Every country certainly has a central bank where the task of the bank is to maintain the stability of the
currency of a country. Then, actually, what is meant by a central bank? You can
find the answer in this article, Sinaumed’s.
Definition of Central Bank
A bank is a place where a person or group of people save their money in a safer, more organized and of
course useful place. Every country certainly has a central bank, where the central bank becomes
a financial institution or agency that is responsible for making and implementing monetary policy to create
stable economic activity in a country.
Some of the tasks of the central bank include maintaining the stability of currency values, inflation
rates, and others related to a country’s financial system. In Indonesia, the duties and
functions of the central bank are carried out by Bank Indonesia. Bank Indonesia is an
independent government-owned institution that has been established since 1953.
The formation of Bank Indonesia was based on the Basic Bank Indonesia Act on July 1, 1953. As for the
initiator, namely the first President of Indonesia, Ir. Soekarno founded this Indonesian bank
to nationalize everything about banking in Indonesia. So, Bank Indonesia is the parent bank of
all banks in Indonesia.
Bank Indonesia is committed to achieving and maintaining stability in the value of the rupiah through the
management of the Monetary, Payment System and Financial System Stability sectors. The
management of these three fields is implemented through policies issued by Bank Indonesia and operated
through various instruments in accordance with the related task areas.
This institution is owned by the government, and has the duty to ensure that the activities of financial
institutions within the country can improve and stabilize the country’s economy nationally.
According to Law No. 23 of 1999, Bank Indonesia is an independent institution established with the
aim of maintaining stability in the value of the rupiah, both the exchange rate for goods and services and
for foreign currencies.
Bank Indonesia is also a legal entity. Not only that, the central bank is also one of the
learning resources for banks, in order to carry out community programs regarding the fields of banking
duties in Indonesia.
History of Bank Indonesia
Sinaumed’s, before the existence of Bank Indonesia, all activities in managing monetary policy were still centered
on De Javasche Bank which was a heritage from the Netherlands since around 1800. After Indonesian
independence, the Indonesian economy still used the structure owned by De Java Bank.
Because a system like this is considered not suitable for Indonesia in the future, the public’s desire arises to
have an institution that is more compatible with national interests in regulating monetary policy.
In general, De Java Bank and Bank Indonesia have the same duties. In 1968, the Law on
the Central Bank was issued which regulated the duties of Bank Indonesia and how this institution was
separated from other banks that usually fulfilled commercial functions.
Bank Indonesia also cooperates with the government as a development agent. Bank Indonesia also
participates in promoting smooth production and economic development to improve the people’s standard of
living.
After the crisis that occurred in 1998, the government set the sole objective of Bank Indonesia.
Bank Indonesia’s work is focused on maintaining the stability of the value of the Rupiah.
However, in 2008 the regulation was again amended through Perppu No. 2 of 2008. It was stated that
Bank Indonesia also had the function of increasing the resilience of the Indonesian banking system so that
it would be able to withstand the global crisis that year.
Bank Indonesia also continues to develop and exist today. Apart from Bank Indonesia, there is
also the Financial Services Authority (OJK) which carries out its duties as a supervisor of banking
activities, a task previously carried out by BI.
Central Bank Duties
Bank Indonesia is an institution that holds monetary authority. The task of the central bank
is to make and carry out a country’s monetary policy in order to achieve and maintain currency
stability.
These policies can influence and consider many things, for example the rate of inflation, economic
development, and so on. There are monetary policies for the short, medium and long term.
In Indonesia, these tasks are carried out by the central bank, namely Bank Indonesia.
In addition, there are several other duties of Bank Indonesia, namely:
1. Establish and Implement Monetary Policy
Bank Indonesia makes monetary policy and implements it to control the amount of money circulating in
society. This is very important because the price of products in the form of goods and services
remains under control and is in accordance with people’s purchasing power.
The monetary policy must aim to encourage the growth of the national economy. Therefore, Bank
Indonesia usually cooperates with the government, so that the policy is in accordance with other economic
and fiscal policies as a support.
2. Regulate and Maintain the Smooth
Payment System
There are two payment systems within the central bank, namely Bank Indonesia as we know it, namely the cash
payment system and the non-cash payment system.
If in the past the use of non-cash payment systems was still limited, now technology has made it easier for us to
make non-cash transactions only through gadgets . Playing a full role and developing a
series of standards, rules, procedures and agreements on this payment system is the task of the central
bank.
3. Manage and Supervise the Bank
The central bank’s next task is to regulate and supervise the banks under it. In this case,
Bank Indonesia is in charge of regulating and supervising the banks under it.
