At a Glance

  • On December 15, Indonesia’s House of Representatives (Parliament) ratified the Financial Sector Development and Strengthening Reform Bill (P2SK) into law. The omnibus financial law consists of 27 chapters and 341 articles amending 17 financial-related rules.
  • The P2SK Law aims to address one key challenge of Indonesia’s financial sector: balancing consumer protection with the dynamic growth of the financial industry.
  • Experts stated that the P2SK Law would improve oversight of Indonesia’s financial industry by reforming its authority structure and strengthening coordination between government financial institutions, such as the Central Bank of Indonesia, Financial Services Authority (OJK), and Deposit Insurance Cooperation (LPS).
  • The financial industry can provide inputs into the derivative law either through relevant business associations and chambers or the Fiscal Policy Agency (BKF) under Indonesia’s Ministry of Finance.


Why is the reform necessary?

The P2SK Law is a financial omnibus law reform that updates obsolete past financial regulations, such as the Banking Law (1992), Deposit Assurance Agency (LPS) Law (2004), and the Financial Services Authority (OJK) Law (2011).

Reforming these regulations through the P2SK Law addresses one of Indonesia’s most pressing financial challenges: consumer financial literacy and the inclusion gap. Financial instruments in Indonesia have become increasingly complex and diverse. Meanwhile, OJK reported in its National Survey of Financial Literacy and Inclusion in 2022 that 35.42% of Indonesian financial service consumers lack an understanding of the financial products and services they use. The gap poses a challenge to consumer safety and protection, hence a reform in financial governance is introduced to maintain regulatory relevance along with industrial growth.

The other objective of the P2SK Law is to strengthen the authority of Indonesia’s financial supervisory agencies. Clauses within the law reinstate each institution’s function and mandates, while other clauses serve as a legal foundation for inter-governmental coordination mechanisms during times of crisis. Moreover, Indonesia’s Minister of Finance, Sri Mulyani Indrawati, added that the timing of the ratification can help the country withstand the ongoing global economic uncertainty.


Key Reforms

Upon ratification, several critical clauses of the law should be examined by industry players.

Supervisory institutions’ impartiality: P2SK regulates the neutrality of the Central Bank of Indonesia (BI) in Article 47, the Financial Services Authorities (OJK) in Article 15, and the Deposit Assurance Agency (LPS) in Article 67 by prohibiting politicians from being nominated as Board of Commissioners/Governors or Board of Commissioners/Governors to be involved in politics.

Central Bank of Indonesia’s (BI) role in financial stability: The Law has added several points that enhance BI’s role in stabilizing Indonesia’s economy. BI’s tasks and objectives have extended to achieve stability in the national currency (Rupiah) value, maintain payment system stability, and help maintain financial system stability to support sustainable economic growth. Some other fundamental reforms related to BI’s function and operations include:

  • Issuance of BI’s digital Rupiah in addition to banknotes and coins (Article 2)
  • Authorities to place funds in financial institutions in the context of money market development, minimum reserve requirement policy, monetary policy mix, and other policy instruments (Article 11)
  • Authorities to purchase securities from private companies through banks and redeem reverse-repurchase notes held by the Deposit Insurance Agency (LPS) as means to solve banking liquidity issues (Article 36A)

Financial Services Authorities (OJK) extended supervisory roles: Similar to strengthening BI’s function, the law rules OJK to oversee additional financial services in Indonesia: cryptocurrency, digital financial assets, financial technology innovation (ITSK), bullion banks, and carbon markets.

Although the P2SK Law recognizes cryptocurrency, the currency is not legal in Indonesia. The law mandates OJK to oversee cryptocurrency assets. Meanwhile, crypto trading is regulated and supervised under the Ministry of Trade’s Commodity Futures Trading Supervisory Agency (Bappebti). The P2SK Law has not further divided the supervisory function between OJK and Bappebti, which may impose an authority overlap and legal uncertainty until an implementation law clarifies the division and the assurance of fund protection.

The P2SK Law regulates carbon trading as stipulated in Articles 23-26, recognizing carbon unit ownership exchanges through an exchange entity permitted by OJK. The article mandates OJK to develop the carbon trading implementation regulations regarding the exchange’s infrastructure development, mechanism, and inter-governmental coordination.

Deposit Assurance Agency’s (LPS) lengthened assurance: The P2SK Law has added another responsibility for LPS: to create and establish regulations that guarantee insurance policies, carry out bank resolutions, and resolve issues faced by insurance companies suspended by the OJK (Section 3, Article 7, No. 4). The law also expands LPS’ responsibilities to include the need to safeguard public funds entrusted to banks and insurance providers. These tasks add up to LPS’s responsibilities beyond securing consumers’ bank assets and liquidity. Furthermore, LPS will start carrying out the Insurance Policy Assurance function five years after the President’s signature of the ratified P2SK (Article 329) to help LPS and the insurance industry adapt to the new law.

Burden sharing scheme during a crisis: The previous regulation (Regulations 2/2020) stipulated BI’s bond purchase to tackle the COVID-19 pandemic’s impacts and the nation’s economic recovery exclusively. However, the P2SK Law now permits BI to purchase long-term government bonds (SBN) in the primary market (Article 36A) during events of crisis (as declared by the President). The purchase scheme and mechanism will be stipulated in a joint decision by the Minister of Finance and the Governor of BI.


Public Response

Regarding the urgency of the reform, Center for Strategic and International Studies (CSIS) researcher Deni Friawan welcomed the ratification as a strengthening regulatory framework for Indonesia’s future financial services optimization that could push for economic growth amidst global uncertainties. Similar notes also come from Segara Institute, viewing the omnibus amendment as a crucial step towards maintaining relevant governance to the current dynamics.

In response to the law’s recognition of the digital Rupiah, the Center of Economic and Law Studies (CELIOS) views that the stipulation further categorizes cryptocurrencies as commodities and strengthens the role of the Rupiah as a currency. Umar Juoro of Habibie Center added that an integrated digital Rupiah could help the nation stabilize inflation. From a monetary perspective, this clause could strengthen the role of the Rupiah in the digital finance sector and allow the government to intervene during economic turbulence. BI would also need to cooperate with the private sector in promoting the digital Rupiah, followed by discussions about the currency’s system, security, and standardization.

Head Commissioner of Deposit Assurance Agency (LPS) Purbaya Yudhi Sadewa told that the five-year transition period provides enough time to measure the Insurance Guarantee Program’s (PPP) effectiveness and analyze the industry’s response towards the handover. A challenge to the transition process would be the state of economic uncertainty, which might affect the performance of the insurance industry.


What’s Next?

The ratification of the P2SK Bill into an omnibus financial law sets reformed amendments to Indonesia’s financial sector regulations. Amending 17 previous laws related to finance, the P2SK Law developed a more detailed inter-government coordination that could enhance Indonesia’s financial sector supervision. The law’s recognition of cryptocurrency, carbon trading, bullion banks, and digital financial asset also lay out a regulatory foundation for future industrial practices. With its ratification on December 15, 2022, the derivative law becomes crucial in providing technical guidance for Indonesia’s conventional and digital financial services.

Due to the omnibus nature of the law, several clauses may require further stipulation to specify the law’s effect on private companies. Article 339 regulated that the ratification of the derivative regulations should occur within the next two years upon the P2SK Law’s ratification. The private sector may provide inputs into the derivative law through relevant business associations and chambers or the Fiscal Policy Agency (BKF) under the Ministry of Finance.


Further Reading