Banking Institutions: Definition, History, Laws and Types

Definition of Banking Institutions – Currently, technological developments are sophisticated. All fields have used technology to save time and achieve convenience, of course. In financial services, it is known as fintech or financial technology .

This fintech has a function to maximize the various services provided by financial institutions. Even though there are many financial institutions, users still have to be careful and choose a trusted financial institution.

In the era of modern economic life, banking institutions have a very important role. Banking institutions in Indonesia have a crucial role in the national financial system. Because of the important role of financial institutions, financial institutions need to be protected by legal instruments such as laws.

What is meant by a banking institution? What are the functions of financial institutions and types of financial institutions? To understand more about banking institutions, see the article below.

Definition of Banking Institution

Based on Law no. 14 of 1967 which was replaced by Law No.7 of 1992 article 1,

Banking is everything related to banks, including institutions, business activities and methods and processes in carrying out their business activities.

Financial institutions are all bodies which, through their activities in the financial sector, withdraw money from and channel it into society. Meanwhile, according to Kep. Decree of the Minister of Finance of the Republic of Indonesia no. 792 of 1990, financial institutions are all business entities in the financial sector, where these institutions collect funds, distribute them to the community and provide development investment costs.

Services or services provided by financial institutions to the public are money transfer services, collection services, foreign currency sales services, clearing services, and others.

To help Sinaumed’s better understand banks and their scope as well as various other financial institutions, the book Banks and Other Financial Institutions is here to assist in solving these problems.

History of Banking in Indonesia

The banking institutions that were present in Indonesia for the first time certainly could not be separated from the Dutch East Indies colonialism. in 1746, the VOC established De Bank van Leening to facilitate VOC trading activities in Indonesia.

Along the way, De Bank van Leening did not operate properly. Finally, on September 1, 1752, De Bank Courant en Bank van leening was established. However, De Bank Courant en Bank van leening also failed to operate properly which ended in bankruptcy.

At the end of the 18th century, the VOC in Indonesia was taken over by the Dutch royal government. The East Indies fell to the British after the reigns of Herman William Daendels and Janssen. History records that there were several banks that played an important role in the Dutch East Indies. These banks are De Javasce NV, De Post Poar Bank, Hulp en Spaar Bank, De Escompto bank NV nationale Handles Bank, De, Algemenevolks Crediet Bank and Nederland Handles Maatschappij.

The Dutch bank that succeeded in developing and becoming the forerunner of Indonesia’s central bank was De Javasche Bank. De Javasche Bank was established in 1828. The Dutch East Indies government gave a monopoly to De Javasche Bank to issue money in which the circulation of money was handled by its own government. Since then, De Javasche Bank has been known as a bank of issues or a circulation bank.

Although not yet a full-fledged central bank, De Javasche Bank had a function as a banker for the Dutch East Indies government. This is because De Javasche Bank only carries out a number of tasks that can be carried out by the central bank. Some of the tasks carried out by De Javasche Bank include discounting notes and short-term notes, issuing banknotes, serving as a government cashier, storing foreign exchange funds and serving as a clearing center.

As time went on and the development of the Indonesian economy, other foreign banks finally began to operate. Some of them are The Chartered Bank of India, Australia and China, Hong Kong and Shanghai Banking Corporation, Yokohama Specie Bank, Taiwan Bank, Mitsui Bank, China and Southern Ltd, and Overseas China Banking Corporation.

On the eve of World War II, the Dutch East Indies liquidated three Japanese banks that were operating at the time. however, when Japan controlled Asia Pacific, Dutch, British and several Chinese banks were liquidated by the Japanese. At that time Japan only wanted to control all finances in one bank. The bank is Bank Rakyat Indonesia, a bank operated by Indonesian sons.

After Indonesia’s independence, De Javasche Bank began to operate again and function as the central bank. Even though at that time De Javasche Bank was still a private business entity and some of its shares were still owned by foreigners. Finally in 1951, De Javasche Bank was nationalized under Law number 24 of 1951.

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Since Indonesia’s independence and the allies have succeeded in defeating Japan, finally Dutch banks and foreign banks have resumed operations. On January 2, 1946, the Governor General of the Dutch East Indies gave permission to reopen Dutch banks in Indonesia. De Javasche Bank still operates as a central bank with its status as a private business entity.

