit InsuranceScheme between regencies/cities in Maluku,South Sumatera, North Sumatera, Bali andEast Borneo with Askrindo on 26th July 2006(earlier than planned).

- Make recommendations for capacitybuilding of the Deposit InsuranceCorporation (through capitalization) toguarantee deposits, particularly to MSMEs.Support from rural banks and thegovernment (Ministry Of Finance) is requiredto compile the rules and regulations fordeposit guarantees.

- Sign MoU with government universities inNorth Sumatera, West Sumatera, SouthSulawesi and East Java to establish theResearch Institute for Regional Banking(Lembaga Riset Perbankan Daerah) (LRPD).

- The results of eight LRPD research projectswere presented in each region in November2006 and on 21st December 2006 at anational seminar held in Jakarta.

- A meeting was held by the Bank ExpertPanel to direct policy.

- Implement and monitor the depositinsurance scheme for provinces andregencies that have signed MoU.

- Four sessions to be held in terms of DepositInsurance Scheme socialization.

- Sign of MoU for the Deposit InsuranceScheme between 10 regencies/cities withAskrindo.

- Review the possible establishment ofResearch Institutes for Regional Banking(Lembaga Riset Perbankan Daerah) inadditional provinces.

- Eight research projects concerning oversightto be conducted by four LRPD (Universityof North Sumatera in Medan, University ofAndalas in Padang, University of Brawijayain Malang and University of Hasanuddin inMakassar).

- Four seminars to disseminate LRPD researchresults to be held.

- One expert panel meeting to be held todiscuss policy direction.

1.3 Improve access toSMME credit andfinancing

2.1 Formalize syndicationprocess in formula-tion of bankingpolicy

22222 IMPROVED QUALITY OF BANKING REGULATIONIMPROVED QUALITY OF BANKING REGULATIONIMPROVED QUALITY OF BANKING REGULATIONIMPROVED QUALITY OF BANKING REGULATIONIMPROVED QUALITY OF BANKING REGULATION




- Reassessment of the Bank Oversight MasterPlan and core principle amendments arescheduled to be completed in 2007.

- Promulgate Internal SE regarding Risk-basedSupervision for Islamic banks.

- Monitor discussions concerning draft actsfor Islamic banks and subsequently ratifyingthe new regulations.

- Compilation of Bank Indonesia Regulations(PBI) and external circulars regarding thesoundness of Islamic rural banks.

- Improve Accounting Guide of IndonesianIslamic Banks (PAPSI) with IAI.

- Supervise the oversight work unitreorganization.

- Training IT specialist HRD on modelvalidation.

- PDG improvement in relation with MSMEresearch and development from the CreditBureau to the Directorate of Rural BankSupervision (DSDM).

- Certification of bank supervisors andauditors for foundation, intermediate andadvanced levels (coordinated by FG BankingSchool).

- Implementation of other necessary training(coordinated by FG Banking School).

- Core principles were refined with technicalassistance from International MonetaryFund (IMF).

- Sign SKB KSSK with Ministry of Financeand related institutions.

- Guidelines for oversight of Islamic banks (incollaboration with the National IslamicBody).

- Issuing and socializing internal circular No8/10/Intern regarding the Directorate ofBank Supervision.

- Oversight work unit reorganization on 1st

March 2006.

- Establishment of KPS.

- Training of market risk specialist (ValidatorModel).

- Issuing and socializing circular No 8/28/Intern on Bank Oversight DocumentManagement Application (AMDP).

- Progress review of bank oversight taskforce with DpG Bank Supervisory Section inMay and June 2006.

- RBS workshop on dedicated teamorganization structure with keynotespeakers from the Federal Reserve andHKMA.

- Identify technical constraints in preparationfor the evaluation of bank oversight taskforce consolidation in 2007.

- Certification of bank supervisors andauditors for the foundation and intermedi-ate levels (coordinated by FG BankingSchool).

- Trained Market Risk (Basel II) specialists.

- Trained of IT specialist in September 2006.

2.2 Phasing-in ofinternational bestpractices

3.1 Strengthen coordina-tion with othersupervisory agencies

3.2 Reorganize thebanking sector atBank Indonesia

3.3 Improve theSupportingInfrastructure forBank Supervision

33333 IMPROVEMENT OF SUPERVISORY FUNCTIONSIMPROVEMENT OF SUPERVISORY FUNCTIONSIMPROVEMENT OF SUPERVISORY FUNCTIONSIMPROVEMENT OF SUPERVISORY FUNCTIONSIMPROVEMENT OF SUPERVISORY FUNCTIONS




- Bank oversight system improvement(coordinated by supervisory FG).

- Train Islamic bank supervisors (KP/KBI).

- Improve the guidelines for the reportingmethods used by Islamic commercial banks(LBUS) and Islamic rural banks.

- Pembahasan lanjutan konsep blue print IT -Follow up discussions on IT blueprint conceptwith regards to :

a. Reorganization of bank oversight workunit.

b. Integration of the information system(UKMI) must refer to the BI ManagementInformation System Blueprint (UKMI).

c. Also refer to the Blueprint for BankSupervision System.

- A review of the Banking Sector SIP Blueprint(DPIP).

- Risk-based online supervision system forIslamic commercial banks (in collaborationwith DTI and DPIP).

- Issue Bank Indonesia regulations to assessthe health level of Islamic commercial banks.

- Issue and socialize circulars regarding GCGfor bank staff.

- Issue and socialize circulars regarding GCGimplementation and self-assessment reports.

- Socialization of amendments to prevailingregulations regarding GCG.

- Establishment of a GCG forum

- Ratify new regulations concerning GCG forIslamic banks.

- CISA for IT specialist in December 2006.

- Improved application of BPR monthlyreport presentation method.

- Discussions of the banking sector»s ITblueprint, compiled by DPIP with internaland external parties (Academics of ITB, IPB,Al-Azhar University, Bandung).

- Issue SOP on Bank Oversight Work Force.

- Online Islamic bank supervision system willbe implemented at the beginning of 2008following the completion of Islamic bankTKS.

- Online Islamic bank supervision system willbe implemented at the beginning of 2008following the completion of Islamic bankTKS.

- Issue PBI 8/14/PBI/2006 as an amendmentto PBI 8/4/PBI/2006 regarding GoodCorporate Governance for CommercialBanks.

- Final draft of GCG external circularregarding GCG reporting and self-assessment, as well as external circular onGCG for commercial bank staff.

- Bank GCG self-assessments.

- Current Bank Indonesia regulationgoverning GCG for Islamic banks stillfollows the regulation for commercialbanks. Currently, an external circular forGCG is being compiled by DPbS andDirectorate of Banking Research andRegulation.

Set up blueprint forthe banking sector ITsystem

3.4 Improveimplementation ofthe risk-basedsupervision.

3.5 Strengtheneffectiveness ofenforcement

4.1 Strengthen GoodCorporateGovernance (GCG)

44444 IMPROVEMENT IN QUALITY OF BANK MANAGEMENT AND OPERATIONSIMPROVEMENT IN QUALITY OF BANK MANAGEMENT AND OPERATIONSIMPROVEMENT IN QUALITY OF BANK MANAGEMENT AND OPERATIONSIMPROVEMENT IN QUALITY OF BANK MANAGEMENT AND OPERATIONSIMPROVEMENT IN QUALITY OF BANK MANAGEMENT AND OPERATIONS




- Continue the regular program of Risk-Management Certification for commercialbank staff.

- Complete the design, curriculum andmaterial for level 4 risk-managementcertification for the regular program.

- Issue Bank Indonesia SE for Risk-Management Certification for commercialbank staff.

- Continue the certification program for ruralbank directors (DPBPR).

- Implement the certification program for thestaff (Board of Directors and Commissioners)of Islamic rural banks.

- Issue an external circular on riskmanagement for Islamic commercial banks.

- MoU on the use of joint banking servicesand the implementation of a joint educationand training program.

- Issue Bank Indonesia regulation forcollaboration between Islamic banks andother parties (to expand the network).

- Expansion of the Credit Information Bureau(DPIP).

Implementation and regulation performedby Bapepam.

- Implementation of Islamic financialinstruments (collaboration between DPbSand DPM).

- Collaborate on hosting annual meeting(ijtima sanawi) of Indonesia-wide IslamicOversight Board (DPS).

- Operational assistance for National IslamicBoard (DSN) and National Islamic ArbitrationBoard.

- Supervise the implementation of the level 1(5 phases) and level 2 (2 phases) risk-management certification test.

- Issue PBI 8/9/2006 as an amendment to PBI7/25/2005.

- Finalize design, curriculum and material forlevel 3 Risk-Management Regular Certifica-tion Program.

- Professional Certification for rural bankdirectors.

- Complete the certification module forIslamic bank staff.

- Delay the issuance of external circulars onrisk-based management for Islamic banks,awaiting the completion of the TKSprogram for Islamic banks (2005-2007).

- Blueprint discussions remain internal.

