Jakarta, Indonesia Sentinel — In an unprecedented development, Indonesia recorded the highest number of rural bank (Bank Perkreditan Rakyat or BPR) closures in its history, with 20 financial institutions shuttered in 2024. This figure is a sharp increase compared to the annual average of 6-7 closures, as reported by the Indonesia Deposit Insurance Corporation (Lembaga Penjamin Simpanan, or LPS).
The closures highlight challenges in governance and fraud prevention within Indonesia’s rural banking sector, a crucial financial system serving smaller communities and micro-enterprises. However, authorities argue that the banking system’s resilience has mitigated any significant public unrest or economic shock.
Regulatory Confidence Amid Rising Closures
Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan or OJK) acknowledged the surge in closures but emphasized the absence of broader financial instability. Dian Ediana Rae, OJK’s Executive Head of Banking Supervision, stated that the swift handling of bank failures showcased the robustness of Indonesia’s regulatory framework.
“The fact that we have closed nearly 20 BPRs this year without causing panic or public distrust speaks volumes about the system’s strength,” Rae said during a webinar hosted by the Indonesian Banking Development Institute in July 2024.
Rae, who also serves as an ex-officio member of LPS, emphasized that prompt action by the deposit insurance authority has ensured depositor funds remain secure. “This is a critical step to maintain public confidence in our financial institutions, whether rural banks or commercial banks,” Rae added.
Systemic Weaknesses: Fraud and Governance Failures
Despite regulatory optimism, underlying issues persist within the rural banking sector. Ary Zulfikar, LPS’s Executive Director of Legal Affairs, identified fraud and governance lapses as the primary culprits behind the closures.
- Inadequate Oversight
A lack of tiered supervision has allowed mismanagement at various organizational levels, from shareholders to directors and staff. - Fictitious Loans
In many cases, bank executives have collaborated with borrowers to approve loans without proper assessment. Some schemes involve kickbacks or fabricated projects, resulting in substantial financial losses. - Misappropriation of Deposits
Another troubling trend involves unauthorized withdrawals from customer accounts. Without robust IT systems, such fraudulent activities often go unnoticed until it’s too late.
Zulfikar underscored the importance of adopting advanced IT systems to strengthen governance and prevent fraud. “Technology can automate credit approvals, flag suspicious activities, and improve overall oversight, making fraud significantly harder to execute,” he said.
A Growing List of Bank Failures
The year 2024 saw closures across various regions of Indonesia, affecting both urban and rural communities. Below are some notable institutions that ceased operations:
- BPR Wijaya Kusuma
- BPRS Mojo Artho Kota Mojokerto (Perseroda)
- BPR Usaha Madani Karya Mulia
- BPR Pasar Bhakti Sidoarjo
- BPR Purworejo
- BPR Aceh Utara
- BPR Bali Artha Anugrah
- BPR Nature Primadana Capital
The list highlights how widespread the issue has become, from Java to Aceh and Bali, underscoring systemic vulnerabilities in smaller financial institutions.
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The Road Ahead: Reforms and Opportunities
While the closures raise concerns, they also present opportunities for reform. Strengthening oversight mechanisms, adopting digital solutions, and enhancing training for banking professionals are some of the immediate steps Indonesia can take.
By focusing on these areas, the rural banking sector could transform into a more resilient and trustworthy pillar of Indonesia’s financial ecosystem. For the United States, Indonesia’s efforts in addressing these challenges may provide valuable lessons in balancing regulatory rigor with financial inclusion.
(Becky)
