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ECONOMIC REPORT ON INDONESIA 2018

CHAPTER 5

Monetary policy in 2018 was focused on safeguarding economic stability with emphasis

on the exchange rate, amid mounting global uncertainty. Bank Indonesia made

preemptive, front-loading and ahead-of-the-curve increases in the policy rate in order

to maintain the attractiveness of domestic financial markets and keep the current account deficit within safe limits. Bank Indonesia backed up its monetary policy with exchange rate stabilization in line with fundamentals, a monetary operations strategy for

maintaining adequate levels of liquidity, strengthening of the Global Financial Safety Net

for external resilience, and coordination with the Government and relevant authorities.

Monetary Policy

CHAPTER 5 | ECONOMIC REPORT ON INDONESIA 201870 |

Monetary policy focused in 2018 on safeguarding

economic stability with emphasis on the

exchange rate, amid growing uncertainty in the

global economy. The significant events of the first three quarters of 2018 – the increases in the US Federal Funds

Rate (FFR) and uncertainty on global financial markets – led to reduced inflows of foreign capital into emerging markets, including Indonesia. These developments were

challenging for monetary policy in countries with open

economies. At the same time as the current account

deficit was widening in response to solid domestic demand, foreign capital inflows were in decline. In turn, this had a negative impact on the balance of payments

(BoP) and exacerbated downward pressure on the rupiah.

This challenge was particularly evident in the second

and third quarters of 2018, necessitating an urgent

response because of the risk to economic and financial system stability and the risk of loss of economic growth

momentum.

Various monetary policy strategies were optimized to

safeguard economic stability. The aim of these strategies

was to maintain the attractiveness of domestic financial markets and keep the current account deficit within safe limits. The policy rate, the Bank Indonesia 7-Day

(Reverse) Repo Rate (BI7DRR), was raised a cumulative

175 basis points in preemptive, front-loading moves

ahead of the monetary policy curve, in order to maintain

the attractiveness of domestic financial markets. These measured actions were taken to control the rupiah

exchange rate and were also consistent with measures

to keep inflation in 2018 and 2019 within the 3.5±1% target range. Bank Indonesia also sought to maintain

exchange rate stability in line with fundamentals, without

interfering with market mechanisms. In addition, Bank

Indonesia enhanced its monetary policy strategy in

order to maintain adequate money market and banking

liquidity, which had tightened as a result of a decline

in foreign capital inflows. And it worked to strengthen the Global Financial Safety Net (GFSN) with the aim

of improving external sector resilience. Lastly, closer

coordination was forged between the Government and

other authorities to bolster the effectiveness of monetary policy in safeguarding economic stability.

The monetary policy responses and the policy mix

implemented by Bank Indonesia and the Government

have successfully further strengthened Indonesia’s

external resilience, kept the economy stable and

sustained the country’s economic growth momentum. In

the fourth quarter of 2018, a renewed increase in foreign

capital inflows occurred, driven by Indonesia’s attractive domestic financial assets, its prudently managed economic stability and the continued positive outlook for

the domestic economy. These policy responses had also

begun to successfully curb imports. In combination with

the increase in foreign capital inflows, these moves by Bank Indonesia and the Government helped to place the

rupiah on an appreciating trend in the fourth quarter of

2018. In parallel developments, inflation in 2018 remained subdued in line with the 3.5±1% inflation target and thus helped to underpin strong economic growth. Key to these

positive developments was the sound functioning of

monetary policy transmission and prudently managed

financial system stability.

5.1. Increasing the Policy Rate

In 2018, the direction of Indonesia’s monetary policy rate

was set within a framework of determining the optimum

monetary policy for a nation with an open economy.

Bank Indonesia determined the policy rate independently

while considering two further key elements: free

movement of foreign capital and continued flexibility in the exchange rate. In keeping with the framework, Bank

Indonesia sought, with its interest rate policy, to create

an adequate interest rate differential and also to bolster the attractiveness of investing foreign capital in domestic

financial market assets. However, the policy rate also remained consistent with measures to keep inflation on track. At the same time, exchange rate policy focused on

maintaining exchange rate stability at about the level of

fundamentals so that it could serve as an instrument for

mitigating external shocks to the economy.

The 2018 increases in the FFR posed a challenge

for monetary policy in emerging market countries,

including Indonesia, in managing economic stability.

These increases reduced the attractiveness of investing

foreign capital in emerging markets. Consequently,

Chapter 5Monetary Policy

ECONOMIC REPORT ON INDONESIA 2018 | CHAPTER 5 | 71

inflows diminished and put pressure on emerging market currencies, including the rupiah. The widening of

Indonesia’s current account deficit over this period put strong pressure on the rupiah, as imports grew rapidly

to satisfy buoyant domestic demand. Furthermore, the

decline in exports consistent with the slowdown in world

economic growth put additional pressure on the current

account.

Bank Indonesia acted consistently within the policy

framework to introduce preemptive, front-loading

and ahead-of-the-curve increases in the BI7DRR. The

preemptive increases in the BI7DRR were linked to the

forward-looking, anticipatory response of Bank Indonesia

to the risk of increases in the FFR and uncertainty on

global financial markets. The front-loading response meant that the magnitude of the increase in the

Indonesian policy rate took into account the possible

extent of an increase in the FFR, so that the interest rate

differential would remain sufficiently large to maintain the attractiveness of domestic assets. Alongside this, the

ahead-of-the-curve response was related to the fact that

the magnitude of Indonesia’s policy rate increases would

also anticipate interest rate increases in other emerging

markets so that the domestic financial market would remain competitive.

Increases in the BI7DRR began in May 2018, and total

increases of 175 basis points lifted the rate to 6.0%. Bank Indonesia began with a 25 basis point increase in the

BI7DRR in May 2018 in response to the Federal Reserve’s

decision in March to raise the FFR and the onset of rising

uncertainty on global financial markets. Again in May, Bank Indonesia announced a further increase in the

BI7DRR of 25 basis points, bringing the rate to 4.75%. This increase was decided in a supplementary meeting

of the Board of Governors after considering the mounting pressure from external factors. In June 2018, Bank

Indonesia announced yet another increase in the BI7DRR,

this time by 50 basis points, in view of the escalating

global uncertainty that was being triggered by predictions

of more aggressive increases in the FFR, as well as rising

oil prices and tensions in US–China trade relations. In

the third quarter of 2018, Bank Indonesia again raised

the BI7DRR, but less aggressively in keeping with the

new lower level of pressure and global uncertainties

compared to the second quarter. By the beginning of

the fourth quarter, global uncertainties were fading, and

Bank Indonesia raised the BI7DDR by only 25 basis points.

