Course : FINC6189 Introduction to

Financial Market and Fin-Tech

Effective Period : September 2021

Bank Indonesia

Session 2
 Acknowledgement

These slides have been adapted from:

https://www.bi.go.id/en/Default.aspx
 Sub Topics

• - About Bank Indonesia

• - Monetary
• - Financial System Stability
• - Payment System
 About Bank Indonesia

• Governor massage
We are delighted to be able to meet you in the
cyber information world. We realized that with
the current sophisticated technology one can
easily obtain information from all over the
world. Information becomes necessary for
daily activities. Consequently, in order to
provide accurate, comprehensive and timely
information, Bank Indonesia has established a
website that is accessible to the public over
here and overseas since 1998.
 About Bank Indonesia

Bank Indonesia web site has gained positive response

from the public over here and overseas. With website
technology, information dissemination, as a way of
showing Bank Indonesia transparency and accountability,
becomes more efficient and effective, as it is broadly
accessible by simple and inexpensive implementation.

The public considers Bank Indonesia website as one of the

most reliable sources of information about economy,
monetary, banking and payment system. It is reflected in
the positive feedback received by Bank Indonesia Public
Relations. Of course, we appreciate it and we thank you for
the critiques and advice, which are very helpful in
improving Bank Indonesia website.
 About Bank Indonesia

In line with the aspiration and expectation

of the public, we continue developing the
website, by improving the design with the
latest innovation, new format, and
enriched information. This new design will
assist the public more in finding
information. We therefore launch the new
design of Bank Indonesia website.
Hopefully, it can become one of the most
reliable sources of economic information.
 About Bank
Indonesia
Bank Indonesia Function

1. As an independent Institutions
2. As a Legal Entity
 About Bank Indonesia
As an Independent State Institution
• A new chapter in the history of Bank Indonesia as an independent
central bank was initiated when a new Central Bank Act,
the UU No. 23/1999 on Bank Indonesia, was enacted on May 17,
1999 and have which has been amended with UU No.3/2004 on
January 15, 2004. The Act confers it the status and position as an
independent state institution and freedom from interference by
the Government or any other external parties.
• As an independent state institution, Bank Indonesia is fully
autonomous in formulating and implementing each of its task and
authority as stipulated in the Act. External parties are strictly
prohibited from interfering with Bank Indonesia's implementation
of its tasks, and Bank Indonesia has the duty to refuse or
disregard any attempt of interference in any form by any party.
• Such unique status and position are necessary so that Ba​nk
Indonesia can implement its role and function as monetary
authority more effectively and efficiently.
 About Bank Indonesia
As a Legal Entity

Whether as a public legal entity or as civil legal

entity, the position of Bank Indonesia is
regulated by the statutes.

As a public legal entity, Bank Indonesia has the

authority to issue policy rules and regulations,
which are binding to the public - at - large.

As a civil legal entity, Bank Indonesia is able to

represent itself in and outside the court of
law.
 About Bank Indonesia
Institutional Relationship

INTERNATIONAL COLLABORATION UNDERTAKEN BY BANK

INDONESIA
Bank Indonesia advocates collaboration with
international institutions to buttress task performance
continuity related to economic, monetary and banking
fields. Bank Indonesia currently participates in international
collaboration covering the following aspects:
1. Joint intervention for foreign exchange market stability.
2. Settlement of cross-border transactions.
3. Correspondent relationships.
4. Information exchange on subjects related to the roles
and functions of the central bank
5. Training/research in monetary and payment system
sectors.
 About Bank Indonesia

Bank Indonesia’s membership of several international

institutions and forums include:

1. The South East Asian Central Banks Research

and Training Centre (SEACEN Centre)
2. The South East Asian, New Zealand and Australia
Forum of Banking Supervision (SEANZA)
3. The Executive’ Meeting of East Asian and Pacific
Central Banks (EMEAP)
4. ASEAN Central Bank Forum (ACBF)
5. Bank for International Settlements (BIS)
 About Bank Indonesia
Memberships of Bank Indonesia as a representative of the
Indonesian Government include:

