Download Do We Need Market Conduct Supervision in Financial Sector?

International Seminar, A New Era of Market Conduct Supervision,
Bali, 8-9 September 2014
Do We Need Market Conduct Supervision in Financial
Sector? If So, for Whom? A Case of Indonesia
Structure of
Financial Sector
Behavioural
Economics in
Action
Complexity of
Market Conduct
Supervision
Financial System
Supervision
Market Conduct
Supervision
2
Indonesia & Its Callenges
• 13,33% of
Indonesian
population is below the
poverty line (BPS, 2011)
• 64,25% of Indonesian live
in rural areas (BPS, 2011)
• 60% of Indonesian have not
got access to formal
financial sector (World
Bank, 2007)
3
Structure of Financial Sector
Formal
Institution
Bank
Informal
Institution
Sharia-Based
FI
Non-Banking
FI
Micro
Finance
Cooperativebased FI
Indigenous
FI
Sharia-Based
FI
Cooperativebased Micro
Finance
(78,035++)
Non
Cooperativesbased Micro
Finance
Non-Banking
Industry
(1670 firms)
Banking
Industry
(2003 firms)
Micro
Finance
4
Complexities
• Heterogeneity of financial
institutions in Indonesia
– Grand vs micro scales financial institutions
– Conventional vs sharia-based financial
institutions
– Conventional vs cooperative-based financial
institutions
– Formal vs informal financial institutions
• There are some problems with
classification
– e.g. BMT is a sharia-based bank, but in
Indonesia, it has been considered as
cooperative-based financial institution,
supervised by the ministry of cooperative and
SME
• Informal sector dominates Indonesian
economy and informal financial
institutions have been flourishing in
Indonesia
– They provide convenience in obtaining
loan (available for 24/7)
– Traditionally loan interest rates is very
high (the rule of 13 or nelulasi [Javanese])
– Various types of informal financial
institutions:
•
•
•
•
Mindhring
Bank thithil/ bank plecit
Shark loan
Rotating saving, etc.
5
Complexities (cont’d)
• There is a strong tendency that nonbanking industry also provide similar
products as banking industry and vice
versa
• Majority of banks have been
expanding their operation to reach Microfinance
customers in rural areas.
• Majority of banks have been
expanding their operation for
financial inclusion
• The networking between banking and
non-banking industries with micro
Financing
finance institutions have been
Companies
flourishing.
Bank
Insurance
Cooperative
6
Regional Banking (BPD): Pattern of Networking
(Pradiptyo et al, 2013)
The pattern of
networking between
BPD and MFIs
depends on the
structure of
economy in the
regions
7
Regional Banks with Simple Networking
Similar pattern:
Bank Kalteng
HQ
Branch Office
Cooperatives
Branch Office
Auxiliary
Office
 Bank Kalimantan
Tengah (Central
Kalimantan)
 Bank Sultra (SouthEast Sulawesi),
 Bank Papua
End Customers/
Members
End Customers
8
Regional Banks with Medium Networking
 It involved several financial
institutions (BPR, LKM, syariah,
dll.) within the networking of
BPD
Bank Sulselbar
HQ
Sharia Branch
Offices
BMT
BPRS
(Sharia Rural
Bank)
Branch Offices
Auxiliary
Offices
Branch Offices
Auxiliary
Offices
Similar pattern:
 Bank Sulselbar (South West of
Sulawesi),
 Bank Bali,
 Bank Kalsel (South Kalimantan)
End Customers
End Customers
End Customers
9
Regional Banks with Complex Networking
Similar Pattern:
BPD DIY HQ
 BPD DIY
(Yogyakarta),
Branch Office
 Bank Aceh,
Branch Office
Syariah Office
BPR
(Rural Bank)
Auxiliary
Office
BMT
KSP (savingloan
cooperative)
BUKP
LKD (Rural
Credit
Institution)
 Bank Nagari (West
Sumatera),
other
micro
syariah
institution
LKMs
KSPs
(cooperative
s)
BMT
Auxiliary
Offices
Auxiliary
Office
Mindring
End
Customers
End Customers
End Customers
 Bank Jateng (Central
Jawa),
 Bank Jatim (East
Jawa),
 Bank Kaltim (East
Kalimantan)
10
Anomaly: Simple Networking in the Most Advanced Region
A Case of BANK
DKI (Jakarta)
Bank DKI HQ
Branch Office
Brance Office
Sharia Offices
Multifinances
End Customers
End Customers
Jakarta is the most
complex and advanced
economy. However
Bank DKI has limited
networking to channel
its credits.
