Aimed to strengthen and develop the rural banks and sharia rural banks and as mandated by Law No. 4 of 2023 on Financial Sector Development and Reinforcement (Pengembangan dan Penguatan Sektor Keuangan) (“P2SK Law“), the Indonesian Financial Services Authority (Otoritas Jasa Keuangan / “OJK”) issued OJK Regulation No. 7 of 2024 on Rural Banks and Sharia Rural Banks (“OJK Reg. 7/2024“). OJK Reg. 7/2024 redefines the business of rural banks and sharia rural banks by regulating several significant aspects of rural banks and sharia rural banks, among others: the establishment, ownership, management, office network, merger, consolidation, and acquisition, up to the license revocation upon the shareholders’ request.
OJK Reg. 7/2024, which comes into effect on 30 April 2024, revokes the two previous regulations on the same topics, namely (i) OJK Regulation No. 21/POJK.03/2019 on Merger, Consolidation, and Acquisition of Rural Banks and Sharia Rural Banks (“Reg. 21/2019”) and (ii) OJK Regulation No. 62/POJK.03/2020 on Rural Banks (“Reg. 62/2020”). OJK Reg. 7/2024 also partially amends OJK Regulation No. 26 of 2022 on Sharia Rural Banks.
Naming
Based on a philosophical ground where the rural banks and sharia rural banks are expected to move the economic wheels, especially of the middle and the lower-class society, the OJK obliges rural banks and sharia rural banks to amend its nomenclature from “Bank Perkreditan Rakyat” to become “Bank Perekonomian Rakyat” (for rural banks) and Bank Perkreditan Rakyat Syariah” to become “Bank Perekonomian Rakyat Syariah” (for sharia rural banks). The changes must be made by no later than 12 January 2025 by submitting an application to the OJK. Failure to do so might be subject to administrative sanctions, such as (i) written warning, (ii) downgrade of soundless level, (iii) prohibition from expanding the business, and/or (iv) temporary suspension over partial operational activities. In addition to the above, the OJK may impose monetary fines of up to IDR 100 million for every violation.
Legal Entity
Under OJK Reg. 7/2024, the rural banks/sharia rural banks might be in the form of Limited Liability Company (including Limited Liability Regional Owned Company (Perusahaan Perseroan Daerah) and General Regional Owned Company (Perusahaan Umum Daerah)) or Cooperative (Koperasi).
Capital & Public Offering
OJK mandates the to-be-established rural banks and sharia rural banks to fulfill a certain amount of paid-up capital to strengthen the capital of the rural banks and sharia rural banks.
Rural Banks
| Zone | Minimum Capital Requirement |
| 1 | IDR 100,000,000,000 (one hundred billion Indonesian Rupiah) |
| 2 | IDR 50,000,000,000 (fifty billion Indonesian Rupiah) |
| 3 | IDR 25,000,000,000 (twenty-five billion Rupiah) |
Sharia Rural Banks
| Zone | Minimum Capital Requirement |
| 1 | IDR 75,000,000,000 (seventy-five billion Indonesian Rupiah) |
| 2 | IDR 35,000,000,000 (thirty-five billion Indonesian Rupiah) |
| 3 | IDR 15,000,000,000 fifteen billion Rupiah) |
The paid-up capital must be injected in full in the form of deposits in other banks (commercial banks, other rural banks, or sharia rural banks).
The zone will be differentiated according to the economic potential and the competition of financial institutions in the relevant provinces. OJK Reg. 7/2024 elaborates that Zone 1 is considered a province with higher economic potential and tighter financial competition between financial institutions, while Zone 3 is considered to have lower economic potential and looser financial competition between financial institutions at the provincial level.
Another notable provision worth noting under the OJK Re. 7/2024 is, as also previously regulated under the P2SK Law, the OJK now allows rural banks and sharia rural banks who meet specific criteria (e.g., a minimum core capital of IDR 80 billion, a certain level of corporate governance, risk profile assessment, and soundness) to increase their capital by way of public offering through the stock market. This provision opens access and provides more opportunities for both investors and the rural banks themselves to establish better structure, resilience, and competitiveness in the financial market.
Foreign Investment
Unlike the previous regulation, which clearly stipulates that rural banks can only be established by Indonesian nationals and/or Indonesian legal entities wholly owned by Indonesian nationals, regional governments, or a combination of the foregoing, OJK Reg. 7/2024 eliminates the wording “wholly owned by Indonesian nationals, regional governments, or a combination of the foregoing” from the legal entities category. This raises a question of whether this means that rural banks can also be owned by a foreign-investment company that is legally established in Indonesia. OJK Reg. 7/2024 only defines Indonesian legal entities as government, regional government, state-owned company, regional state-owned company, cooperatives, limited liability companies, and other entities established under the prevailing laws. The regulation in OJK Reg. 7/2024 seems in line with the same regulation under the P2SK Law.
Mandatory Consolidation/Merger
OJK Reg. 7/2024 mandates a mandatory consolidation or merger for Rural Banks and Sharia Rural Banks owned by the same Controlling Shareholder in one territory (e.g., Sumatra, Java, Kalimantan, Bali & Nusa Tenggara, Sulawesi, and Maluku & Papua) or main islands (kepulauan utama). This consolidation shall be carried out by no longer than 2 (two) years as of the enactment of POJK Reg. 7/2024. For regional government-owned rural banks and sharia rural banks, the mandatory consolidation or merger deadline stretches to 3 (three) years.
For example: Mr. X has 2 rural banks and 1 sharia rural bank on Java Island. The consolidation obligation shall be applied to such 2 rural banks. Nevertheless, Mr. X is allowed (based on his initiative) to merge or consolidate the rural banks and sharia rural bank to become sharia rural bank. The proposal for mandatory consolidation/merger must be submitted to the OJK no later than 4 (four) months after the enactment of OJK Reg. 7/2024. Nonetheless, OJK may decide to prolong the deadline based on an application submitted by the relevant Rural Banks and Sharia Rural Banks.
Moreover, OJK also supports the Micro Financial Institution (a financial institution specifically established to empower the local community by providing several services, among others, microloans, saving accounts, and consultation for business developments) to be merged with rural banks or sharia rural banks.
Commentary
The OJK states in its announcement that one of the reasons for the issuance of OJK Reg. 7/2024 is to support the development of rural banks so that they can contribute more to provide financing for micro and small undertakings. In addition, the OJK also wants to increase more supervision of the rural banks since it found some structural weakness that includes fraud in some rural banks.
The goals are clearly set through the issuance of OJK Reg. 7/2024. P2SK Law (and now OJK Reg 7/2024) provides more ways for rural banks to address their difficulty in raising capital by allowing them to carry out a public offering. In short, OJK Reg. 7/2024 seems to provide significant breakthroughs for rural banks and sharia rural banks by carrying out mandatory consolidation/merger and opening up access to the stock market. Such provisions may drastically improve the business of rural/sharia banking in many critical aspects, among others: in the technology sector, corporate governance, soundness, etc. Local community surrounding the rural banks or sharia rural banks is expected to reap the benefits of this new regulation stipulated by OJK.
For further information, please contact:
general@metalaw.id
MetaLAW, Legal Consultant, Jakarta, Indonesia
