Financial Services Authority Regulation Number 20/POJK.03/2019 Concerning the Health Level Assessment System for Sharia Microfinance Banks

COPY
FINANCIAL SERVICES AUTHORITY REGULATION
REPUBLIC OF INDONESIA
NUMBER 20 /POJK.03/2019
CONCERNING
THE HEALTH LEVEL ASSESSMENT SYSTEM FOR
SHARIA MICROFINANCE BANKS
BY THE GRACE OF THE MOST HIGH GOD,
THE COMMISSIONERS COUNCIL OF THE FINANCIAL SERVICES AUTHORITY, Considering:
a. that with the transfer of functions, duties, and authorities for the regulation and supervision of financial services activities in the Banking sector from Bank Indonesia to the Financial Services Authority; b. that the health of Sharia microfinance banks is an interest of all parties involved, including owners and managers of the bank, the public using bank services, and the Financial Services Authority;
c. that the application of Sharia principles in the management of Sharia microfinance banks is one of the factors influencing the health level assessment system;
d. that the improvement of Sharia financial standards is one of the factors influencing the health level assessment system for Sharia microfinance banks; e. that based on the considerations referred to in letters a through d, it is necessary to establish a Financial Services Authority Regulation concerning the Health Level Assessment System for Sharia Microfinance Banks; Recalling:

1. Law Number 21 of 2008 concerning Sharia Banking (State Gazette of the Republic of Indonesia Year 2008 Number 94, Supplement to the State Gazette of the Republic of Indonesia Number 4867);
2. Law Number 21 of 2011 concerning the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to the State Gazette of the Republic of Indonesia Number 5253);
   DECIDING:
   To Establish: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING THE HEALTH LEVEL ASSESSMENT SYSTEM FOR SHARIA MICROFINANCE BANKS.

CHAPTER I
GENERAL PROVISIONS
Article 1
In this Financial Services Authority Regulation, the following terms are defined as:

1. Sharia Microfinance Bank, hereinafter abbreviated as BPRS, is a Sharia bank that does not provide payment transaction services in its activities.
2. Board of Directors is the BPRS organ authorized and fully responsible for managing BPRS for the benefit of BPRS, in accordance with the purpose and objectives of BPRS, and representing BPRS, both inside and outside the court, in accordance with the provisions of the Articles of Association.
3. Board of Commissioners is the BPRS organ tasked with conducting general and/or specific supervision in accordance with the Articles of Association and providing advice to the Board of Directors.
4. BPRS Health Level is the result of quantitative and qualitative assessments of various aspects that influence the condition or performance of BPRS through quantitative and qualitative assessment of capital factors, asset quality factors, profitability factors, liquidity factors, and qualitative assessment of management factors.
5. Quantitative Assessment is an assessment of the position, development, and projection of BPRS financial ratios.
6. Qualitative Assessment is an assessment of management factors and the results of Quantitative Assessment by considering relevant supporting and/or comparative indicators.
7. Risk Management is a series of methodologies and procedures used to identify, measure, monitor, and control risks arising from all business activities of BPRS.
8. Financial Factors are one of the factors forming the BPRS Health Level, consisting of capital factors, asset quality factors, profitability factors, and liquidity factors.
9. Financial Factor Rank is the final assessment result combining capital factors, asset quality factors, profitability factors, and liquidity factors.
10. Composite Rank is the final assessment result of the BPRS Health Level, which is a combination of the Financial Factor Rank and the management rank.
11. Sharia Principles are Islamic legal principles in banking activities based on fatwas issued by institutions having authority in determining fatwas in the field of Sharia.

