1. Banking Liberalization :
An Indonesian Experience
Presented in the symposium of the Assessment of Trade
in Services held by WTO Secretariat
Geneva, March 2002
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2.
AGENDA
 I. INTRODUCTION
 II. BANKING REFORMS & LIBERALIZATION
 III. BANKING LIBERALIZATION SINCE THE OUTBREAK
OF THE FINANCIAL CRISIS
 IV. LESSONS LEARNED FROM INDONESIA
EXPERIENCE
 V. BANKING LIBERALIZATION IN THE CONTEXT OF
MULTILATERAL AGREEMENTS
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3. I.INTRODUCTION
DEREGULATION PACKAGE
DEREGULATION PACKAGE
in the real sector ::invite foreign direct
in the real sector invite foreign direct
Crash of the investment (Act No.1 of 1967)
investment (Act No.1 of 1967)
international
in banking sector (Act No.14 of 1967) ::
in banking sector (Act No.14 of 1967)
oil market (the
October, 1988 policy package (the policy on
October, 1988 policy package (the policy on
mid-1980s) foreign entry in banking sector)
foreign entry in banking sector)
Deteriorated liberal regime for foreign exchange flows
liberal regime for foreign exchange flows
economy
Issued a MULTILATERAL AGREEMENTS (WTO,
MULTILATERAL AGREEMENTS (WTO,
APEC, ASEAN)
APEC, ASEAN)
series of Liberalization process in banking sector ::
Liberalization process in banking sector
deregulations to strengthen the banking regulations and
to strengthen the banking regulations and
by the oversight framework
oversight framework
Government should be integral part of any liberalization
should be integral part of any liberalization
program
program
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4. II. BANKING REFORMS &
LIBERALIZATION
SERIES OF FINANCIAL AND BANKING DEREGULATION PACKAGE
1. June 1983 policy package :
 3 main points i.e. lifting credit ceiling and liberating deposit
interest rates and phasing out Bank Indonesia liquidity credit.
 The aim of policy : to reduce limitation for banks to extend
credits and to eliminate provisions on bank deposit interest
rates previously prescribed by Bank Indonesia.
2. October 1988 policy package
 This package set forth financial, monetary and banking
policies, especially easing of restrictions relating to banking
institution covering the opening of new private banks, bank
offices and non bank financial institutions and various
prudential banking regulations.
 The impact of policy package : the establishment of large
number of new private banks, both domestic and joint venture
banks 4

5. II. BANKING REFORMS & LIBERALIZATION
(Cont.)
3. The March 25, 1989 policy package
 Foreign exchange banks and non-banks financial
institutions were required to maintain a net open
position at not more than 25% of stockholders
equity;
 Offshore borrowing ceilings for foreign exchange
banks and non-bank financial institutions were
eliminated;
 Commercial banks, development banks, and non
financial institutions were permitted to lend
investment credits and to undertake equity
participation with a certain requirement.
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6. II. BANKING REFORMS & LIBERALIZATION
(Cont.)
4. The February 28, 1991 policy package
This package sets forth :
 The Basic Scheme for Bank Supervision;
 Provisions related to :
 Licensing, ownership, and management of banks,
covering the foundation, ownership and management
banks, opening of offices, and equity participation of
banks in overseas financial institutions;
 Prudential principles, covering capital adequacy
requirements, legal lending limit, and net open position;
 Supporting factors for banking operations.
5. The May 29, 1993 policy package
This package covers prudential measures that should be fulfilled
by bank i.e. Capital Adequacy Ratio, regulation concerning
allowance for earning assets losses and provision on legal
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7. II.BANKING REFORMS & LIBERALIZATION
(Cont.)
1.The enactment of new Banking Act No. 7 of 1992 to replace
Banking Act No. 14 of 1967.
the function of banks as a development agent is continued.
the purpose of banking system is to support national
development in order to improve equitable distribution of
wealth, economic growth, and national stability
2.The main distinction
Banking structure :
 Banking Act No. 14 of 1967 : consist of several types of
banks depend on the core bank business such as
Development Banks, Commercial Banks, and Regional
Development Banks.
 Banking Act No. 7 of 1992 : there are only two kinds of
banks i.e. Commercial Banks and Rural Banks. This Act
does not classify banks based on their core businesses.
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8.
BANKING REFORMS & LIBERALIZATION
3.The enactment of the ownership of banks on Banking Act
No. 7 of 1992
Classification of commercial banks : domestic commercial
banks, joint venture banks, foreign banks
Geographical limitation
 joint venture banks and foreign banks may only open
their offices in eight major cities with limited number of
offices in each city.
Foreign participation in the ownership of commercial
banks,
 foreign employees could engage in the management
of joint venture banks and foreign banks.
 the foreign employees should conduct a transfer of
knowledge to Indonesian employees.
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9.
III. BANKING LIBERALIZATION SINCE THE
OUTBREAK OF THE FINANCIAL CRISIS
Banking Crisis
Banking Crisis The Bank Reform
The Bank Reform
 Exchange rate
 Exchange rate Program
Program
turbulance
turbulance
 The fragility
 The fragility
of banking
of banking The Strategic
The Strategic
system
system Measures
Measures
 The
 The
liquidation of
liquidation of
16 banks
16 banks Government Guarantee Scheme
Government Guarantee Scheme
Banking restructuring
Banking restructuring
re-capitalization
re-capitalization
corporate restructuring
corporate restructuring
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legal framework improvement
legal framework improvement

10. BANKING LIBERALIZATION SINCE THE
OUTBREAK OF THE FINANCIAL CRISIS
A New Banking Act No. 10 of 1998 and Its Implementation Regulations
1. Relaxation of foreign participation in the establishment of new banks.
 foreign citizens and or foreign legal entities together with Indonesian
citizens and or Indonesian legal entities may establish a new locally
incorporated bank based on a “partnership” principle.
2. Relaxation of foreign participation in existing banks
Foreign investors may also participate in existing banks through :
 direct acquisition ; and or
 purchasing bank’s shares through stock exchange
3. Opening of foreign bank branches.
 a foreign bank may open a new branch and sub-branch
 requirements :
 having good rating and reputation from the International rating
agency;
 possessing total assets included in the list of top world rank 200;
 placing the operational funds in Rupiah or foreign currency with the
minimum equivalent value of Rp. 3 trillion (+ USD 300 Million).
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11.
IV. LESSONS LEARNED FROM INDONESIAN
EXPERIENCE
*) Position of March
**) Position of December
In the year 2001 : 1 U$ is equivalent with Rp. 10.000,-
Source : Bank Indonesia 11

12. V. BANKING LIBERALIZATION IN THE CONTEXT OF
MULTILATERAL AGREEMENTS
1. Indonesia has made a moderate commitments in the international
fora.
2. The process of liberalization should be properly managed and
overseen in order to secure domestic interest and to avoid
unnecessary negative impact of liberalization process.
3. The assessment of trade in services :
 Undertaking an assessment of trade in services at the national
level
 Difficulties : lack of data, analytical and methodological
problems
 Enable developing countries to have a better picture relating to
the course of their countries’ liberalization process.
4. The treatment of autonomous liberalization :
 Having an agreed criteria and modalities for the granting of
credit for autonomous liberalization
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13. End of Presentation
Thank You
Created by AF
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