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Indonesia Deposit Insurance Corporation

What is Indonesia Deposit Insurance Corporation?

The banking industry is one of the most important components in the national economy in order to maintain a balance of progress and national economic unity. The stability of the banking industry referred to greatly affects overall economic stability. Several events at the end of 1997 included the liquidation of 16 banks followed by the monetary and banking crisis in 1998 which resulted in a decline in the level of public confidence in the banking system in Indonesia, resulting in the withdrawal of public funds from the banking system (bank runs) in very significant amounts. To increase public trust in the national banking system at the same time to prevent the weakening of the rupiah exchange rate, the Government provides guarantees for all bank payment obligations, including public deposits (Blanket Guarantee). The guarantee is stipulated in Presidential Decree Number 26 of 1998 concerning Guarantees Against Payment Obligations for Commercial Banks and Presidential Decree Number 193 of 1998 concerning Guarantees Against Payment Obligations of Rural Credit Banks.

From 1998 to February 2004 the Government guarantee program was implemented by the Indonesian Bank Restructuring Agency (IBRA). This agency handles the implementation of Government guarantees for the payment obligations of 52 banks that have been suspended from operations or business activities since 1998.

When IBRA ended its work on 27 February 2004, the implementation of the Government guarantee program was transferred to the Minister of Finance based on Presidential Decree number 17 of 2004. The guarantee program that had not been completed by IBRA was subsequently carried out by the Minister of Finance. To carry out this Government guarantee program, the Minister of Finance is authorized to form a Government guarantee implementation unit within the Ministry of Finance. Based on this, on February 27, 2004 the Minister of Finance formed the Government Guarantee Implementation Unit (UP3).

In its implementation, this vast guarantee is indeed proven to be able to stop the flow of withdrawal of public funds from the banking system and slowly foster public confidence in the banking industry. However, the vast scope of the guarantee has weighed on the state budget and can cause moral hazard both from the bank manager and from the public. Bank managers become less careful in managing public funds, while customers do not care to know the financial condition of the bank because their deposits are fully guaranteed by the government. Thus the guarantee program for all bank obligations does not encourage market discipline. In addition, the wide application of guarantees that are based on Presidential Decree is not able to provide legal force, causing problems in the implementation of guarantees. Therefore, we need a stronger legal basis in the form of a law.

To overcome the above and in order to continue to create a sense of security for depositors and to maintain the stability of the banking system, this very broad guarantee program needs to be replaced with a limited guarantee system. Law Number 10 of 1998 concerning Banking mandates the establishment of a Deposit Insurance Corporation (LPS) as an executor of public fund guarantees. On September 22, 2004, the President of the Republic of Indonesia passed Republic of Indonesia Law No. 24 concerning the Deposit Insurance Corporation. Based on this Law, LPS was formed, an independent institution, whose function is to guarantee the deposits of depositing customers and to actively participate in maintaining the stability of the banking system in accordance with their authority. The law was effective since September 22, 2005, and from that date the LPS was officially operational.

Who's guaranteed:

  1. Guaranteed deposits include mortgages, deposits, certificates of deposit, savings, or other forms of exchange.
  2. Bank customer deposits in accordance with Shariah Principles guaranteed include:
    • Giro based on the Principles of Wadiah.
    • Savings based on the Principles of Wadiah.
    • Savings based on the Mudharabah Muthlaqah Principle or the Mudharabah Mudharabah whose risk is borne by the bank.
    • Deposits based on the Mudharabah Muthlaqah Principle or the Mudharabah Mudharabah whose risk is borne by the bank.
    • Savings in accordance with other Shariah Principles prescribed by LPS upon consideration of LPP.
  3. Secured deposits are deposits derived from the public, including those from other banks.
  4. The LPS-guaranteed Savings value includes the balance at the date of the Bank's revocation.
  5. The balance is:
    • The principal added to the proceeds of the customer's rights, to the Savings having a component of the proceeds arising from the transaction in accordance with Shariah principles.
    • The principal plus the interest that the customer has, to the Savings with the interest component.
    • Current value per business revocation date using the discount rate recorded on the billboard, for Savings with discounted components.
  6. Secured balances for each customer in one Bank are the result of the consolidated balance of the entire customer's Savings Account at the Bank, either single or joint account.
  7. For joint accounts, the account balance that counts against one customer is the combined account balance that is divided prorated by the number of account holders.
  8. In the event that the customer has an account in writing provided for the benefit of the other party, the balance of the account will be considered as the beneficiary's account balance in question.
  9. The guaranteed balances for each customer at one Bank are:
    • As a whole, from September 22, 2005 until March 21, 2006.
    • Up to IDR 5,000,000,000 (five billion rupiah), from March 22, 2006 until September 21, 2006.
    • Up to IDR 1,000,000,000 (one billion rupees), from September 22, 2006 until March 21, 2007.
    • Up to IDR 100,000,000 (one hundred million rupiah), as of March 22, 2007.
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