End Customers
11
Interest Rates and Transaction Costs of Networking
• The spread of interest rates between regional
banks (BPDs) and rural banks (BPRs) tend to
Regional
be conservative
Bank (BPD) • Significant differences in interest rates
occurred between BPD/BPR with MFIs
Rural Bank
• Recall: tradisional interest rate (Jawa):
(BPR)
NELULASI (the law of 13). We may
borrow 100% of fund, but we should return
MFIs
130%
• Transaction costs of networking between
BPDs and BPRs are almost negligible,
however the transaction cost between BPDs
and BPRs with MFI tend to be expensive.
12
Structure of
Financial Sector
Behavioural
Economics in
Action
Complexity of
Market Conduct
Supervision
Financial System
Supervision
Market Conduct
Supervision
13
Financial Supervision Pre-OJK
House of
Representative
President
Bank Indonesia
(Jakarta + 41
regional offices)
The
Ministry of
Finance
Banking Industry
[2003 firms]
Bapepam LK
(only in Jakarta)
Stratified
supervision
Micro Finance (BKD,
TPSP, dll)
Non-Banking
Industry (1670
firms)
The Ministry of
Cooperative and
SME
The
Ministry of
Trade
Cooperatives
(78,035 Firms++)
Cooperatives
(78,035 Firms++)
Commodity
Futures Market
14
Pre OJK: Lack of Coordination in Supervision
Bank
House
hold
• Two different
supervisors but no data
sharing and data
interfacing
• Potential assymmetric
information problems
are paramount
Cooperative
Bank
Bank of
Indonesia
The Ministry
of KUKM
Invest
ors
Bank of
Indonesia
• Two different supervisors
but no data sharing and data
interfacing
• Potential asymmetric
information problems are
paramount
Listed
Company
BapepamLK
15
Examples of No Man’s Land in Financial Supervision
•
•
•
BMT X was very aggressive in marketing its •
products and opened its office in an
elementary school
Pupils and staffs of five elementary schools
became its customers, and they saved their •
money in the BMT and worthed Rp8 billion.
Then, the BMT collapsed and the customers
were panic and they consulted the regulators:
– BI: the BMT is not a bank or BPR (rural
bank)
– Bappepam: the BMT is not their
supervisee.
– The Ministry of KUKM: the BMT is
their supervisee, but the customer
money was not guaranteed by LPS
(IDIC)
Mrs X had borrowed money from money
lender who act as cooperative Rp3 million.
After the 5th month, she cannot afford to
pay the installment.
Few months later, her loan became Rp11
million as she has to pay:
– Interest rate
– Fee for belated payment
– Fee for penalty (between 1-5x interest
rate)
– Fee for debt collector (Rp1,5
million/visit)
• In her case the debt collector
visited her house twice and she
has to pay for it.
16
Financial Supervision Post OJK Act
House of
Representative
Bank
Indonesia
??
President
OJK
Micro Prudential +
Customer Protection
Macro
Prudential
Supervision ?
Non-Banking Financial
Industry (1670 firms), Banks
[2003 firms]
Micro Finance (BKD,
TPSP, dll)
The Ministry of
Cooperative and
SME
Non Financial-Based
Cooperatives
Cooperatives (78,035++
The Ministry
of Trade
Commodity
Futures
Market
17
Financial Supervision Post OJK & SME Acts
House of
Representative
Bank
Indonesia
??