Overall, the increases in the policy rate succeeded in

maintaining attractive levels in domestic interest rates,

reflected in the high interest rate differential (Chart 5.1).

5.2. Maintaining the Exchange Rate in Line with Fundamentals

Interest rate policy responses were also supported

by action to maintain exchange rate stability in line

with rupiah fundamentals, while retaining flexibility and promoting the operation of market mechanisms.

Bank Indonesia focused its exchange rate policy on

ensuring that economic adjustments made amid the

global uncertainty could move forward as intended and

support steady, continued economic growth. Exchange

rate stability in the midst of global uncertainty was

also important because it would minimize the risk of

excessive expectations of depreciation, and would also

stop pressure emerging on price stability and the financial system.

The policy strategy for stabilization of the rupiah

exchange rate was implemented in two parts. First, Bank

Indonesia optimized interventions on the forex market

and the government bonds market. Bank Indonesia

made selling interventions on the forex market to

minimize excessive fluctuation in the rupiah, and it bought government securities on the secondary market

to maintain rupiah liquidity, which had declined when

the forex market interventions took place. Second, Bank

Indonesia managed liquidity on the forex market and

successfully maintained adequate levels without placing

excessive pressure on the exchange rate.

Grafik 6.1. Suku Bunga Kebijakan dan Suku Bunga PUAB O/N

Interest Rate Policy - FFR Real Interest Rate Policy (rhs)

Percent Percent

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

-5

0

5

10

15

20

25

Turkey IndonesiaThailand Malaysia Brazil India

Source: CEIC

Chart 5.1. Interest Rate Differential and Real Interest Rate


Bank Indonesia backed up its exchange rate policy

with action on financial market deepening in both the rupiah and forex markets. These included developing

hedging instruments such as overnight index swaps (OIS),

interest rate swaps (IRS) and domestic non-deliverable

forwards (DNDF). It also included policies to support the

effectiveness of hedging transactions, including removal of the requirement for cash collateral to be provided for

structured product transactions. The launch of DNDF

transactions on 1 November 2018 indirectly contributed to

more stable movement in the rupiah exchange rate, due

to the availability of this hedging facility inside Indonesia

and the growing numbers of market actors conducting

such transactions. The introduction of DNDF transactions

provided market actors with another alternative in

conducting transactions on the forex market; they had

relied more on spot transactions in the past. The broader

range of alternative instruments eased forex demand

on the spot market, which in turn contributed to more

efficient shaping of price expectations on the domestic forex market. This efficiency also resulted from the diminished role of the offshore non-deliverable forwards market, which had often been used as a benchmark for prices. These positive developments contributed to

stability in the rupiah.

Bank Indonesia also took measures to ensure adequate

liquidity on the domestic forex market and thus minimize

secondary risks to the rupiah exchange rate. It introduced

changes to the rules and transactions features of a

number of policy instruments. These changes included

the setting of a more efficient swap premium and the expansion of eligible underlying transactions for hedging

swaps with Bank Indonesia to include proof of transfer of

export proceeds. It also lowered the minimum amount

for hedging swap transactions with Bank Indonesia from

USD10 million to USD2 million. In regard to hedging

instruments, Bank Indonesia engaged in more extensive

communication with exporters and customers. It held

awareness-raising events and published planned auctions

of forex instruments and the outcomes on the Bank

Indonesia website in order to promote the development

of forex hedging transactions on the domestic forex

market.

5.3. Maintaining Adequate Liquidity

Bank Indonesia reinforced its monetary policy with an

operational strategy for maintaining adequate liquidity in

the money market and banking system. Bank Indonesia

decided to implement this policy because the decline

in foreign capital inflows would reduce liquidity in the money market and banking system. Action was needed

to forestall this possibility, which could have impacted

banking resilience particularly with regard to adequate

liquidity, given that credit growth was on an upward

trend. Anticipatory action was also necessary because

such developments may affect financial system stability.

Consistent with this direction in monetary policy

operations, Bank Indonesia employed a number of

strategies in the second and third quarters of 2018 to

ensure the availability of liquidity on the money and forex

markets during a time of mounting global pressure. First,

Bank Indonesia increased the frequency of auctions for

short-tenor government securities reverse repo (RR SBN)

transactions, covering the 1-week, 2-week, and 1-month

tenors, to support the restructuring of bank liquidity

profiles. Auctioning of the 1-week government securities reverse repo instrument was increased from twice a week

to three times per week beginning in April 2018, and then

followed by daily auctions starting in September 2018.

Flexibility was introduced to the 2-week and 1-month

tenor RR SBN to keep pace with the liquidity needs of

banks.

Bank Indonesia also introduced measures to optimize

the short-term government securities reverse repo

instruments in open market operations (OMO). Besides

maintaining adequate liquidity, a further purpose of this

strategy was to increase the use of government securities

as an open market operations instrument, consolidate

the debt securities market and improve financial market deepening. The government securities reverse repo was

optimized through a phased lengthening of tenors for this

instrument. Bank Indonesia began auctioning 6-month government securities reverse repo in early July 2018,

replacing the previous use of Bank Indonesia Certificates of Deposit. Bank Indonesia also reactivated auctions of

Bank Indonesia Certificates (SBIs) for the 9-month and 12-month tenors in July 2018 in an effort to stimulate foreign capital inflows. Following this, Bank Indonesia launched auctions of 9-month government securities reverse repo to replace 9-month SBIs at the end of September 2018. Following this strategy, Bank Indonesia

employed government securities reverse repo for most

of its operations, with tenors ranging from 1 week to 9 months.


In the fourth quarter of 2018, the focus of the monetary

operations strategy began to shift towards support for economic financing, but with an ongoing focus on safeguarding economic stability. This policy direction

was adopted because economic stability had returned to

a safe level, and this opened up space to implement the

strategy. During this period, Bank Indonesia strengthened

monetary operations by allowing greater access for the

banking system in order to expand liquidity. This strategy

was implemented by continuing the strengthening of

monetary operations undertaken in the preceding period,

including fine tune operations and auctioning of foreign exchange swaps.

