Indonesia - Banking and securities

The government's Bank Negara Indonesia (BNI) was established in 1953 as the successor to the Java Bank. In 1965, all state banks with the exception of State Trading Bank were incorporated into the BNI as separate units. In 1969, this policy was reversed, and the state banks were again reorganized as individual banks. In 1967, as part of the new regime's policy of encouraging foreign investment, foreign banks were permitted to operate in Indonesia, on condition that they invested at least $1 million, of which at least $500,000 had to be brought into the country. The law also provided that foreign banks were to appoint Indonesian banks as their correspondents for any dealings outside Jakarta. The Indonesian banking system transformed after 1980, through a process of gradual but steady reform, which culminated in the 1992 banking law. Joint-ventures were allowed with Indonesian partners. The partial liberalization of the banking industry had a dramatic impact. One result was a sharp deterioration of the banking system's asset quality. The precipitous growth in bank credits threatened to undermine economic stability by stimulating a sharp increase in import demand and inflationary pressures. Responding to this threat, the government initiated an abrupt tightening of monetary policy during the 1990s. From 1992 until 1997, the rupiah was managed in relation to the dollar, but in 1997, the currency was allowed to float because of Asian currency depreciation. Unfortunately, political and social unrest resulted in a highly volatile currency. The 1998 economic failure brought about a major restructuring of the banking system which was literally bankrupted. State-owned banks held $80 billion in corporate debts and more than two-thirds of their loans were non-performing in 1999. The Bank of Indonesia alone faced a deficit of over $4.1 billion in 2000.

Bank Indonesia, as the central bank, is responsible for the administration and regulation of the four state banks and other banking operations. Among the state banks, Bank Rakjat Indonesia specializes in credits to agricultural cooperative societies but also provides fishing and rural credit in general. Bank Tabungan Negara promotes savings among the general public. Bank Negara Indonesia (BNI) provides funding for industry. After the financial crash in 1999, four of the state banks were merged into the new Bank Mandiri; including the Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor Impor, and BAPINDO. Bank Bumi Daya provided credits to estates and forestry operations; Bank Dagang Negara provided credits to the mining sector; and Bank Ekspor Impor Indonesia specialized in credits for the production, processing, and marketing of export products, and the Development Bank of Indonesia (Bank Pembangunan Indonesia-or BAPINDO) provided financial assistance to government enterprises and approved new industries. There were 128 private domestic commercial banks in 1998; 38 of them were liquidated in 1999, eight of them were taken over by the government, eight of them were able to function with government aid, and 71 private banks were able to continue without assistance. Two joint-venture banks closed, out of a total of 32 jointly-owned banks. Foreign investment in the banking system is now allowed up to 99%. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $16.6 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $81.6 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 15.03%. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 17.62%.

Indonesia's first stock exchange was established in December 1912 in Jakarta, although both this and two subsequent exchanges established in Surabaya and Semarang in 1925 were shut down during the Japanese occupation. An attempt to revive the capital markets in the early 1950s proved futile, and it was not until August 1977 that the Jakarta Stock Exchange (JSE) was successfully relaunched amid a comprehensive set of institutional reforms that resulted in the establishment of the Capital Market Executive Agency (Badan Pelaksana Pasar Modal-BAPEPAM) to manage the market, as well as a state-owned securities firm, Danareksa, to facilitate the flotation of shares. After sinking to 276 in the fall of 1998, the JSI rose from just below 500 in early 1999 to above 700 in mid-1999, but was back down to 508 in mid-2000 and below 400 by 2001.

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