05 Jul 2024
OJK Moves to Strengthen Social Economy by Modernizing BPR Sector

Introduction

An important, and frequently overlooked, aspect of the Indonesian financial services industry is the  crucial role played by often privately owned savings and loan banks, known now as Bank Perkonomian Rakyat,[1] and their sharia-compliant equivalents, the Bank Perekonomian Rakyat Syariah[2] (collectively “BPR”). The operations of these financial institutions are restricted by law to taking deposits from the public and providing loans to small and micro businesses and individual borrowers. They are prohibited from providing non-cash services, such as giro-based money transfers. While most BPRs remain minuscule, some have grown to become very significant operations.

There have been concerns for some time as to the sheer number of small BPRs and the possibility that these could be falling under the radar when it comes to supervision. Consequently, the Indonesian Financial Services Authority (“OJK”) has issued OJK Regulation No. 7/2024 (POJK No. 7/2024, “New Regulation”)[3]  to both strengthen oversight and institute a number of important changes designed to encourage the modernization, growth and consolidation of the BPR sector.

The New Regulation, which was issued on 25 April 2024 and came into effect on 30 April 2024,[4] deals generally with a BPR’s establishment, management and operations. But perhaps its most striking aspect is that it now permits BPRs to go public, thus allowing them to offer equity and debt securities on the capital markets, something that was prohibited under the previous legislation. While a public listing could normally be expected to open the door to foreign investment,  we nevertheless believe that it is unlikely that non-Indonesians will be permitted to invest in the BPR sector any time soon, despite the fact that the New Regulation does not expressly prohibit foreign investment. This is because the BPRs are essentially intended to be grass-roots institutions with the primary purpose of supporting the social economy.

In this ABNR legal update, we will take a closer look at the new rules governing the listing, merger, consolidation, and acquisition of BPRs.

A. Stock Exchange Listing and Offerings of Securities

Article 35 of the New Regulation permits BPRs to make public offerings of equity and debt securities. A shariah-based  BPR may only issue debt securities in the form of sukuk.[5]

A BPR that intends to make a public offering must satisfy the following criteria:

1. The plan for the proposed offering should be incorporated in their annual business plan;
2. Core capital of at least IDR 80 billion (approx. USD 5 million);
3. An OJK-issued governance assessment rating of at least 2 for the last 2 assessment periods;
4. An OJK-issued risk profile assessment rating of at least 2 for the last 2 assessment periods; and
5. An OJK-issued composite financial soundness rating of at least 2 for the last 2 assessment periods.

The general capital market regulations apply to a BPR making a public offering, in addition to the general banking regulations.

While POJK No. 7/2024 establishes overarching requirements for BPRs making public offerings, it is anticipated that the Indonesian Stock Exchange (IDX) will issue its own regulations to further refine the criteria for BPRs so as to tailor to their unique characteristics.

B. Merger, Consolidation and Acquisition

As with the earlier legislation, Article 98 of the New Regulation explains the procedures for the merger, consolidation or acquisition of a BPR. Such actions may occur at the initiative of the BPR itself or be directed by the OJK, with its approval also being required for whatever actions are proposed.

Merger or consolidation can take place between conventional  BPRs (resulting in a  new BPR), between BPRs and Islamic BPRs (leading to an Islamic BPR), or between Islamic BPRs (to form a new Islamic BPR). The institutions concerned must meet specified requirements on capital and soundness ratings.

In addition, OJK has authority to direct a merger, consolidation, or acquisition in cases of non-compliance with core capital requirements or operational difficulties, or to ensure that fair pricing principles are adhered to. It also has authority to intervene should BPR shareholders, controllers, executives or supervisors obstruct a merger, consolidation, or acquisition process that has been directed by OJK.

ABNR Commentary

While the BPR sector is often overlooked, it nevertheless plays an essential role in oiling the wheels of the Indonesian economy at the grassroots, plugging the gap left by the bigger retail banks, which are often loath to lend to SMEs, thus depriving them of the capital they need to grow.

However, concerns have been raised about the sheer number of small BPRs currently operating and the difficulties that this poses for effective regulation. Consequently, the OJK has embarked on a program to encourage the consolidation and strengthening of the sector through merger and acquisition so as to create larger, more robust BPRs that can effectively manage risk and better serve the financial needs of underserved communities. It is against this background that the OJK has issued the New Regulation, with the ultimate goal being to increase confidence in the BPR sector and boost the role that it plays in Indonesia’s overall economic and social development.