Indonesian parliament passes omnibus bill to strengthen central bank's control over financial sector

Indonesian parliament passes omnibus bill to strengthen central bank's control over financial sector

A screenshot showing Lawmaker Dolfie Othniel Frederic Palit of the Commission XI overseeing financial matters (left) handing out the omnibus bill to the House Speaker Puan Maharani.

Indonesia’s parliament on Thursday approved an omnibus bill aimed at strengthening and preparing the financial industry for future technology despite market concerns over potential changes in the central bank’s independence, among others.

The newly passed law — known locally as P2SK, an abbreviation for development and strengthening of the financial sector — covers all segments of financial services, including banking, capital market, insurance, financing companies, venture capital, pension funds, and innovations in the sector.

“The P2SK Bill is urgently needed as a policy instrument capable of improving the financial sector condition to be deep, innovative, efficient, inclusive, and trustworthy as well as strong and stable,” said Dolfie Othniel Frederic Palit, Deputy Chairman of the House Finance Commission, quoting a note from ruling party PDI-Perjuangan.

During the deliberation, the bill received overwhelming support from factions in the parliament, some even calling it the answer to the many problems plaguing the financial sector.

The approval of this bill is urgent considering that Indonesia’s financial sector experienced significant dynamics during the COVID-19 pandemic, according to Fithra Faisal Hastiadi, an economist from the University of Indonesia and Executive Director at think-tank Next Policy.

“We saw policy cooperation between the central bank and the government during the pandemic, including when Bank Indonesia bought government bonds to fund the fiscal deficit caused by the crisis. Going forward, we must be better prepared to face similar turmoil, so we need sustainable policies and regulations,” Hastiadi said.

Apart from that, this law is expected to have a positive impact on financial innovation such as fintech and digital banks to crypto asset trading.

“One of the weaknesses of fintech, especially fintech lending, is that the industry has a weak legal instrument that covers sanctions and incentives for operators,” Hastiadi continued.

The P2SK Bill, through articles 8A and 8B, stipulates that the financial sector regulator OJK has the authority to submit requests for bankruptcy declarations and/or requests for postponement of debt payment obligations to debtors, including the provider of technology-based lending services such as peer-to-peer lending. 

“This article regulates what actions must be taken for fintech operators if they have high non-performing loans. This is relevant considering the many problems in the industry such as project defaults, potential frauds, and so forth,” Hastiadi added.

The law also introduces digital rupiah as legal tender and recognises cryptocurrency and digital assets as regulated financial securities. Previously, cryptocurrencies were recognised as a commodity.

Through the bill, OJK will gain additional authority to oversee activities in the financial sector technology innovation (ITSK) sector and carbon exchange to crypto and digital assets. Previously, crypto trading was regulated and supervised by Indonesia’s commodity futures trading supervisory body, Bappebti.

Even though the centralisation of supervision might make control easier, the addition of authority for the OJK also bears risks, argued Heru Sutadi, Executive Director at the Indonesia ICT Institute.

“We must continue to monitor whether the granting of absolute authority to the OJK can resolve problems such as the proliferation of illegal digital lending or investment platforms that are detrimental to society,” said Sutadi.

“So far, the institution has not been able to provide a solution that satisfies the community. I hope that the new authority will not add complications to the digital financial sector,” he continued.

Bank Indonesia, the central bank, recently launched the design for its digital rupiah currency that will use blockchain technology. PPSK includes a legal framework for the digital currency, putting it on a par with the country’s fiat money to be a medium of exchange and store of value.

The new law also sets out the framework for carbon trading.

Industry experts have sounded concerns over politically-induced problems, such as a change that will allow politicians to govern the central bank. According to the latest draft seen by DealStreetAsia, however, no active political party member can be nominated as governor.

Finance Minister Sri Mulyani Indrawati, at the plenary meeting on Thursday, also emphasised that no political party administrator or its member can be nominated for top-level positions in Bank Indonesia, Financial Services Authority, and the Deposit Insurance Institution.

She added that the bill has expanded Bank Indonesia’s responsibility to include maintaining the financial system stability and economic growth while still being independent.

With additional reporting by Gita Rossiana.

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