- Establishment of the Credit InformationBureau (BIK) on 29th June 2009 using theDPIP budget.

- SID for Islamic rural banks on 1st March2006; SID for LKBB reporting on 1st June2006; Infrastructure provision on 28th June2006, improving application performance(through version upgrading) on 30th

November 2006; and TOR compilation on1st December 2006.

Implementation and regulation performedby Bapepam.

4.2 MImprove quality ofbank riskmanagement

4.3 Improve bankoperating capabilities

5.1 Development of theCredit Bureau

5.2 Improve credit ratingagency

5.3 Strengthen roles ofinstitutionsresponsible for fatwaand of Islamicarbitration boards aspart of the drive tobuild Islamic bankcompliance to Islamicprinciples.

55555 DEVELOPMENT OF BANKING INFRASTRUCTUREDEVELOPMENT OF BANKING INFRASTRUCTUREDEVELOPMENT OF BANKING INFRASTRUCTUREDEVELOPMENT OF BANKING INFRASTRUCTUREDEVELOPMENT OF BANKING INFRASTRUCTURE




- Monitoring the implementation of BankIndonesia regulations on customercomplaint resolution.

- Issuing internal circular regarding customercomplaint resolution.

- Socializing Bank Mediation regulations andcirculars.

- Preparing to establish the Bank MediationInstitution.

- Improving the bank mediation function ofBank Indonesia.

- Monitor Bank Indonesia regulationsconcerning product informationtransparency and the use of customers»private data.

- Issue internal circular on bank productinformation transparency and the use ofcustomers» private data.

- Amend Bank Indonesia regulationsregarding agreements for standards andIslamic bank financing.

- Improving Islamic banks» product codes.

- Survey education methods and theeffectiveness of bank product informationtransparency.

- Issue Bank Indonesia regulations concerningconsumer education.

- Implement an education strategy.

- Implement a consumer education programfor Islamic banks.

- Drafting internal circular on customercomplaint resolution.

- Monitoring quarterly customer complaintreport.

- Issue PBI No 8/5/PBI/2006 regarding bankmediation (Pakjan 2006).

- Issue external circular No 8/14 regardingbank mediation and internal circular No 8/23 regarding bank mediation.

- Monitor of Bank Indonesia Regulationsconcerning Product Information Transpar-ency and the use of customer»s privatedata

- Draft Internal circular regarding Informa-tion transparency of bank products andthe use of customers» private data.

- Conduct baseline survey of consumereducation.

- Establish strategy to implement consumereducation.

- Draft Bank Indonesia regulationsconcerning consumer education.

6.1 Prepare standards forcustomer complaintmechanism

6.2 Establishindependentmediation agency

6.3 Prepare regulationson transparency ofproduct information

6.4 Promote ConsumerEducation

66666 IMPROVEMENT OF CONSUMER PROTECTIONIMPROVEMENT OF CONSUMER PROTECTIONIMPROVEMENT OF CONSUMER PROTECTIONIMPROVEMENT OF CONSUMER PROTECTIONIMPROVEMENT OF CONSUMER PROTECTION

73Appendix – List of Banking Regulations 2006


COMMERCIAL BANKS

The January and October 2006 Banking Policy

Packages (Pakjan and Pakto) were launched with the

purpose of safeguarding the bank role in the operation of

the intermediary function while strengthening the

foundations of the banking system under the faltering

economic conditions of the time.

1. Bank Indonesia Regulation (PBI) No. 8/1/PBI/2006

dated 3 January 2006 concerning the Emergency

Financing Facility for Commercial Banks.

It is possible that banks will experience liquidity

difficulties to the extent of endangering their survival

and generating systemic impact with potential for a

crisis endangering financial system stability. The

Emergency Financing Facility (EFF) is a financing line

extended by Bank Indonesia to systemically important

problem banks experiencing liquidity difficulties, but

still complying with the level of solvability prescribed

by Bank Indonesia. The decision to extend the facility

is adopted in a meeting between the Minister of

Finance and the Governor of Bank Indonesia and the

facility is funded at the expense of the government.

This regulation essentially stipulates the criteria and

requirements for requesting the Emergency Financing

Facility from Bank Indonesia.


dated 30 January 2006 concerning Amendment to

Bank Indonesia Regulation (PBI) No. 7/2/PBI/2005

concerning Asset Quality Rating for Commercial

Banks.

Appendix 2

To operate sustainable, banks must manage credit

exposures at appropriate levels to minimise potential

for losses. In principle, rating of earning assets used

to finance one debtor or one project, whether

provided by one or more banks, must follow the

uniform classification approach in which the lowest

level of asset quality is assigned to all such assets.

However, in view of the economic slowdown and to

safeguard the banking role in the intermediary

function, the implementation of uniform classification

calls for a transitional phase. This regulation provides

for the phasing in of uniform classification for earning

assets extended by more than one bank to finance

one debtor or project. The phased implementation is

based on debtor classification and/or limit of earning

assets extended to the debtor.


dated 30 January 2006 concerning Implementation

of Good Corporate Governance for Commercial

Banks.

Good corporate governance is a system requiring

bank to be managed according to the principles of

transparency, accountability, responsibility,

independence and fairness. Bank Indonesia adopted

the regulation on implementation of good corporate

governance to assist the domestic banking system in

dealing with increasingly complex risks, protect the

interests of stakeholders, improve legal and regulatory

compliance and raise the prevailing level of ethics in

List of Banking Regulations 2006

74 Appendix – List of Banking Regulations 2006


asset quality rating and formation of allowance for

earning asset losses for all assets of bank subsidiaries

in order to ensure the survival of the bank.


dated 5 October 2006 concerning Amendment to


concerning the Legal Lending Limit for Commercial

Banks.

Bank Indonesia introduced changes to some

regulations on the LLL in a move to strengthen the

bank intermediary function in the domestic economy.

The changes were also made in view of the generally

sound quality of bank risk management, achieved

among others by the requirement to implement risk

management and good corporate governance. These

changes, which are seen as supportive of national

economic development as it concerns provision of

bank funds to state owned enterprises, cover the

following: redefinition of related parties; scope of the

LLL for related parties; reaffirmation of the rules on

debtor grouping by family ties; and expansion of

economic sectors.




concerning Implementation of Good Corporate

Governance.

To achieve a proportionate response to the dynamics

taking place in the banking system, it became

necessary to enhance good corporate governance in

order to reinforce the condition of the banking

industry. The changes made by Bank Indonesia to the

operation of good corporate governance encompass

the role of the board of commissioners and board of

directors and the check and balance role of

independent parties with respect to related parties

connected with the controlling shareholders.

the banking industry. These measures are aimed at

the internal strengthening of the domestic banking

industry as envisaged in the Indonesian Banking

Architecture (API).


dated 30 January 2006 concerning Bank Mediation.

Complaint resolution by banks frequently leads to

disputes with bank customers, and this has created

the need for an independent mediation institution

organised by banking associations. The independent

mediation institution will offer a simple, economical

and quick alternative for resolving disputes between

customers and banks in line with international best

practices and the applicable laws and regulations.

Pending the establishment of the mediation

institution, Bank Indonesia has issued a regulation

on the interim role in mediation performed by Bank

Indonesia. In this regard, Bank Indonesia will not

provide any recommendations or take any decisions

in the resolution of disputes between customers and

banks. The focus of dispute resolution will be on

claims against banks by retail customers and micro

and small-scale enterprises up to a maximum limit of

Rp 500,000,000.00 (five hundred million rupiah).


dated 30 January 2006 concerning Application of

Consolidated Risk Management for Banks Exercising

Control over Subsidiaries.

Bank risk exposures may arise directly in the course

of business and indirectly from business conducted

by subsidiaries. For this reason, banks are required to

implement consolidated risk management with regard

to subsidiaries. Like with the scope of the CAR and

LLL prudential regulations that apply to individual

banks and to bank subsidiaries on a consolidated

basis, this regulation requires banks to calculate risk

weighted assets for risk exposures of their subsidiaries,




dated 5 October 2006 concerning Special Treatment

for Bank Credit in Disaster-Hit Areas in Indonesia.

Indonesia has been hit by multiple natural disasters

that have struck in various parts of the nation. In most

cases, these disasters have significantly impacted the

local economy. In support of economic recovery in

the disaster-hit areas, Bank Indonesia has amended

the requirements for quality rating of credit and/or

other provision of funds by banks in the disaster-hit

areas for debtors with loan ceilings up to Rp 5 billion.

In these areas, asset quality rating shall be based solely

on prompt repayment of principal and/or interest for

a period of 3 years after the disaster.


dated 5 October 2006 concerning the Single Presence

Policy in the Indonesian Banking System.

Bank Indonesia embarked on an ownership

restructuring of the banking system by introducing

the single presence policy for Indonesian banks. This

policy is designed to accelerate bank consolidation

and improve the effectiveness of consolidated bank

supervision. The essence of the single presence policy

is that any one party may only become controlling

shareholder at one commercial bank in Indonesia.