1. Association of South East Asian Nations (ASEAN)

2. ASEAN+3 (ASEAN + China, Japan and Korea)
3. Asia Pacific Economic Cooperation (APEC)
4. Manila Framework Group (MFG)
5. Asia-Europe Meeting (ASEM)
6. Islamic Development Bank (IDB)
7. International Monetary Fund (IMF)
8. World Bank, including membership of International Bank of
Reconstruction and Development (IBRD), International
Development Association (IDA) and International Finance
Cooperation (IFC), as well as Multilateral Investment Guarantee
Agency (MIGA)
9. World trade Organization (WTO)
10. Intergovernmental Group of 20 (G20)
11. Intergovernmental Group of 15 (G15, as an observer)
12. Intergovernmental Group of 24 (G24, as an observer)
 Monetary
Monetary Policy Objectives

• The goal of Bank Indonesia is to achieve and maintain the

stability of the rupiah. This goal is stipulated in article 7 of Act
No. 3 of 2004 concerning Bank Indonesia.
 
• Rupiah stability is defined, among others, as stability of
prices for goods and services reflected in inflation.
• To achieve this goal, Bank Indonesia decided in 2005 to
adopt the inflation targeting framework, in which inflation is
the primary monetary policy objective, while adhering to the
free floating exchange rate system.
• Exchange rate stability plays a crucial role in achieving price
and financial system stability. For this reason, Bank
Indonesia also operates an exchange rate policy designed to
minimise excessive rate volatility, rather than to peg the
exchange rate to a particular level.
 Monetary
Monetary Policy Objectives

To carry this out, Bank Indonesia holds powers to

conduct monetary policy through the establishment
of monetary targets (such as money supply or interest
rates) with the primary goal of keeping inflation at the
government-prescribed level.  
On the operational level, these monetary objectives
rely on the use of instruments, including open market
operations on the rupiah and forex money markets,
setting the discount rate, prescribing a minimum
reserve requirement and regulating credit or
financing.  
Bank Indonesia may also apply monetary controls
based on Sharia Principles.
 Monetary
Monetary Policy Framework in
Indonesia
To implement monetary policy, Bank Indonesia has
opted for a working framework known as the
Inflation Targeting Framework (ITF).
This framework was formally adopted ​in July 2005,
and replaces the previous monetary policy using
base money as the monetary policy target.
 

What is the ITF?   |   Why the ITF?    |    

How is the ITF applied?
 Monetary
Monetary Policy Framework in Indonesia
What is the ITF?
Under this framework, Bank Indonesia explicity announces the
government-set inflation target to the public and monetary
policy is geared towards achievement of this target. For the
inflation target to be reached, monetary policy is implemented
with a forward-looking approach, meaning that any change in
the monetary policy stance is undertaken after evaluating
whether future developments in inflation are on track with the
established inflation target. Under this framework, monetary
policy also operates with transparency and accountability to the
public. At the operational level, the monetary policy stance is
reflected in the setting of the policy rate (BI Rate) with the
expectation of influencing money market rates and in turn the
deposit rates and lending rates in the banking system. Changes
in these rates will ultimately influence output and inflation.
 Monetary
Monetary Policy Framework in Indonesia
Why the ITF?
• With the abandonment of the crawling band exchange rate system
in 1997, Bank Indonesia needed a new nominal anchor for
managing monetary policy.  The nominal anchor is a nominal
variable (such as a price index, exchange rate or money supply)
explicitly targeted by the central bank as a basis or benchmark for
formation of other prices.  For example, if the exchange rate is the
target, foreign inflation will become domestic inflation. 
• Why does monetary policy require a nominal anchor? Without this,
there can be no clarity on what direction monetary policy is taking,
and the public then has nothing to guide their expectations of
inflation.  This is akin to a ship adrift at sea, with no clear direction
to the next port.  Instead, a nominal anchor enables the public to
shape the inflation expectations needed to manage business
calculations in line with the nominal anchor.  By announcing an
inflation target and ensuring consistent achievement of that target,
Bank Indonesia will raise the credibility of its monetary policy, which
in turn will guide public expectations of inflation in line with the
target set by BI. 
 Monetary
Why the ITF?

