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Definition of Central Bank: History, Duties, Authorities, and Roles

Timesofummah.com – In a real sense, the central bank is an agency or a financial institution that is responsible for a monetary policy and creating a stable level of economic activity in a country.

The central bank is an institution that is owned by private parties in a state government, has the responsibility for currency stability, maintaining inflation rates, banking sector stability, and the entire financial system in a country.

The role of the central bank in Indonesia itself is temporarily assigned to Bank Indonesia. Quoted from many sources, the task of the Central Bank or even in Indonesia itself, namely in short, Bank Indonesia is to make and implement Monetary Policy, to control the amount of money that runs in the community so that the prices of goods and services can be controlled by the public.

Then in regulating and maintaining the smooth running of a payment system, the payment system that is regulated is a cash and non-cash payment system. The central bank is responsible for the agreement, creating rules, standards and according to the procedures that have been used in the circulation of money in the community.

Definition of Central Bank

Definition of Central Bank History, Duties, Authorities, and Roles

The central bank itself in general has the meaning of an agency that has many responsibilities for the monetary policy of a country’s territory. The central bank has a role to maintain price stability and the value of the currency that has prevailed in the country, which is widely known as inflation.

The central bank is obliged to keep the inflation rate under control and always in the lowest possible value and in the optimal position for the economy, by controlling the balance in the amount of goods and money. If there is too much money in circulation, the central bank also has the right to use an authority it has.

In Indonesia itself, the function of a central bank is by Bank Indonesia. Bank Indonesia is an independent state institution, free from the affairs of the Government or other parties, except in matters that are expressly and regulated by law.

The function of the central bank in Indonesia is carried out by Bank Indonesia. The role and duties of Bank Indonesia, which as the central bank has undergone a long evolution from being a circulation bank, to becoming an agent in the development of the government, and finally in 1999 to becoming an independent institution with the sole purpose of achieving Rupiah value stability.

Central Bank History

In a country, the level of economic stability is very highly dependent on the value of the currency that is already in effect. In an effort to maintain the level of currency stability, an institution known as the central bank will be born. Recently, the role of the central bank in Indonesia has been handed over to Bank Indonesia or known as BI. However, it turns out that the bank that already has a role as a central bank in Indonesia is not only BI.

Along the way, there were three banks that had become central banks in this country, namely the National Bank of Indonesia (BNI), De Javasche Bank, and BI. All three have a very important role to maintain the level of currency stability in the colonial era, independence until now.

De Javasche Bank: The First Central Bank in Indonesia

De Javasche Bank is the first central bank in Indonesia. This institution was built in 1929 during the reign of the Dutch East Indies led by King Willem 1. The location is right in Jakarta. De Javasche Bank made a big expansion by establishing branches in Sumatra, Sulawesi, Semarang, Surabaya, Kalimantan, and even in New York.

Its function was to attempt to print and distribute banknotes in the Dutch East Indies colony. The currency distributed at that time was the Dutch guilder. The bank which was established as a legal entity PT and at that time was called Naamloze Vennootschap, had an important role in maintaining currency circulation. Likewise, international trade activities at that time were already high.

You can learn about K From De Javasche Bank to Bank Indonesia, Fragments of the History of Central Banks in Indonesia
by Erwien Kusuma

BNI 46: Central Bank Issuing Oeang Republik Indonesia (ORI)

Many ordinary people state that Bank Indonesia is the central bank owned by Indonesia after the Indonesian independence period was initiated. This assumption is wrong. If we look at the fact that BI itself was only established in 1953. At the beginning of Indonesia’s independence, the banking institution that had an important role in maintaining currency stability was Bank Nasional Indonesia 46 or BNI 46.

With the stipulation of BNI 46 as the central bank of Indonesia based on Government Regulation in Lieu of Law Number 2 of 1946 which was made on July 5, 1946. ORI which is known as the first currency that has been issued by Indonesia.

