Bloomberg News

Indonesia Tussle Over Financial Body Ends as Government Prevails

October 22, 2011

Oct. 22 (Bloomberg) -- Indonesia ended months of impasse over the board composition of a planned financial regulator as lawmakers yielded to the government’s efforts to reduce the risk of political interference in bank supervision.

The Financial Services Authority parliamentary working committee agreed Oct. 20 to the government’s plan for two former finance ministry and central bank members on the agency’s board of commissioners, along with seven presidential picks vetted by parliament, Achsanul Qosasi, a vice chairman of the committee, said by phone in Jakarta yesterday. Parliament had wanted two of its members in the mix.

“The composition of the board of commissioners is good and it will make this body independent, without political interference in supervising financial institutions,” said David Sumual, an economist at PT Bank Central Asia in Jakarta.

The working group had been meeting since last year to debate whether lawmakers should be included in managing an authority set to take over regulation of capital markets, insurers, pension funds and banks from the finance ministry and central bank. Indonesia spent 450 trillion rupiah ($50 billion) to rescue lenders during the Asian financial crisis, when anger over corruption during Suharto’s regime helped topple the dictator in 1998.

The new regulator, known in the Indonesian language as Otoritas Jasa Keuangan, or OJK, is due to start operating in January 2013, supervising capital markets, insurers, pension funds and other non-bank institutions, Qosasi said. Oversight of commercial banks will start from January 2014, he said.

Transition Time

“We are giving a transition time for commercial banks during the one year, as the banking industry is more complicated,” Qosasi said.

The country’s financial industry is dominated by banks that are products of a restructuring in the aftermath of the 1997-98 Asian crisis. The World Bank and Moody’s Investors Service are among those who have called for financial regulators to be non- politicized in a nation that has for years attempted to rein in corruption.

“It is imperative that the Financial Services Authority is able to do its job properly according to its legal mandates, free from political intervention,” the World Bank’s Indonesia country office said in an e-mail to Bloomberg News in June. Some government and non-government agencies are still “beholden to powerful interest groups,” the Washington-based lender said in a 2008 report.

Voting Rights

The two former Bank Indonesia and finance ministry officials on the OJK’s board will have voting rights, said Qosasi. Nusron Wahid, the working committee’s chairman, said in July that Indonesia’s parliament had wanted the two ex- government members to have no voting rights. On the board selection process, the president will give 14 names to parliament for so-called fit and proper tests, out of which the legislature will choose seven people. The president will also nominate two of his 14 suggestions to be chairman, for parliament to choose.

President Susilo Bambang Yudhoyono began his second term in October 2009 vowing to target the bribery and extortion that deter foreign investment. Former President Suharto, who ruled for more than three decades and whose family and friends had interests in businesses from trading cloves to transporting petrochemicals, was alleged to have stolen as much as $35 billion from the country, the United Nations Office on Drugs and Crime report said in 2007.

Bank Mandiri

PT Bank Mandiri, Indonesia’s largest bank by assets, was formed from four state-owned lenders. In 2000, its president director, Robby Djohan, was removed months after the Indonesian Observer reported he refused to name the bank’s bad debtors, citing Djohan. Five years later, a successor was replaced and later put on trial for corruption charges, winning an acquittal in 2006. A director for compliance was removed in 2005 after a government probe into loans extended by the bank.

The OJK will take over regulation of capital markets, insurers and pension funds from the Capital Market and Financial Institution Supervisory Board, and assume responsibility for bank supervision, currently handled by the central bank. Bank Indonesia oversees 120 foreign and local commercial banks.

“This body will be independent like the central bank,” Qosasi said. “If a crisis happens and there’s a problem in banks, the OJK together with Indonesia’s deposit insurance agency will set up a committee on financial-sector stability to decide whether they need to save the bank, or close it.”

Bank Bailouts

Indonesia’s government in 2008 enacted regulations allowing the central bank to bail out lenders in need of liquidity. The country spent about 450 trillion rupiah, mainly in the form of government bonds, bailing out lenders to prevent them from collapsing when the rupiah lost three-quarters of its value during the Asian financial crisis.

A more recent bailout of PT Bank Century during the 2008 global financial crisis was attacked by Yudhoyono’s own political allies, with parliament voting last year for a criminal probe of Vice President Boediono and then Finance Minister Sri Mulyani Indrawati.

The reverberations from that rescue spread this year when Bank Indonesia Deputy Governor Budi Mulya became the latest target of probes into the 2008 Bank Century bailout. Mulya came under investigation by the state auditor regarding a “personal” 1 billion-rupiah loan he obtained from the former owner of Bank Century, Difi Johansyah, a spokesman at Bank Indonesia in Jakarta, said earlier this month.

The deputy governor was relieved of his role as head of monetary policy operations as of the end of last month while retaining the deputy’s post, Johansyah said. Bank Indonesia’s board of governors approved a request by Mulya for “non- active” status because of “personal reasons,” the central bank said in a statement on its website yesterday.

--With assistance from Berni Moestafa and Greg Ahlstrand in Jakarta and Ryan Woo in Singapore. Editors: Stephanie Phang, Alan Soughley.

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net.


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