Hopes Pinned on Omnibus Law for Financial Sector
The Omnibus Law for the Financial Sector aims to strengthen the economy. However, there are a number of notes so that the Omnibus Law can become a solid legal umbrella for the Indonesian financial sector.
The House of Representatives (DPR) has resumed the discussion about a legal draft aiming to develop and strengthen the financial sector, known as -- when it passed -- the omnibus financial law.
This omnibus financial law is looking to revise a number of laws concerning Bank Indonesia (BI), Financial Services Authority (OJK), Deposit Insurance Corporation (LPS), Financial System Stabilizing Committee (KSSK), Prevention and Management of Financial System Crisis (PPKSK), banking, insurance and cooperatives.
Finance Minister Sri Mulyani Indrawati has said that the omnibus financial law is aimed at strengthening the economy by revamping Indonesia’s investment ecosystem and competitiveness in the face of the global economy. It is becoming more urgent now that the world is currently facing the risk of a recession due to emerging stagflation.
Some footnotes
There are several noteworthy issues related to this sought-after omnibus financial law. First, learning from the formation of the omnibus job creation law, which was passed by DPR into what later turned out to be contentious Law No. 11/2020, the government and the House need to be more prudent in discussing the omnibus financial bill this time.
Having been ratified, the Job Creation Law underwent a formal review at the Constitutional Court (MK), and on 25 Nov., 2021, it issued the decree No. 91/PUU-XVIII/2020, ruling that the legislation procedures of Law No. 11/2020 on job creation breached the 1945 Constitution of the Republic of Indonesia and deeming it conditionally unconstitutional.
Also read:
> Opportunity to Fix the Job Creation Law
> Implementation of Job Creation Law
The Constitutional Court ordered the legislators (government and DPR) to make improvements within a maximum of two years from the time the decision was handed down, and if within that given period, no improvements were made, Law No. 11/2020 concerning job creation would become permanently unconstitutional. One of the drawbacks was that the law did not hold the principle of openness to the public in its discussion. It did not involve the community, which would have been seen as meaningful participation in its deliberation.
Regarding the omnibus financial bill, the government and DPR should invite other stakeholders and take into account the views of the public, industry associations, academic experts and financial observers as well as practitioners in banking, insurance and cooperatives in the bill’s discussion. Their views will enrich the provisional substance of the omnibus financial law.
Second, which laws urgently need to be revised? The Finance Ministry has proposed an amendment to Law No. 9/2016 concerning prevention and management of financial-system crisis (PPKSK). The crisis prevention and management mandated in the law has so far addressed solely the banking industry. It does not touch on the non-banking financial industry (IKNB).
Third, I also see that coordination among the financial system stabilizing committee (KSSK) members needs to be improved further. KSSK is a coordinating institution that carries out prevention and management of financial-system crisis for the interests and monetary-system resilience of the state.
The KSSK is led by the finance minister as both coordinator and member, with the membership also including the BI governor, the OJK board of commissioners’ chairman and LPS board of commissioners’ chairman. An improved coordination is expected to make each member more responsive in the face of various global pressures that could potentially disrupt monetary stability.
A discourse is current that members of the KSSK, employees of the finance ministry, BI, OJK and LPS cannot be prosecuted, either civilly or criminally, in relation to their decisions.
Fourth, to stem potential insurance cases, such as the one experienced by PT Asuransi Jiwasraya, an Insurance Guarantee Institution (LPA) is needed for insurance, as LPS for banking. However, plans are already in store with a view to expanding the LPS’ authorities by the provision of a guarantee for insurance-policy holders, as OJK is seeking to reform IKNB. The reform encompasses improving the implementation of risk management, governance and investment-performance reports to the authorities.
Banking industry
Fifth, the omnibus financial law will also amend Law No. 23/1999 on Bank Indonesia. Why? It is because BI's tasks in regulating and supervising banks have shifted to OJK since 1 Jan., 2014. Now BI and OJK each have their macro-prudential and micro-prudential policies. OJK carries out the task of regulating and supervising financial-service activities in the banking sector, capital market, insurance, pension fund, financing institutions and other financial-service institutions.
On the other hand, BI remains in charge of monetary policymaking, such as controlling inflation and exchange-rate stability, setting the benchmark-interest rate and the minimum statutory-reserve requirement (GWM). BI also regulates and maintains the payment-flow system.
Sixth, the omnibus financial law will expand BI's tasks and authorities by the purchase of Government Securities (SBN) owned by LPS as an anticipatory liquidity measure in dealing with bank problems. There is also a discourse that commercial banks are required to adjust the credit interest-rate threshold in accordance with the BI benchmark-interest rate no later than seven days after the interest-rate adjustment is determined.