CHAPTER II
ASSESSMENT OF BPRS HEALTH LEVEL
Article 2
(1) BPRS is required to conduct business activities based on prudential principles and Sharia Principles to maintain or improve the BPRS Health Level. (2) The Board of Directors and Board of Commissioners of BPRS are required to monitor and take necessary steps so that the BPRS Health Level as referred to in paragraph (1) can be met.
Article 3
(1) The Financial Services Authority conducts the assessment of the BPRS Health Level.
(2) The assessment of the BPRS Health Level as referred to in paragraph (1) includes assessment of:
a. capital; b. asset quality;
c. profitability;
d. liquidity; and e. management.
Article 4
(1) Assessment of the capital factor as referred to in Article 3 paragraph (2) letter a includes assessment of:
a. adequacy, projection, and capital capacity to anticipate risks; and b. intermediary function over investment funds using the profit-sharing method. (2) Assessment of the asset quality factor as referred to in Article 3 paragraph (2) letter b includes assessment of:
a. quality of productive assets and concentration of risk exposure; and b. adequacy of policies and procedures, documentation systems, and performance in handling non-performing productive assets. (3) Assessment of the profitability factor as referred to in Article 3 paragraph (2) letter c includes assessment of:
a. the ability of productive assets to generate profit; and b. the level of operational efficiency.
(4) Assessment of the liquidity factor as referred to in Article 3 paragraph (2) letter d includes assessment of:
a. the ability to meet short-term obligations and potential maturity mismatch; and b. adequacy of liquidity management policies.
(5) Assessment of the management factor as referred to in Article 3 paragraph (2) letter e includes assessment of:
a. quality of general management, including implementation of commitments to the Financial Services Authority or other parties; b. implementation of Risk Management, especially management's understanding of BPRS risks; and
c. BPRS compliance with Sharia Principles and implementation of social functions.
Article 5
(1) Assessment of components from the capital factor, asset quality factor, profitability factor, and liquidity factor as referred to in Article 4 paragraph (1) through paragraph (4) is calculated quantitatively. (2) Assessment of components from the management factor as referred to in Article 4 paragraph (5) is conducted qualitatively by considering relevant supporting and/or comparative indicators. (3) Based on the assessment results for each component as referred to in paragraph (1) and paragraph (2), component ranks are established. (4) The rank for each component as referred to in paragraph (1) is established as:
a. rank 1; b. rank 2;
c. rank 3;
d. rank 4; or e. rank 5.
(5) The rank for each component of the management factor as referred to in paragraph (2) is established as:
a. rank A; b. rank B;
c. rank C; or
d. rank D.
Article 6
(1) Based on the establishment of ranks for each component as referred to in Article 5, the rank for each factor is assessed and established. (2) The rank for each factor as referred to in paragraph (1) for the capital factor, asset quality factor, profitability factor, and liquidity factor is established as:
a. factor rank 1; b. factor rank 2;
c. factor rank 3;
d. factor rank 4; or e. factor rank 5.
(3) The factor rank as referred to in paragraph (1) for the management factor is established as:
a. management rank A; b. management rank B;
c. management rank C; or
d. management rank D.
Article 7
(1) Assessment and establishment of ranks for the capital factor, asset quality factor, profitability factor, and liquidity factor as referred to in Article 6 paragraph (2) are conducted through analysis of main ratio ranks and supporting ratio ranks by considering relevant supporting and/or comparative indicators. (2) Assessment and establishment of ranks for the management factor as referred to in Article 6 paragraph (3) are conducted through analysis of component ranks from the management factor by considering other relevant information.
Article 8
(1) Based on the establishment of factor ranks as referred to in Article 7 paragraph (1), the Financial Factor Rank is assessed and established. (2) Assessment of the Financial Factor Rank as referred to in paragraph (1) is conducted by summing the weighted results of the capital factor rank, asset quality factor rank, profitability factor rank, and liquidity factor rank. (3) The Financial Factor Rank as referred to in paragraph (1) is established as:
a. Financial Factor Rank 1; b. Financial Factor Rank 2;
c. Financial Factor Rank 3;
d. Financial Factor Rank 4; or e. Financial Factor Rank 5.
Article 9
(1) Based on the management factor rank as referred to in Article 6 paragraph (3) and the Financial Factor Rank as referred to in Article 8, the Composite Rank is assessed and established. (2) Assessment of the Composite Rank as referred to in paragraph (1) is conducted by combining the management factor rank and the Financial Factor Rank using a conversion table and considering relevant supporting and/or comparative indicators. (3) The Composite Rank as referred to in paragraph (1) is established as:
a. Composite Rank 1; b. Composite Rank 2;
c. Composite Rank 3;
d. Composite Rank 4; or e. Composite Rank 5.
Article 10
BPRS is required to calculate financial ratios related to the assessment of the BPRS Health Level quarterly, for the end positions of March, June, September, and December.