A nominal anchor is used in the ITF for a number of reasons

• ​The ITF is more easily understood by the public.  With an explicit
inflation target, the public will understand the direction of inflation.  In
contrast, when a base money target is employed, the public has greater
difficulty in understanding the future direction of inflation, especially if
the linkage with inflation is unclear.
• The ITF focuses on inflation as the monetary policy priority, in keeping
with the mandate vested in Bank Indonesia.
• The ITF is forward looking, as appropriate to the time lag for policy to
have impact on inflation.
• The ITF strengthens the transparency and accountability of monetary
policy and in so doing boosts monetary policy credibility.
 Transparency, accountability and clarity of objectives form part of the
good governance of a bank vested with independence.
• The ITF does not require an assumption of stability in the relationship
between money supply, output and inflation.  Instead, the ITF
represents a more comprehensive approach that takes ac​count of a
number of information variables on the condition of the economy.
 Monetary
Monetary Policy Framework in Indonesia
How is the ITF applied?

Under the ITF framework, Bank Indonesia announces future

inflation targets for specific periods.  
During each period, Bank Indonesia will evaluate whether the
inflation projection is on track with the adopted target.  
This projection employs a number of models and various
information depicting future inflation conditions.  If the inflation
projection is no longer compatible with the target, Bank
Indonesia then responds with the instruments at its disposal.  
For example, if the inflation projection overshoots the target,
Bank Indonesia will adopt a tight bias monetary policy.  Bank
Indonesia issues regular explanations to the public on the
assessment of inflation conditions, the future outlook and
decisions taken. If the inflation target is not reached, an
explanation must be provided to the public and measures
taken to put inflation back on course for its target.
 Monetary
Inflation
Introduction to Inflation​​
• In simple terms, inflation is understood as a persistent, ongoing
rise across a broad spectrum of prices. An increase in prices for
one or two goods alone ca​nnot be described as inflation unless
that increase spreads to (or leads to escalating prices for) other
goods. The reverse of inflation is deflation.
• The indicator commonly used to measure the level of inflation
is the Consumer Price Index (CPI). Changes in the CPI over time
are indicative of price movements for packages of goods and
services consumed by the public. Since July 2008, the packages
of goods and services in the CPI basket have been based on the
2007 Cost of Living Survey conducted by the Statistics Indonesia
(BPS). Following this, BPS monitors price movements for these
goods and services in selected cities and towns each month,
using information from traditional markets and modern retail
outlets on specific categories of goods and services in each
location.
 Monetary
Inflation
Other inflation indicators used in international best practice
include: 
1. Wholesale Price Index. The wholesale price for a
commodity is the price of transactions taking place between
the first wholesaler and the next largest trader for large
quantities on the first market for a commodity. [More
detailed explanations of the Wholesale Price Index can be
found at the Statistics Indonesia (BPS) website: 
http://dds.bps.go.id/eng/]

2. The Gross Domestic Product (GDP) Deflator illustrates the

measurement of price levels for the final goods and services
produced within an economy. The GDP Deflator is derived by
dividing GDP based on nominal prices by GDP based on
constant prices. 
 Monetary
Inflation
Categorisation of Inflation
The inflation measured in the CPI in Indonesia is divided into
7 expenditure categories (based on the Classification of
Individual Consumption by Purpose - COICOP). These are:

1. Food Stuffs
2. Processed Foods, Beverages and Tobacco
3. Housing
4. Clothing
5. Health
6. Education and Sports and 
7. Transportation and Communications.
 Monetary
Disaggregation of Inflation

In addition to the COICOP classifications, BPS now publishes inflation figures based
on other classifications known as disaggregation of inflation. This disaggregation is
performed by generating an inflation indicator more illustrative of the influence of
fundamentals.
In Indonesia, CPI inflation is disaggregated into:
1. Core Inflation, i.e. the persistent component within inflation movement, 
influenced by fundamentals such as:
– Supply-demand interaction
– External environment: exchange rate, international commodity prices,
trading partner inflation
– Trader and consumer expectations of inflation.
2. Non-Core Inflation, i.e. the inflation component marked by volatility due to the
influence of non-fundamentals. The non-core components of inflation are:
– Volatile Foods: Inflation predominantly influenced by shocks in the food
stuffs category, such as harvests,​disruptions from natural events or
movements in domestic food commodity prices and international food co​
mmodity prices. 
– Administered Prices:  Inflation predominantly influenced by shocks from
government-announced prices, such as for​​subsidised fuels, electricity billing
rates, transport fares and so on.
 Monetary
Inflation Determinants