Finally, in 1953 to make it easier to carry out monetary and other economic policies, the Basic Bank Indonesia Law was enacted as stated in Law no. 11 of 1953. This law was issued considering that De Javasche Bank was still legally incorporated as a Limited Liability Company and was not yet able to freely implement economic policies.

In the following years, the Government of Indonesia inaugurated Bank Rakyat Indonesia as the first state-owned bank in Indonesia. Bank Rakyat Indonesia had stopped operating, but the bank resumed operations after the formation of the Renville agreement. In 1960, the Farmers and Fishermen Cooperative Bank was formed. The Farmers and Fishermen Cooperative Bank is the result of a fusion of Bank Rakyat Indonesia, Bank Farmers and Fishermen and the Nederlandsche Maatschappij.

In 1946, Bank Negara Indonesia was established, serving as the central bank. The Poesat Bank Indonesia Foundation was merged into Bank Negara Indonesia. Over time, the Indonesian government strengthened the position of Bank Negara Indonesia. Finally, during the Round Table Conference, the Governments of Indonesia and the Netherlands agreed to change the function of Bank Negara Indonesia to become a commercial bank, which was originally a central bank.

Laws Governing Banking in Indonesia

Currently, the applicable Banking Law is Law no. 10 of 1998, which is an amendment to Law no. 7 of 1992. There are several articles that have been amended, such as the article regarding the licensing authority for opening bank offices. Initially the licensing authority was the authority of the Ministry of Finance, but in the end this authority was handed over to the central bank, Bank Indonesia.

Bank is a business entity that is different from other business entities or institutions. Bank is a profit-oriented business entity. Banks are part of the national financial system and national economic system. As a trusted institution, banking is a pillar of the banking industry. The existence of banks is interrelated, if one bank collapses, of course it will affect the other banks.

Because of these conditions, Bank Indonesia has taken steps to develop banks over time. Bank Indonesia even assigned coaching duties to the Directorate of Bank Supervision and Development. Until the end of 1999, apart from being given monetary authority, Bank Indonesia was also given authority as the Lender of the last resort. As a lender of last resort, Bank Indonesia can provide credit in the Bank Indonesia Liquidity Credit scheme and also Bank Indonesia Liquidity Assistance.

Over time, Bank Indonesia was positioned as an independent institution and no longer extended credit. This is also stated in the Bank Indonesia Law. However, until now, people still do not understand the difference in the functions of banks and cooperatives because both institutions are both institutions that collect funds from the public.

Functions of Banking Institutions

The following are some of the functions that banking institutions have, namely:

1. As an Intermediary Institution

Banking institutions have a function as intermediary institutions. The intermediary institution in question is an institution that collects funds from the public in the form of deposits by providing deposits to the public. For example, such as hajj savings, time deposits, school savings and other savings.

2. As a distributor of funds to the community

Banking institutions apart from being intermediary institutions also have the benefit of being institutions that channel funds to the public in the form of loan products. This loan is also determined by credit interest rates which are useful for increasing the country’s economic growth .

3. Helping the People’s Economy

Banking institutions can be elements that help the people’s economy so that they can overcome modern economic problems that are often faced by business people.

4. As a Payment System

Banking institutions are providers of payment systems such as demand deposits, checks, money transfers, credit cards, interbank clearing and others, so they can assist in payments between businesses.

As explained above, where banks have many functions in society, Sinaumed’s can deepen the basic concepts of banking and other financial institutions through the book Banks and Financial Institutions Edition 2.

5. As a Service Provider for Economic Activities

Banking institutions become providers of services that are closely related to economic activities. Bank services such as safekeeping of valuables, bill settlement services and guarantee services.

6. As a Development agent

Banking institutions become agents of development. Banks have the task of collecting funds and channeling funds to the public which is very important for the smooth running of the real sector. These activities allow people to invest, and also consumption related to money.

Financial institutions become trusted agents. The basis of bank activities is a trust. If people want to deposit their funds with banks, of course, it must be based on trust.