The policy operational strategy for maintaining adequate

liquidity was bolstered by an increase in the average

statutory reserve portion. In 2018, the average statutory

reserve portion was increased twice, first to 2% from 1.5% in July 2018 and later to 3% in December 2018.1

The second policy was a continuation of the reforms

of the monetary policy operational framework for

increasing flexibility in liquidity management by banks, strengthening the bank intermediary function and

supporting measures for deepening of the financial market (Box 5.1 Implementation of the Average Statutory

Reserve Requirement).

The findings of a Bank Indonesia study demonstrate the considerable effectiveness of the average statutory reserve requirement in influencing flexibility in bank liquidity management. This was reflected in growing use by banks of the instrument and reduced volatility in

interbank rates. Banks made increased use of the average

rupiah statutory reserves following the increase in the

average statutory reserve portion in July 2018. Alongside

this, banks have also started to make use of the 2% average foreign currency statutory reserve requirement,

which came into effect on 1 October 2108. The number of banks using the average statutory reserve requirement

increased to 42 in the period from July to December 2018,

up from 28 banks in the period from October 2017 to end-

June 2018.

In tandem with the strategy for safeguarding liquidity,

Bank Indonesia also issued sharia financial instruments, in this case sharia certificates of deposit and Bank Indonesia sukuk (SukBI), or Islamic bonds. The sukuk

1 The increase in the average statutory reserve portion is set out in Board of Governors

Members Regulation No. 20/30/PADG/2018 dated 30 November 2018, which came into force on 1 December 2018.

instrument auctioned for the first time on 21 December 2018 were sukuk instruments with underlying assets in

the form of sharia-compliant securities held by Bank

Indonesia. SukBI will replace the use of the government

sharia securities (SBSN) reserve repo instrument. One

of the advantages of SukBI compared to reverse repo

instruments is that ownerships of SBSNs or government

sharia treasury notes, which comprise the underlying

assets for SukBI, are not transferred to banks. Another

advantage is that SukBI are not based on an akad

wa’d (sellback agreement) with Bank Indonesia and

can therefore be traded more flexibly. The more flexible features of the SukBI instrument enable sharia open market operations to be carried out in more

comprehensive range of tenors, thus supporting bank

liquidity management.2

Support for adequate banking liquidity was provided via

various monetary operations strategies. This was evident

from the monetary operations ratio indicator, in addition

to the adequate level of bank holdings of government

securities. On one hand is the contractionary monetary

operations position and its ratio to rupiah deposits,

which represents one indicator of bank liquidity. This

ratio decreased temporarily in the second and third

quarters of 2018 before resuming upward movement in

the fourth quarter of 2018.3 The contractionary monetary

operations position and its ratio to rupiah deposits,

following a decline to IDR392.4 trillion (8.5% of deposits) and IDR302.0 trillion (6.5% of deposits) at the end of the second and third quarters of 2018, climbed back to

IDR382.8 trillion (7.9% of deposits) in the fourth quarter of 2018. On the other hand, banks expanded their

holdings of government securities, which continued to

demonstrate resilience in banking liquidity. Accordingly,

the combined position of contractionary monetary

operations and bank holdings of government securities,

which also declined temporarily during the second

quarter (IDR853.6 trillion or 18.5% of deposits) and the third quarter (IDR923.0 trillion or 19.8% of deposits), managed to recover by the end of 2018, reaching IDR994.2 trillion or 20.6%. The end-2018 position of contractionary monetary operations plus bank holdings of government

securities was higher than the end-2017 position, which

stood at IDR962.8 trillion (21.2%) (Chart 5.2).

2 Bank Indonesia Sukuk (SukBI) is an instrument for monetary operations and the sharia

money market.

3 The contractionary monetary operations position indicates the total Bank Indonesia monetary operations of a contractionary nature conducted with the banking system.


Overall, the monetary policy strategy pursued amid global

uncertainties was able to keep the monetary base (M0)

position in alignment with the needs of the economy. In

2018, M0 growth came to 6.8%, below the 2017 growth recorded at 11.1% (Chart 5.3). This reduced growth in the monetary base in 2018 is explained by weaker

performance in net foreign assets and net domestic

assets. Average growth in net foreign assets came to

3.6% in 2018, below the 2017 growth of 14.7%. Similarly, average net domestic assets growth was 5.6% in 2018, down from the 2017 growth of 23.5% (Chart 5.4).

5.4. Strengthening the Global Financial Safety Net

Exchange rate policy was also supported by measures

to reinforce external resilience. Indonesia’s international

reserves position remained strong, although it was

recorded at USD120.7 billion at the end of 2018, below

the end-2017 position of USD130.2 billion. The end-2018 international reserves position was sufficient to pay for 6.7 months of imports or 6.5 months of imports and servicing of official external debt, well above the three months of imports that serves as the international

standard. The international reserves position offers strong assurance that Indonesia’s external sector is resilient

and that the country has the capacity to safeguard

macroeconomic and financial system stability.

Further measures by Bank Indonesia to reinforce external

resilience included strengthening of the GFSN through

financial cooperation with monetary authorities in

partner countries or with international institutions

through swap lines or credit lines. The financial cooperation is aimed at supporting international reserves

management in order to resolve difficulties in the BoP or to cover short-term liquidity needs. GFSN facilities can be

used for both crisis prevention and crisis resolution.

Indonesia has GFSN facilities on a bilateral, regional and

multilateral basis, and these were concluded by Bank

Indonesia and/or the Government. On a bilateral level,

Bank Indonesia has partnered with several other central

banks (Table 5.1). This cooperation takes the form of

a bilateral swap arrangement with the Bank of Japan

(BoJ) and a bilateral currency swap arrangement with

the People’s Bank of China (PBoC).4 In other cooperation,

4 The BoJ acts as the agent of the Ministry of Finance of Japan.

Grafik 6.5. Jumlah Bank yang Memanfaatkan GWM Averaging

Gross MO Position SBN Position

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

14.8%

20.2%21.2%

20.6%

2015I II III IV I II III IV I II III IV I II III IV

2016 2017 2018

PercentIDR trillion

Ratio (Contractionary MO + SBN)/IDR Deposit (rhs)

Source: Bank Indonesia

Chart 5.2. Contractionary Monetary Operation Position and Bank Holdings of Government Securities

Grafik 6.6. Pertumbuhan Komponen M0

Percent, yoy

M0

Commercial Banks DemandDeposits at BI

Currency in Circulation (CurrencyOutside Banks + Cash in Vaults)

-15

-10

-5

0

5

10

15

20

25

30

I II III IV I II III IV I II III IV I II III IV

2015 2016 2017 2018


Chart 5.3. Growth of Base Money Components

Grafik 6.7. Pertumbuhan Faktor yang memengaruhi M0

Percent, yoy

-30

-20

-10

0

10

20

30

40

50

60


2015 2016 2017 2018

NFA

NDA

M0


Chart 5.4. Growth of Base Money and Its Affecting Factors


a local currency bilateral swap agreement has been

concluded with the Monetary Authority of Singapore

(MAS). In regional-level cooperation, GFSN facilities are

available under the ASEAN Swap Arrangement and Chiang

Mai Initiative Multilateralization (CMIM). The objective

of cooperation under the ASEAN Swap Arrangement and

CMIM is to provide short-term liquidity to ASEAN member

nations. At the multilateral level, the International

Monetary Fund also has facilities available in the form of

flexible credit lines, precautionary and liquidity lines and stand-by arrangements for all members who meet the

required criteria.