Anyone who acts as controlling shareholder at more

than one bank is required to choose from three

options: transfer their shares to other parties, arrange

merger/consolidation for the banks under their control

or establish a bank holding company.


dated 5 October 2006 concerning Incentives for Bank

Consolidation.

A comprehensive, all-round approach is essential for

accelerating the bank consolidation process. Bank

Indonesia has therefore adopted a policy of offering

incentives to banks interested in merger or

consolidation as follows: simplified procedure for

approval to operate as foreign exchange bank;

temporary relaxation of the statutory reserve

requirement; extension of deadline for resolution of

the exceeding of the LLL arising in consequence to

merger; simplified procedures for licensing of bank

branch offices; and partial reimbursement of

consultant fees for due diligence.

Other commercial bank regulations for strength-

ening the banking system.


dated 29 May 2006 concerning Amendment to Bank

Indonesia Regulation (PBI) No. 7/25/PBI/2005

concerning Risk Management Certification for

Managers and Officers of Commercial Banks.

Professional certification institutions have been

assigned the task of holding risk management

certification programmes for executive officers in

order to build the knowledge and skills of bank

managers in the area of risk management. The

changes made in this regulation concern the

operation of the executive programme for managers

and officers of commercial banks to meet the need

for improved competency and expertise in risk

management.

12. Bank Indonesia Regulation No. 8/10/PBI/2006 dated

7 June 2006 concerning Special Treatment for Bank

Credit Following the Natural Disaster in Yogyakarta

and Nearby Areas in Central Java.

The natural disaster that struck Yogyakarta and nearby

areas in Central Java Province resulted in significant

disruption to the economy in the region. This

regulation extends special treatment for classification

of credit quality extended by commercial banks within

a certain ceiling and for restructured debt in order to

promote economic recovery in the disaster-hit areas.




dated 10 July 2006 concerning Commercial Bank

Periodic Reports.

Effective decision making in adoption of monetary

policy requires accurate, complete and timely

information and data on banks. In addition, the rapid

advancement in the financial industry also calls for

more complete provision of information. To this end,

Bank Indonesia revamped the system for report

delivery and procedures for preparation of some

existing reports and the commercial bank periodic

report. Among others, banks and Islamic divisions are

required to prepare and deliver commercial bank

periodic reports to Bank Indonesia online.

ISLAMIC BANKING


dated 30 January 2006 concerning Conversion of

Conventional Commercial Bank Business to

Commercial Banks Conducting Business Based on

Islamic Principles and Establishment of Bank Offices

Conducting Business Based on Islamic Principles by

Conventional Commercial Banks.

These policy adjustments represent an effort to

promote expansion in Islamic bank service coverage

at low cost in response to rising public demand for

Islamic banking services. The regulation provides for

the opportunity for office channelling, in which

conventional banks with Islamic divisions and Islamic

branch offices may provide Islamic banking services

on behalf of Islamic branch offices.


dated 5 October 2006 concerning Asset Quality for

Commercial Banks Conducting Business Based on

Islamic Principles.

This policy change was made to obtain a more

comprehensive picture of asset quality at Islamic

commercial banks and to promote profit sharing

based financing within the boundaries of prudential

regulations. The changes in the regulation cover the

definition of financing, loan classification and

calculation of the ratio of actual revenues to revenue

projection.



Bank Indonesia Regulation No. 6/21/PBI/2004

concerning the Minimum Capital Adequacy

Requirement for Rural Banks Based on Islamic

Principles.

To obtain a more accurate picture of the capital

adequacy of Islamic Rural Banks, funds for paid up

capital previously recognised as tier 2 capitals are now

incorporated into tier 1 capital. Adjustments were also

made to risk weightings for provision of funds to MSEs

and civil servants/pensioners and for home mortgages.




concerning Statutory Reserves in Rupiah and Foreign

Currencies for Commercial Banks Conducting

Business Based on Islamic Principles.

The purpose of this regulation is to maintain safe levels

of liquidity in the Islamic banking system and reaffirm

the requirement to maintain statutory reserves and

additional statutory reserves. To this end, changes

were made to the calculation of the ratio of rupiah

financing to rupiah depositor funds, the key factor in

determining statutory reserves. The ratio now

compares financing in rupiah with depositor funds in

rupiah at the end of the reporting period 2 (two)

reporting periods previously.




dated 5 October 2006 concerning Asset Quality for

Rural Banks Based on Islamic Principles.

This regulation was issued to anticipate the growing

complexity of the business conducted by Islamic rural

banks and obtain a more comprehensive picture of

their earning assets quality. Changes in the regulation

apply to loan classification ratings for mudharabah

and musyarakah financing and allowance for earning

asset losses from murabahah, salam and istishna

financing.




concerning Rural Banks Based on Islamic Principles.

The purpose of this regulation is to promote expansion

in Islamic rural bank office networks through

streamlined procedures for approval of office opening

and encourage management by independent board

members. This in turn will foster the growth of a

sound and efficient Islamic banking system while

maintaining adequate levels of capital to ensure the

operational sustainability of Islamic rural banks. The

changes relate to capital requirements for opening

of Islamic rural bank branch offices and competence

of management/board of directors at Islamic rural

banks.


dated 27 February 2006 concerning Amendment to


concerning the Minimum Capital Adequacy

Requirement for Commercial Banks Based on Islamic

Principles.

The changes set out in this regulation are aimed at

promoting the Islamic banking role in stimulating

activity in the real sector by focusing funds channelling

activities on the small enterprise sector and civil

servants/pensioners. In the regulation, the risk

weighting for fund disbursements to small-scale

enterprises is lowered to 85% and for fund

disbursements to civil servants/pensioners to 50%.

RURAL BANKS


dated 5 October 2006 concerning the Minimum

Capital Adequacy Requirement for Rural Banks.

This regulation was issued to bring the calculation of

rural bank capital into line with best practices for bank

capital, among others by: addition of some

accounting items to tier 1 capital, change in allowance

for earning asset losses eligible for inclusion as tier 2

capital and special allowance for earning asset losses

to be offset against outstanding earning assets in the

calculation of risk weighted assets. The regulation also

prohibits rural banks from paying out dividends on

profit if the CAR falls below the regulatory minimum,

provides for payment of rural bank capital in the form

of fixed assets and stipulates lower risk weighting for

credit to boost rural bank credit expansion in the

MSME sector.


dated 5 October 2006 concerning Earning Asset

Quality and Formation of Allowance for Earning Asset

Losses.

This regulation updates the existing provisions on

quality rating of earning assets to ensure that the

calculation of rural bank capital adequacy properly

reflects the risks carried by the bank. The regulation

prescribes improvements in the criteria for

assessment of earning asset quality and quality of

inter bank placements. It also introduces new

provisions for debt restructuring and takeover of

collateral, and permits rural banks to extend credit

with a grace period.




dated 5 October 2006 concerning Financial

Transparency of Rural Banks.

This regulation was issued to strengthen the financial

transparency of rural banks towards the public. In

this, Bank Indonesia responds to the needs of

commercial banks in support of the linkage program

with rural banks for MSE financing. The regulation

prescribes an increased frequency of published

financial statements in addition to the annual report

and expands the scope of information to include

key financial ratios and other information of

importance.


dated 8 November 2006 concerning Rural Banks.

To reinforce the institutional structures of rural banks,

changes were made to existing regulations by

tightening the requirements for bank capital and

competency of members and candidates for the

board of directors. In a further move to promote

the intermediary function for rural banks, Bank

Indonesia relaxed the requirements concerning

capital and feasibility studies for opening of branch

offices with due consideration for prudential banking

principles. The relaxation of existing regulations

relates to the CAR, restrictions on outdoor cash

operations using ATM machines, requirements for

members/candidates for the board of directors,

sanctions on rural banks falling short of the required

paid up capital and requirement for moving office

to an area appropriate to the level achieved in paid

up capital.