Inflation arises from pressures on the supply side (cost

push inflation), on the demand side (demand
pull inflation) and inflation expectations.
Factors driving cost push inflation arise from exchange
rate depreciation, the impact of inflation in foreign
countries and especially trading partners, increases in
administered prices1 and negative supply shocks2
brought about by natural disasters and disruptions to
distribution. Demand pull inflation is driven by high
demand for goods and services relative to supply.
Within the macroeconomic context, this condition is
illustrated by real output in excess of potential output or
aggregate demand beyond the capacity of the economy.
 Monetary
Inflation Determinants

On the other hand, the inflation expectations factor is

influenced by the behaviour of the public and economic actors
in applying expected inflation figures in their economic
activities.
These inflation expectations may tend to be adaptive or
forward looking. Reflecting this is the price forming behaviour
at the producer and trader levels, especially in the period
leading up to major religious festivities (Eid-ul-Fitr, Christmas
and New Year) and when new rulings are issued on the
regional minimum wage. Although the general availability of
goods is seen as adequate to cope with increased demand,
prices of goods and services at times of religious festivities
mount beyond the levels explained by the supply-demand
condition. Similarly, when new rulings are issued on the
regional minimum wage, traders also raise prices even though
the wage increase has only modest significance in fuelling
increased demand.
 Monetary
Important of Price Stability

• Stable inflation is a prerequisite for the sustainable economic

growth that will ultimately bring benefits through improvements in
public welfare. The importance of inflation control is based on the
reasoning that high, unstable inflation will have negative impact on
the social and economic condition of the people.
• First, high inflation will lead to steady erosion of people's real
incomes and deterioration in living standards so that all members
of society and especially the poor sink into deeper poverty.
• Second, unstable inflation will create uncertainty for economic
actors, affecting their ability to make decisions. Empirical
experience shows that unstable inflation will create added difficulty
for the public in their decisions regarding consumption, investment
and production, which in turn will hamper economic growth.
• Third, a higher level of domestic inflation in comparison to
neighbouring countries will make domestic interest rates
uncompetitive, which may lead to pressure on the rupiah exchange
rate.
 Monetary
BI 7-day (Reverse) Repo Rate

• Bank Indonesia strengthened monetary operations by

introducing a new policy rate known as the BI 7-Day
(Reverse) Repo Rate, effective from 19th August 2016.
In addition to the existing BI Rate, the new policy rate
does not represent a change of monetary policy stance.

• Why did Bank Indonesia introduce a new reference

rate? In order to accelerate the transmission of the
policy rate to the money market, banking industry and
real sector. The new BI 7-Day (Reverse) Repo Rate has a
stronger correlation with money market rates, is
transactional or tradeable on the market and increases
financial market deepening.
 Monetary
BI 7-day (Reverse) Repo Rate

• During the transition period, the BI Rate will still be

announced as the reference rate alongside the BI 7-
Day (Reverse) Repo Rate.
• Strengthening monetary operations has become
commonplace among central banks and is considered
an international best practice when implementing
monetary operations. Monetary operations are always
honed to boost policy effectiveness, especially in terms
of maintaining price stability.
• Monetary operations were also refined considering the
recent conducive macroeconomic conditions, which
provided impetus to efforts to strengthen monetary
operations.
 Monetary Operation
Monetary Operations by Bank Indonesia

To achieve the overriding monetary policy objective, Bank

Indonesia has implemented a monetary policy framework for
management of interest rates (interest rate target).
The policy rate, commonly known as the BI 7DDR, is adopted in
the Board of Governors Meeting at Bank Indonesia. At the
operational level, the BI 7DDR is reflected in movement in the
Interbank Overnight (O/N) Rate.
The interbank money market is the activity of lending and
borrowing money between one bank and another bank. An
interbank rate represents the price formed in a deal between
parties lending and borrowing funds. Activity on the interbank
is conducted over the counter (OTC) through deals between
borrowers and holders of funds arranged without passing
through an exchange floor. Interbank tenors range from one
working day (overnight) to one year.
 Monetary Operation
Monetary Operations by Bank
Indonesia