The printing process as well as the ORI basis run by BNI 46 has been running since October 30, 1946. With the ORI, money issued by the Japanese and De Javasche Bank can no longer be valid. ORI is printed in the form of paper money which has been signed directly by the Minister of Finance.

However, BNI’s role as the central bank at that time did not last long. The main reason is that BNI 46 has limited assets. At that time, it was written that the circulation of ORI could not be carried out optimally and also could not be spread throughout Indonesia. Thus, the role of the central bank in Indonesia was transferred back to the De Javasche Bank in 1949.

Nationalization of De Javasche Bank and BI Selected as Central Bank

In December 1951, the Government of Indonesia had adopted the policy to nationalize De Javasche Bank which was later marked by Law Number 24 of 1951 which was related to the nationalization of De Javasche Bank NV. In addition, in early July 1953, the Government of Indonesia had established Bank Indonesia and made it the central bank of Indonesia.

In this journey, BI has the same task and role as De Javasche Bank, namely serving as a banking institution, regulating monetary, and regulating the payment system in Indonesia.

Furthermore, the duties and functions of BI began to diminish in 1968. This was marked by the issuance of the Central Bank Act in 1968 which stated that BI would no longer carry out its role as a commercial bank, but would serve as an agent of development in an effort to improve the welfare of the people.

However, in 1999 BI regained its role as the central bank with the issuance of Law Number 23 of 1999. With this law, BI’s role in maintaining and maintaining stability in the value of the rupiah was reclaimed. Then, BI’s role will increase in the aim of strengthening Indonesian governance with the creation of the 2004 amendments.

Many of these roles have been held by Bank Indonesia until now. In carrying out its role, BI in short has three main tasks, establishing and implementing monetary policy, maintaining the smooth running of the payment system, and also maintaining the level of stability of the financial system in Indonesia.

Central Bank Duties

As already mentioned, Bank Indonesia itself has its own duties and responsibilities that must be carried out properly, establish and implement monetary policy, maintain the smooth running of a payment system, and maintain a stable level of financial system in Indonesia. Based on the understanding of the central bank, below is a complete explanation of the duties of the central bank:

1. Establish and Implement Monetary Policy

The stipulation of monetary obligations must be carried out, in order to maintain the circulation of the amount of currency that exists in the community, then all prices of goods and services can be maintained and controlled.

The monetary policy needs to be implemented to support national economic growth. Therefore, BI must cooperate with the government so that all policies that have been determined can run in accordance with fiscal policy and several other economic policies.

2. Manage and Maintain Smooth Payment System

The meaning of a payment system is a cash and non-cash payment system. Bank Indonesia has a full role in issuing rules, standards, agreements and procedures to be used in regulating the circulation of money.

3. Regulate and Supervise Banking

BI needs to carry out macroprudential supervision that is useful for maintaining the stability of the prevailing financial system in Indonesia. This macroprudential policy is a policy that has been prepared to be able to provide limits to the risks and costs of a systemic crisis, in order to maintain the balance of a financial system in Indonesia.

You can learn about K From De Javasche Bank to Bank Indonesia, Fragments of the History of Central Banks in Indonesia
by Erwien Kusuma

Central Bank Authority

BI, which acts as the central bank in Indonesia, has special powers regulated by the Law of the Republic of Indonesia, namely:

1. Authority to Make Monetary Policy

Bank Indonesia needs to determine and determine the discount rate, it is necessary to make financing and credit policies. Bank Indonesia must also be able to set and determine monetary targets by determining the inflation rate that occurs in Indonesia every year.

BI also has a very important authority in controlling monetary by not limiting open market activities.

2. Authority to Regulate Payment System

Bank Indonesia has three basic powers. First, BI has an authority to determine and determine the use of payment instruments. Second, make and give approval for permits to operate the payment system. Finally, to oversee the implementation of the payment system.

3. Authority to Regulate and Supervise Banking

Then, Bank Indonesia as the central bank certainly has four main powers. First, to have the authority to make as well as to establish a policy related to the implementation of banking that is already in effect in Indonesia. Second, the authority to impose sanctions on parties who have violated the policy has been determined in accordance with the provisions of the law.

