Indonesia Court Weighs Legal Challenge to Banking Regulator OJK

Indonesia’s constitutional court is finalizing a review of a legal challenge to the role of the country’s financial regulator, in a case that will decide who supervises banking in Southeast Asia’s largest economy.

The Financial Services Authority, known as the OJK, took over supervision of lenders from the central bank last year under a 2011 law on financial institutions. The court, whose verdict is final and can’t be contested, is assessing an appeal against eight articles of the law in a challenge to the definition, authority and fees of the new regulator, according to court documents seen by Bloomberg.

The case against the OJK, created to improve supervision following banking collapses during the 1997-1998 Asian financial crisis, comes as levels of bad debt are rising in a slowing economy. Banks want regulation to return to the central bank.

“It’s desirable, as soon as possible, that supervision should go back to Bank Indonesia,” Sigit Pramono, chairman of Indonesia’s National Banks Association, said in an interview. “It’s not about the fees, but about readiness when a crisis occurs,” he said.

The nine-judge court has heard testimony from Pramono as well as the OJK’s Chairman Muliaman Hadad and Bank Indonesia Deputy Governor Ronald Waas. Bank Indonesia Governor Agus Martowardojo and Hadad, who joined the OJK from the central bank, declined to comment on the result.

“The verdict is still being finalized,” said Arief Hidayat, the court’s head judge. “It is still under discussion with other judges.”

State Control

The plaintiffs bringing the case against the regulator are Salamuddin Daeng, a researcher at Indonesia For Global Justice, and lawyers Ahmad Suryono and Ahmad Irwandi Lubis, according to the case’s legal adviser Syamsudin Slawat Pesilette.

They are looking for either the dismissal of the OJK, the return of banking supervision to Bank Indonesia, or for the OJK’s fees to be paid to the state budget, he said. The OJK requires banks to pay an annual fee of 0.03 percent of their assets, to pay for operations, Pramono said.

“The OJK doesn’t follow the state framework as it took authority which was under other institutions and later on it will become an empire, an independent institution, which then will be difficult for the state to control,” Pesilette said.

Policy Confusion

Moving banking supervision back to the central bank would probably lead to a period of dislocation as the two organizations adjust, with the OJK still likely to be supervising non-banking institutions, said Eric Sugandi, a Jakarta-based economist at Standard Chartered Plc.

Among the new regulations the OJK is pushing for are consolidation of local banks, a change in funding sources at lenders and restrictions on foreign ownership at local banks and insurers. The authority is currently negotiating a bank reciprocity deal with China.

Modeled on the U.K.’s financial regulator, it also regulates insurers, auto financing companies and the stock exchange.

“It hasn’t had significant achievement as the institution is quite new,” said Rangga Cipta, an economist in Jakarta at PT Samuel Sekuritas Indonesia. “I don’t agree with the separation of supervision and monetary policy, because it would be ineffective amid a need for fast mitigation during a crisis,” he said, adding there was a consensus that supervision should be merged under the central bank.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE