LEGAL POLICY IN THE FIELD OF MONETARY AND REGIONAL BANKING IN RESPONDING TO ECONOMIC DEVELOPMENT

LEGAL POLICY IN THE FIELD OF MONETARY AND REGIONAL BANKING

IN RESPONDING TO ECONOMIC DEVELOPMENT[1]

 

By: Rosalina

Introduction

 Monetary policy, as a component of macroeconomic policy, is essentially a policy of controlling the money supply to ensure it meets the needs of an economic system. By controlling the money supply, it is hoped that a certain level of economic growth can be achieved without causing inflation due to the increase in the money supply, which drives demand for goods, also known as inflation. demand-pull inflation.

The monetary policy objectives sought by the Indonesian monetary authorities are, in principle, economic growth, price and interest rate stability, and balance of payments equilibrium, as well as achieving employment opportunities. Bank Indonesia develops monetary planning through a monetary program, which essentially defines the amount of money in circulation over a given period, based on certain assumptions. This monetary program provides the basic framework for Bank Indonesia's plans to achieve in carrying out its monetary control duties. Furthermore, based on this monetary program, Bank Indonesia continuously monitors major monetary developments targeted by the program. Bank Indonesia routinely publishes Indonesian Financial Economic Statistics, both weekly and monthly, in addition to the Bank Indonesia Annual Report.[2]

Discussion

Monetary and banking developments in Indonesia since the New Order can basically be classified into 3 periods, namely:[3]

1. Period of economic stabilization and rehabilitation

Monetary and banking policies during the period of economic stabilization and rehabilitation at the beginning of the New Order era were primarily aimed at addressing the dire economic conditions at the time. Although there is no definitive, agreed-upon inflation figure, various observers estimate the inflation rate to be around 650% per year, a staggering figure compared to the economic conditions of neighboring countries at the time. To curb this inflation rate, the government sought to control inflation within safe limits, increase exports, and ensure adequate clothing for the public. Two key policies were adopted to control inflation. First changing the deficit budget policy to a balanced budget. Secondly,, implementing a very strict and qualitative credit policy. During this period, the government, as part of its economic restructuring, also restructured the banking system by issuing Law No. 14 of 1967 concerning the Principles of Banking and Law No. 13 of 1968 concerning Bank Indonesia.

 

 

2. The period when the economy was supported by the oil sector

The government's policy of mobilizing public funds as a source of development financing, coupled with the provision of low-interest Bank Indonesia Liquidity Credit (KLBI), increased the banking sector's credit disbursement capacity. The large amount of KLBI provided, driven by the substantial state revenues from oil exports in the mid-1970s, known as the "oil boom," led to a resurgent inflation rate. Monetary policies pursued during this oil boom period included:

a) Determine the credit limit (credit ceiling) and other assets.

b) Increase credit interest.

c) Increase deposit interest.

d) Increase the mandatory liquidity reserve requirements.

  

3. Banking deregulation period

Entering the 1980s, the Indonesian economy experienced a recession as a result of the global recession. Gross domestic product fell drastically to only 2,2% compared to an average of 7,7% in previous years, even reaching 9,9% in 1980. Meanwhile, the balance of payments continued to deteriorate and even experienced a deficit of USD 1,930 million in 1982. To address the worsening economic conditions, the government made changes to economic policies, including monetary and banking. The policies implemented by the government at that time included:[4]

a) Adjustment of the rupiah exchange rate against the US dollar in March 1983 from Rp. 700 to Rp. 970.

b) Rescheduling of projects that use large amounts of foreign exchange.

c) Deregulating the monetary and banking sectors with various types of policy packages.

 

Banking Conditions in the Monetary Crisis Era

The 1997/1998 period was the most challenging in Indonesia's thirty years of economic development. It began with the 1997 exchange rate crisis. Since then, Indonesia's economic performance has declined sharply and become a protracted crisis across various sectors. The crisis spread rapidly given Indonesia's high level of economic openness and substantial dependence on foreign exchange. The crisis worsened due to various fundamental weaknesses within the national economy, particularly at the micro level.

To address the deepening crisis, the government has taken various measures. However, these efforts have yielded limited results due to a growing crisis of confidence in the country's management capabilities and a weakening economic outlook. As the crisis worsened, financial intermediation, particularly in banking, was disrupted, resulting in various obstacles to the flow of funds to finance investment and production activities.

The fundamental weaknesses of microeconomics are also reflected in the fragility (fragility) in the financial sector, particularly banking. Part of this vulnerability is related to unstable macroeconomic conditions, particularly in the form of rupiah exchange rate fluctuations and high interest rates. Macroeconomic instability and government policy responses make it extremely difficult for banks to accurately assess credit and market risks.