79Appendix - Banking Key Indicator as of September 2006

Appendix 3Banking Key Indicators as of September 2006

NO.NO.NO.NO.NO. BANKBANKBANKBANKBANK NAME NAME NAME NAME NAMETOTALTOTALTOTALTOTALTOTAL

ASSETSASSETSASSETSASSETSASSETSSECURITISECURITISECURITISECURITISECURITI

ES TO 3ES TO 3ES TO 3ES TO 3ES TO 3RDRDRDRDRD

PARTYPARTYPARTYPARTYPARTY

AND BIAND BIAND BIAND BIAND BI

PLACEMENTPLACEMENTPLACEMENTPLACEMENTPLACEMENTON OTHERON OTHERON OTHERON OTHERON OTHER

BANKSBANKSBANKSBANKSBANKS

TOTALTOTALTOTALTOTALTOTAL

OTHEROTHEROTHEROTHEROTHER

CLAIMSCLAIMSCLAIMSCLAIMSCLAIMSTOTOTOTOTO

33333RDRDRDRDRD PARTY PARTY PARTY PARTY PARTY

CONTINU-CONTINU-CONTINU-CONTINU-CONTINU-

ANCEANCEANCEANCEANCECOMMIT-COMMIT-COMMIT-COMMIT-COMMIT-

MENT TOMENT TOMENT TOMENT TOMENT TO


INCLUSIONINCLUSIONINCLUSIONINCLUSIONINCLUSION GIROGIROGIROGIROGIRO SAVINGSSAVINGSSAVINGSSAVINGSSAVINGS DEPOSITSDEPOSITSDEPOSITSDEPOSITSDEPOSITS TOTALTOTALTOTALTOTALTOTAL EEEEEQQQQQUITUITUITUITUITYYYYYCREDITSCREDITSCREDITSCREDITSCREDITS

PRODUCTIVE ASSETSPRODUCTIVE ASSETSPRODUCTIVE ASSETSPRODUCTIVE ASSETSPRODUCTIVE ASSETS DEPOSITSDEPOSITSDEPOSITSDEPOSITSDEPOSITS

STATE-OWNED BANKSSTATE-OWNED BANKSSTATE-OWNED BANKSSTATE-OWNED BANKSSTATE-OWNED BANKS

1 008 PT BANK MANDIRI (PERSERO) Tbk 242,612,663 100,852,650 102,061,159 14,141,188 2,202,329 6,050,051 15,784,062 241,091,439 41,116,267 46,571,503 99,112,376 186,800,146 24,370,989

2 009 PT BANK NEGARA INDONESIA (PERSERO),Tbk 156,698,353 60,262,029 52,155,187 19,567,437 1,957,181 3,848,862 8,783,842 146,574,538 36,393,009 34,203,107 54,783,686 125,379,802 13,127,444

3 002 PT BANK RAKYAT INDONESIA (PERSERO) Tbk. 140,457,247 86,691,193 32,991,037 8,324,702 71,132 527,570 3,647,342 132,252,976 20,689,153 51,819,870 39,658,037 112,167,060 15,375,904

4 200 PT BANK TABUNGAN NEGARA (PERSERO) Tbk. 31,392,268 17,343,980 11,426,028 194,178 94,979 902,602 29,961,767 1,319,272 5,387,185 13,999,424 20,705,881 1,636,830

5 003 PT BANK EKSPOR INDONESIA (PERSERO) 8,651,457 3,907,628 1,491,001 3,005,084 210,086 1,170,471 9,784,270 46,454 599,007 645,461 3,934,508

FOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKS

6 014 PT BANK CENTRAL ASIA Tbk. 163,262,807 53,694,881 73,543,814 8,477,265 417,682 2,292,189 2,540,689 140,966,520 31,976,729 65,638,704 42,532,829 140,148,262 17,642,804

7 011 PT BANK DANAMON INDONESIA Tbk 74,896,314 38,991,588 20,317,941 6,946,328 699,360 2,134,617 69,089,834 4,485,161 8,848,987 36,692,685 50,026,833 8,871,996

8 016 PT BANK INTERNASIONAL INDONESIA Tbk 45,678,040 21,343,573 14,003,927 4,500,964 492,212 618,740 983,866 41,943,282 8,933,003 4,853,452 21,062,513 34,848,968 5,123,089

9 022 PT BANK NIAGA, Tbk 42,402,738 30,939,908 6,160,663 776,818 322,334 684,672 1,167,110 40,051,505 5,514,931 4,952,385 24,371,988 34,839,304 4,622,101

10 013 PT BANK PERMATA Tbk (d/h PT. BANK BALI ) 36,438,965 22,086,514 7,047,829 1,779,821 107,152 220,677 582,014 31,824,007 5,958,291 5,543,330 17,308,720 28,810,341 3,553,924

11 019 PT PAN INDONESIA BANK, Tbk 33,949,824 17,797,157 7,201,025 5,191,780 334,170 523,926 589,926 31,637,984 4,976,380 4,749,812 13,110,187 22,836,379 6,369,547

12 026 PT LIPPO BANK, Tbk 30,343,504 10,892,337 10,861,815 2,447,453 3,464 92,399 549,518 24,846,986 8,250,888 8,778,028 8,445,306 25,474,222 3,208,618

13 426 PT BANK MEGA, Tbk 26,559,058 10,450,906 11,750,656 436,097 31 150,763 373,815 23,162,268 3,039,118 2,677,056 17,336,327 23,052,501 1,938,476

14 441 PT BANK BUKOPIN 26,340,036 14,991,480 7,108,835 1,263,037 5,550 213,898 768,525 24,351,325 7,332,044 1,688,600 12,354,004 21,374,648 1,698,724

15 028 PT BANK NISP, Tbk 22,405,758 14,152,608 4,001,491 1,199,302 56,994 441,032 1,170,923 21,022,350 2,391,797 3,573,894 11,205,013 17,170,704 2,345,288

16 023 PT BANK UOB BUANA, Tbk. 16,844,832 10,241,487 3,382,178 1,536,228 88 33,288 223,030 15,416,299 3,239,492 4,009,612 5,131,884 12,380,988 3,182,268

17 087 PT BANK EKONOMI RAHARJA 14,126,414 5,583,352 5,851,491 1,008,280 65,315 343,170 12,851,608 2,257,310 3,476,396 7,158,562 12,892,268 898,128

18 095 PT BANK CENTURY Tbk.(BANK CIC-6.12.2004) 13,020,564 2,071,470 2,622,783 4,234,373 1,035,968 80,888 10,045,482 581,415 537,635 8,638,464 9,757,514 633,545

19 037 PT BANK ARTHA GRAHA INTERNASIONAL TBK 10,428,216 6,990,065 1,492,635 316,344 13,027 16,824 548,881 9,377,776 784,096 580,466 6,775,638 8,140,200 545,949

20 485 PT BANK BUMIPUTERA INDONESIA 4,842,114 3,757,000 265,259 114,294 20,073 64,198 4,220,824 577,311 461,475 3,032,589 4,071,375 515,777

21 089 PT BANK HAGA 3,897,716 2,070,891 1,104,767 49,086 11,794 654,184 3,890,722 696,927 542,531 2,171,302 3,410,760 286,206

22 151 PT BANK MESTIKA DHARMA 3,609,916 2,703,841 418,610 143,450 55,238 3,321,139 341,651 1,356,976 1,053,616 2,752,243 769,380

23 097 PT BANK MAYAPADA INTERNATIONAL 3,515,516 2,482,806 60,019 93,019 34,202 12,394 2,682,440 224,113 163,831 2,421,574 2,809,518 360,056

(in million Rp)(in million Rp)(in million Rp)(in million Rp)(in million Rp)

NO.NO.NO.NO.NO.IDIDIDIDID

BANKBANKBANKBANKBANK


24 145 PT. BANK NUSANTARA PARAHYANGAN TBK. 3,129,245 1,542,560 905,969 353,183 5,451 28,339 2,835,502 425,046 270,450 2,012,326 2,707,822 265,654

25 494 PT BANK AGRONIAGA Tbk. 2,907,374 2,057,012 434,310 77,949 20 80,342 4,417 2,654,050 298,042 57,124 1,954,810 2,309,976 256,821

26 167 PT BANK KESAWAN, Tbk 1,807,520 795,913 795,913 163,623 327,877 1,159,959 1,651,459 125,660

27 157 PT BANK MASPION INDONESIA 1,738,320 1,057,309 392,336 30,807 63 12,892 1,493,407 194,657 418,061 935,016 1,547,734 163,061

28 076 PT BANK BUMI ARTA 1,625,659 595,001 683,104 40,529 1,610 4,504 266,984 1,591,732 293,518 285,953 620,109 1,199,580 351,422

29 020 PT BANK ARTA NIAGA KENCANA 1,253,310 780,415 300,064 26,943 146 199,965 1,307,533 124,413 197,433 779,013 1,100,859 131,158

30 153 PT. BANK SINARMAS 1,060,492 455,067 170,921 250,859 94,324 10,282 981,453 213,369 21,265 603,546 838,180 109,862

31 159 PT BANK HAGAKITA 1,049,936 765,930 94,322 28,431 1,829 11,898 902,410 197,838 120,914 552,152 870,904 121,185

32 161 PT BANK GANESHA 1,020,529 704,162 57,560 135,835 10,352 104,397 1,012,306 118,617 56,391 726,928 901,936 94,024

33 146 PT BANK SWADESI, Tbk 958,222 438,642 349,227 61,399 131,699 980,967 63,695 63,074 700,699 827,468 114,018

34 088 PT BANK ANTAR DAERAH 633,679 379,426 105,952 72,761 6 23,803 581,948 84,779 161,045 283,905 529,729 62,374

35 162 PT BANK WINDU KENTJANA 573,904 307,383 117,125 38,458 1,013 463,979 64,483 121,597 333,863 519,943 47,420

36 093 PT BANK IFI 483,481 263,968 112,606 6,397 336 383,307 13,618 10,697 279,247 303,562 24,694

37 164 PT. BANK HALIM INDONESIA 461,696 272,058 110,940 40,897 2,391 19,916 446,202 42,979 48,698 218,790 310,467 110,757

