INDONESIAN FINANCIAL MARKET

By

S Madhu

Dinesh Kumar

S Arun Sathiya

Overview

1. S Arun Sathiya

Capital Market Supervisory Agency (BAPEPAM)

2. S Madhu

Bank Indonesia

REPUBLIC OF INDONESIA

• National name : Republik Indonesia• Capital : Jakarta• Monetary unit : Rupiah• GDP(2005 est.) : $901.7 billion• Exchange Rate : 9188 Rp / USD • Industries : petroleum and natural

gas, textiles, footwear, mining, cement, chemical fertilizers, plywood, rubber, tourism ,etc

INTRODUCTION

• The existence of a capital market in Indonesia dates at least from 1912

when the Dutch Colonial government established a stock exchange

• The real development of the capital market in Indonesia started in

1977 when the Jakarta stock exchange was reopened under the newly

created Capital Market Operation Board (BAPEPAM) of the Ministry of

Finance.

• Corporate bonds began to play a role as capital market instruments in

1983. JASAMARGA (The state owned highway construction and

maintenance corporation) issued the first bonds, using the proceeds to

finance construction of toll highways, among other things.

Contd…

• During the 1980’s the government started to reform

regulations that had obstructed investor interest in the

bourse in order to create the climate conducive to business.

• Pakdes package of 1987 relaxed government regulation of

the market and licensing and had a major effect on the

market’s development.

• The Pakdes package adopted in December 1990 reformed

the institutional structure of the capital market.

The Existing Regulatory StructuresMinistry of Finance

Directorate General of Financial Institution

Capital Market Supervisory Agency

Insurance

Pension Funds

Finance

Venture Capital

Others Financial Services

Stock Exchanges

Issuers / Public Companies

Securities Firms

Investment Funds

Others Capital Market Supporting Institutions

1987 to 1992 Reforms

• Allowing foreign investors to own 49% maximum of listed

shares, removing fluctuation trading limit, and introducing

Parallel Bourse to allow medium-scale companies (Dec. 87)

• Moving towards a disclosured-based regime with the

establishment of SURABAYA STOCK EXCHANGE (SSX) in

1989 and privatization of the JAKARTA STOCK EXCHANGE

(JSX) in 1992

• Market infrastructure was simultaneously modernized

As a result…

25

67

132145

162181

231248

9

50464334

242322

0

50

100

150

200

250

300

88 89 90 91 92 93 94 95

Nu

mb

ers

of

Issu

ers

Stock Issuers Bond Issuers

The Effectiveness of Capital Market Law in January 1996 brought significant changes in

the Indonesian securities industry

• BAPEPAM (Badan Pengawas Pasar Modal) becomes more

independent in regulating and supervising the market

• BAPEPAM has more enforcement powers

• More stringent sanctions for serious violations such as

market manipulation and insider trading

• Open-end Investment Fund is introduced and allow to

operate

But the growth of the issuers remained slow as 1997 monetary crisis gave its disastrous impacts to the

market and to the Indonesian economy as a whole

267

306 309 321347

379401

55

1009491

767070

0

50

100

150

200

250

300

350

400

450

96 97 98 99 2000 2001 2002

Nu

mb

ers

of

Issu

ers

Stock Issuers Bond Issuers

Where they are …

The JSX Market Cap accounted only 0.13% of the Global Market Cap

The JSX trading value accounted only 0.04% of the global trading value

Numbers of Investors in 2002

Total Population

Singapore

Malaysia

Indonesia

1 m

3 m

70,000

3,5 m

18 m

220 m

Switzerland 1,3 m7,3 m

Domestic Investors

THE CAPITAL MARKET SUPERVISORY AGENCY

• When the capital market was activated in 1976,

Capital Market Executive Agency (BAPEPAM)

was established

• The Capital Market Supervisory Agency,

hereinafter referred to as BAPEPAM, shall

provide guidance, regulation, and day-to-day

supervision of the Capital Market.

Vision and Mission

• The vision of the BAPEPAM is “to develop strong and

globally competitive capital markets, as the activator of the

national economy”.

