National and Global Islamic Financial Architecture:
Prolems and Possible Solutions for the OIC Member Countries
75
Bankruptcy and Resolution of Banks
The Financial Stability Coordination Forum (FKSSK) chaired by the Minister of Finance and its
members (governors of the Bank Indonesia and Chairman of the Indonesian Deposit Insurance
Corporation) deals with issues related to bank failure, bankruptcy and systemic financial
system instability. The goal of FKSSK is not only to maintain financial stability but also to
anticipate and prevent instability in the banking system by avoiding bank failure and
bankruptcy (Republic of Indonesia, 2011).
Regulation of bankruptcy and bank failure are stipulated in the Indonesian Deposit Insurance
Corporation (LPS) Regulation Number 2/PLPS/2011, 2011. It defines bank failure as a bank
having financial difficulty which endangers its business operations and cannot be solved by the
banking supervisory authorities (Bank Indonesia or other regulators). One way to resolve the
issue is with the placement of LPS’s private funds in the failed bank to improve the financial
conditions of the bank temporarily. Another way of resolving bank failure by the LPS is to sell
the stocks of the failed bank to the public either via direct selling to potential investors or via
the capital market. Stocks can be offered to either individual investors (domestic or overseas)
or institutional investors (domestic or overseas).
4.3.2. Financial System Regulation and Supervision Framework
Regulations on the Indonesian financial system both conventional and Islamic financial
systems are under the purview of Bank Indonesia (BI), the Indonesian Financial Service
Authority (OJK), the Ministry of Finance, and the Indonesian Deposit Insurance Corporation
(LPS). In 2011, the regulatory role of Islamic banking was transferred to the newly established
Indonesian Financial Services Authority (OJK) (under Act Number 21 year 2011 on OJK) which
became the regulatory authority for both conventional and Islamic banking, nonbank financial
institutions, and capital markets. While Bank Indonesia is responsible for the monetary system
(monetary authority), macroprudential policy, money market, payment system and financial
system stability, OJK is responsible for microprudential policies and the
regulation/supervision of the banking system, capital market, and nonbank financial
institutions (Republic of Indonesia, 1999 and 2004).
As indicated, the Ministry of Finance acts as a fiscal authority to manage tax, state budget,
regional financial system, etc, and the Indonesian Deposit Insurance Corporation is a deposit
guarantor that deals with bank failure (Ministry of Finance 2015 and Republic of Indonesia,
2004).
For banking supervision, the main actor is the OJK which regulates and supervises both Islamic
and conventional banks. OJK conducts both on-site and off-site banking supervisions with a
risk-based banking supervision mechanism. However, in certain cases, if the bank is in
financial difficulty or even default, OJK will coordinate with Bank Indonesia to determine its
potential systemic risk impact, with the LPS to plan for the bank's failure mitigation, and with
the Ministry of Finance as a representative of the government to get a final recommendation
on the status of the bank.
Currently, financial regulators are in discussion with the parliament to issue the Financial
System Security Network (JPSK) Act that will identify the responsible party (body or regulator)
to make decisions on bank failure, financial system distress, and even financial/economic