38 152 PT BANK METRO EKSPRESS 334,614 185,330 108,243 22,020 63 3,740 319,396 43,210 47,885 82,244 173,339 154,280

NON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKS

39 213 PT BANK TABUNGAN PENSIUNAN NASIONAL 5,521,504 4,317,076 594,363 34,471 22 1,000 4,946,932 30,168 521,382 3,905,087 4,456,637 829,146

40 472 PT BANK JASA JAKARTA 2,330,317 1,584,659 569,256 901 346,092 2,500,908 165,972 147,287 1,618,936 1,932,195 279,515

41 566 PT BANK VICTORIA INTERNATIONAL 2,060,844 864,418 971,489 50,404 100,921 1,987,232 60,759 98,577 1,496,248 1,655,584 293,961

42 490 PT BANK YUDHA BHAKTI 1,833,490 816,864 485,484 287,103 10 8,125 1,597,586 65,421 48,999 1,516,572 1,630,992 150,480

43 558 PT BANK EKSEKUTIF INTERNASIONAL, Tbk. 1,408,694 904,613 35,693 1,145 250 941,701 12,677 95,343 1,123,526 1,231,546 136,137

44 567 PT BANK HARDA INTERNASIONAL 1,209,883 800,943 212,323 1,296 3,867 1,018,429 277,346 83,311 718,499 1,079,156 86,974

45 212 PT BANK HIMPUNAN SAUDARA 1906, Tbk 948,590 708,017 86,758 55,505 387 913 851,580 89,181 96,262 630,711 816,154 90,675

46 555 PT BANK INDEX SELINDO 937,880 461,344 348,694 14,325 1,400 825,763 108,607 152,493 575,732 836,832 88,295

47 525 PT BANK AKITA 734,345 554,962 99,763 87 3,269 658,081 70,720 20,601 527,941 619,262 89,113

48 523 PT DIPO INTERNATIONAL BANK 652,333 465,204 106,428 19,556 89,472 680,660 182,648 19,275 338,008 539,931 99,230

49 536 PT BANK UIB 621,575 433,725 104,719 4,075 13,629 556,148 51,311 32,027 442,081 525,419 84,639

50 521 PT BANK PERSYARIKATAN INDONESIA 614,213 184,885 28,467 211,446 419 425,217 9,222 26,196 238,236 273,654 149,484






















51 559 PT CENTRATAMA NASIONAL BANK 529,180 351,579 77,327 4,476 4,302 437,684 32,627 91,576 312,131 436,334 72,344

52 520 PT PRIMA MASTER BANK 517,094 385,524 46,304 23,287 2,217 457,332 43,666 35,918 355,047 434,631 61,125

53 535 PT BANK KESEJAHTERAAN EKONOMI 441,233 386,630 34,759 1,007 158 422,554 5,464 28,468 246,697 280,629 132,880

54 548 PT BANK MULTI ARTA SENTOSA (MAS) 424,129 362,468 21,910 9,723 1,815 395,916 15,734 33,719 324,907 374,360 43,226

55 513 PT BANK INA PERDANA 401,635 334,854 30,964 6,882 221 372,921 28,970 44,920 256,649 330,539 39,655

56 553 PT BANK MAYORA 319,016 117,794 161,348 20 20,217 299,379 39,940 19,598 203,368 262,906 50,763

57 422 PT BANK DJASA ARTA 314,826 176,070 74,905 7,321 5,955 264,251 30,347 44,376 201,967 276,690 29,875

58 498 PT BANK INDOMONEX 302,097 180,769 81,037 779 615 263,200 20,648 31,038 214,175 265,861 26,413

59 562 PT BANK FAMA INTERNASIONAL 288,353 211,550 42,148 1,050 254,748 19,251 13,160 208,164 240,575 42,650

60 491 PT BANK MITRANIAGA 280,116 164,344 75,575 506 704 241,129 14,718 16,194 222,286 253,198 24,975

61 466 PT BANK SRI PARTHA 273,245 147,993 15,933 163,926 3,176 133,271 76,701 213,148 44,634

62 484 PT BANK BINTANG MANUNGGAL 242,786 174,917 35,978 15,712 651 227,258 15,707 9,140 174,877 199,724 32,565

63 531 PT ANGLOMAS INTERNASIONAL BANK 226,489 177,119 29,677 85 1,035 207,916 20,375 29,163 142,495 192,033 30,062

64 542 PT BANK ARTOS INDONESIA 213,403 145,486 39,005 211 184,702 22,080 16,670 136,586 175,336 25,522

65 517 PT BANK HARFA 205,738 124,882 30,096 43 24,978 179,999 8,271 9,314 155,873 173,458 24,298

66 501 PT BANK ROYAL INDONESIA 173,014 32,804 24,780 98,073 5 155,662 115,536 9,750 18,375 143,661 24,660

67 564 PT BANK SINAR HARAPAN BALI 171,548 127,997 17,016 1,457 146,470 2,960 81,000 50,299 134,259 24,315

68 526 PT LIMAN INTERNATIONAL BANK 167,949 68,053 59,095 8,061 17,788 152,997 15,967 22,979 44,832 83,778 74,699

69 166 PT BANK HARMONI INTERNATIONAL 160,628 101,038 25,833 7,144 1,322 135,337 12,039 39,246 77,542 128,827 27,885

70 459 PT BANK BISNIS INTERNASIONAL 114,672 58,404 29,315 923 300 88,942 10,573 7,206 65,299 83,078 29,629

71 547 PT BANK PURBA DANARTA 70,829 12,174 50,891 1,140 64,205 8,380 8,618 30,187 47,185 22,714

72 405 PT BANK SWAGUNA 70,402 46,835 640 66 231 47,772 1,988 2,028 21,176 25,192 22,171

73 503 PT ALFINDO SEJAHTERA BANK 20,188 8,422 8,077 212 16,711 1,349 2,592 4,139 8,080 11,746

RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)

74 110 PT BPD JAWA BARAT 20,126,417 11,368,252 2,797,963 3,670,758 341 162,599 17,999,913 6,607,473 1,878,753 7,373,814 15,860,040 1,802,150

75 114 PT. BPD JAWA TIMUR 14,897,032 4,642,160 6,776,483 240,176 243,124 11,901,943 7,750,341 2,207,285 2,948,466 12,906,092 1,200,310

76 119 PT BANK PEMBANGUNAN DAERAH RIAU 12,121,690 2,259,857 7,772,241 504,686 1,447 118,492 10,656,723 8,652,469 939,831 1,640,123 11,232,423 594,664

77 113 PT BANK PEMBANGUNAN DAERAH JAWA TENGAH 10,723,638 5,748,341 1,184,417 2,187,430 2,668 165,803 9,288,659 4,088,563 1,696,378 3,650,008 9,434,949 932,194






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CLAIMSCLAIMSCLAIMSCLAIMSCLAIMS

TOTOTOTOTO33333RDRDRDRDRD PARTY PARTY PARTY PARTY PARTY


ANCEANCEANCEANCEANCE

COMMIT-COMMIT-COMMIT-COMMIT-COMMIT-MENT TOMENT TOMENT TOMENT TOMENT TO








78 124 BPD KALIMANTAN TIMUR 10,714,187 1,956,492 6,879,691 314,498 3,275 244,384 9,398,340 4,791,425 764,253 3,972,510 9,528,188 658,079

79 111 PT. BPD DKI 9,814,764 3,678,272 3,700,840 1,083,239 927 6,186 305,951 8,775,415 2,829,258 1,134,596 4,284,541 8,248,395 726,324

80 116 PT. BANK BPD ACEH 9,713,760 1,963,710 5,661,585 670,454 130 162,053 8,457,932 4,674,096 888,726 3,218,657 8,781,479 573,464

81 117 PT. BPD SUMATERA UTARA 7,628,028 2,772,887 3,399,609 355,734 750 190,026 6,719,006 4,249,793 1,054,135 1,314,228 6,618,156 850,094

82 120 PT BPD SUMATERA SELATAN 6,417,538 2,021,019 2,046,609 1,475,792 1,250 1,006 366,961 5,912,637 3,639,809 705,972 1,429,093 5,774,874 347,458

83 132 PT. BPD PAPUA 5,608,014 1,188,656 2,976,207 571,975 20,407 4,757,245 4,152,840 689,247 152,696 4,994,783 457,114

84 118 BPD SUMATERA BARAT 5,296,507 2,855,152 1,198,410 759,312 250 21,692 4,834,816 2,144,382 745,640 1,383,323 4,273,345 505,150

85 126 PT BPD SULAWESI SELATAN 4,062,055 1,924,230 948,774 601,000 66 2,795 3,476,865 2,378,682 321,867 649,692 3,350,241 528,727

86 129 PT. BANK PEMBANGUNAN DAERAH BALI 4,013,256 2,693,387 904,126 24,456 635 18,353 3,640,957 1,145,573 1,068,451 1,011,395 3,225,419 601,865

