BACHELOR OF MANAGEMENT

SCHOOL OF BUSINESS AND MANAGEMENT

INSTITUT TEKNOLOGI BANDUNG

MB-4056
BANK MANAGEMENT and
OTHER FINANCIAL SERVICES

Introduction to Financial Institutions

and Services

Bandung, August, 2019

Financial System
An institutional framework existing in a country to
enable financial transactions
Three main parts
● Financial assets (loans, deposits, bonds, equities, etc.)
● Financial institutions (banks, mutual funds, insurance companies, etc.)
● Financial markets (money market, capital market, forex market, etc.)
Regulation is another aspect of the financial system
(Banking Law, Bank Indonesia Regulation, Financial
Institution Law, Basel Committee, Tax Law)
Financial assets/instruments
Enable channeling funds from surplus units to deficit
units
There are instruments for savers such as deposits,
equities, mutual fund units, etc.
There are instruments for borrowers such as loans,
overdrafts, etc.
Like businesses, governments too raise funds through
issue of bonds, Treasury bills, etc.
Money Instruments like Bank Indonesia Certificate, ORI,
SUN etc. are available to savers who wish to lend money
to the government
Money Market Instruments (1)
Call money- money borrowed/lent for a day. No
collateral is required.
Inter-bank term money- Borrowings among banks for
a period of day or more.
Treasury Bills- short term instruments issued by the
Govt. to raise money.
BI Certificates (SBI) - Issued by Bank Indonesia to
control inflation. Minimum value is IDR100 billion,
tradable in the market. Issued at a discount to the face
value
CDs/Bonds can be issued by banks/FIs
Money Market Instruments (2)
Commercial Paper (CPs) are issued by corporates to
raise short term money
CP is an unsecured promissory note privately placed
with investors at a discount rate to face value. The
maturity of CP is between 3 and 6 months
Financial Institutions
Includes institutions and mechanisms which
● Affect generation of savings by the community
● Mobilization of savings
● Effective distribution of savings
Institutions are banks, insurance companies, mutual
funds- promote/mobilized savings
Individual investors, industrial and trading companies-
borrowers
Financial Markets
Money Market- for short-term funds (less than a year)
● Organized (Banks)
● Unorganized (money lenders, chit funds, etc.)

Capital Market- for long-term funds

● Primary Issues Market
● Stock Market
● Bond Market
Organized Money Market
Call money market
Bill Market
● Treasury bills
● Commercial bills
Bank loans (short-term)
Organized money market comprises BI, banks
(commercial and co-operative)
Call money market (1)
It deals with one-day loans (overnight, to be precise)
called call loans or call money
Participants are mostly banks. Also called inter-bank call
money market.
The borrowing is exclusively limited to banks, who are
temporarily short of funds.
On the lending side, besides banks with excess cash and
as special cases few FIs like Pension Funds, Insurance,
Securities, Leasing/Multi Finance.
All others have to keep their funds in term deposits with
banks to earn interest
Call money market (2)
Call loans are generally made on a clean basis- i.e. no
collateral is required
The main function of the call money market is to
redistribute the pool of day-to-day surplus funds of banks
among other banks in temporary deficit of funds
The call market helps banks earn interest and yet improve
their liquidity
It is a highly competitive and sensitive market
It acts as a good indicator of the liquidity position
Bill Market
Treasury Bill market- Also called the T-Bill
market/SBI
◦ These bills are short-term liabilities (7-day,30-day, 30-day,
90-day, 180-day) of the Bank Indonesia;
◦ It is an IOU of the government, a promise to pay the stated
amount after expiry of the stated period from the date of
issue;
◦ They are issued at discount to the face value and at the end
of maturity, the face value is paid
◦ The rate of discount and the corresponding issue price are
determined at each auction.
Indonesia Banking System(1)
Central Bank (Bank Indonesia)
Commercial banks
Rural banks / BPR
Banks can be classified as based ownership:
● Government Bank
● Private Bank
Government banks owned by:-
● Central Government represent by MoF i.e.: Bank Mandiri, Bank
BRI, Bank BNI, Bank BTN
● Province Own: Bank DKI, Bank Jabar Banten, Bank Jateng, Bank
DIY etc
Indonesia Banking System(2)
Private banks:
National banks: Bank BCA, Bank Mega, Bank Panin, Bank
CIMB Niaga, Bank Permata, OCBC-NISP; Bank BII; Bank
Danamon
Foreign banks: Citibank, Deutche Bank, HSBC Bank, ICBC
Bank, Standard Chartered Bank, BoTM Bank, JP Morgan Bank;
Joint venture bank: Bank Mizuho, Bank Sumitomo, Bank Hana,
Bank DBS

