Role of Regional Heads in Regional Development Banks in Indonesia

Corporate Governance (CG) in the banking sector influences company performance and plays a role in the policy making process. In Indonesia Context, the Regional Development Banks (RDB) as an important part of economic development faces issues related to the CG structure in RDB relating to the Board’s position which is influenced by regional political dynamics according to the Financial Services Authority, This research aims to know the role of the Provincial Head in the management and performance of the RDB to then provide recommendation / input on the CG Assessment for the RDB currently being used. To get an overview of that role, this study uses two site selection categories based on RDB financial  performance.

The informants who will be interviewed in this research are the Head of Provincial Region

  • DKI Jakarta
  • Jawa Timur
  • Jawa Barat
  • Nusa Tenggara Timur
  • Sumatera Utara
  • Sumatera Selatan
  • Kalimantan Selatan
  • D.I Yogyakarta

This research is carried out by the Center for Governance, Public Policy and Business Studies, Faculty of Administrative Science, Universitas Indonesia and also in collaboration with Financial Inclusion, Public Governance& Administrative Reform, and Democracy&Local Government research cluster.

Good Governance application analysis in Regional Development Bank

Indonesia has recorded the development of Corporate Governance (CG) practices along with fundamental improvement of its economy after crisis in 1997. One of the main factor that causes the crisis is institutional vulnerability of financial and corporate sector. This is when CG is important to strengthen banking institution, financial institution and other corporate entities.Increasing interest of better structure and governance practice is based on certain condition such as low-governance standard, low-ethical standard and financing problems. Specifically in developing country like Indonesia, those obtacles are related to institutional problems like poor law enforcement, corruption, and nonoptimal supervision mechanism.

 

The main issue in CG closely related with corporate management mechanism. The problem among them usually the segregation of authority between ownership and management within corporate entities. The main reason to strenghten  CG is to improve the management in corporate sectors so the risk of violations can be reduced.

Alongside the economic development of Indonesia, the existence of state owned enterprise (BUMN) and local state owned enterprise (BUMD) represent government in economic sectors where government itself plays role to provide goods and service in order to achieve social welfare. One of the most significant local state owned enterprise is Regional Development Bank (RDB). Despite its rapid development, RDB’s contributions to national banking sectors and regional economics was not considered optimal. Financial Services Authority of Indonesia (OJK) reports say that RDB’s contribution to regional economics still insignificant as reflected in a report that say only 30 percent of total credit that has been distributed to productive market share.

Specifically in banking sector, studies regarding CG show us corelation between implementation of CG itself and bank performance in financial and economic crisis. Within Indonesian banking and financial structure, RDB has important role in economic development. The existance of RDB expected to be proponents to develop economic and financial institution as well as subtitutes role of private banks in local state government.

CG Issue in RDB is one of the compelling factor to many fraud and nepotism case in RDB Sectors, especially with the presence of political interest within RDB. Several corruption case that involves RDB since 2015-2018 show us lack of CG process and poor control mechanism within RDB. Based on those cases, this research will discuss about the implemetation  of RDB’s governance and the dynamics between actors within RDB itself.

This research will be conducted in 4 research site: Bank DKI Jakarta, Bank Jatim, Bank Sumatera Utaran and Bank Nusa Tenggara Barat. Selection of theese sites are according to

-Registered as well as Unregistered RDBs at OJK

-RDBs that experienced regional head transtition period

-RDBs that represents East/Midlle/West Indonesian teritories.