Deposit Insurance Corporation
What is Deposit Insurance Corporation?
Banking industry is one of main pillars in national economy to maintain the balance of development and unity of national economy. Stability in the banking industry will affect overall economic stability. What happen in the late 1997 when 16 banks were liquidated and followed by monetary and banking crisis in 1998 have created great distrust and lack of faith among Indonesian people to the then banking system, causing significant mass withdrawal of monies from the banks. To regain public trust on national banking and to impede foreign exchange against rupiah, the Government warrants all banking payments, including public saving (Blanket Guarantee). It is stipulated in Presidential Decree No 26 year 1998 concerning Guarantee on Payment Obligation of Public Banks and Presidential Decree Number 193 year 1998 concerning Guarantee on Payment Obligation of Small Financial Institutions.
From 1998 to February 2004, government’s blanket guarantee program was implemented by Indonesian Bank Restructuring Agency (BPPN). This agency responsible to implement government’s guarantee on payment obligation of 52 liquidated banks or business after 1998.
After BPPN completed its task in February 27, 2004, the implementation of Government guarantee was transferred to Minister of Finance according to Presidential Decree No. 17 year 2004. Minister of Finance then take on the responsibility of completing the guarantee program left by BPPN. To implement this government guarantee program, Minister of Finance was authorized to set up Government Guarantee implementation unit within Department of Finance. Based on this decree, on February 27, 2004 Minister of Finance established Government Guarantee Implementation Unit (UP3).
In its implementation, this vast scale guarantee have proven to stop mass withdrawal of public funds from the banks and slowly resume the public trust in banking industry. Nevertheless, the broadness of guarantee scope has burdened state budget and may cause moral hazards from the bank’s management and the society. The management of banks will be less prudent in managing public funds, while the customers will tend to be indifference in finding out more of the bank’s financial condition because their savings are fully guaranteed by the government. The guarantee program on bank’s obligation is not encouraging market’s discipline. Besides, the application of this guarantee which was made according to Presidential Decree did not provide strong legal foundation, therefore inciting problems in its implementation. Therefore a stronger legal foundation in the form of Law is needed.
To overcome this issue, and to maintain the feeling safe of the customers as well as preserving the stability of banking system, this guarantee program needs to be replaced with limited guarantee system. Law Number 10 year 1998 concerning Banking mandated the establishment of Deposit Insurance Institution or Lembaga Penjamin Simpanan (LPS) to insured public funds. On 22 September 2004, President of Republic of Indonesia authorized RI’s Law Number 24 on Deposit Insurance Institution. According to this Law, LPS, an independent institution to insure customer’s deposit/savings and actively involved in preserving the stability of banking system within their responsibility was established.
The Law is effective on 22 September 2005, and LPS began its operation since then.
- Insured deposit/saving by this institution are current account, deposit account, deposit certificate, savings and other similar products.
- Saving account for customers who prefers to use Sharia banking principle:
- current account based on Wadiah Principle
- saving account based on Wadiah Principle;
- saving account based on Mudharabah Muthlaqah principle or Mudharabah Muqayyadah Principle whose risk is insured by the bank;
- deposits based on Mudharabah Muthlaqah principle or Mudharabah Muqayyadah Principle whose risk is insured by the bank;
- Other saving accounts according to other Sharia Law approved by LPP.
- Insured saving are public funds, including those coming from other banks.
- The amount of saving insured by LPS includes the account balance on the date when the Bank Business Permit is withdrawn.
- The balance of saving account includes:
- principal amount with its additional sharing of yields already reserved for the customers, for any Saving containing sharing of yields component in Sharia principle;
- principal saving with additional interest reserved for the customers, for any interest-based Saving;
- Current value of saving as of the bank’s revocation date of its business permit, calculated using discount rate as written on the giro cheque for any saving with discount rate component.
- Balance of saving insured for individual customer in a bank is combined amount of customers’ saving in that bank, either individual account or joint account;
- For joint account, the balance to be insured by a customer is the balance of that joint account divided evenly (pro rate) with the number of account owners
- In case the customer have account as proven in writing that it is allocated for a beneficiary, then the balance of that account will be calculated as the beneficiary’s
- The balance insured for individual customer in a Bank is:
- all, for balance date as of 22 September 2005 to 21 March 2006;
- maximum is Rp. 5,000,000,000.00 (five billion rupiah), for balance date as of 22 March 2006 to 21 September 2006;
- maximum is Rp. 1,000,000,000.00 (one billion rupiah), for balance date as of 22 September 2006 to 21 March 2007;
- maximum is Rp. 100,000,000.00 (one hundred million rupiah), for balance as of 22 March 2007