How can international banks operate in your jurisdiction?
An international bank can operate in Indonesia by either (i) establishing a subsidiary as a separate legal entity or (ii) opening a foreign bank branch office which forms part of the same legal entity as its head office. Both a subsidiary and a branch office require their own governance and risk management, and must comply with the capital and liquidity requirements in Indonesia.
To operate through a subsidiary, an international bank must establish an Indonesian limited liability company by way of joint venture with at least one other founder, as the Indonesian Company Law requires a minimum of two founders/shareholders. Under the Indonesian Company Law, to establish an Indonesian limited liability company certain procedures must be followed, including the execution of a Deed of Establishment to be approved by the Minister of Law and Human Rights.
Foreign ownership of up to 99 per cent is currently permitted in an Indonesian bank, subject to certain ownership limits which apply to a single shareholder, namely 40 per cent maximum ownership for a shareholder in the form of a bank or financial institution, 30 per cent maximum ownership for a non-financial institution shareholder and 20 per cent maximum ownership for an individual shareholder.
There are two main stages of licensing for the limited liability company to engage as a commercial bank: (i) principal approval, and (ii) the granting of a business license. Both of which must be applied to the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or “OJK” - whose authorities in supervising banks in Indonesia were previously transferred from Bank Indonesia) simultaneously with the establishment of the limited liability company.
Foreign bank branch office
Subject to the requirement under the new banking bill (discussed below), no Indonesian limited liability company must be established to open a foreign bank branch office, as it will form part of the same legal entity as its head office. However, before the branch can operate in Indonesia, the same two-stage licensing process (i.e. principle approval and business license) must be completed.
OJK’s current policy and draft new banking bill
It is worth noting that by way of policy, the OJK currently has a moratorium in place on banking licenses and therefore it would be difficult to establish a new bank in Indonesia at this time. We understand that this policy does not relate to legal and regulatory matters, but rather relates to political matters. The OJK values reciprocity principle and will consider the treatment that a Home State regulator (or jurisdiction) applies to Indonesian companies investing in banks or opening branches within that jurisdiction.
A draft banking bill is currently being deliberated by the Indonesia’s House of Representatives (“Draft Banking Bill”). The Draft Banking Bill may significantly affect the Indonesian banking sector including international banks wishing to operates in Indonesia if passed in its current form. International banks would no longer be able to operate in Indonesia through their branches, but would instead have to create a subsidiary and operate through an Indonesian limited liability company. Existing branches of international banks would have to convert to Indonesian limited liability companies within 10 years as of the promulgation of the Draft Banking Bill. These requirements may however, be exempted based on the reciprocity principle. In addition, the Draft Banking Bill also reduces the foreign ownership limit for an Indonesian limited liability bank from a 99 per cent to a 40 per cent maximum shareholding. It remains unclear when the Draft Banking Bill will be enacted and whether it will be adopted in its current form.
The remainder of this note focuses on the requirements for foreign bank branch offices in Indonesia.
What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?
From the regulatory perspective, the OJK will consider the general requirements set out in the Indonesian banking regulations, under which an international bank wishing to open a foreign bank branch in Indonesia:
- must have a good rating and reputation assigned by an international ratings agency such as Moody’s, Standard & Poor’s or equivalent international ratings agencies with at least an ‘A’ predicate or the equivalent;
- must have total assets which is considered as world’s top 200 – while the relevant regulation does not provide further explanation on how an international bank will be considered by OJK as a bank having a total assets as world’s top 200, we note from a number of Bank Indonesia regulations that a reference to world’s top 200 is normally based on information stated in Banker’s Almanac; and
- it must allocate business funds in the amount of at least IDR 3 trillion (approximately USD 215 million) or its equivalent in other currencies.
In addition, the OJK will consider the banking business competition level in Indonesia, the banking business density and the equitable distribution of national economic development.
As mentioned in No. 1 above, OJK will also take into account the reciprocity principle in treating an international bank wishing to open a foreign bank branch in Indonesia. This means that the level of ease that is set by the OJK on a case by case basis for an international bank to establish and open a foreign bank branch in Indonesia will depend on the level of ease/difficulties for Indonesian banks to establish and open a branch in the relevant Home State jurisdiction. We understand that the standard of the treatment may be set out in a memorandum of understanding between OJK and the relevant Home State lead regulators. To date, OJK has signed memorandum of understanding with the lead regulators in China, Malaysia, Japan, and Dubai.
Is resolution an important factor in your supervisor’s determination of a branch?
From the regulatory perspective, Indonesia does not recognise the concept of resolution that is found in certain other jurisdictions (i.e. that the resolution is formulated by the banks or the relevant Home State). Therefore, such kind of resolution should not be an important factor in OJK’s determination of a foreign bank branch.
One of the important factors in OJK’s determination of the licensing for a foreign bank branch is a working plan for the branch’s first year of operation, which must be prepared and submitted together with the principle approval application to OJK. The working plan must include at least:
- assessment of market opportunities and economic potential;
- a business activities plan covering the collection and distribution of funds as well as steps to be taken in relation to the plan;
- an employment plan; and
- projections of monthly cash flow and loss and profit calculations.
What are the regulatory reporting requirements placed on branches?
The foreign bank branch must commence its business activities within 60 days after the issuance of the business license from OJK, as evidenced by a report on the implementation of its business activities. The report must be submitted to the OJK no later than 10 days after commencement of its business activities.
The appointment of the head of the foreign bank branch, any changes to the foreign bank branch’s name, address and any particular changes to its head office (e.g. change of name or the legal status of its head office) must also be reported to the OJK. Certain periodical reports related to its business activities and transactions must also be submitted by the foreign bank branch to the OJK and/or Bank Indonesia (as applicable).
Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?
As mentioned in No. 1 above, an international bank can operate through a foreign bank branch in Indonesia without having to establish a subsidiary and vice-versa. The level of difficulties for an international bank to operate in Indonesia through a foreign bank branch office or subsidiary should be the same, as the international bank will be required to go through the two-stage licensing process.
However, as also mentioned in No. 1 above, upon the promulgation of the Draft Banking Bill (to the extent it is promulgated in its current form), international banks would no longer be able to operate in Indonesia through branches. Instead, they would have to establish an Indonesian limited liability company as subsidiary. Existing branches of international banks would be required to convert their presence into an Indonesian limited liability company within 10 years as of the promulgation of the Draft Banking Bill.
Where can I find further information?
Limited information can be found at the websites listed below. However, we note that not all of this information is available in English.