If movement in the overnight interbank rate does not

vary far from the anchor (the BI 7DDR), Bank Indonesia
will work consistently to safeguard and fulfil the liquidity
needs of the banking system while maintaining the
equilibrium for formation of fair, stable interest rates.
The liquidity needs of the banking system are estimated
by taking into account autonomous factors such as
government operations, maturity of OMO instruments
and standing facilities and changes in currency outside
banks.
These factors can have an expansionary or
contractionary impact on money market liquidity.
 Monetary Operation
Monetary Operations by Bank Indonesia

Monetary Operations represent the implementation of

the monetary policy adopted by Bank Indonesia for the
purpose of monetary control and are conducted
through Open Market Operations and Standing
Facilities.
Open Market Operations, or OMO, are transactions
conducted by Bank Indonesia on the money market
with banks and/or other parties within the framework of
Monetary Operations, while Standing Facilities consist of
lending facilities extended by Bank Indonesia to banks
and/or other parties and deposit facilities extended to
banks and/or other parties at Bank Indonesia for the
purpose of Monetary Operations.
Monetary Operation
 Monetary Operations by Bank
Indonesia​​
Monetary Operations Process
To determine how much liquidity should be absorbed or made
available to maintain supply and demand equilibrium, Bank
Indonesia must set targets for monetary operations each day. As
explained earlier, the monetary operations targets take account of
autonomous factors subject to change on a daily basis.
Liquidity Projections
The effectiveness of interest rate-based monetary operations
depends to a great extent on availability of reliable, even-handed
information for all market actors that fosters common perceptions
for achieving the objective of these operations in shaping fair
interest rates. For this reason, in October 2008 Bank Indonesia
launched twice daily announcements of banking liquidity
conditions on the Bank Indonesia website, the BI-SSSS and other
facilities, targeting market actors and the public. It is expected that
information on liquidity conditions will assist bank treasury
departments in managing their liquidity needs and improve the
effectiveness of Open Market Operations.
 Monetary Operations by Bank
Indonesia​​

Monetary Operations Process

The liquidity projection announcements cover 2 (two) major areas:

• Total Liquidity Projection 
The Total Liquidity Projection is an estimation of rupiah liquidity on
the market, projected from net change in the autonomous factors
that play a role in adding to or diminishing rupiah liquidity. Rupiah
liquidity is influenced, among others, by net incoming/outgoing
cash to and from the banking system and changes in the
government account at Bank Indonesia, net OMO instruments
reaching maturity and the net change in the demand deposit
balances held by banks at Bank Indonesia.
• Excess Reserves Projection
The Excess Reserves Projection represents the difference between
estimated statutory reserves held by banks at Bank Indonesia and
the statutory reserve requirement. The excess reserves projection
reflects the magnitude of rupiah liquidity in the banking system
after conducting Open Market Operations.
 Monetary Operations by Bank
Indonesia​​
Improving Monetary Operations
• Under a framework of improving monetary operations,
Bank Indonesia will extend the maturity profile of Bank
Indonesia Certificates (SBI). SBI auctions that were
previously held weekly will be changed to monthly.
Additionally, 3-month and 6-month SBI will be prioritized
in order to absorb excess rupiah liquidity.
• The change from weekly to monthly auctions is expected
to bolster bank liquidity management over a longer time
horizon. Furthermore, the absorption of excess liquidity
through the prioritization of 3-month and 6-month SBI
will foster more active transactions on the money market
and ensure more effective monetary operations.
 Monetary Operations by Bank Indonesia

Improving Monetary Operations

The implementation of improved monetary operations

will commence in June 2010, with a 3-month transition
period beginning in March 2010. During the transition
period, BI will impose a timeframe for liquidity abortion
in the second week of each month. In addition, during
the transition period SBI auctions will be held with
different tenures and larger-than-usual indicative
targets. Gradually, weekly SBI auctions will be held
fortnightly and subsequently monthly. Since the
beginning of the transition period, efforts to absorb
excess liquidity have been directed towards 3 and 6-
month SBI. In order to assist money market players
with their liquidity management during the transition
period, BI will publish a SBI auction calendar.
 Monetary Operations by Bank
Indonesia

Improving Monetary Operations

In order to maintain adequate liquidity and

interest rate stability BI will continue to
optimize other monetary operations, namely
FASBI, Repo O/N and Fine Tune Operations
(Fine Tune Contraction and Expansion).
Therefore, there is no adjustment to the
structure of existing monetary operation
instruments. Meanwhile, sharia SBI (SBIS)
auctions will follow the shortest SBI auction
schedule and tenure.
 Financial System Stability