Private banking is usually family owned business /

Corporate employing own working capital;
Indonesia Banking System(3)
Banks can be classified based on its operation:
● Foreign exchange banks: L/C, act as money changer;
● Non-Foreign exchange limited operation

Banks can be classified based on capital:

◦ Ref. PBI NO.14/26/PBI/2012- BANK BUSINESS AND OFFICE
NETWORKING BASED on CORE CAPITAL BANK:
● Core Capital Book 1 < IDR1 trillion
● Core Capital Book 2 = IDR1 trillion but less than IDR5 trillion
● Core Capital Book 3 = IDR5 trillion but less than IDR30 trillion
● Core Capital Book 4 > IDR30 trillion
Indonesia Banking System(4)

Banking in Indonesia as of October 2011

Indonesian Banking Architecture
Progress of banking in Indonesia (1)
1988 – 1996 :
from 111 banks in October 1988 to be 240 banks in 1994 – 1995;
1997 – 1998 :
Banking crisis, 27 banks recapitalized and 7 banks were taken over by
Government required funds more than IDR7 trillion;
Progress of banking in Indonesia (2)
1999 – 2002 :
Strengthening the regulatory framework to develop a plan clear implementation to meet the
25 Basel Core Principles for Effective Banking Supervision becomes the standard for the
supervision of international banks;
Improve the payment system infrastructure by developing Real Time Gross Settlements
(RTGS);
Applying the bank guarantee scheme through Lembaga Penjaminan Simpanan (LPS) to
protect deposits community in the bank;
Restructuring bad loans, whether conducted by IBRA, Jakarta and the Indonesian Debt
Initiative Restructuring Agency (INDRA);
Implement privatization and divestiture program for bank state-owned banks and banks
that recapitulated;
Increase the capital requirements for the establishment of a new bank.

2002 - now:
lending began to increase in product innovation;
development of derivative products (such as credit linked notes), as well as the product of
cooperation with other institutions (mutual funds and bancassurance)
Progress of banking in Indonesia (3)
Diversification in banking: Banking has moved from
deposit and lending to
● Retail banking
● Consumer banking
● ATMs
● Mobile banking
● Internet banking
Profitability of Banks(1)
Reforms has shifted the focus of banks from being
development oriented to being commercially viable
Prior to reforms, banks were not profitable and in fact
made losses for the following reasons:
● Declining interest income
● Increasing cost of operations
Profitability of banks (2)
Declining interest income was for the following
reasons:
● Bad loans;
● Global crisis;
Rising costs of operations for banks was because of
several reasons: economic and political
The Indonesia Capital Market (1)
Market for long-term capital. Demand comes from the
industrial, service sector and government
Supply comes from individuals, corporates, banks,
financial institutions, etc.
Can be classified into:
● Industrial securities market (new issues and stock
market);
● Right issues
The Indonesia Capital Market (2)
Financial Institutions
● Pension funds;
● Insurance;
● Koperasi;
● Pawnshop

Financial Intermediaries
● Merchant Banks/Securities Companies
● Mutual Funds
● Leasing Companies
● Venture Capital Companies
Industrial Securities Market

Refers to the market for shares and debentures of old

and new companies
New Issues Market- also known as the primary market-
refers to raising of new capital in the form of shares and
debentures
Stock Market- also known as the secondary market.
Deals with securities already issued by companies
Financial Intermediaries (1)
Mutual Funds- Promote savings and mobilize funds
which are invested in the stock market and bond
market
Indirect source of finance to companies
Pool funds of savers and invest in the stock
market/bond market
Their instruments at saver’s end are called units
Offer many types of schemes: growth fund, income
fund, balanced fund
Regulated by OJK (Indonesia Financial Services
Authority)
Financial Intermediaries (2)
Securities/Merchant banking- manage and underwrite new
issues, undertake syndication of credit, advise corporate
clients on fund raising
Subject to regulation by OJK
OJK regulates them on issue activity and portfolio
management of their business.
OJK supervises those merchant banks which are subsidiaries
or affiliates of commercial banks
Have to adopt stipulated capital adequacy norms and abide by
a code of conduct
Conclusion
There are other financial intermediaries such as
Koperasi, Venture Capital Funds, and Leasing
Companies, etc.
Indonesia’s financial system is quite huge and caters
to every kind of demand for funds.
Banks are at the core of our financial system and
therefore, there is greater expectation from them in
terms of developing economy and industries.