87 123 PT. BPD KALIMANTAN BARAT 3,206,911 944,414 1,275,975 507,642 175 40,052 2,768,258 2,018,970 604,449 285,285 2,908,704 166,329

88 122 PD BPD KALIMANTAN SELATAN 2,885,539 825,123 1,433,102 160,035 739 61,750 2,480,749 1,928,289 312,191 374,129 2,614,609 232,729

89 130 PT. BPD NUSA TENGGARA TIMUR 2,352,668 1,325,768 350,080 401,308 69 99,491 2,176,716 1,321,153 272,267 421,099 2,014,519 269,682

90 125 PT BANK PEMBANGUNAN KALTENG 2,341,668 507,022 1,188,483 262,093 515 68,457 2,026,570 1,757,328 278,603 84,672 2,120,603 176,135

91 112 BPD YOGYAKARTA 2,292,588 1,132,107 764,573 114,501 130 10,090 2,021,401 911,608 628,429 492,443 2,032,480 181,035

92 121 PT. BANK LAMPUNG 2,042,344 1,106,363 5,522 104,434 499 48,766 1,265,584 1,100,213 148,050 445,741 1,694,004 121,876

93 127 PT. BPD SULAWESI UTARA 1,833,093 848,204 503,298 275,279 47,943 1,674,724 392,729 357,994 652,655 1,403,378 159,429

94 128 PT. BPD NUSA TENGGARA BARAT 1,821,252 1,170,970 117,656 81,957 1,051 54,435 1,426,069 765,887 257,674 218,644 1,242,205 210,167

95 131 PT. BPD MALUKU 1,675,404 559,310 88,033 262,064 58,330 967,737 997,374 235,888 261,807 1,495,069 86,065

96 133 PT. BANK PEMBANGUNAN DAERAH BENGKULU 1,267,752 540,099 14,756 203,828 80 3,966 762,729 891,912 117,228 122,306 1,131,446 104,017

97 115 PD. BANK PEMBANGUNAN DAERAH JAMBI 1,161,366 432,446 442,424 90 17,983 892,943 705,523 89,024 215,758 1,010,305 117,042

98 135 BPD SULAWESI TENGGARA 1,038,965 341,895 110,000 477,648 20,485 950,028 753,336 104,739 36,595 894,670 116,982

99 134 PT. BPD SULAWESI TENGAH 833,497 202,852 234,097 299,294 22,651 758,894 699,056 32,689 21,802 753,547 48,479

JOINT-VENTURE BANKSJOINT-VENTURE BANKSJOINT-VENTURE BANKSJOINT-VENTURE BANKSJOINT-VENTURE BANKS

100 046 PT BANK DBS INDONESIA 11,821,293 7,081,648 3,134,621 600,356 431,137 659,343 11,907,105 1,107,364 41,619 5,172,599 6,321,582 1,572,942

101 048 PT BANK MIZUHO INDONESIA 7,679,608 4,949,545 558,929 956,677 967,637 1,799,209 9,231,997 2,534,523 2,782 1,655,343 4,192,648 1,467,163

102 045 PT BANK SUMITOMO MITSUI INDONESIA 5,925,323 4,322,712 662,160 518,914 142,185 727,044 6,373,015 1,921,821 1,610,943 3,532,764 1,438,417

103 950 PT BANK COMMONWEALTH 4,745,571 1,436,504 918,904 1,958,286 64 5,422 11,120 4,330,300 388,957 414,139 3,346,447 4,149,543 299,825

104 061 PT ANZ PANIN BANK 4,549,680 2,766,221 94,607 1,388,974 66,754 1,035,518 5,352,074 527,494 2,723,298 3,250,792 893,056






















105 047 PT BANK RESONA PERDANIA 4,498,911 3,105,435 694,957 400,980 34,308 197,771 417,430 4,850,881 1,224,542 1,267 1,589,548 2,815,357 960,405

106 058 PT BANK UOB INDONESIA 4,367,591 2,525,036 1,388,673 274,271 1,938 94,569 434,464 4,718,951 629,747 35,105 1,576,800 2,241,652 1,174,318

107 949 PT BANK CHINATRUST INDONESIA 3,814,460 2,876,006 495,825 161,143 152,130 358,590 4,043,694 543,216 322,721 1,688,720 2,554,657 888,400

108 060 PT RABOBANK INTERNATIONAL INDONESIA 3,169,417 3,001,125 319,529 36,734 19,474 44,992 324,092 3,745,946 182,806 815,807 998,613 260,445

109 068 PT BANK WOORI INDONESIA 2,354,406 1,057,458 798,969 318,479 120,866 286,285 2,582,057 359,945 44,378 365,372 769,695 668,905

110 948 PT BANK OCBC-INDONESIA 1,954,332 1,104,657 694,598 61,898 68,876 126,141 2,056,170 248,360 106 655,679 904,145 430,113

111 059 PT BANK KEB INDONESIA 1,888,525 1,099,549 708,977 43,014 14,189 288,406 2,154,135 553,308 265,933 819,241 669,087

112 057 PT BANK BNP INDONESIA 1,436,659 1,214,250 55,883 158,889 20,733 487,964 1,937,719 113,670 363,344 477,014 259,936

113 945 PT BANK FINCONESIA 1,057,477 781,906 164,298 120,061 44,103 299,791 1,410,159 45,864 514,554 560,418 223,574

114 036 PT BANK MULTICOR 678,072 328,351 140,981 141,788 4,529 126,533 742,182 159,793 18,806 334,849 513,448 150,886

115 947 PT BANK MAYBANK INDOCORP 331,882 101,634 179,083 38,585 66,234 385,536 44,242 189 35,511 79,942 185,370

116 054 PT. BANK CAPITAL INDONESIA 260,625 46,092 135,511 33,923 3,539 219,065 5,890 1,556 115,542 122,988 73,974

FOREIGN BANKSFOREIGN BANKSFOREIGN BANKSFOREIGN BANKSFOREIGN BANKS

117 031 CITIBANK N.A. 34,257,835 20,281,358 5,068,388 6,393,237 631,231 1,923,619 34,297,833 8,372,583 1,949,220 15,421,079 25,742,882 3,790,743

118 041 THE HONGKONG & SHANGHAI B.C. 27,115,508 11,856,407 5,324,993 6,836,967 1,500 1,368,619 9,564,235 34,952,721 7,965,208 12,599,556 20,564,764 136,569

119 067 DEUTSCHE BANK AG. 22,737,783 4,575,373 8,971,311 7,962,512 21,893 87,873 754,314 22,373,276 2,179,943 6,838,069 9,018,012 1,943,978

120 050 STANDARD CHARTERED BANK 22,384,399 8,198,853 5,190,230 6,674,730 1,055,347 2,949,194 24,068,354 4,001,993 774,087 6,058,751 10,834,831 224,118

121 042 THE BANK OF TOKYO-MITSUBISHI LTD. 19,117,487 12,567,270 3,460,234 2,328,510 359,708 1,921,607 20,637,329 4,803,705 4,304,441 9,108,146 3,436,437

122 052 ABN AMRO BANK 15,970,637 9,264,812 4,186,470 1,464,816 854 193,883 749,122 15,859,957 4,448,876 463,556 6,019,074 10,931,506 996,083

123 032 JP. MORGAN CHASE BANK 4,558,197 1,021,694 2,114,806 999,075 65,160 152,642 4,353,377 480,590 1,012,080 1,492,670 83,850

124 030 AMERICAN EXPRESS BANK 2,708,239 1,310,084 619,407 590,358 172 15,329 2,535,350 251,271 36,975 1,702,981 1,991,227 13,501

125 040 THE BANGKOK BANK COMP. LTD 1,887,659 1,660,231 166,269 54,055 48,387 232,725 2,161,667 317,649 409,985 727,634 209,573

126 069 BANK OF CHINA 723,107 239 384,698 324,661 453,028 1,162,626 229,544 3,431 24,843 257,818 (1,131)

127 033 BANK OF AMERICA, N.A 437,599 16,465 81,151 294,688 383 65,036 457,723 295,940 44,527 340,467 3,797

SHARIA BANKSSHARIA BANKSSHARIA BANKSSHARIA BANKSSHARIA BANKS

128 451 PT.BANK SYARIAH MANDIRI, Tbk 8,903,521 474 630,149 5,045,514 4,399 158,651 5,839,187 1,746,000 2,278,354 3,545,238 7,569,592 673,352

129 147 PT BANK MUAMALAT INDONESIA 8,070,740 217,878 629,000 2,753,335 6,677 168,753 3,775,643 570,006 2,045,819 3,738,784 6,354,609 810,529

130 506 PT BANK SYARIAH MEGA INDONESIA 1,803,577 12,983 1,293 193,426 250 207,952 18,587 451,939 1,097,165 1,567,691 136,002






PLACEMENTPLACEMENTPLACEMENTPLACEMENTPLACEMENT

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CLAIMSCLAIMSCLAIMSCLAIMSCLAIMS