• Financial System Stability (FSS) does not in fact have any

standard international definition. Instead, multiple
definitions are in use essentially stating that a financial
system becomes unstable when economic activity is
hindered and the system is endangering the economy
itself. The following are examples of definitions quoted
from various sources:

• FSS means that the financial system has the capability to

allocate funds efficiently and absorb shocks as they arise, thus
preventing disruption of real sector activities and the financial
system.
 Financial System Stability

• FSS is a condition represented by a strong

financial system capable of withstanding
economic shocks, one that is able to ensure
intermediary function, settlement of payments
and diversification of risk.

• FSS is a condition in which the economic

mechanisms of price formation, funds
allocation and risk management operate
properly in support of economic growth.
 Financial System Stability

Despite the absence of a uniform definition, a deeper

understanding of FSS can be gained by looking at the
factors likely to disrupt stability.
Financial system instability can be triggered by turmoil
and many other causes. In most cases, instability
results from combination of market failures caused by
structural factors or behavior of market players.
Market failure itself can be brought on by external and
domestic conditions. In a financial system built on
markets, institutions and infrastructure, the
predominant risks include credit risk, liquidity risk,
market risk and operational risk.
 Financial System Stability

The technology-driven trend towards financial sector

globalization has led to the emergence of an integrated,
borderless financial system operating in real time. Innovative
financial products have mushroomed, creating an added
dimension of complexity. These developments have not only
vastly expanded the possible sources of financial system
instability, but may also increase the challenge of bringing
such instability under control.

As a rule, the sources of financial system instability are

identified through a forward looking process to ascertain the
potential risks that could influence the future condition of the
financial system. Once identified, these risks are analysed for
their potential for heightened threat, contagion effect and
systemic impact that could devastate the economy.
Financial System Stability
 Financial System Stability
• THE ROLES OF BANK INDONESIA

Bank Indonesia carries a three-fold responsibility as

monetary authority and the regulatory and supervisory
authority for the banking system and payment system.
As such, BI's most important task is not only to
safeguard monetary stability, but also financial system
stability.

Whatever BI may achieve in monetary stability without

commensurate financial system stability will be of little
value in supporting sustainable economic growth.
Monetary stability and financial system stability are like
two sides of the same coin. Monetary stability has
significant impact on financial system stability.
 Financial System Stability
THE ROLES OF BANK INDONESIA

Conversely, financial system stability is the pillar of

effective monetary policy. The financial system
provides a channel for monetary policy transmission
and any financial system instability will prevent
monetary policy transmission from operating
normally.

Conversely, monetary instability will fundamentally

impact financial system stability, because the financial
system will be unable to operate effectively. This is
the background to the inclusion of financial system
stability within the responsibilities of Bank Indonesia.
 Financial System Stability
THE ROLES OF BANK INDONESIA

What, therefore, is Bank Indonesia's role in maintaining

financial system stability? As the central bank, Bank
Indonesia has five major roles:

1. First, Bank Indonesia safeguards monetary stability

through the use of interest rates in open market operations,
while also employing other instruments. Bank Indonesia is
required to establish an appropriate, well-balanced monetary
policy. The reason is that any disruption to monetary stability
has immediate impact on all aspects of the economy.
Excessively tight monetary policy applied through high
interest rates will tend to stifle economic activity, and vice-
versa. Therefore, to create monetary stability, Bank
Indonesia has adopted a policy known as the inflation
targeting framework.
 Financial System Stability
THE ROLES OF BANK INDONESIA

Second, Bank Indonesia has a vital role in building the sound

performance of financial institutions, particularly in the banking
sector. The performance of banking institutions is promoted through
the supervisory and regulatory mechanism. Like in other countries,
the banking sector plays a dominant role in the financial system. For
this reason, any failure in this sector could lead to financial instability
and disruption of the economy. To prevent such failure, it is essential
to uphold an effective system for bank supervision and banking
policy. In addition, market discipline must operate through
supervisory and regulatory powers, as well as law enforcement.
Evidence suggests that countries applying market discipline benefit
from robust financial system stability. Law enforcement actions are
also intended to protect the banking system and stakeholders while
promoting confidence in the financial system. To build a sustainable
level of stability in the banking sector, Bank Indonesia has developed
the Indonesian Banking Architecture and plans for implementation of
the Basel II Accords.
 Financial System Stability
THE ROLES OF BANK INDONESIA