CHAPTER III
MECHANISM AND FOLLOW-UP OF ASSESSMENT RESULTS
Article 11
(1) The Financial Services Authority conducts the assessment of the BPRS Health Level quarterly, for the end positions of March, June, September, and December. (2) The assessment of the BPRS Health Level as referred to in paragraph (1) is conducted based on examination results, periodic reports submitted by BPRS, and/or other information. (3) In conducting the assessment of the BPRS Health Level as referred to in paragraph (1), the Financial Services Authority may request additional information and explanations from BPRS.
Article 12
(1) Based on the assessment results as referred to in Article 11, the Financial Services Authority requests the Board of Directors, Board of Commissioners, and/or shareholders to submit an action plan in the event that the BPRS Health Level assessment results show:
a. one or more of the capital, asset quality, profitability, and liquidity factors have a factor rank of 4 or 5; b. the management factor has a management rank of C or D; and/or
c. it has a Composite Rank of 4 or 5.
(2) BPRS is required to submit the action plan as referred to in paragraph (1) within a maximum of 21 (twenty-one) working days after the date of request from the Financial Services Authority. (3) The action plan submitted by BPRS to the Financial Services Authority is a commitment of BPRS that must be fulfilled.
Article 13
(1) BPRS is required to submit a report on the realization of the action plan as referred to in Article 12 paragraph (1) within a maximum of 10 (ten) working days after the implementation of the action plan. (2) In the event that the implementation of the action plan is conducted in stages, BPRS is required to report the realization of each stage of the action plan within a maximum of 10 (ten) working days after the implementation of each stage. (3) In the event that BPRS has not implemented and/or completed the action plan, BPRS is required to report the reasons and causes for the non-implementation and/or non-completion of the action plan within a maximum of 10 (ten) working days after the target completion time established.
Article 14
The obligation to submit an action plan as referred to in Article 12 paragraph (2) and the report on the realization of the action plan as referred to in Article 13 is exempted for BPRS that are under intensive supervision or special supervision by the Financial Services Authority as regulated in the Financial Services Authority Regulation concerning the establishment of status and follow-up of supervision for rural credit banks and Sharia microfinance banks.

CHAPTER IV
SANCTIONS
Article 15
BPRS that do not implement the provisions as referred to in Article 2, Article 10, Article 12 paragraph (2), and Article 13 are subject to administrative sanctions in the form of:
a. written reprimand; and/or b. listing of members of the Board of Directors, members of the Board of Commissioners, and/or shareholders in the list of parties prohibited from becoming main parties through the re-evaluation mechanism for main parties of financial service institutions.
Article 16
BPRS that do not fulfill or do not implement obligations as referred to in Article 12 paragraph (3) are subject to administrative sanctions in the form of:
a. written reprimand; b. a fine of Rp1,000,000,- (one million rupiah); and/or
c. listing of members of the Board of Directors, members of the Board of Commissioners, and/or shareholders in the list of parties prohibited from becoming main parties through the re-evaluation mechanism for main parties of financial service institutions.

CHAPTER V
CLOSING PROVISIONS
Article 17
(1) Further provisions regarding the BPRS Health Level assessment system are regulated in a Circular Letter of the Financial Services Authority. (2) Before the Circular Letter of the Financial Services Authority as referred to in paragraph (1) is implemented, Bank Indonesia Circular Letter Number 9/29/DPbS concerning the Health Level Assessment System for Rural Credit Banks Based on Sharia Principles remains in effect.
Article 18
With the implementation of this Financial Services Authority Regulation, Bank Indonesia Regulation Number 9/17/PBI/2007 concerning the Health Level Assessment System for Rural Credit Banks Based on Sharia Principles (State Gazette of the Republic of Indonesia Year 2007 Number 146, Supplement to the State Gazette of the Republic of Indonesia Number 4787) is repealed and declared invalid.
Article 19
This Financial Services Authority Regulation takes effect on the date of its promulgation.

This copy is consistent with the original
Director of Law 1
Legal Department signed
Yuliana
For everyone to know, it is ordered to promulgate this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia. Established in Jakarta on 2 September 2019 CHAIRMAN OF THE COMMISSIONERS COUNCIL FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA, signed WIMBOH SANTOSO promulgated in Jakarta on 9 September 2019 MINISTER OF LAW AND HUMAN RIGHTS REPUBLIC OF INDONESIA, signed YASONNA H. LAOLY STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2019 NUMBER 158