4. Maintaining Financial System Stability
The task of the central bank is to carry out overall supervision of a country’s economic activity.
This aims to maintain the stability of the financial system. Macroprudential policies
are also very important to monitor.
Macroprudential policy is a policy established to limit the costs and risks of a crisis, so that the balance of
the financial system is maintained.
Authority of Bank Indonesia
In the context of establishing and implementing monetary policy, Bank Indonesia has the authority to:
- Setting monetary targets by taking into account the inflation rate target, which is set.
- Carry out monetary control by using methods, which include but are not limited to:
- Open market operations in the money market, both rupiah and foreign currency.
- Determination of the discount rate. Discounts are deductions or interest that must be
paid by people, who sell notes (trade notes) that are cashed prematurely.
- Determination of minimum mandatory reserves.
- Credit or financing arrangements.
Legal Basis for the Establishment of Bank Indonesia
The establishment of Bank Indonesia was preceded by the nationalization process of De Javasche Bank NV
(DJB) which was carried out in December 1951 based on Law (UU) Number 24 of 1951 concerning the
Nationalization of De Javasche Bank NV. After DJB was nationalized, the Republic of Indonesia
established Bank Indonesia based on Law Number 11 of 1953 concerning the Stipulation of the Basic Bank
Indonesia Law which was ratified on 19 May 1953, announced on 2 June 1953 and came into force on 1 July
1953.
The date of entry into force of the Act is also commemorated as the birthday of Bank Indonesia.
In addition, the law stated that Bank Indonesia was established to act as Indonesia’s central bank.
In its journey, the role of Indonesian banks has changed in accordance with economic, social and
political dynamics both nationally and globally.
In line with this, the law which became the legal basis for the existence of Bank Indonesia underwent
changes and improvements. The current law which forms the legal basis for Bank Indonesia is Law
Number 23 of 1999 concerning Bank Indonesia (which has been amended several times, most recently by Law No.
6 of 2009).
Not only at the statutory level, but fundamental changes have also occurred at the constitutional level.
The Fourth Amendment to the 1945 Constitution of the Republic of Indonesia (UUD 1945), inserts a
new article, 23D, which reads, “The state has a central bank whose composition, position, authority,
responsibility and independence are regulated by law.”
Status and Position of Bank Indonesia
1. As an Independent State Institution
A new chapter in the history of Bank Indonesia as an independent Central Bank began when a new law, namely
Law no. 23/1999 concerning Bank Indonesia, declared effective on 17 May 1999.
This law gives status and position as an independent state institution and free from interference from the
government or other parties. As an independent state institution, Bank Indonesia has full
autonomy in formulating and implementing each of its duties and authorities as stipulated in this
law.
Outsiders are not justified in interfering with the implementation of Bank Indonesia’s duties and Bank
Indonesia is also obliged to refuse or ignore intervention in any form from any party. To
further guarantee this independence, this law has given a special position to Bank Indonesia within the
constitutional structure of the Republic of Indonesia.
As an independent state institution, the position of Bank Indonesia is not equal to that of the State
Higher Institutions. Besides that, the position of Bank Indonesia is also not the same as the
Department, because the position of Bank Indonesia is outside the Government.
This special status and position is required so that Bank Indonesia can carry out its role and function as a
monetary authority more effectively and efficiently.
2. As a Legal Entity
The status of Bank Indonesia, both as a public legal entity and as a private legal entity, is stipulated by
law. As a public legal entity, Bank Indonesia has the authority to stipulate legal regulations
which are the implementation of laws that are binding on the entire public at large in accordance with their
duties and authorities.
So, as a civil legal entity, Bank Indonesia can act for and on behalf of itself both inside and outside the
court.
Central Bank Functions
Bank Indonesia as the central bank in Indonesia also has several functions that complement the tasks we
have discussed previously. In the monetary structure, the function of the central bank is to
control the circulation of money. The following functions of the central bank are as follows,
namely:
1. Circulation Bank
The function of the central bank is the holder of the sole right (octroation right) in the circulation of
banknotes and coins as legal means of payment. This was determined in order to avoid
discrepancies in the price of different currency values for each region.
2. Banker’s Bank, Government Agents and Advisors
As a banker, the function of the central bank in Indonesia is to carry out transactions related to buying
and selling foreign exchange. Then Bank Indonesia became the institution that received tax
payments from the government and also assisted government payments from the center to the regions.