President
OJK
Micro Prudential +
Customer Protection
Macro
Prudential
Supervision ?
Non-Banking Financial
Industry (1670 firms), Banks
[2003 firms], Financial-based
Cooperatives (??)
Non-Cooperative Micro
Finance (BKD, TPSP, etc)
The Ministry of
Cooperative and
SME
Non Financial-Based
Cooperatives
Non-Financial
Cooperatives (??)
The Ministry
of Trade
Commodity
Futures
Market
18
Structure of
Financial Sector
Behavioural
Economics in
Action
Complexity of
Market Conduct
Supervision
Financial System
Supervision
Market Conduct
Supervision
19
Coverage of Market Conduct
Market Conduct = behavior of agents in a market (FCA, 2014 & BNM, 2014)
Market Conduct
(S-C-P)
Prudential
Supervision
Financial
Sector
Supervision
Market
Conduct
Supervision
Consumer Protection
(OJK Act and POJK)
Treat Consumer
Fairly
20
Coverage and Objective of Market Conduct Supervision
Coverage
Objective
Consumer
Protection
Financial
Institution
Behaviour
Consumer
Behaviour
Interaction
Prudential
Market
Conduct
Promoting
Competition
Financial
market
integration
21
Market Conduct Vs Prudential Supervisions
22
Prudential Supervisions
Risky Asset
ownership
Prudential Supervisions
Sales and
Marketing
Strategy
Risky
Competition
Transparency
of products
Debt
Collection
Total Asset
Transparency
of reports
Market
Conduct
Fees of
Products
Data Protection
Mitigating
too big to fail
Source: Miskhin, 2014
Consumer
Awareness
Source: BNM, 2014
23
Why do we need market conduct supervision?
Low Financial
Literation
Complexity
of Financial
Product
Asymmetric
Information dan
Pareto Optimality
The Role of
Government
Market
Conduct
Supervision
Mitigating
Potential
Financial Crisis
24
Asymmetric Information in Financial Sector
Financial
Institutions
Transaction
Networking
(telemarketer,
etc)
Product
Consumer
Asymmetric
Information
Capital
Owner
• Asymmetric information problems are
paramount in financial sector.
• Complexity:
• Agent (informed player) in one
transaction may become principal
(less informed player) in other
transaction
• Data interfacing & data sharing among
compartment within OJK should be
used to minimize asymmetric
information.
• Understanding the rationality and
behaviour of economic agents in
Indonesia is paramount.
25
Financial Literacy
• Low literacy rate exacerbate
asymmetric information problems.
• Various cases in financial sector in
High
Low
Indonesia show many consumers may
Education
not aware that they may involve in
High Most likely
Probable
ponzy-scheme financial transaction.
Low
Probable
Most likely
• Even if a financial sector stated clearly
its product is a ponzy-scheme product,
• The level of consumer financial literacy may be
many customers still buy the product.
reflected from the behavior of the consumers. • The sense of fairness in financial
• 78,16% of Indonesian population have low
transaction tend to be low.
Financial Literacy
literacy rate (the lowest in South East Asia.
26
Existing Supervision
Idealized Supervision
Market Conduct Supervision
Market Conduct Supervision
Stock Market
Prudential Supervision
NonBanking
Stock
Market
Banking
Prudential
Supervision
Financial Sector Supervision
Market Conduct
Supervision
Market Conduct
Supervision
27
Structure of
Financial Sector
Behavioural
Economics in
Action
Complexity of
Market Conduct
Supervision
Financial System
Supervision
Market Conduct
Supervision
28
Complexity of Dispute in Financial Sector
Customer
Other
agents
Financial
Institutions
OJK
Debt
Collector
Solicitor
• Disputes in financial sector, sometimes,
are more complex than customerfinancial institution relation.
• The source of disputes may raise owing
to other agents.