The draft regulation interferes too much in the OJK’s work domain in carrying out micro-prudential policies. On the other hand, BI has implemented macro-prudential policies. It is true that the transmission of changes in BI's benchmark-interest rate will not immediately be apparent in bank-lending rates. Why? It is because banks will definitely recalculate the cost of funds first before lowering loan-interest rates, for example in the event that BI's benchmark-interest rate runs low.
Also read:
> The Challenge in Lowering Lending Rates
It appears that the expansion of BI's tasks and authorities will be a direct intervention in the banking sector, like on 20 Aug., 2009. At that time, BI inked an agreement with 14 top banks to lower lending rates by 150 basis points (1.5 percent) above the BI rate of 6.5 percent for the following three months.
As a result, effective 20 Nov., 2009, BI set a maximum deposit-interest rate of 7 percent to spur a decrease in lending rates by an average of 14.04 percent as of November 2009. The agreement received positive responses from banks and the average loan interest was lowered by 13.02 percent as of March 2010.
OJK has also initiated an intervention by setting an upper limit on the deposit-interest rate effective 1 Oct., 2014. The maximum deposit-interest rate was 200 basis points (2 percent) and 225 basis points (2.25 percent) above the BI rate or 9.5 percent and 9. 75 percent respectively for BUKU IV (commercial banks with core capital above Rp 30 trillion [US$2 million]) and BUKU III (commercial banks with core capital of between Rp 5 trillion and Rp 30 trillion) categories for deposits above Rp 2 billion.
In fact, the regulators did not need to intervene. They should have left it to the market mechanism via the basic-lending rates (SBDK) or prime-lending rates. When there is an intervention, it actually confirms that the SBDK has not been effective in lowering loan-interest rates. The SBDK is the lowest interest rate used as the basis for the bank in determining the loan interest charged to bank customers.
Seventh, the omnibus financial law also needs to revise Law No. 10/1997, which was enacted as an amendment to Law No. 7/1992 concerning banking, because the financing industry has been developing rapidly. Currently, there are financial technology (fintech) companies, especially those with peer-to-peer lending model, which pose threats to lending banks. OJK data show there were 102 fintech companies as of May 2022 with outstanding loans increasing by 3.85 percent from Rp 38.68 trillion as of April 2022 to Rp 40.17 trillion as of May 2022. Non-performing finance (NPF) loans decreased from 2.31 percent to 2.28 percent in the same period.
When there is an intervention, it actually confirms that the SBDK has not been effective in lowering loan-interest rates.
Fintech companies deserve to be included in the OJK Financial Information Service System (SLIK) in order to protect the interests of customers, investors and fintech businesses. SLIK is a substitute for the Debtor Information System (SID), now known as BI checking, following its move to manage it effectively since 1 Jan., 2018. SLIK contains bank-customer data and IKNB.
Being in the SLIK, fintech companies will have access to the customer's credit history necessary to suppress NPF loans. Fintech companies have so far acquired customers like sorting “cats in a sack”. Without SLIK, prospective customers can apply successfully for loans with many fintech lenders regardless of if they already have a mountain of bad loans elsewhere. As a consequence, many customers get caught up in high-interest loans!
Cooperatives
Eighth, the Job Creation Law provides three points of facilitation for cooperatives: (1) the formation of a primary cooperative needing only a minimum of 9 people, from the initial 20; (2) a secondary cooperative can be formed with membership of at least 3 cooperatives; and (3) member meetings can be held online or offline.
It should be more than that. Fortunately, the OJK's tasks and authorities will be expanded by regulating and supervising the saving and loan cooperatives (KSP) because KSP is allowed to collect funds from the public. Moreover, many financial-irregularities cases involving KSP have surfaced lately, such as the default-investment case in Pandawa Group in Depok and Indosurya Cipta in Jakarta. The KSPs were estimated to amount to 38,354 units, or to account for 30 percent of the total 127,846 cooperative units by the end of 2021. This really is not an easy supervising task for the new OJK board of commissioners!
With the diverse issues to deal with as mentioned above, the omnibus financial law is expected to become an effective legal umbrella for the Indonesian financial sector.
Law No. 17/2012 concerning cooperatives was once ratified, but it was annulled by the Constitutional Court, which ruled reversion to Law No. 25/1992. However, in order to keep up with the development of cooperatives, this Law No. 25/1992 needs a revision.
With the diverse issues to deal with as mentioned above, the omnibus financial law is expected to become an effective legal umbrella for the Indonesian financial sector.
Paul Sutaryono
Paul Sutaryono, Banking Observer; BNI former assistant vice president
This article was translated by Musthofid.