• First, to develop strong Indonesian capital markets as the

activator of the national economy.

• Second, the Indonesian capital market should be

competitive in the global environment.

Contd…

• Enhancing commitment to develop a more robust capital market;

• Providing more access to medium-sized enterprises and credit union (cooperatives) to use capital market as their alternative source of financing;

• Supporting regional/local government to raise fund through the capital market;

• Strengthening domestic-based investors and encouraging them to participate actively in the capital market;

• Improving the quality of market infrastructure that meet international standards and to cope with global challenges

Objective of BAPEPAM

• The major functions of the Agency are,

– Evaluate whether the companies that are to sell their

shares through capital market have complied with the

requirements and are sound and fit.

– Organize an effective and efficient capital market.

– Extensively supervise the development of Issuers.

• In order to carry out its objectives BAPEPAM

shall have authority to do the following:

Contd…

• grant:

– business licenses to Securities Exchanges, Clearing

Guarantee Institutions, a Central Securities Depository,

Investment Funds, Securities Companies, Investment

Advisors, and Securities Administration Agencies;

– individual licenses to Underwriter’s Representatives, Broker-

Dealer’s Representatives, and Investment Manager’s

Representatives; and

– approvals to Custodian banks;

Contd…

• inspect:

– Issuers and Public Companies that have submitted or that

are required to submit a Registration Statement to

BAPEPAM; or

– Persons that, under this Law, are required to have a business

or individual license, or to be approved, or to be registered

as a professional;

• publish findings of inspections

• suspend all trading on a Securities Exchange in times of

emergency,

Contd…

• require the registration of Capital Market Supporting

Professionals and Trust-Agents

• take steps necessary to avert loss to the public arising

from violation of Capital Market regulations;

• do any other act required by this Law

Person to submit report Things to be reported to BAPEPAM

Stock Exchange

Daily Report on the Exchange TransactionMonthly Activity Report

Semi/Annual ReportOther Report when required

Clearing Guarantee Corporation and Central Securities Depositary

Daily Report on Clearing and DepositaryDaily Report on Mutation of Depositary and Settlement

of the Exchange transactionMonthly Report

Semi/Annual Financial Report

Other Reports when required

Investment Fund Monthly Report

Securities CompanyAnnual Financial Report

on Net Adjusted Working Capital Investment Manager Monthly Activity Report

Credit Rating AgencySemi Annual Activity Report

Annual Activity Report

Securities Administration AgencyMonthly Activity ReportAnnual Activity Report

Annual Report

Organization• Chairman

• Executive Secretary

• Director of the Regulation and Legal Counsel Bureau

• Director of the Enforcement Bureau

• Director of the Investment Management and Research Bureau

• Director of the Market Institutions and Trading Bureau

• Director of the Corporate Finance I Bureau

• Director of the Corporate Finance II Bureau

• Director of the Accounting Standards Bureau

Procedure for Issuing or rejecting a license.

• The approval or rejection of an application by BAPEPAM

with respect to a license, approval, or registration, must be

done within forty-five days from the date the complete

application is received by BAPEPAM.

• Within the period referred to in paragraph (1), BAPEPAM

may request amendments and or additional information to

complete the application for licensing, approval, or

registration.

Contd…

• When BAPEPAM requests an amendment and/or additional

information as specified in paragraph (2), the period for

approval or denial shall be counted from the date such

amendment and/or additional information is received by

BAPEPAM.

CAPITAL MARKET DEVELOPMENT STRATEGY

• Regulatory alignment & harmonization

Accounting standards

Listing requirements

Investor protection regime

Regulation of cross-border trades and investment

Standardize investor protection rules across jurisdictions

to ensure credibility of the region

Harmonize regulatory requirements and standards

Contd…

• Integrated market infrastructure

Market intermediation

Trading systems

Clearance and settlement

Efficient and effective market linkages

Cross-border trading

Common clearing and settlement

Conclusion

• The purpose of the Capital Market is to support national

development by enhancing public welfare through economic

growth and societal stability, while fostering a more suitable

distribution of wealth.