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
REPUBLIC OF INDONESIA
NUMBER 20 /POJK.03/2019
CONCERNING
THE HEALTH LEVEL ASSESSMENT SYSTEM FOR
SHARIA MICROFINANCE BANKS
I. GENERAL
The BPRS Health Level is an interest of all relevant parties, including owners, bank managers, the public using bank services, the Financial Services Authority, and other parties. The BPRS Health Level can be used by interested parties to evaluate the performance of BPRS in applying prudential principles, compliance with applicable regulations, and Risk Management. BPRS is not only required to meet prudential principles and implement Risk Management, but must also be able to conduct banking operations in accordance with Sharia Principles in gathering and distributing public funds and other banking service activities. In the process of assessing the BPRS Health Level, assessment of inherent risks in BPRS activities must also be included. In addition, the dynamic nature of BPS conditions drives a dynamic BPRS Health Level assessment system, so it needs to be regulated separately to provide an image of current and future conditions, including the application of Sharia Principles. The regulation of the BPRS Health Level assessment system is conducted through a Quantitative Assessment and Qualitative Assessment approach for capital factors, asset quality factors, profitability factors, and liquidity factors, as well as management factors. The final assessment results can be used by BPRS as one of the means in determining business strategies in the future, and for the Financial Services Authority, it can be used as a means for establishing and implementing supervision and development strategies. Given that since December 31, 2013, the functions, duties, and authorities for the regulation and supervision of financial services activities in the Banking sector have transferred from Bank Indonesia to the Financial Services Authority, regulations regarding the BPRS health level assessment system need to be regulated again in a Financial Services Authority Regulation.
II. ARTICLE BY ARTICLE
Article 1
Clearly sufficient.
Article 2
Clearly sufficient.
Article 3
Paragraph (1)
Clearly sufficient.
Paragraph (2)
Letter a
Capital assessment is a Quantitative and Qualitative Assessment of BPRS capital adequacy to anticipate current and future risk exposures.
Letter b
Asset quality assessment is a Quantitative and Qualitative Assessment of BPRS asset conditions and the adequacy of financing Risk Management. Letter c Profitability assessment is a Quantitative and Qualitative Assessment of BPRS conditions and ability to generate profit to support operational and capital activities. Letter d Liquidity assessment is a Quantitative and Qualitative Assessment of BPRS ability to maintain the capacity to meet short-term obligations. Letter e Management assessment is a Qualitative Assessment of the managerial capability of BPRS managers to conduct business, including commitments to the Financial Services Authority or other parties or authorities, adequacy of Risk Management, and BPRS compliance with Sharia Principles and implementation of social functions, such as the role of BPRS in managing zakat, infaq, shadaqah (ZIS) funds, cash waqf, and other relevant matters.
Article 4
Paragraph (1)
Letter a
Clearly sufficient.
Letter b
The intermediary function over investment funds using the profit-sharing method, known as profit sharing, is the role of BPRS as a manager of tied or untied investment funds using the profit-sharing method. Paragraph (2) Clearly sufficient. Paragraph (3) Clearly sufficient. Paragraph (4) Maturity mismatch refers to the mismatch between the maturity of BPRS assets and liabilities. Paragraph (5) Letter a Clearly sufficient. Letter b BPRS management's understanding of BPRS risks can be assessed based on management statements, strategies, BPRS performance, or other information. Letter c Clearly sufficient.
Article 5
Paragraph (1)
Components of the capital factor, asset quality factor, profitability factor, and liquidity factor consist of financial ratios.
Paragraph (2)
Clearly sufficient.
Paragraph (3)
Clearly sufficient.
Paragraph (4)
A smaller rank order reflects a better BPRS condition.
Paragraph (5)
An earlier rank order reflects a better BPRS condition.
Article 6
Paragraph (1)
Clearly sufficient.
Paragraph (2)
A smaller factor rank order reflects a better BPRS condition.
Paragraph (3)
An earlier management rank order reflects a better BPRS condition.
Article 7
Paragraph (1)
Main ratios are ratios that form the factor rank value. Supporting ratios are ratios that add to or subtract from the factor rank value.
Supporting indicators are other information that can influence the assessment results of factor ranks, such as observation ratios.
Observation ratios are ratios that can be used as an additional consideration in the final assessment of Financial Factors.
Relevant comparators are similar information in the industry that can be compared, such as average capital adequacy ratio information for the BPRS industry. Paragraph (2) Other relevant information is information related to the assessed factor.
Article 8
Paragraph (1)
Clearly sufficient.
Paragraph (2)
Clearly sufficient.
Paragraph (3)
A smaller Financial Factor Rank order reflects a better BPRS condition.
Article 9
Paragraph (1)
Clearly sufficient.
Paragraph (2)
Clearly sufficient.
Paragraph (3)
A smaller Composite Rank order reflects a better BPRS condition.
Article 10
Clearly sufficient.
Article 11
Paragraph (1)
Clearly sufficient.
Paragraph (2)
Other information includes, for example, assessment results by other competent authorities or institutions.
Paragraph (3)
Clearly sufficient.
Article 12
Paragraph (1)
The action plan contains improvement steps for problems having a major impact with a target completion time over a certain period.
Paragraph (2)
The request date is the date of the Financial Services Authority letter or the date of the meeting minutes between the Financial Services Authority and BPRS. Paragraph (3) Clearly sufficient.
Article 13
Paragraph (1)
The action plan realization report submitted by BPRS includes, among other things, proof of implementation and supporting documents.
Paragraph (2)
Clearly sufficient.
Paragraph (3)
Clearly sufficient.
Article 14
Clearly sufficient.
Article 15
Clearly sufficient.
Article 16
Clearly sufficient.
Article 17
Clearly sufficient.
Article 18
Clearly sufficient.
Article 19
Clearly sufficient.
SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 6380