At the regional level, Bank Indonesia successfully

concluded agreements for expanded financial

cooperation during 2018. In October 2018, Bank Indonesia

strengthened its bilateral swap arrangement with the

BoJ to allow rupiah swap transactions to be conducted

against US dollars and/or Japanese yen. Prior to this,

only US dollars could be used. On 5 November 2018, Bank

Indonesia reached agreement on financial cooperation with MAS on a local currency bilateral swap agreement

and bilateral repo line. The cooperation with MAS is

aimed at bolstering monetary and financial stability, and the economic development of both nations. In other

developments, on 16 November 2018, Bank Indonesia expanded the scope of its bilateral currency swap

arrangement with PBoC by increasing the value of the

facility provided and extending the term of validity.

Table 5.1. Financial Cooperation in GFSN

Facility Type Objective ValueSigning of the

Agreement

Validity

PeriodDetails

Bilateral

BSA BI-BoJ

Bilateral swap arrangement between the

Rupiah and US dollar and / or the Japanese

Yen to overcome liquidity difficulties due to balance of payments problems or short-

term liquidity

BoJ’s commitment: USD22.76 billion

14 October 2018 3 years

BCSA BI-PBoC


Rupiah and the Chinese Yuan to solve

short-term liquidity difficulties, encourage bilateral trade and direct investment

between the two countries and other

objectives according to mutual agreement

Bank Indonesia and PBoC’s

commitment: USD30 billion, respectively

16 November 2018 3 years

The value increased from

the previous agreement

USD15 billion. This facility

is aimed to support

trade transaction and

investment between two

countries

LCBSA BI-MAS


Rupiah and the Singapore dollar to gain

access to liquidity in foreign currencies, if

needed, to maintain monetary and financial stability

Bank Indonesia and MAS’

commitment: USD7 billion,

respectively

5 November 2018 1 year

Regional

ASA

Regional swap arrangement between the

Rupiah and the US dollar / Japanese Yen

/ Euro to provide short-term liquidity for

ASEAN member countries experiencing

balance of payments problems

USD2 billion 17 November 2017 2 years

Extended several times

since first signing in November 2005

CMIM

Regional swap arrangement between the

Rupiah and the US dollar to overcome

balance of payments difficulties and short-term liquidity for ASEAN member countries

USD240 billion (the maximum

facility that can be withdrawn

by Indonesia is USD22.76 billion)

Bank Indonesia’s commitment:

USD9.1 dollar

17 July 2014

Not

limited,

evaluated

every 5

years

Amendment of agreement

for strengthening CMIM

facilities. The initial

agreement was signed in

March 2010

Multilateral

IMF

Provision of liquidity for member countries

that meet the criteria to resolve liquidity

difficulties

a. FCL: uncapped

b. PLL: up to 125% (period of 6 months) or 250% -500% quota (period of 1-2 years)

c. SBA: 145%-435% quota


Bank Indonesia also joined central banks of partner

countries to increase diversification in use of currencies in international trading transactions. The objective of

this cooperation is to promote the use of local currency

settlement in bilateral trading transactions under the

bilateral currency swap arrangement scheme, which

helps to maintain a stable rupiah exchange rate. Bank

Indonesia has now entered into bilateral currency swap

arrangement agreements with PBoC, Bank of Korea and

the Reserve Bank of Australia (Table 5.2). Another form

of cooperation is the local currency swap framework

(LCS), which encourages banks that are appointed

cross-currency dealers to facilitate local currency swap

transactions. The LCS framework is an agreement

between Bank Indonesia, Bank of Thailand and Bank

Negara Malaysia.

5.5. Building Closer Policy Coordination

Policy coordination between Bank Indonesia and the

Government was strengthened further to support

the effectiveness of monetary policy in safeguarding macroeconomic stability. Policy coordination was carried

out to support achievement of the inflation target and to keep the current account deficit within safe limits. Coordination for inflation control and reduction of the current account deficit is also implemented through the development of sharia economics and finance and the expansion of the role of micro, small and medium

enterprises (MSMEs).

On inflation control, Bank Indonesia worked steadily to build closer cooperation with central and regional

government. In January 2018, the Government and Bank

Indonesia agreed five strategic measures to keep inflation in 2018 within the 3.5±1% target range.5 In August 2018,

Bank Indonesia and the Government also reached

agreement on strategic actions to keep inflation within the 3.5±1% target range over 2018 and 2019 and to bring inflation lower to 3.0±1% in the medium term, or 2020 to 2021. These measures were put in place primarily to keep

volatile foods (VF) inflation at around 4% under a four-pillar strategy (known as the 4K strategy) of affordability of prices, availability of supplies, quick distribution and

effective communications.

Bank Indonesia also worked steadily to strengthen

coordination with the Government for control of

food prices in advance of the Idul Fitri holidays. This

coordination took place in the Central Inflation Control Team (TPIP) and Regional Inflation Control Teams (TPIDs). Control of food inflation was also supported by refinements in regulations relating to inflation control. In addition, coordination was also strengthened at the

regional government level, and consistent effort was made in 2018 to build stronger coordination between

central and regional governments via TPID national

coordinating meetings.

MSME suppliers of vital foods were also strengthened as

part of Bank Indonesia’s inflation control work, because their products contribute significantly to VF inflation. Bank Indonesia continued to develop clusters in various

regions for the five vital food commodities. This scheme

5 These were agreed in a coordinating meeting of heads of government agencies and line

ministries grouped within the TPIP in Jakarta on 22 January 2018. It requires parties to

control VF inflation, manage the amount and timing of AP price increases, strengthen coordination, strengthen data quality and strengthen Bank Indonesia’s policy mix to

maintain macroeconomic stability.