• To reach this objective, the Capital Market plays a strategic

role by financing businesses, both large and small and

provides the public with investment opportunities.

Contd…

• Necessary legislation for economic development includes

regulation of the Capital Market which it is expected that the

Capital Market will have a greater role in development, so that

national economic objectives may be achieved.

Bank Indonesia

History

• Bank Indonesia was founded on July 1, 1953, in the

Sukarno era - from the nationalization of De Javasche

Bank, a Dutch bank dating from colonial times.

• For the next 15 years, Bank Indonesia carried on

commercial activities as well as acting as the nation’s

bank.

Contd…

• This came to an end with the Act No. 13 Year 1968 on

Central Bank, which was subsequently replaced by the

Act No. 23 Year 1999, finally freeing the bank from

government interference.

• Thereafter, the bank reported to the House of

Representatives instead of the president, and the bank’s

governor was no longer a member of the cabinet.

Organization

• The bank is led by the board of governors, comprising the governor, a senior deputy governor and at between four and seven deputy governors.

• The governor and deputy governors serve for a term five years, and

are eligible for re-election for a maximum of two terms.

• The governor and senior deputy governor are nominated and

appointed by the president, with approval from the House of

Representatives. Deputy governors are nominated by the governor

and appointed by the president, with approval of the House of

Representatives.

Contd…

• The president has no power to dismiss a member of the board,

except when a board member voluntarily resigns, is permanently

handicapped, or is proven guilty of criminal offence.

• The Board of Governors Meeting is the bank’s highest decision-

making forum. It is held at least once a month to decide on general

policy on monetary affairs, and at least once a week to evaluate

policy implementation or to decide on other strategic and principle

policy.

AFTER ASIAN CRISIS

• After the Asian currency crisis of 1997

• Indonesia suffered the most economic damage during which it

experienced a sharper drop of the currency than any other country

involved in the crisis.

• Political and economic shocks, including the sharp drop in the

currency, bank runs, and the collapse of the Suharto regime

inspired by the political instability, deteriorated the balance sheets of

leading banks.

Banking Restructuring in Indonesia

• As part of efforts to restore people's confidence in Indonesia's

financial and economic system, Bank Indonesia has embarked on a

comprehensive restructuring of the banking system.

• The restructuring is absolutely imperative, in order to reactivate

banking intermediary role in encouraging economic growth and

optimizing effective implementation of monetary policy.

• The restructuring involves restoring people's confidence in the

system, banking recapitalizing, credit restructuring, improving

banking regulation and supervising function.

Indonesian Banking Architecture

1. Creation of a robust structure for the domestic banking system

capable of meeting the needs of the public and promoting sustainable

economic development.

2. Creation of an effective system for bank regulation and supervision

based on international standards.

3. Creation of a strong, highly competitive banking industry, resilient in

the face of risks.

Contd…

4. Building of good corporate governance for internal

strengthening of the national banking system.

5. Provision of a complete range of infrastructure to support

the creation of a healthy banking industry.

6. Empowerment and protection for consumers of banking

services.

Indonesian Bank Restructuring Agency

• The IBRA, which was established on 27 January 1998, set out to

build a bank restructuring mechanism.

• The IBRA, which was established as an integrated agency to tackle

the bank restructuring, could not be empowered for legal authority

and not endowed with enough budget.

• Under IMF guidance ,the IBRA created a bank restructuring

mechanism independent of the government and Bank Indonesia.

• But it failed to get full cooperation from the government and resulted

in undermining its authority. It was dissolved in the year 2004.

Public Fund Injection

• The banking sector restructuring policy published in 1998 revealed

a public fund injection program to the banking sector.

• Capital injections were conducted in 1999 by the mechanism of the

issuance of government bonds by the Indonesian government to

inject funds into banks.

• Banks employed a set of capital adequacy ratio criteria; 4% or

higher for healthy banks, 25% to 4% for banks that required capital

injections and 25% or lower for banks that were to be immediately

shut down. The banking sector had deteriorated that far.

Mission and Vission

• To achieve and maintain rupiah stability by maintaining monetary

stability and by promoting financial system stability for Indonesia’s

long term sustainable development.