Third, Bank Indonesia’s powers include the maintenance of a

robust payment system. Failure to settle by any one
participant will lead to serious risk of disruption in the
payment system. This could trigger contagion and in turn
systemic risk. To mitigate this risk in the payment system,
Bank Indonesia has developed a specific regulatory
framework and launched new mechanisms for payment
system operation.

One of these mechanisms is the Real Time Gross Settlement

(RTGS) system, which offers vastly improved security and
speed of payment system transactions. In its position as
payment system authority, Bank Indonesia also has access
to the necessary information and expertise to identify
potential risks in the payment system.
 Financial System Stability
THE ROLES OF BANK INDONESIA

Fourth, Bank Indonesia is able to tap its research and

monitoring capabilities to access information on threats
to financial stability.
Bank Indonesia employs macroprudential monitoring to
monitor vulnerabilities in the financial sector and detect
potential shocks that could impact financial system
stability.
These indicators have been developed at BI, using in-
house research capabilities. The information generated
by this monitoring is then used to produce
recommendations to inform the decisions by the
relevant authorities on the most appropriate actions for
dealing with disturbances in the financial sector.
 Financial System Stability
THE ROLES OF BANK INDONESIA

Fifth, Bank Indonesia operates the financial system safety net

under the central bank lender of last resort (LoLR) function.
The LoLR function is a traditional role exercised by Bank
Indonesia as the central bank in crisis management with the
primary objective of preventing financial system instability.
The LoLR function includes provision of liquidity under normal
and crisis conditions. This support is extended only to banks
faced with liquidity problems that could potentially trigger a
systemic crisis.
Under normal conditions, the LoLR function may operate for
banks experiencing temporary liquidity mismatch, which must
still possess adequate repayment capability. In operating the
LoLR function, Bank Indonesia must steer clear of moral
hazard. For this reason, liquidity can only be provided under
strict requirements and subject to assessment of systemic
risk.
 Payment System
PAYMENT SYSTEM IN INDONESIA

What is the Payment System?

What is the payment system? The payment system covers
the legal and regulatory framework, institutions and
mechanisms used to transfer funds in order to settle
liabilities arising from economic activities. What, then, are
the components of the payment system? Needless to say,
there must be payment instruments and a clearing
mechanism that includes settlement. Of course, other
components are involved, such as the institutions
participating in the operation of the payment system. These
include banks, non-bank financial institutions, non-bank
funds transfer providers, switching companies and even the
central bank (see Growth).  
 Payment System
PAYMENT SYSTEM IN INDONESIA

Evolution of Payment Instruments

• There has been very rapid and sophisticated advancement
in payment instruments.  If we look back to the early days of
payment instruments, the barter system was a common
practice in ancient times. Gradually, people became
accustomed to the use of specific units representing a value
of payment, more commonly known as money. Now, money
is one of the most widely used payment instruments in
society. Payment instruments later advanced from cash-
based instruments to non-cash payment instruments, such
as the paper-based instruments of cheques and bilyet giro
(non-negotiable bank clearing payment orders).  Following
this, payments took a further step forward to the use of
paperless instruments, such as electronic funds transfers
and card-based instruments (ATM cards, credit cards, debit
cards and prepaid cards).
 Payment System
PAYMENT SYSTEM IN INDONESIA

Cash Instruments
• Cash exists mostly as banknotes and coins. Cash continues to
play an important role, especially in small transactions. In
today’s modern society, the use of cash such as banknotes and
coins is declining in comparison to payments drawing on
demand deposit funds.  In 2005, cash accounted for 43.3
percent of the total money supply.
• However, cash also has disadvantages in regard to efficiency.
Inefficiency arises because of the high costs of cash handling,
not to mention loss of time when making payments. For
example, one can spend a long time queuing to make a
payment at a counter. Also, conducting high value transactions
in cash runs the risk of theft, robbery and counterfeiting.
• In view of the inconvenience and inefficiency of using cash, BI
has taken the initiative to promote the building of a less cash
society (LCS).
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PAYMENT SYSTEM IN INDONESIA

