Indonesia launches first bullion banks to retain more value domestically

Indonesia has launched its first bullion banks by licensing Bank Syariah Indonesia (BSI) and state-owned pawn Pegadaian to provide bullion banking services. This initiative aims to strengthen the gold downstream sector and maximize economic benefits from processing, trading and financing, helping gold-producer Indonesia retain more value domestically.

Indonesia ranks eighth in global gold production, producing 160 metric tonnes annually, and sixth in gold reserves, holding 2,600 tonnes, or 5 percent of global reserves as of 2023. As of September 2024, its gold reserves were valued at US$6.69 billion, reinforcing its position in the global market. Indonesia, however, has small gold reserves of 201 tonnes, lagging behind Singapore, which holds 280 tonnes of gold bars.

When launching the bullion banks, President Prabowo highlighted that despite Indonesia’s high status as a gold producer, much of this gold flows overseas instead of circulating within the domestic financial system. Bullion banks are intended to retain gold transactions within the country, thereby creating a fully integrated gold business ecosystem, ranging from mining and refining to manufacturing and retail sales.

According to Prabowo, the bullion banking system is expected to contribute Rp 245 trillion (US$14.98 billion) to gross domestic product (GDP) and generate 1.8 million new jobs, supporting Indonesia’s broader industrialization and economic expansion efforts.

The bullion banks are expected to attract the public, which holds about 1,800 tonnes of gold, to save their gold in the banks, which would then securitize it to create more financing opportunities. Pegadaian, for example, said that it aims to more than double its gold reserves from around 100 tonnes now, to 220 tonnes over the next five years.

The government has also pushed gold producers to sell their outputs in the domestic market to create more economic activities. Recently gold and copper miner PT Freeport Indonesia has agreed to supply 30 tonnes, out of its 50 tonnes annually, to state-owned gold mining company PT Aneka Tambang (Antam) for five years, valued at $12.5 billion.

The establishment of bullion banks is expected to better improve recording of gold transactions in the country. During the administration of former president Joko “Jokowi” Widodo, the Financial Transaction Reports and Analysis Center (PPATK) reported Rp 189 trillion (US$11.59 billion) of suspicious gold export and import transactions, which caused state losses of hundreds of billions of rupiah from unpaid taxes and other unpaid levies.

The bullion banking initiative is backed by Law No. 4/2023 on Financial Sector Development and Strengthening, which provides a legal foundation for financial institutions to conduct bullion business activities. To ensure regulatory oversight, Indonesian Financial Services Authority (OJK) Regulation No. 17/2024 establishes a structured framework governing the sector, outlining the scope of activities, institutional participation, compliance requirements and phased implementation.

To ensure compliance and mitigate illegal gold sourcing, financial institutions must adhere to a minimum threshold for gold financing transactions, initially set at 500 grams per transaction. Gold used in these transactions must meet national or internationally recognized standards, with OJK retaining the authority to adjust weight requirements based on industry developments.

Given Indonesia’s nascent bullion banking sector, the regulation introduces a three-stage implementation strategy. In the initial phase, institutions can conduct gold deposits, financing, trading and storage, with a 70 percent cap on unallocated gold used for financing and trading. This limit increases to 80 percent in the second phase and 90 percent in the final phase, where financial institutions may expand into other bullion-related services. However, institutions that only provide custodial services remain restricted from engaging in other bullion activities.

Despite its potential economic benefits, some economists warn of the risks associated with bullion banking, particularly fraud and money laundering vulnerabilities. International cases have demonstrated how bullion banking can be exploited for market manipulation and illicit activities.

One prominent case involved Canada’s Bank of Nova Scotia, which, along with Deutsche Bank AG, Société Générale SA, Barclays PLC and HSBC PLC, was accused of colluding to manipulate gold benchmark prices. Such instances underscore the need for robust regulatory oversight in Indonesia’s bullion banking sector.

Financial experts argue that strict anti-fraud and anti-money laundering mechanisms must be implemented to prevent potential abuse. With Indonesia’s bullion banking industry still in its early stages, ensuring compliance, transparency and sound risk management will be critical to maintaining credibility and securing long-term trust in the system.