Third, it is authorized to grant or revoke permits to institutions and bank business activities. Lastly, BI is also authorized to supervise various conventional bank activities, in the banking system or individually.

The role of Bank Indonesia as the central bank

The question is, what is the role of Bank Indonesia in maintaining financial system stability? As the central bank, Bank Indonesia has five main roles to maintain stability in the financial system.

The five roles that include policies and instruments to maintain stability in a financial system are:

First, Bank Indonesia has the task of maintaining monetary stability, among others, through an interest rate instrument in open market operations. Bank Indonesia itself is required to be able to determine monetary policy in a balanced and appropriate manner. This is reminiscent of the disruption of monetary stability that has a direct impact on various aspects of the economy.

For monetary policy itself, with the application of interest rates that are already too tight, it will kill a lot of economic activity, and vice versa. Therefore, in order to create monetary stability, BI has implemented a policy known as the inflation targeting framework.

The second role, Bank Indonesia itself has an important or vital role in creating sound financial institution performance, especially in banking. The creation of such a banking institution’s performance is carried out with a supervisory and regulatory mechanism. As in other countries, the banking sector has a dominant part in a financial system. Thus, failure in this sector can lead to financial instability and disrupt the economy.

In order to prevent the occurrence of such failures, an effective banking supervision system and policy must be enforced. In addition, market discipline through the authority on supervision and policy makers and law enforcement must continue to be implemented. Evidence that shows in countries that undergo a market discipline, which has the concept of stability in a solid or strong financial system.

Meanwhile, law enforcement efforts are meant to protect banks and stakeholders as well as encourage confidence in the financial system. To be able to create stability in a sustainable banking sector, BI has prepared the Indonesian Banking Architecture and plans for the implementation of Basel II.

Third, Bank Indonesia has the authority to regulate and maintain the smooth running of the payment system. If there is a failure to settle event on one of the participants in the payment system, it will give birth to serious potential risks and even disrupt the smooth running of the payment system. This failure ultimately creates a contagion risk, giving rise to a systemic disorder. Bank Indonesia is also developing mechanisms and arrangements aimed at reducing risk in an increasingly growing payment system.

That is by establishing a real-time payment system known as the RTGS (Real Time Gross Settlement) system which can further increase the security and speed of the payment system. As an authority on the payment system, BI itself also has the information and expertise in identifying potential risks in its payment system.

Then fourth, with its function in research and monitoring, Bank Indonesia can access information that is considered to threaten financial stability. Through macroprudential monitoring, Bank Indonesia can monitor the vulnerability of the financial sector and detect potential shocks that could have an impact on financial system stability.

Through research, Bank Indonesia can develop macroprudential instruments and indicators to detect vulnerabilities in the financial sector. The results of this research and monitoring can then become a recommendation for the relevant authorities in choosing the right steps to reduce disruptions to the financial sector.

Fifth, Bank Indonesia has a function as a safety net in the financial system through the function of the central bank, lender of the last resort (LoLR). The LoLR function itself is the traditional role of Bank Indonesia as the central bank in managing the crisis in order to avoid instability in the financial system.

Its function is to act as LoLR which includes the provision of liquidity in normal and crisis conditions. This function is only given to banks that have faced liquidity problems and of course there is the potential for a systemic crisis to occur.

Under normal conditions, the LoLR function can be applied to banks that have experienced temporary liquidity difficulties so that they still have the ability to repay. To carry out its function as LoLR, Bank Indonesia is required to avoid the occurrence of moral hazard. Therefore, systemic risk considerations and strict requirements must be applied to the provision of liquidity.

You can learn about Central Bank Policy: Theory & Practice
by Perry Warjiyo, Solikin M. Juhro

This is an explanation of the meaning of a central bank, complete in writing with its objectives, duties and authorities in carrying out all of its responsibilities. In this discussion, it is very important to be able to increase our knowledge and insight regarding the central bank, especially if our company is currently able to relate to conventional banks which are under the control of the central bank.

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