Table 5.2. Financial Cooperation in LCS framework

Facility Type Objective ValueSigning of the

Agreement

Validity

PeriodDetails

BCSA BI-BoK


Rupiah and the Korean won to increase

bilateral trade and strengthen financial cooperation for the economic development

of the two countries

Bank Indonesia and BoK’s

commitmet: KRW10.7 trillion,

respectively

6 March 2017 3 years

BCSA BI-RBA

Bilateral cooperation to increase bilateral

trade and other objectives in accordance with

agreement of both parties for the economic

development of the two countries

Bank Indonesia and RBA’s

commitment: AUD10 billion,

respectively

16 November 2018 3 years Effectively started on December 15, 2018


support provision of labor; and (iv) expanding the export

market for Indonesian industry.

Policy coordination also took place in relation to efforts to strengthen the role of tourism in improving the current

account. A central and regional government coordinating

meeting held on the topic of accelerating development of

priority tourist destinations put forward nine strategies

that represent common priorities. The nine strategies

are (i) adoption of a strategy for achieving tourism

performance targets through increased accessibility,

diversity of attractions, quality of amenities, support from

more robust marketing and capacity building for those

working in tourism; (ii) strengthening of tourism data

and information; (iii) improved access to financing for tourism businesses; (iv) increased availability of payment

system services, the digital economy and the associated

ecosystems; (v) stronger synergy between business

and government in promotion of tourism destinations;

(vi) improved access or connectivity by land and air;

(vii) integrated tourism attractions; (viii) upgrading of

amenities in tourist destinations; and (ix) improvements

in quality of HR and tourism businesses. 9

Bank Indonesia also promoted the development of sharia

economics to reinforce the structure of the economy. This

was carried out both through development of the halal

economic chain, involving the economic empowerment

of Islamic boarding schools (known as pesantren,

they also operate similarly to community centers),

and development of sharia-compliant businesses in a

number of sectors and for various commodities, including

tourism, food, fashion and MSMEs. Development of

sharia economics and finance and halal lifestyles are also promoted through public education and campaign

activities at local sharia economic festivals and the

internationally acclaimed Indonesia Sharia Economic

Festival (ISEF), both now held on a regular basis.

5.6. Transmission Functioning Well

In general, monetary policy transmission functioned well

and thus supported measures to safeguard economic

stability. Monetary policy transmission through the

interest rate channel was visible in movement in the

overnight interbank rate, which tracked the policy rate.

The cumulative 175 basis point increases in the policy

9 See Box 10.1 Tourism to Boost Foreign Exchange.

began in 2006, and is a comprehensive program designed to develop clusters from upstream to downstream.6 Bank

Indonesia’s cluster development scheme has delivered

positive benefits: increases in production, productivity and/or farmer incomes, and more stable prices at the

farmer level.7 In 2018, Bank Indonesia also launched a

new pilot project – a business model for downstream

development of food clusters.8 Clusters for vital food

commodities will be expanded further to support inflation control.

Bank Indonesia also worked closely with ministries and

relevant agencies at the central and regional government

levels. Examples of this include cooperation with the

Ministry of Agriculture, Ministry of Cooperatives and

Small and Medium Enterprises (SMEs), relevant regional

governments and regional sector offices, the banking system and the private sector. The cooperation includes

business skills capacity building for MSMEs and MSME

pilot projects that are focused on vital food commodities.

Bank Indonesia and the agencies it works with can

together develop MSMEs comprehensively – from

upstream to downstream. This cooperation promotes

more sustainable MSME growth and simultaneously

supports inflation control and export growth.

To support efforts for control of the current account deficit, Bank Indonesia progressively strengthened coordination with the Government. The various forms

of coordination included coordinating meetings with

the central and regional governments (Rakorpusda). A

coordinating meeting on developing export-oriented

industry by expanding market access and building

well-supported industrial zones was held, given the

need to strengthen current account performance on

the export side. Delegates at the meeting agreed four

strategic, consistent and synergetic directions. They are (i)

promoting development of export-oriented industries in

the regions; (ii) reducing costs of logistics within domestic

industry; (iii) building human resources (HR) capacity to

6 In the fourth quarter of 2018, 229 clusters were participating in Bank Indonesia’s cluster development scheme. They were distributed around Bank Indonesia’s 46 regional offices. The five vital food commodities are rice, red chili peppers, shallots, garlic and beef.

7 Study findings: Impact of Food Resilience Clusters on Measures for Control of Volatile Foods Inflation (Bank Indonesia, 2018).

8 Downstream development is the development of processing industries using VF

commodities/vital foodstuffs from agroindustry as raw materials for food processing. Contracts are put in place to guarantee prices for farmers and supply for industry or end-

consumers. Farmers are encouraged to produce (upstream activity) and this is followed

by processing of their crops to generate added value and improvements in marketing

(downstream activity).


rate over 2018 were accompanied by increases totaling

190 basis points in the overnight interbank rate, bringing it to 5.83%. The daily average spread between the policy rate and the overnight interbank rate came to 25 basis

points during 2018, below the 43 basis point spread in 2017 (Chart 5.5). The rise in interbank rates was also

accompanied by subdued volatility in the overnight

interbank rate, a trend supported by the adequate

liquidity levels.

Policy rate transmission to time deposit rates operated

more quickly, particularly after the increases in the BI7DRR. From the beginning of the year through April

2018, time deposit rates progressively declined in keeping

with the reductions in the policy rate since January 2016. The cumulative 200 basis point reductions in the policy

rate from January 2016 to April 2018 were followed by 213 basis points of decline in time deposit rates. During the May-to-October period of increases in the policy

rate, the BI7DRR, transmission of increases began to take

effect in time deposit rates in June. Time deposit rates climbed 102 basis points from June to December 2018,

reaching 6.88%. In analysis by tenor, time deposit rates were up in all tenors, although the 12-month tenor saw

only a modest rise. The strongest increase in deposit rates

took place in the 1-month tenor, which rose 119 basis points following the period of increases in the policy rate.

Deposit rates in the 3- and 6-month tenors also climbed incrementally with increases totaling 101 bps and 94 bps respectively by the end of 2018 (Chart 5.6).