Type of Banking Institution

The following are the types of banking institutions namely,

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1. Central banks

The central bank is a financial institution that has the responsibility to maintain the stability of currency exchange rates. The central bank in Indonesia is Bank Indonesia. As a central bank, Bank Indonesia has the main objective of maintaining the value of the currency or maintaining the stability of the rupiah currency. This stability includes stable goods or services, stable exchange rates with foreign currencies.

Bank Indonesia has an operational legal basis as regulated in Law no. 23 of 1999 which was amended by Law no. 3 of 2004. The duties of the Indonesian bank are to establish and implement monetary policy, regulate and maintain the payment system, regulate and supervise commercial banks. Bank Indonesia is an institution that is part of the Indonesian government.

Bank Indonesia can issue business licenses as a commercial bank or a people’s credit bank. In addition, Bank Indonesia must also pay attention to the requirements that must be met. Bank Indonesia must also pay attention to the existing competition among banks in Indonesia, the saturation level of the number of banks in certain areas and also the distribution of national economic development.

Bank Indonesia as the central bank is authorized to distribute Bank Indonesia Liquidity Credit and to regulate money in circulation and control inflation. This authority is often considered vulnerable because it can be intervened by anyone, including the government.

Apart from being the central bank, Bank Indonesia is also the Lender of the last resort. Lender of the last resort is a liquidity facility provided to a financial institution in response to turmoil that could lead to a soaring increase in demand. The concept of Lender of the last resort was put forward by Henry Thornton in the 19th century. Henry Thornton put forward the elements of a good central bank.

In its own implementation, the central bank has policies that fall into the theoretical and empirical foundations of Monetary policy as well as applicable principles and practices. Learn it all in the book Central Bank Policy : Theory & Practice.

2. Commercial banks

Based on Law no. 10 of 1998, the definition of a commercial bank is a bank that carries out business activities conventionally and or based on sharia principles which in its activities provide services in payment traffic.

Based on sharia principles, in providing credit, commercial banks are required to have confidence based on analysis and the customer’s ability and ability to pay off their debts as promised. This is stated in Law no. 10 of 1998 article 8. In addition, commercial banks must also have and apply guidelines for credit and financing based on sharia principles that have been established by the central bank or Bank Indonesia.

According to Law no. 10 of 1998 article 12, Commercial banks can cooperate with Bank Indonesia and the government to implement programs to improve people’s living standards through cooperatives, small or even medium businesses. Commercial banks can also buy part or all of the collateral through an auction or not through an auction. Conditions for purchasing collateral are further regulated in government regulations.

The legal form of a commercial bank can be a Limited Liability Company, a cooperative or a regional company. The establishment of a commercial bank can only be done by Indonesian citizens or legal entities in Indonesia. Indonesian legal entities with foreign nationals in partnership can also establish commercial banks.

Commercial banks are further divided into two types, namely foreign exchange commercial banks and non-foreign exchange commercial banks. Examples of commercial foreign exchange banks are Bank Bukopin, Bank BCA, Bank CIMB Niaga, Bank BRI Agroniaga and others. Meanwhile, non-foreign exchange commercial banks, for example, are Bank BCA Syariah, Bank Mayora, Bank Panin Syariah and others.

Sinaumed’s can learn the workings of commercial banks as well as other explanations about commercial banks which are certainly important through the book Management of Commercial Banks by Julius R. Latumaerissa.

3. Rural Credit Banks

According to Law no. 10 of 1998, people’s credit banks have the meaning of banks that carry out business activities conventionally or based on sharia principles which in their activities do not provide services in payment traffic.

If there are people’s credit banks that carry out their financial business activities based on sharia principles, they are not allowed to carry out their financial activities according to conventional principles. This also applies vice versa, if rural credit banks carry out their financial activities based on conventional principles, they are not allowed to carry out financial activities based on sharia principles.

In carrying out financial activities, rural credit banks are not much different from commercial banks. These activities include collecting funds from the community and channeling funds to the community. However, there is a slight difference between people’s credit banks and commercial banks, namely that people’s credit banks are not allowed to provide financial services such as accepting demand deposits, foreign exchange and insurance.

There are 1545 people’s credit banks currently spread across Indonesia. This is based on data submitted by the Financial Services Authority. An example of a people’s credit bank in Indonesia, namely Pt. BPR Pesona Letris Pratama, PT. BPR Nusantara and PT. Business Fund BPR.

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