TOTOTOTOTO33333RDRDRDRDRD PARTY PARTY PARTY PARTY PARTY


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84Appendix - Banking Key Financial Ratio as of September 2006

Appendix 4Banking Key Financial Ratio as of September 2006

STATE-OWNED BANKSSTATE-OWNED BANKSSTATE-OWNED BANKSSTATE-OWNED BANKSSTATE-OWNED BANKS

1 008 PT BANK MANDIRI (PERSERO) Tbk 25.45 26.03 6.63 102.37 0.96 91.63 53.54

2 009 PT BANK NEGARA INDONESIA (PERSERO),Tbk 17.57 16.58 3.31 136.92 1.81 84.38 48.55

3 002 PT BANK RAKYAT INDONESIA (PERSERO) Tbk. 19.77 4.79 4.69 168.96 4.56 73.78 77.29

4 200 PT BANK TABUNGAN NEGARA (PERSERO) Tbk. 18.17 5.2 2.1 180.55 1.91 86.56 83.76

5 003 PT BANK EKSPOR INDONESIA (PERSERO) 87.94 0.83 1.57 172.75 4.77 55.8 605.4

FOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKSFOREX NATIONAL PRIVATE COMMERCIAL BANKS

6 014 PT BANK CENTRAL ASIA Tbk. 23.99 1.57 1.33 141.6 3.84 69.1 38.31

7 011 PT BANK DANAMON INDONESIA Tbk 22.86 3.5 2.08 108.01 2.27 81.27 77.8

8 016 PT BANK INTERNASIONAL INDONESIA Tbk 23.59 4.78 1.7 113.41 1.52 89.47 61.43

9 022 PT BANK NIAGA, Tbk 17.63 3.64 1.95 114.23 2.34 83.82 88.81

10 013 PT BANK PERMATA Tbk (d/h PT. BANK BALI ) 12.8 6.5 3.2 137.5 1.2 91.5 76.7

11 019 PT PAN INDONESIA BANK, Tbk 34.74 7.79 4.74 107.34 2.55 80.52 77.93

12 026 PT LIPPO BANK, Tbk 20.8 1.98 2.08 162.69 2.76 76.82 42.76

13 426 PT BANK MEGA, Tbk 17 1.73 0.71 100.01 0.81 93.48 45.34

14 441 PT BANK BUKOPIN 14.93 3.95 1.16 101.08 1.96 85.67 69.45

15 028 PT BANK NISP, Tbk 18.33 3.31 1.13 100.03 1.54 87.71 81.94

16 023 PT BANK UOB BUANA, Tbk. 30.12 4.26 1.56 110.48 3.61 74.25 82.72

17 087 PT BANK EKONOMI RAHARJA 13.81 2.2 0.91 129.09 1.63 86.35 43.31

18 095 PT BANK CENTURY Tbk.(BANK CIC-6.12.2004) 12.34 7.22 0.76 100.01 0.33 93.66 21.1

19 037 PT BANK ARTHA GRAHA INTERNASIONAL TBK 10.9 6.32 1.94 83.15 0.42 96.89 85.84

20 485 PT BANK BUMIPUTERA INDONESIA 14.57 5.87 1.78 116.57 0.21 99.07 92.28

21 089 PT BANK HAGA 12.75 2.43 0.79 100 2.79 79.72 60.52

22 151 PT BANK MESTIKA DHARMA 23.64 3.83 2.29 253.59 6.87 58.3 98.24

23 097 PT BANK MAYAPADA INTERNATIONAL 13.67 4.08 1.69 102.93 1.16 91.64 86.64

24 145 PT. BANK NUSANTARA PARAHYANGAN TBK. 16.7 1.31 1.48 197 1.05 89.25 56.97

NONONONONO BANKBANKBANKBANKBANK NAMNAMNAMNAMNAMEEEEE CARCARCARCARCAR NPLNPLNPLNPLNPL PPAP tPPAP tPPAP tPPAP tPPAP tooooo

ProduktiProduktiProduktiProduktiProduktive Assetsve Assetsve Assetsve Assetsve AssetsComplianceComplianceComplianceComplianceCompliance

PPAPPPAPPPAPPPAPPPAPROAROAROAROAROA BOPOBOPOBOPOBOPOBOPO LDRLDRLDRLDRLDR

(Percent)(Percent)(Percent)(Percent)(Percent)