Non-Cash Instruments
• Non-cash instruments have become well established and are in
popular use. This shows us that non-cash payment services provided
by banks and non-bank financial institutions (NBFIs), whether for
funds transfers, clearing operations or settlement, are available and
operating in Indonesia. High value non-cash payments are processed
by Bank Indonesia through the BI-RTGS (Real Time Gross Settlement)
system and the Clearing System. The BI-RTGS System is the major
channel for settlement of financial transactions in Indonesia.
• Almost 95 percent of high value and urgent financial transactions,
such as on the interbank money market, the stock market,
government transactions, foreign currency transactions and clearing
settlement, are processed through the BI-RTGS system. In 2005, the
daily turnover of transactions handled in the BI-RTGS system
reached at least Rp 82.8 trillion. By comparison, only Rp 4.7 trillion
was recorded in daily non-cash transactions using card-based
instruments provided by banks or NBFIs.  
 Payment System
PAYMENT SYSTEM IN INDONESIA
The importance of the BI-RTGS system to the national
payment system means that the continuity and stability of
the system must be safeguarded at all times. If at any time
the BI-RTGS system breaks down or experiences a technical
fault, there will inevitably be highly disruptive impact on the
operation and stability of the domestic financial system.

This does not even include the material and non-material

impact of system breakdown. BI therefore pays very close
attention to maintaining the stability of the BI-RTGS, which is
categorised as a Systemically Important Payment System
(SIPS), one that processes high value, urgent payment
transactions.
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PAYMENT SYSTEM IN INDONESIA

Bank Indonesia therefore has every reason to take great care

in safeguarding the stability of the existing SIPS. To do this, it
manages the risks, design, technological reliability, supporting
networks and the SIPS rules. In addition to the SIPS, there are
also System Wide Important Payment Systems (SWIPS), which
are systems used by the public.

The clearing system and card-based instruments come within

the SWIPS category. BI also pays careful attention to the
various SWIPS because of their popular use. Whenever a
system experiences disruption, the public interest in
conducting payments will also suffer, as will confidence in the
system and the payment instruments processed within the
system.
 Payment System
PAYMENT SYSTEM IN INDONESIA

BI does not only seek to create efficiency in the payment

system, but also equitable access and consumer protection.
Creation of efficiency in the payment system is intended to
provide convenience to users in which they can select a
payment method accessible throughout Indonesia at the
lowest possible cost.

Equitable access means that BI also considers how equity

considerations are applied in the operation of the payment
system. Lastly, consumer protection means that operators
have the obligation to adopt reasonable consumer
protection principles in their system operations.
 Payment System
Payment System Indicator

1. RTGS
2. Cash
3. SKNBI

Please find more detailed about those three payment system

indicator in your group discussion
 Payment System
Cash Payment Instruments
 Payment System
Cash Payment Instruments
 Payment System
Non Cash Payment Instruments

1. Cards
2. Cheques
3. Bilyet Giro
4. Debit Notes
 Payment System
Non Cash Payment Instruments
 Payment System
Non Cash Payment Instruments-
example of Bilyet Giro
 Payment System
Example of Debit Note
 Payment System
Settlement System

1. BI-RTGS
2. BI-SSSS
3. SKNBI
 Payment System

Settlement System
• In order to mitigate risk in national payment, Bank
Indonesia have developed transaction settlement system,
Bank Indonesia Real Time Gross Settlement (BI-RTGS),
• Bank Indonesia Scripless Securities Settlement System
(BI-SSSS) and National Clearing System (SKN). BI-RTGS is
an elctronic fund transfer in Rupiahs between
participants where the settlement conducted directly and
individually per transaction. BI-SSSS  is a transaction
media with Bank Indonesia and securities administration
electronically. During settlement, BI-SSSS connected
directly to BI-RTGS seamlessly.
• While SKN is an interbank clearing system for cheque
payment, Bilyet Giro, other debit notes and interbank
credit transfer.
 Payment System

In Your group please find more information about

PAYMENT SYSTEM
1. Go to www.bi.go.id
2. Payment System
3. Find Payment system education
4. Find Payment system Licence Information

Submit this the work assignment next week

THANK YOU