On March 25 2011 Bank Indonesia issued the Regulation on Asset Quality Assessment for Commercial Sharia Banks and Sharia Business Units (13/13/PBI/2011). The regulation has been issued to:

  • promote and improve the application of prudential risk management principles in the Sharia-based banking industry; and
  • update regulations on Sharia banking business in light of the introduction of the Law on Sharia Banking (21/2008).

In essence, the regulation requires Sharia-compliant banks and Sharia business units to assess and supervise their own asset activities and to be proactive in ensuring the liquidity of their productive and non-productive assets. The asset assessment must be conducted monthly and reported to Bank Indonesia, along with documents to support the assessment and classification. If supporting documents are not supplied, Bank Indonesia may downgrade the bank's asset quality rate.

The regulation also defines the terms 'productive assets' and 'non-productive assets' and stipulates how these assets are to be treated in the assessment. 'Productive assets' include all investments by the bank, in rupiah or foreign currency, that will potentially gain income, whereas 'non-productive assets' are assets that may cause potential loss to the banks.

Chapter V of the regulation includes provisions on the mechanism and procedures for the write-off of both productive and non-productive assets, the valuation of the securities and the removal of the right to collect. Like most Bank Indonesia rules, the regulation provides for administrative penalties for non-compliance.

For further information on this topic please contact Hamud Balfas at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125), fax (+62 21 250 5121) or email ([email protected]).