• To be recognized, domestically and internationally, as a credible

central bank through the strength of our values and achievement of

low, stable rates of inflation

STRATEGIC VALUES

• Competency

• Integrity

• Transparency

• Accountability

• Cohesiveness

STRATEGIC OBJECTIVES

• To realize its Mission, Vision and Strategic Values, Bank Indonesia

has stipulated the following medium-long term strategic objectives :

• Maintain monetary stability 

• Maintain the financial sustainability of Bank Indonesia

• Strengthen the effectiveness of monetary management

• Create a sound and effective banking system and financial system

stability 

Contd…

• Maintain the security and effectiveness of the payment system 

• Increase the effectiveness of Good Governance implementation 

• Strengthen the organization and build highly competent human

resources with the support of a knowledge-based work culture

• Integrate Bank Indonesia's transformation in line with Bank

Indonesia's destination statement of 2008 

REGULATING AND SUPERVISING BANKING SYSTEM

• Bank Indonesia issues regulation, grants and revokes bank's

license or certain banking activities permit, conducts banking

supervisory and imposes sanction to bank in accordance to the law

of the land. In conducting these tasks, Bank Indonesia, with utmost

prudence, is authorized to enact banking regulations.

• In the context of the Bank's authority in bank licensing, asides from

granting and revoking business license of the banking institutions,

Bank Indonesia may grant permit in opening, closing and moving of

bank's branch office, grant approval of bank's ownership and

management, also grant permit to bank concerning particular

business activities.

Contd…

• The Bank's supervisory authority takes the form of direct

and indirect monitoring. Direct supervision is conducted

through on-site examination regularly or randomly as

needed. Indirect supervision is conducted through

research, analysis and evaluation of submitted banks

report

Bank Indonesia Issues New Regulation on Foreign Loans

• The regulation signed by Governor (2004) of the central bank Burganuddin Abdullah, said short and long term borrowers must adopt risk management including market, credit and liquidity risks.

• Long term borrowers must have certain rating from national or international rating agency and they are required to submit full report to the central bank including about the rating, financial ratio, financial report, report about foreign loan in a year and results of analysis of company management.

• Short term borrowers are required to submit only financial ratio and financial reports.

• Foreign loans have positive and negative effects on the balance of payments and monetary stability, therefore, the principle of prudence must be observed the central bank said.

IMF and Bank Indonesia

• In 2003, the Indonesian government made a political decision to

terminate policy management based on loans and advice from the

IMF.

• Exit from the IMF program meant receiving no further loans from the

fund. Thereafter, the government became responsible for

implementing economic policy without any input from the IMF. While

the IMFs guidance is still partly effective under Article IV,

consultation with the IMF (surveillance) and post program

monitoring, the government restored its autonomy in establishing

economic policy.

Independent Banking Supervisory Agency

• With the dissolution of the IBRA in February 2004, the

Indonesian banking sector was back to normal. Since

the dissolution of the IBRA, Bank Indonesia has

supervised banks. Although the new Central Banking

Law (2004) stipulates detachment of banking supervision

authority from Bank Indonesia and the setting up of an

independent banking supervising agency, opposition

from the central bank has prevented its implementation

CONCLUSION

• The Indonesian banking sector has been recovering slowly but

steadily in real terms and that privatization of state banks (sales of

government-owned shares to the private sector) has not always

brought improved business performances and market valuations.

• The Indonesian banking sector is proven to be on a recovery trend.

However, issues still remain; the bank supervision structure is still

weak due to the continuing absence of the Financial Supervising

Agency

Contd…

• And inflation rates remain relatively high compared with those of

other Asian countries. Sales of state banks to private investors are

another outstanding issue.

• In order to maintain and further enhance the health of the banking

sector, macro economic issues and institutional issues such as that

of the banking supervising structure require early solution.

SOURCE

• http:.//www.bapepam.go.id

• http://www.indoexchange.com/

• http://www.idx.co.id/MainMenu/Peraturan/Listing/

tabid/98/lang/en-US/language/en-US/Default.aspx

Thank You