THE REGULATION OF INDONESIAN ISLAMIC BANK’S CORPORATE GOVERNANCE REGULATIONS

3. THE REGULATION OF INDONESIAN ISLAMIC BANK’S CORPORATE GOVERNANCE REGULATIONS

The pioneer effort on this regulation has been initiated by several international institution, such as, AAOIFI (2002) has promulgated Governance Standards for Islamic Financial Institutions (GSIFI) and later IFSB (2005) issued Guiding Principles on Corporate Governance

for Institutions Offering only Islamic Financial Services. In Indonesia, initiatives to improve corporate governance in the banking industry have

been carried out by Bank Indonesia (the central bank), Bapepam-LK (Capital Market and Financial Institution Supervisory Agency) and the Indonesian Institute of Accountants (IAI) through a number of regulations and provisions related to corporate governance structures and mechanisms, rules on transparency and accountability as well as the financial accounting and disclosure of the financial report standards.

Following, such efforts were initiated to improve good corporate governance in the corporate sector. On 19 August 1999, the National Committee on Corporate Governance (the Committee) was established as a non-government body by Decree of the Coordinating Minister for Economy, Finance and Industry No.: Kep. 10/M.EKUIN/08/1999 with the task of formulating

and recommending a national policy for the implementation of corporate governance (The National Committee on Good Corporate Governance, 2000).

This authority will cover several main duties:

1. Codifying corporate governance principles as a Code for Good Corporate Governance (“the Code”) to be used as a guidance for the Indonesian business circumstance.

2. Initiating improvement laws and legislation in line with the implementation of the Code.

3. Developing the institutional framework to support the implementation of the Code.

JURNAL EkonomiKa

Indonesia: Does Regulatory Framework Matter ? On 1 May 2000, the Committee published the Code for Good Corporate Governance (the

Code). The objective of the Code is “to maximize corporate and shareholder value by enhancing transparency, reliability and accountability, and by promoting creativity and progressive entrepreneurship” (The National Committee on Good Corporate Governance, 2000 p. 3).

Also, Indonesia government has established Komite Nasional Kebijakan Governance (KNKG/National Committee for Governance Policy) on 30 November 2004. This institution

has responsibility to observe and enhance good governance circumstances in public and private sectors. Relating to banking sector, KKNG has developed a Banking Commission in which coordinate with financial and banking authorities in focusing for the issues of good corporate

governance in banking sector. Specifically, Bank Indonesia has published the Indonesian Banking Architecture as a basic

comprehensive framework of the Indonesian banking system to provide direction, shape, and structure of the banking industry. The Indonesian Banking Architecture includes the principle of good corporate governance practices in the bank as one of the essential objectives to be achieved (Bank Indonesia, 2010).

Wibisono (2009) explains that principles of good corporate governance in the Islamic bank have been accommodated in Indonesian Islamic Bank Act No. 21 Year 2008. This particular act has main objectives to be achieved, consist of (1) legal certainty assurance to the stakeholders and develop confidence of the customer in using Islamic bank’s products; (2) shariah compliance assurance and governance of Shari’ah supervisory Board (SSB) functions,

and (3) financial stability creation based of prudential banking system and good corporate governance implementation. More specific in Chapter VI of Islamic Bank Act No. 21 Year 2008 has addressed the issues of good corporate governance, prudential banking and risk management in the Islamic bank.

Following, based on Bank Indonesia Circular Letter No. 12/13/DPBS dated 30 April 2010 (Bank Indonesia, 2010) regarding the implementation of Good Corporate Governance for Islamic Bank and Islamic bank division (Unit Usaha Syariah/UUS), Islamic bank and Islamic bank division are required in implementing good corporate governance in its business operation and perform Good Corporate Governance (GCG) report through a self-assessment method. This effort aims to improve the performance of the bank, to protect the interests of stakeholders and improve regulatory compliance and ethical values (code of conduct) which applies in general to the banking industry. (Bank Indonesia, 2009; Prasojoharto, 2010)

According to Bank Indonesia Circular Letter No. 12/13/DPBS dated 30 April 2010 (Bank Indonesia, 2010) regarding the implementation of Good Corporate Governance for Islamic Bank and Islamic bank division, there are eleven factors that must be assessed and reported by the bank through a self-assessment method. This report covers issues of the performance of Board of Director (BOD), Board of Commissioner (BOC) and board of committees, Shariah

compliance aspects, handling of conflict of interests, internal and external audit examination, prudential banking principle and transparency and disclosure policy.