The PPSK Law will increase economic capabilities and enable digitisation
The COVID-19 pandemic pushed sustainable economic spending at the forefront of financial reforms. Developing nations in particular had to identify resilient financial models and reform archaic regulations. Indonesia was one such country that made swift moves to plug the gaps. Through its Financial Sector Development and Strengthening Reform Bill (PPSK), Indonesia has kickstarted the era of financial transformation.
Termed the Financial Omnibus, the PPSK law has amended 17 laws in the financial sector, including banking, capital markets, insurance, and pension. At the core of these reforms is the upholding of the Financial Services Authority (OJK) as the apex supervisory and regulatory body.
The PPSK law has the potential to accelerate financial innovation in Indonesia since it lays emphasis on digitisation of financial services.
BREAKING BARRIERS
When Covid struck in 2020, the Jokowi government was tasked with financing public spending in healthcare. This included offering food and medical aid during lockdowns, hospitalisation, and vaccination expenses. Indonesia raised $4.3 billion using a pandemic bond to fund these costs. However, a long-term solution was the need of the hour.
On one hand, there was a need to remove entry barriers to finance for Indonesian citizens. On the other, there was a need to monitor the addition of riskier instruments such as crypto. A joint consensus paved the way for a financial omnibus in the form of the PPSK law.
While the PPSK law aims to build an accessible financial system, there are concerns that the government may mandate bond purchases by the central bank during tough economic situations. However, the government has assured all regulators about complete autonomy in their daily operations.
| Sector | Old Law | PPSK Law |
| Banking | Commercial banks and rural banks can be cooperatives. | Commercial and rural banks have to become limited liability companies. |
| Insurance | No guarantees of fund safety against licences being revoked, so policy payments were at risk. | Deposit Insurance Corporation will guarantee fund safety if an insurer’s licence is revoked. |
| Fintech | Fintech companies are regulated by the central bank and OJK. | Fintech entities will have to register with a dedicated association and also get opportunities to test pilot products under sandbox programmes. |
Source: Conventus Law
PLANNING FOR THE FUTURE
Having witnessed a financial crisis in 1998, Indonesia sought to take steps to build reform-led financial stability. In addition, President Joko Widodo wanted to cut bureaucratic hurdles to finance. The PPSK law was an answer to all these concerns. It took a three-pronged approach to overcome the stumbling blocks:
Fintech institutions will also get the liberty to test out need-based products and services through pilot projects under the sandbox initiative. Trial Projects, if successful, will get an opportunity to convert into licensed products.
The Golden Indonesia 2045 mission envisions Indonesia as a developed country taking a spot among the top five economies in the world by 2045. For this to happen, fiscal revitalisation of the country’s financial system is indispensable. The PPSK law will act as a stimulant in this endeavour.
Tripudjo Soemarko is the Advisor – Government Relations of our Indonesian subsidiary, Indonesia Business Partners. He is a career banker with over 30 years of work experience at HSBC.
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