The magnitude of the pressure of capital outflows (capital outflows) triggered by the financial crisis in neighboring countries, including Thailand, has caused the rupiah exchange rate to decline. This weakening of the rupiah exchange rate is heavily influenced by the increasing demand for dollars to meet maturing foreign debt obligations, finance imports, and for speculative purposes in the rupiah. To address this crisis, Bank Indonesia has taken various steps, including widening the rupiah exchange rate intervention range against the dollar from 8% to 12%, accompanied by intervention in both the foreign exchange market and the foreign exchange market. forward nor spotA free-floating exchange rate system was implemented and intervention in the foreign exchange market was increased.[5]

As an initial step in the context of improving the banking sector, on November 1, 1997, after careful research and inspection by Bank Indonesia, the government revoked the business licenses of 16 banks that were declared bankrupt. insolventThis effort, originally intended to restore confidence in banking, has been met with a negative public response, resulting in massive withdrawals and the transfer of funds from banks deemed less sound to more sound ones. This development has caused a number of banks to experience liquidity problems, leading many to violate the Minimum Reserve Requirement (Giro Wajib Minimum) regulations. Some banks even experienced negative balances in their checking accounts at Bank Indonesia. To avoid a chain reaction, (contagion) impact on the banking system as a whole (systematic risk).[6]

In Indonesia, credit distribution institutions are synonymous with banks. While other institutions exist, banks are business units that generally use credit as a source of revenue, through interest or profit sharing. From an economic perspective, the purpose of providing credit by credit distribution institutions is to generate profit. Because they are profit-oriented, credit institutions may only extend credit if they have confidence in the prospective borrower's ability and willingness to repay the loan. In this context, the security component (safety) and profits (profitability) in a credit transaction.

Meanwhile, because in general banking obtains funds from the public and its activities are supervised by the government, several credit objectives can be added as follows:[7]

a. To make government programs in the economic and development sectors a success (government interests).

b. Increasing the activities of companies/individuals being funded (borrowers) in order to fulfill business needs and other needs (community interests).

c. Obtaining profits for the company's survival, so that it can expand its business and services (interests of bank/credit institution capital owners).

From the above objectives, the function or use of credit can be given as follows:[8]

a. Increase the utility, circulation, and flow of money. The increased utility of money occurs because owners of money or capital lend directly to entrepreneurs who need money/capital, or they can deposit their money or capital in credit institutions to be lent to entrepreneurs who need it. Meanwhile, credit provided through checking accounts can create new payment methods such as checks, giro bills, money orders, and the circulation of cash within the community.

b. Increase the utility and circulation of goods.

By obtaining credit, entrepreneurs (borrowers or debtors) can process raw materials into finished goods, thereby increasing the utility of the goods. Furthermore, credit can also increase the circulation of goods through direct sales or credit sales, thereby increasing the circulation of goods.

c. Credit is a tool for maintaining economic stability.

Economic stability can be maintained through inflation control, infrastructure rehabilitation, and public needs. Because credit is selectively directed toward productive sectors, including increasing exports and meeting public needs, credit can indirectly maintain a country's stability.

d. Increase enthusiasm for business and increase income.

Credit assistance provided by credit institutions to individuals or companies will increase their business activities. Increased business results in increased profits. If these profits are cumulatively invested in the capital structure, this increase will continue. This is indirectly linked to increased income and tax revenue, which ultimately improves public welfare.

e. Improving international relations.

Large banks abroad with business networks or in more developed countries can provide direct or indirect credit assistance to domestic entrepreneurs or governments. This assistance is reflected in the form of loans with flexible terms, including low interest rates and long loan terms. Through cross-border credit assistance, the relationship between the lending and receiving countries becomes stronger. In other words, credit can strengthen international relations.

Credit or other facilities as defined above contain important elements that serve as the legal basis for a form of credit or financing, namely a credit agreement. The credit agreement in question is a written loan agreement between a bank or financing institution (as the creditor) and another party receiving the credit (as the debtor/creditor customer).

 

 

Closing Event

Credit is a loan agreement between a bank, the creditor, and a customer, the debtor. In this agreement, the bank, as the creditor, trusts the customer to repay the loan within an agreed-upon timeframe.

Credit granted by a credit institution is based on trust, so granting credit is essentially a grant of trust. In this case, credit is only granted if there is a strong belief that the prospective borrower can repay that trust in a timely manner.

 

 

 

READING LIST

Hermansyah, Indonesian National Banking Law, Kencana, Jakarta, 2008.

Johannes Ibrahim, Banks as Intermediary Institutions in Positive Law, Main, Bandung, 2004.

Supramono Gatot, Banking and Credit Issues, Bridge, Jakarta, 1995.

Nasroen Yabasari and Nina Kurnia Dewi, Credit Guarantee, Helping MSMEs Access Financing, Alumni, Bandung, 2007.

Law Number 10 of 1998 concerning Amendments to Law Number 7 of 1992 concerning Banking.

Ensikloditya.blogspot.com accessed March 9, 2013.