NO. IDNO. IDNO. IDNO. IDNO. ID






PPAPPPAPPPAPPPAPPPAPROAROAROAROAROA BOPOBOPOBOPOBOPOBOPO LDRLDRLDRLDRLDRNO. IDNO. IDNO. IDNO. IDNO. ID


25 494 PT BANK AGRONIAGA Tbk. 16 5 1 104 1 97 83

26 167 PT BANK KESAWAN, Tbk 10.88 5.09 0.92 119.21 0.43 99.03 66.33

27 157 PT BANK MASPION INDONESIA 14.63 2.15 0.88 100.11 0.93 93.53 68.28

28 076 PT BANK BUMI ARTA 40.56 2.44 0.84 100 2.77 79.08 49.54

29 020 PT BANK ARTA NIAGA KENCANA 20.5 2.42 0.7 124.95 1.17 92.25 70.89

30 153 PT. BANK SINARMAS 27.66 1.69 2.03 134.57 1.27 88.36 54.29

31 159 PT BANK HAGAKITA 14.35 3.26 1.83 100 0.65 96.08 87.95

32 161 PT BANK GANESHA 16.77 2.16 0.8 101.09 -0.3 101.77 78.07

33 146 PT BANK SWADESI, Tbk 25.64 2.74 2.05 153.44 1.28 91.12 53.01

34 088 PT BANK ANTAR DAERAH 16.34 3.27 1.08 110.47 1.45 89.79 69.46

35 162 PT BANK WINDU KENTJANA 15.26 1.04 0.78 100 0.2 98.62 59.12

36 093 PT BANK IFI 11.74 28.46 2.16 119.78 -9.19 224.18 86.96

37 164 PT. BANK HALIM INDONESIA 60.08 2.12 2.14 195.26 2.95 79.16 87.06

38 152 PT BANK METRO EKSPRESS 64.71 4.35 3.72 161.59 3.59 74.58 106.92

NON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKSNON-FOREX NATIONAL PRIVATE COMMERCIAL BANKS

39 213 PT BANK TABUNGAN PENSIUNAN NASIONAL 32.01 2.5 3.03 105.11 3.51 83.05 96.87

40 472 PT BANK JASA JAKARTA 24.09 1.03 1.39 135.83 2.51 84.85 82.01

41 566 PT BANK VICTORIA INTERNATIONAL 30.38 6.71 3.33 198.99 1.43 89.49 51.46

42 490 PT BANK YUDHA BHAKTI 16.2 6.89 1.33 100.03 0.76 95.12 50.09

43 558 PT BANK EKSEKUTIF INTERNASIONAL, Tbk. 9.76 5.26 2.53 100.46 -0.85 108.49 73.44

44 567 PT BANK HARDA INTERNASIONAL 13.99 4.28 1.32 102.61 0.12 98.33 74.22

45 212 PT BANK HIMPUNAN SAUDARA 1906, Tbk 13.32 1.54 1.69 106.53 1.83 93.5 86.75

46 555 PT BANK INDEX SELINDO 17.64 1.87 1.26 117.27 1.18 91.67 55.13

47 525 PT BANK AKITA 17.97 3.19 0.74 100.06 1.5 94.61 89.62

48 523 PT DIPO INTERNATIONAL BANK 19.43 3.91 1.5 121.79 2.87 81.19 86.3

49 536 PT BANK UIB 18.99 2.88 1.22 100 0.43 97.25 82.55

50 521 PT BANK PERSYARIKATAN INDONESIA 12.25 56.7 6.68 104.25 -1.05 202.91 54.91

51 559 PT CENTRATAMA NASIONAL BANK 18.31 4.78 0.31 105.64 1.56 92.82 80.58

52 520 PT PRIMA MASTER BANK 18.71 1.31 0.81 123.58 0.85 93.47 88.07







53 535 PT BANK KESEJAHTERAAN EKONOMI 34.03 2.13 2.33 100.43 4.51 74.73 137.77

54 548 PT BANK MULTI ARTA SENTOSA (MAS) 16.34 0.97 1.41 127.12 1.91 87.12 96.82

55 513 PT BANK INA PERDANA 14.09 1.95 1.9 104.53 0.62 96.16 101.31

56 553 PT BANK MAYORA 31.26 3.51 1.89 198.67 0.46 99.16 44.8

57 422 PT BANK DJASA ARTA 13.21 8.95 2.01 100.54 -1.03 109.22 62.46

58 498 PT BANK INDOMONEX 13.08 4.12 1.03 0.59 96.65 67.99

59 562 PT BANK FAMA INTERNASIONAL 18.53 4.56 0.79 106.63 1.32 92.48 87.94

60 491 PT BANK MITRANIAGA 18.58 2.56 0.52 84 0.1 100 64.91

61 466 PT BANK SRI PARTHA 22.91 9.28 1.53 120.26 -0.14 103.79 69.43

62 484 PT BANK BINTANG MANUNGGAL 17.8 1.82 1.7 111.47 0.95 93.93 87.58

63 531 PT ANGLOMAS INTERNASIONAL BANK 16.08 12.61 0.97 111.03 1.03 94.25 92.23

64 542 PT BANK ARTOS INDONESIA 18.64 3.66 1.29 101.49 0.02 100.68 82.98

65 517 PT BANK HARFA 16.95 3.4 0.61 133.79 -2.57 117.69 72

66 501 PT BANK ROYAL INDONESIA 42.14 0.02 0.87 102.08 0.17 91.37 22.83

67 564 PT BANK SINAR HARAPAN BALI 19.55 1.84 2.2 124.3 2.02 89.1 95.34

68 526 PT LIMAN INTERNATIONAL BANK 76.17 5.59 1.91 257.51 11 66.08 81.23

69 166 PT BANK HARMONI INTERNATIONAL 24.21 0.33 1.14 145.32 1.82 87.7 78.43

70 459 PT BANK BISNIS INTERNASIONAL 42 1 151 1 100 70

71 547 PT BANK PURBA DANARTA 203.47 5.38 2.9 332.99 3.65 71.33 25.8

72 405 PT BANK SWAGUNA 10362 778 690 8195 -70 10328 9905

73 503 PT ALFINDO SEJAHTERA BANK 113.65 0.57 100 -2.53 119.64 104.23

RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)RURAL DEVELOPMENT BANKS (BPD)

74 110 PT BPD JAWA BARAT 15.69 0.51 1.29 112.09 3.04 76.71 71.67

75 114 PT. BPD JAWA TIMUR 34.23 0.96 1.27 182.17 4.68 65.67 35.97

76 119 PT BANK PEMBANGUNAN DAERAH RIAU 27.99 2.91 0.79 100.05 4.49 60.89 20.12

77 113 PT BANK PEMBANGUNAN DAERAH JAWA TENGAH 17.11 0.74 1.21 105.61 3.96 71.97 60.91

78 124 BPD KALIMANTAN TIMUR 25.93 2.94 0.5 102 3.75 66.73 20.53

79 111 PT. BPD DKI 16.33 4.9 2.28 109.25 1.89 85.61 44.59

80 116 PT. BANK BPD ACEH 28.69 1.75 0.66 117.95 4.31 61.21 22.36


81 117 PT. BPD SUMATERA UTARA 35.33 3.37 1.82 163.33 2.71 81.47 41.9

82 120 PT BPD SUMATERA SELATAN 17.33 3.49 2.01 157.13 1.43 87.17 34.99

83 132 PT. BPD PAPUA 46.16 2.1 0.86 100.96 4 68.34 23.8

84 118 BPD SUMATERA BARAT 22.8 4.28 2.26 99.98 3.35 76.39 66.77

85 126 PT BPD SULAWESI SELATAN 23.53 2.48 2.01 4.49 55.68 57.44

86 129 PT. BANK PEMBANGUNAN DAERAH BALI 20.77 1.68 1.76 103.61 5.47 63.04 83.51

87 123 PT. BPD KALIMANTAN BARAT 20.01 1.38 1.03 113.69 3.34 73.81 32.47

88 122 PD BPD KALIMANTAN SELATAN 21.35 3.29 0.92 101.53 3.65 74.65 31.88

89 130 PT. BPD NUSA TENGGARA TIMUR 16.88 0.72 1.39 97.7 5.01 63.63 65.81

90 125 PT BANK PEMBANGUNAN KALTENG 36.64 4.03 1.54 117.05 4.4 64.98 23.91

91 112 BPD YOGYAKARTA 15.03 2.04 1.65 110.11 3.31 76.38 55.7

92 121 PT. BANK LAMPUNG 19.9 1.31 2.3 135.52 2.66 79.38 61.21

93 127 PT. BPD SULAWESI UTARA 13.87 1.08 1.44 127.71 6.59 67.37 60.44

94 128 PT. BPD NUSA TENGGARA BARAT 15.37 1.47 2.1 104.63 4.56 76.7 94.27

95 131 PT. BPD MALUKU 21.12 4.48 3.3 100 1 90.39 37.41

96 133 PT. BANK PEMBANGUNAN DAERAH BENGKULU 23.58 2.73 1.73 84.74 3.25 68.72

97 115 PD. BANK PEMBANGUNAN DAERAH JAMBI 38.79 0.87 1.37 105.61 3.54 72.93 42.8

98 135 BPD SULAWESI TENGGARA 29.73 3.91 1.79 99.44 7.91 50.02 38.21

99 134 PT. BPD SULAWESI TENGAH 24.79 13.57 2.01 109.33 2.41 74.39 26.92

JOINT-VENTURE BANKSJOINT-VENTURE BANKSJOINT-VENTURE BANKSJOINT-VENTURE BANKSJOINT-VENTURE BANKS

100 046 PT BANK DBS INDONESIA 22.72 1.67 0.89 150.84 1.53 89.66 112.02

101 048 PT BANK MIZUHO INDONESIA 26.66 0.68 2.03 140.07 3.84 56.86 118.05

102 045 PT BANK SUMITOMO MITSUI INDONESIA 48.86 2.08 1.28 100 5.91 37.38 122.27

103 950 PT BANK COMMONWEALTH 17.35 0.3 0.84 100.43 0.01 100.81 34.62

104 061 PT ANZ PANIN BANK 18.6 5.38 2.85 102.54 4.57 77.92 85.09

105 047 PT BANK RESONA PERDANIA 23.64 7.45 5.81 157.46 2.94 71.25 110.3

106 058 PT BANK UOB INDONESIA 54.1 3.5 2.6 105.1 4.9 57.9 112.6

107 949 PT BANK CHINATRUST INDONESIA 22.87 2.39 2.46 175.93 8.06 49.8 112.58

108 060 PT RABOBANK INTERNATIONAL INDONESIA 13.22 14 3.59 105.77 -7.16 166.05 300.53







109 068 PT BANK WOORI INDONESIA 65.1 0.56 1.21 137.57 7.05 34.96 136.08

110 948 PT BANK OCBC-INDONESIA 64.62 6.06 3 122.12 1.78 81.39 122.18

111 059 PT BANK KEB INDONESIA 60.11 2.24 2.62 9.07 25.32 134.22

112 057 PT BANK BNP INDONESIA 23.8 8.2 5.28 119.38 4.1 92.81 254.55

113 945 PT BANK FINCONESIA 34.04 15.58 7.14 156.44 1.54 84.43 139.52

114 036 PT BANK MULTICOR 37.85 4.44 3.63 181.31 1.62 87.44 63.95

115 947 PT BANK MAYBANK INDOCORP 122.93 6.71 2.08 101.15 5.15 67.15 127.13

116 054 PT. BANK CAPITAL INDONESIA 58.38 0.81 155.64 3.18 78.57 37.48

FOREIGN BANKSFOREIGN BANKSFOREIGN BANKSFOREIGN BANKSFOREIGN BANKS

117 031 CITIBANK N.A. 24.57 5.11 4.59 119.83 5.03 71.58 78.78

118 041 THE HONGKONG & SHANGHAI B.C. 17.11 4 2 131 2 64 58

119 067 DEUTSCHE BANK AG. 57.68 9.75 2.38 106.66 8.18 49.72 50.74

120 050 STANDARD CHARTERED BANK 20.37 5.32 2.65 108.43 4.51 71.06 75.67

121 042 THE BANK OF TOKYO-MITSUBISHI LTD. 33.38 2.08 1.28 100 4.42 53.72 137.98

122 052 ABN AMRO BANK 14.66 2.56 2.15 100.01 2.62 82.12 84.75

123 032 JP. MORGAN CHASE BANK 61.62 0 0.51 100.96 7.78 49.05 68.45

124 030 AMERICAN EXPRESS BANK 61.52 0.55 222.21 -1.6 110.77 65.79

125 040 THE BANGKOK BANK COMP. LTD 36.3 4.69 6.17 189.44 2.46 53.59 228.17

126 069 BANK OF CHINA 70.07 0.97 100.39 2.5 63.78 0.09

127 033 BANK OF AMERICA, N.A 76 1 121 5 67 5

SHARIA BANKSSHARIA BANKSSHARIA BANKSSHARIA BANKSSHARIA BANKS

128 451 PT.BANK SYARIAH MANDIRI, Tbk 11.98 6.8 2.76 104.14 0.95 91.55 95.43

129 147 PT BANK MUAMALAT INDONESIA 14.65 4.43 1.7 94.92 2.36 82.69 87.29

130 506 PT BANK SYARIAH MEGA INDONESIA 9.1 0.95 1.52 100.5 3.45 82.63 *)

*) Data Publikasi Tidak tersedia






Banking Supervision Report 2006

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Transcript of Banking Supervision Report 2006