Transmission of policy rate increases to lending rates was

not as pronounced as for transmission to time deposit

rates because, at that point in the financial cycle, credit growth and demand were still low, liquidity was adequate

and banks needed to expand credit. The less-than-ideal

transmission of policy rate increases was reflected in the gradual decline in lending rates, and also the uneven

distribution of increases in lending rates. In analysis

by credit category, rates for investment credit edged

upwards by 9 basis points, while downward movement persisted in working capital credit, with rates falling by

18 basis points, and in consumer credit, with rates falling

by 61 basis points. From the beginning of the series of increases in the policy rate to the end of 2018, the

weighted average lending rate fell 27 bps to 10.81% (Chart 5.7). The sustained decline in lending rates during a time

of rising deposit rates resulted in a narrowing of the bank

interest rate margin (Chart 5.8).

Grafik 6.8. Spread Suku Bunga Kebijakan dan Suku Bunga PUAB O/N

Spread of BI Rate & O/N Interbank Rate

Spread of BI-7DRR & O/NInterbank Rate

Average of BI Rate & O/NInterbank Rate Spread

Average of BI-7DRR& O/N Interbank RateSpread


0

50

100

150

200

250


2015 2016 2017 2018

bps

Chart 5.5. Policy Rate and Overnight Interbank Money Market Spread

12 Months24 Months

1 Month

3 Months

Grafik 6.9. Suku Bunga Deposito Berdasarkan Tenor

I II III IV I II III IV I II III IV I II III IV2015 2016 2017 2018

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

Weighted Average of Deposit Rate6 Months


Percent

Chart 5.6. Time Deposits Rate by Tenor

Grafik 6.10. Pertumbuhan Kredit dan Suku Bunga Berdasarkan Jenis Penggunaan


2015 2016 2017 2018

6

7

8

9

10

11

12

13

14

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

Weighted Averageof Credit Rate

InvestmentCredit Rate

ConsumptionCredit Rate

Credit Growth (rhs)

Working CapitalCredit Rate

Percent, yoyPercent


Chart 5.7. Credit Growth and Credit Rate


Continued decline in lending rates, coupled with strong

domestic demand, led to more rapid credit growth.

Acceleration of credit growth was recorded in working

capital credit and investment credit, but growth in

consumption credit was lower. This resulted, however,

in an overall increase in credit growth to 11.8% in 2018, up from 8.2% in 2017. In disaggregation by currency, rupiah lending grew 11.1% in 2018, increasing from 8.3% growth in 2017. At the same time, credit growth in foreign

currency reached 15.5% at the effective exchange rate (or 7.5% at a constant exchange rate), up in comparison to 8.2% growth in 2017.

In contrast to transmission in the bank credit channel,

policy rate transmission operated more strongly

in the asset price channel, as reflected in yields on government and corporate bonds. Yields on 10-year

government bonds climbed in 2018 to 8.0% from 6.3%. Yields on corporate bonds similarly rose, as indicated

by an increase in the weighted average interest rate on

corporate bonds. This increase in corporate bonds yields

slowed the pace of financing on the financial market in initial public offerings (IPOs), rights issues, corporate bonds, medium-term notes and certificates of deposit.10,11

In 2018, total financing raised on financial markets came to IDR209.3 trillion. Interest in financing on the corporate financial market began to fade in June 2018, one month after the change in direction in the policy rate. In analysis

10 IPOs are the initial public sale of shares in a company to investors, while rights issues offer shareholders the opportunity to buy new shares at a specified price and within a defined period.

11 Medium-term notes are debt securities with terms of five to ten years. Negotiable certificates of deposit are holdings in the form of time deposits, where certificates documenting the existence of the deposit are transferable or negotiable.

by components, the slowdown took place mostly in

rights issues and corporate bond issues. Following these

developments, financing on the financial market grew by 7.2% in 2018, having slowed from 17.3% growth in 2017.12

The various forms of monetary policy transmission

helped maintain adequate economic liquidity in line

with the needs of the economy, despite some decline

in comparison to 2018. M1 growth reached 4.8% at the end of 2018, down from 12.4% at the end of 2017. The downturn in M1 growth took place mainly in rupiah

demand deposits, while growth in cash currency

remained stable. Meanwhile, quasi-money registered

6.8% growth, just under the 6.9% recorded at the end of 2017. This lower rate of growth in quasi-money

is explained largely by contraction in rupiah and

foreign currency time deposits. In response to these

developments, M2 growth reached 6.3% at the end of 2018, below the 8.3% growth recorded at the end of 2017 (Chart 5.9). The slowdown in M2 growth is explained mainly by contraction in net foreign assets, though it is

offset by increased lending by banks.

12 See Chapter 7 for discussion of transmission in the bank credit and asset price channels.

Grafik 6.11. Kontribusi Komponen Kuasi

0

1

2

3

4

5

6

7

4

5

6

7

8

9

10

11

12

13

14

2015I II III IV I II III IV I II III IV I II III IV

2016 2017 2018

BI-7DRR

Weighted AverageCredit Rate

Weighted Average Deposit Rate


BI Rate

Spread of Credit - Time Deposit (rhs)

Percent Percent

Chart 5.8. Time Deposit and Credit Rate Spread

Grafik 6.15. Pertumbuhan Komponen M2

Quasi Money

M2

M1

2

4

6

0

8

10

12

14

16

18

Percent, yoy

20

I II III IV2015

I II III IV2016

I II III IV2017

I II III IV2018


Chart 5.9. Growth of M2 Components


Implementation of the Average Statutory Reserve

Requirement

Box 5.1.

Since 1 July 2017, Bank Indonesia has implemented an

average statutory reserves policy as part of its reformulation

of the operational framework for monetary policy.

Before implementation of this average statutory reserve

requirement, banks were required to meet their entire

statutory reserves obligation in full on a daily basis. The new

rule requires gives banks more flexibility in managing the minimum funds that they must retain at Bank Indonesia,

with adjustments depending on their liquidity conditions.

Most importantly, this new rule can reduce volatility on

the interbank money market so that monetary policy

transmission from the Bank Indonesia policy rate to

the policy operational target, in this case the interbank

overnight rate, is more effective and liquidity management is optimized. In the initial stage of the new average statutory

reserve, the policy applied only to rupiah primary statutory

reserves held by conventional banks, and only on 1.5% of deposits (the total primary statutory reserve requirement is

6.5% of deposits).

