An analysis of regulatory and governance reform in the banking industry in Indonesia after the financial crisis of 1997/1998

Abstract

Corporate governance reform in the banking industry became a major concern in Indonesia after the Asian financial crisis 1997/1998. The study is motivated by the performance of corporate governance in Indonesia that has been perceived as not showing any significant improvement after nearly two decades of reform. The study aims to analyze the government responses to the financial crisis and implementation of corporate governance in the banking industry in Indonesia. This research uses doctrinal research which consists of a review of primary data such as law and regulation, and secondary data such as reports, journals and the international standards related to the corporate governance. This research also uses descriptive analysis to elaborate the concept and the model of corporate governance and the case study method to investigate the implementation of corporate governance in selected banks in Indonesia. The main findings of this study are as follows. Firstly, the legal and regulation reforms are designed to cover (i) banking restructuring; (ii) improving banking regulation; (iii) improving corporate governance standards and its implementation to follow the international standards and best practice. Secondly, there has been institutional reform which consists of (i) ensuring independence of Bank Indonesia as the central bank; (ii) the establishment of the Financial Services Authority (OJK); (iii) the establishment of Indonesian Deposit Insurance (LPS). Thirdly, there has been Islamic Banking reform, namely: (i) the establishment of the Shariah Advisory Council (DSN) which is one of the most important institutional reform of the Islamic banking industry; (ii) the establishment of Shariah Supervisory Board (DPS) in each Islamic bank; and (iii) dispute resolution mechanism for Islamic banking. The analysis of implementation of corporate governance in the four selected banks indicates that corporate governance in the banking industry has been improved. Overall, the study concludes that there are significant regulatory and governance reforms and implementation of corporate governance standards in the banking industry in Indonesia. However, some case studies revealed that the implementation of corporate governance needs further improvement, especially on the supervision and law enforcement. Furthermore, the study recommends: first, the banking authority (i.e. the Financial Services Authority /OJK) must increase the speed of adoption and implementation of the corporate governance standards. Second, the quality of supervision and law enforcement at all levels of the governance structure must be improved. Third, there must be cooperative efforts amongst the authorities to improve corporate governance, including cooperation regarding the Komite Stabilitas Sistem Keuangan/KSSK.