As a banker, Bank Indonesia and Merta aim to help circulate government-owned securities and help analyze
national economic data. As an agent and advisory bank for the government, Bank Indonesia’s
function is to manage and manage all administration related to national debts.
In addition, Bank Indonesia must provide interest payment services on these debts. Bank
Indonesia also provides advice and information regarding the current state of the money market and capital
market to the government. The function of the central bank is to banker the various banks.
This means that the central bank is a source of funds for other banks.
3. Final Level Lenders
The central bank or Bank Indonesia is the lender at the last level, known as the lender of last resort.
This means that the central bank can provide loans to lower banks in the form of emergency
liquidity credit facilities.
4. Establish and Implement Monetary Policy
Monetary policy is a decision taken in order to support economic activity through various matters related
to determining the amount of money circulating in society. The function of the central bank is
to set and implement monetary policy.
The authorities of the central bank relating to the setting and implementation of monetary policy are:
- Setting discount rates, minimum reserves of commercial banks, arranging credit or financing.
- Setting monetary targets by taking into account the target inflation rate.
- Carry out monetary control without being limited to open market operations in the money market, both in the
form of rupiah and foreign currency. - Establish and implement monetary policy to achieve and maintain stability in the value of the rupiah.
5. Manage and Maintain the Smooth Payment
System
The next function of the central bank is to facilitate payment traffic. Bank Indonesia, in
this case, organizes clearing and duplicates currency circulating between commercial banks.
In order to carry out its function of regulating and maintaining payment traffic, Bank Indonesia has
received several authorities from the government. One of these powers is to give approvals and
permits, as well as carry out the operation of various payment system services.
Therefore, Bank Indonesia must require payment system service providers to submit reports on their
activities. Bank Indonesia also has the authority to determine the use of exchange/payment
instruments. One of the other functions of the central bank is to regulate and maintain the
smooth operation of the payment system.
In order to carry out this function, the authority of the central bank includes:
- Determine the use of tools or payment instruments.
- Carry out and provide approval and permits for the operation of payment system services.
- Requiring payment system service providers to submit reports on their activities.
- The central bank is the only institution authorized to issue and circulate rupiah currency and revoke,
withdraw and destroy money from circulation.
6. Maintaining Financial System Stability
Maintaining financial system stability is the next task of Bank Indonesia, which is a condition that allows the
national financial system to function effectively and efficiently and is able to withstand internal and external
vulnerabilities.
So that the allocation of sources of funding or financing can contribute to the growth and stability of the
national economy. A financial system that is not functioning properly will reduce the
effectiveness of monetary policy, disrupt the smooth running of economic activities and result in a slowdown
in economic growth.
The central bank or Bank Indonesia also has an interest in maintaining financial system stability related to its
function as a Lender of Last Resort or LoLR, namely the authority authorized to provide liquidity during a
crisis.
Bank Indonesia in exercising its authority to maintain financial system stability, the central bank has a legal
umbrella, namely:
- Law Number 21 of 2011 concerning the Financial Services Authority.
- Law Number 9 of 2016 concerning Prevention and Management of Financial System Crisis.
- Bank Indonesia Regulation Number 16/11/PBI/2014 concerning Macroprudential Regulation and Supervision.
7. Maintain State Treasury Reserves
In this case, the function of the central bank is not only cash reserves from commercial banks but also
foreign exchange. Bank Indonesia can increase or decrease the amount of money circulating in
society.
This is done by increasing or decreasing the minimum reserves that must be met by commercial banks in
granting credit and circulating money. By increasing the state treasury reserves, Bank
Indonesia intends to reduce the amount of money in circulation.
Meanwhile, reducing cash reserves means that the central bank wants to increase the amount of money in
circulation. This is interconnected because the higher the cash reserve, the bank of course has
to hold more money and can’t just circulate it.
Bank Indonesia does not only function as an internal reserve, namely managing domestic money circulation.
This central bank also functions as an external reserve, which regulates all matters related to
international payments.
In addition to the above functions, Bank Indonesia also used to supervise banks and various companies
engaged in the financial sector. However, now this task has shifted to the authority of the
Financial Services Authority (OJK).
This is a discussion of the meaning and duties of the central bank. Hopefully all the
discussion above is useful as well as add to your insight. Sinaumed’s can get more knowledge about
the duties of a central bank by reading books available at sinaumedia.com .
As #FriendsWithoutLimits we always try to give the best. Reading lots of books and articles
will never hurt you, because Sinaumed’s will get #MoreWithReading information and knowledge.
Author: Yufi Cantika Sukma Divine