Subsequently in 2018, the average statutory reserves

provisions were amended several times. On 16 July 2018, Bank Indonesia increased to 2% from 1.5% the portion of deposits to which the average statutory reserves portion

could be applied. It also expanded the scope of the policy

to include sharia commercial banks and sharia divisions

of conventional banks; they may apply the averaging

policy to up to 2% of their full 5% statutory reserve requirement. Then, with effect from 1 October 2018, the expanded flexibility was extended to foreign currency statutory reserves. The amendment allowed conventional

commercial banks to apply the average statutory reserves

rule to foreign currency reserves – at up to 2% of their total 8% reserve requirement. In a subsequent response to challenging conditions in bank liquidity throughout

2018, the average rupiah statutory reserves portion for

conventional and sharia banks was raised again – to 3% from 2%. This policy represents one form of Bank Indonesia support for increasing flexibility and distribution in rupiah liquidity in the banking system.

Bank Indonesia’s average statutory reserve requirement

quickly and successfully improved efficiency in management of bank liquidity, as reflected in the reduction of idle money recorded in bank excess reserves.1 The

average statutory reserve requirement permits better

management of bank excess reserves, because banks

can use their excess reserves from an earlier point in the

maintenance period to remain in compliance with the

statutory reserve requirement. Within four months of

the launch of the average statutory reserve requirement

(July–October 2017), excess reserves, or idle money held by

banks, was reduced by 50%. Ideally, this idle money can be allocated to other income-earning instruments or loaned

out. Bank Indonesia worked steadily to bring about these

efficiency improvements, another of which was prescribing a zero interest rate for bank reserves held at Bank Indonesia

effective from 16 July 2018.2 The objective of this change

was to encourage banks to make optimum use of average

statutory reserves, which in turn would reduce idle money

in the banking system.

Banks steadily expanded their use of the average statutory

reserve requirement. Average use of this instrument reached

7.4% of the total statutory reserve requirement over the period from July to December 2018 (Chart 1). Daily average

use of the average statutory reserve requirement reached

IDR9.30 trillion at the end of 2018, approximately equal to the daily average volume on the overnight interbank market

in December 2018 of IDR9.79 trillion. At the same time, the

1 Excess reserves are the surplus of bank reserves held at Bank Indonesia.

2 In keeping with practice at the majority of central banks in other countries.

Grafik 2. Jumlah Bank yang Memanfaatkan GWM


MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2

MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2

MP 1

MP 2

7 108 9 12 1 2 3 4 5 6 711 108 9 12112017 2018

0

2

4

6

8

10

12

0

2

4

6

8

10

12

Percent of Reserve RequirementAveraging Utilization

Percent of utilization IDR trillion

Average Statutory Reserve Requirement Utilization

Chart 1. Average Statutory Reserve Requirement Utilization


banking system made optimum use of the foreign currency

average statutory reserve requirement of 2% effective from 16 July 2018 and 3% from 1 December 2018. Overall, the number of banks using the average statutory reserve

requirement increased to an average of 42 per maintenance

period from July to December 2018, up from an average

of 28 banks per maintenance period in the period from

October 2017 to end-June 2018 (Chart 2).

The banking system took advantage of the average

statutory reserve requirement as a means of optimizing

liquidity. Early in the implementation period (an

observation period took place from August to November

2017), no specific pattern in use of the average statutory reserves was visible. However, a pattern of use according to the maintenance period did start to emerge as banks

developed greater understanding of the policy and adapted

accordingly. Some banks had excess balances at the

beginning of a maintenance period and then, near the end

of the maintenance period, took advantage of the leeway

offered by the average statutory reserve requirement.3 This

pattern was visible in the increasing day-to-day variation in

bank reserves balances over the span of several subsequent

observation periods (Chart 3). These findings indicate that average statutory reserves had come into regular use as

part of the liquidity management strategies of some banks.

Even so, the pattern of use of the new flexibility in statutory reserves was varied, influenced by liquidity conditions and a bank’s motivation for using it.

3 The excess bank reserves referred to here are funds minus the amount required for primary statutory reserves (including the average statutory reserves portion).

As envisaged in the initial design, the average statutory

reserve requirement and subsequent increases in the

percentage level successfully reduced volatility on the

interbank money market. This is evidenced by the negative

and significant parameter of the average statutory reserves portion in the interbank money market rate volatility

equation.4 In addition, estimates using average equations

also indicate that increases in the average statutory reserves

portion resulted in a lower average interbank money market

rate. This finding indicates that liquidity risk was reduced, and that this was coincident to the increase in the average

statutory reserves portion. In addition, the decline in the

average interbank money market rate may also be an

indication of improved pricing efficiency in interest rates, which may ultimately support financial market deepening.

Furthermore, the positive effect of implementing the average statutory reserve will improve policy

implementation and regulation of the average statutory

reserve requirement. An evaluation of the average statutory

reserve requirement since it was introduced in July 2017

indicates that it has contributed to efficiency in the banking system, and has optimized banking liquidity management

and thereby also financial market deepening. This is evident from the steady growth in use of the instrument. Indications

suggest that the average statutory reserve requirement has

reduced volatility on the interbank money market, in line

with the study findings.

4 Harahap, B. A., Bary, P., Kusuma, A. C. M., Tanjaya, E. and Nurunnisa, A. “Evaluasi Implementasi GWM rata-rata,” (Bank Indonesia, 2018).

Grafik 2. Jumlah Bank yang Memanfaatkan GWM


The average of banks using average statutory reserverequirement before July 2018 = 26 banks

After July 2018 = 42 banks

MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2

MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2 MP 1

MP 2

MP 1

MP 2

MP 1

MP 2

7 108 9 12 1 2 3 4 5 6 711 108 9 12112017 2018

0

5

10

15

20

25

30

35

40

45

50

Banks

Chart 2. The Number of Banks Using Average Statutory Reserve Requirement

Grafik 3. Variasi Rerata Posisi Kelebihan Giro Bank Harian3

IDR trillion

Apr 18 - Jul 18 Jun 18 - Sep 18Aug - Nov17 Dec 17 - Mar 18

-10

-5

0

5

20

15

10

+1 +2 +3 -3 -2 -1C

ays after a n enan e er


Note: C is a constant that represents the average of excess reserves in overall days of the maintenanceperiod; +1 and +2 are day 1 and day 2 at the start of the maintenance period, respectively; -1 and-2 are day 1 and day 2 at the end of the maintenance period, respectively.

Chart 3. Average of Daily Excess Reserves in Maintenance Period


Box 5.2.

