The Indonesia Banking Architecture

:: Indonesian Banking Architecture

The Indonesian Banking Architecture (API) is a comprehensive basic framework for the Indonesian banking system, outlining the direction, outline, and structure of the banking industry for the next five to ten years.  The policy direction for the future development of the banking industry set out in the API is based on the vision of building a sound, strong, and efficient banking industry in order to create financial system stability for promotion of national economic growth.

The API is urgently needed for the strengthening of the fundamentals of the banking industry.  The economic crisis of 1997 exposed the institutional weaknesses in the banking industry and lack of adequate supporting infrastructure. In so doing, it also demonstrated the need for reinforcing the fundamentals of the system in order to build resilience against internal and external shocks.  The weaknesses in the fundamentals of the national banking system not only pose challenges for the banking industry as a whole, but also for Bank Indonesia as the authority responsible for bank supervision.

Because of the absence of a formal policy direction communicated to the public on the future direction and strategy for the banking industry, it was unclear as to what direction the banking industry would take in the long term.  Before the launching of the API, many questions had arisen over the future structure of the Indonesian banking industry, the long-term development strategy for sharia banking, promotion of lending to small, medium, and micro enterprises (SMMEs), and the institutional strengthening of rural banks. In addition, the inadequate supporting infrastructure for the banking system and lack of consumer protection also emerged as issues of importance to stakeholders in the banking industry.

The need for a long-term direction and development strategy for the banking industry has become a global trend and this process is well advanced in other countries such as Malaysia, Thailand, Singapore, and Hongkong.  This clearly demonstrates that a banking system blue print is an essential requirement, one that must urgently be put together to meet the needs of the national banking industry.

In response to the need for the blue print and to consolidate the gains achieved since 1998 under the bank restructuring program, Bank Indonesia launched the API on January 9, 2004, as a comprehensive policy framework for the future development of the Indonesian banking industry.  The launching of the API was also integrally linked to the publication of the Government white paper under Presidential Instruction No. 5 of 2003, in which the API is one of the key programs for promoting national economic recovery.

Driven by the overriding desire for the banking system to have stronger fundamentals, Bank Indonesia sees the need for various revisions to the programs set out in the API.  These improvements also take into account the feedback from implementation of the API during the past two years and are closely related to the various changes that have taken place in the national and international economy.  The improvements include more specific strategies for development of sharia banks, rural banks, and SMMEs.  The API Programs are thus expected to acquire a more comprehensive scope covering the full extent of the banking system as it pertains to commercial banks and rural banks, both conventional and sharia-based, and the development of SMMEs.