Bank Indonesia Sukuk as an Instrument for Monetary Operations

and the Sharia Money Market

Bank Indonesia Sukuk (SukBI) form part of the basic

framework of the Bank Indonesia sharia monetary and

macroprudential policy mix. SukBI not only function as an

instrument for sharia monetary operations, but also as an

instrument on the sharia money market. Bank Indonesia

envisages that issues of SukBI will help to strengthen

the role of sharia financial institutions in its policy transmission and will help to expand sharia-compliant

economic financing, while maintaining stability in the national financial system.

Within the framework of the dual (sharia and

conventional) banking system, Bank Indonesia

has implemented the sharia monetary policy and

macroprudential mix as part of its policy mix. The policy

mix seeks to fulfill Bank Indonesia’s mandate to bring price stability and support financial system stability. Under the sharia monetary and macroprudential policy

mix, Bank Indonesia has issued a set of regulations

covering the average statutory reserve requirement,

financing-to-value (FTV), the macroprudential liquidity buffer (MLB) and the macroprudential intermediation ratio (RIM), all based on sharia principles. To support the

effectiveness of this policy mix, a deep sharia-compliant financial market is needed that is capable of facilitating liquidity management needs efficiently, based on sharia principles.

The SukBI instrument represents a further step in the

reform of the monetary policy operational framework and

is a vital part of the basic framework for Bank Indonesia’s

sharia monetary and macroprudential policy mix. Up to

2018, Bank Indonesia employed various sharia-compliant

monetary instruments, such as sharia Bank Indonesia

certificates (SBIS), SBIS repo, government sharia securities (SBSN) reverse repo and sharia term deposits.

SukBI have been issued to replace the SBSN reverse

repo instrument, which is not flexible enough because it cannot be traded. SBSN reverse repos can be negotiated

in repurchase agreements, but the transfer of ownership

of the SBSNs that form the underlying transaction make

this instrument less attractive for liquidity management

on the sharia money market. SukBI are issued in several

tenors to complement the tenors of the existing sharia

monetary instruments and thus support better liquidity

management in the sharia banking system.

In addition, SukBI can be used as collateral for repo

transactions in Bank Indonesia standing facilities, i.e.

provision of rupiah funds in a conventional standing

facility (lending facility) or provision of rupiah funds in

a sharia-compliant standing facility (financing facility). The launch of SukBI was marked by Bank Indonesia

Regulation No. 20/14/PBI/2018 concerning the Second

Amendment to Bank Indonesia Regulation No. 20/5/

PBI/2108 concerning Monetary Operations, which entered

into force on 17 December 2018.

It is envisaged that the issuing of SukBI will strengthen

the role of sharia financial institutions in Bank Indonesia policy transmission and economic financing, because SukBI also function as a sharia money market instrument.

The SukBI characteristics that support its function as a

sharia money market instrument are as follows:

• Term of at least 1 day and no more than 12

months;

• Issued in scripless form;

• May be placed as collateral with Bank Indonesia;

• May only be held by banks;

• On the primary market, only available for

purchase by sharia commercial banks and sharia

divisions of conventional banks;

• May be traded on the secondary market;

• May be purchased by conventional commercial

banks on the secondary market.

SukBI are securities issued by Bank Indonesia with

underlying assets in the form of sharia-compliant

securities held by Bank Indonesia. SukBI apply the al-

musharakah al-muntahiyah bi al-tamlik agreement. This

agreement is essentially a participation or partnership

(shirkah) contract with funds contributed by two or more

parties, followed by the purchase of an ownership portion

(hishah) by one party from the other party or parties at

the end of the contract or at maturity. The agreement


demonstrates that in essence, SukBI holders have joint

ownership with Bank Indonesia of the sharia-compliant

securities that comprise the underlying assets. Bank

Indonesia pays out the income earned on the SukBI at

maturity or before that date in the event that the bank

holding the SukBI is unable to meet its SukBI repurchase

obligation.

For example (Figure 1), Bank Indonesia has 1,000 units

of sharia-compliant securities that form the underlying

assets for issuing SukBI. Bank Indonesia then issues SukBI

on the basis of funds contributed by the investor (in this

case, a sharia commercial bank or sharia division of a

conventional bank) for 999 units of the underlying asset, while retaining one unit as its own contribution of funds.

In this case, a joint contribution of funds (al-musharakah)

is concluded between Bank Indonesia and the investor

with an agreement on the profit-sharing ratio for the income earned from the underlying assets that will be

paid to the investor. At the maturity date, Bank Indonesia

will repurchase the 999-unit portion (hishah) from the investor (al-muntahiyah bi al-tamlik) and pay the income

earned on the SukBI to the investor.

The issuance of SukBI as part of the policy mix has

implications for a number of previous relevant

regulations. In the regulatory framework related to

Gambar 1. Skema Sukuk BI

SBSN Profit(tenor SukBI)

Investor fund participation (syirkah) shareExample: 999 units SukBI

Portion (hishah)

Mutahiyah BitTamlik

SukBI

Profit

Rate

Due date

Profit sharing (nisbah)*

Profit sharingof sukuk holders

BI fund participation (syirkah) shareMin. 1 unit of OMO smallest instrument

(IDR 1 million)

BI’s Sharia Securities(Underlying SukBI)

Example: 1000 units

*Nisbah is one of musyarakah akad principles, which is not necessarily the same with the fund participation ratio (syirkah)

MU

SY

AR

AK

AH

Figure 1. Bank Indonesia Sukuk Scheme

sharia macroprudential management, SukBI come within

the scope of securities eligible for use in complying

with the MLB and sharia-compliant MLB. Therefore,

a second amendment was made to Regulation of the

Board of Governors Members Number 20/11/PADG/2018

dated 31 May 2018 concerning Macroprudential Intermediation Ratios and Macroprudential Liquidity

Buffers for Conventional Commercial Banks, Sharia Commercial Banks and Sharia Divisions. The SukBI

instrument also satisfies the criteria for high-quality sharia-compliant securities that can be used as collateral

for short-term liquidity borrowing and sharia-compliant

short-term liquidity financing. For these reasons, Bank Indonesia update provisions relating to short-term

liquidity borrowing and sharia-compliant short-term

liquidity financing in Bank Indonesia Regulation No 20/16/PBI/2018 dated 17 December 2018 concerning Amendment to Bank Indonesia Regulation No. 19/3/PBI/2017 concerning Short-Term Liquidity Borrowing for

Conventional Commercial Banks, and Bank Indonesia

Regulation No. 20/17/PBI/2018 concerning Amendment to

Bank Indonesia Regulation No. 19/4/PBI/2017 concerning Sharia-Compliant Short-Term Liquidity Financing for

Sharia Commercial Banks.

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