• Understanding on potential strategies
used to conduct crime in financial sector
is paramount
• Ideally the following acts should be
ratified in Indonesia:
• Freedom of information act
• Data protection act
29
Inspection Game: Modeling
Market Conduct Supervision
OJK
• Market conduct supervision
Not Inspect
may be modelled as an
Inspect
inspection game, antara OJK
dan PUJK/Nasabah
Violate the law
b1 , b2
a1 ,
• The game only have a Mixed
Strategy Nash Equilibrium.
a2
FI/Customer
• Consequences: each player
Obey the law
d1 , d2
c1 , c2
does not have a particular
strategy which guarantee to
optimize payoff.
where: c1 > a1, b1 > d1 & a2 > b2, d2 > c2
30
Complexities of the Inspection Game
• The underlying assumption of the inspection game is the use of representative agent.
• It is assumed that each player is able to take decisions efficiently and there is no
chance of coordination failure in making decision among divisions within the OJK.
• Complexity:
– A decision in an organization is an accummulation of interaction among divisions in the
organization, thus coordination is plausible in an organization.
• It should be noted that OJK was formed as amalgamation of two institutions (i.e.
Bank Indonesia and Bappepam LK), which have different organizational culture,
thus mis-coordination within divisions of the OJK may be inevitable.
– This is exacerbated by the fact that Indonesian may not be keen on cooperating among
themselves (Pradiptyo et.al. , 2013)
31
Structure of
Financial Sector
Behavioural
Economics in
Action
Complexity of
Market Conduct
Supervision
Financial System
Supervision
Market Conduct
Supervision
32
Do Informal Traders Follow Loss Aversion? (Pradiptyo, et.al, 2010)
• Various studies using experimental method show that individuals tend to follow loss
aversion/reference-dependent expected utility function proposed by TverskyKahneman (1979, 1991, 1992).
• Do the findings hold in Indonesia?
• A simple experiment was conducted in Yogyakarta for informal traders
– 100 questionnaires were distributed to informal traders in 7 traditional markets in Yogyakarta. 81 informal
traders participated in the experiment
• In the beginning of the experiment, an endowment of Rp100,000 was given to each
participant.
•
•
During the experiment, the participants were exposed to 40 pair-wise lotteries on decision
making under risk. The designed of the pair-wise lotteries were modified from Tversky and
Kahneman (1979).
In the end of the experiment, each participant chose one of 40 pair-wise lotteries randomly, and
played the lottery and received money according to the outcome of the game.
33
Experimental Results
• Allais Paradox
• Certainty Effect
•
•
•
•
 Allais Paradox holds
 Participants tend to choose prospects
with high probability of success.
 The axiom was violated
 Loss aversion (reflection effect) does not
Independent Axiom
hold
Loss Aversion
 Participant tend to be consistent in
Preference Consistency
their choices (i.e. their choices were
robust to small change in the payoffs)
 Participants tend to be risk loving when
Small Probability Prospects Effects
facing prospects with low probability
of success.
34
The Reflection Effect Does Not Hold
No
13
Choice A
Payoff
Prob.
Payoff
Prob.
50,000
0,80
30,000
1,00
35
14
50,000
50,000
50,000
>
0,25
31
Payoff
16
-50,000
50*
Choice B
Prob.
0,25
17
-50,000
18
-50,000
1,00
36
-50,000
<
<
43*
0,25
60*
-30,000
>
0,25
31
1,00
-30,000
0,40
52*
Prob.
-30,000
0,20
21
0,50
Payoff
0,80
38
29
12,500
<
Choice A
29
30,000
>
No
46*
30,000
0,40
52*
35
<
0,20
52*
15
Choice B
0,50
29
-12,500
<
1,00
50*
35
The Reflection Effect Does Not Hold (cont’d)
• Many studies show that individuals tend to
follow reference dependent expected
utility (RDEU) or loss aversion (see
Camerer, 2000 for literature survey in this
topic)
• RDEU/Loss Aversion: Individuals tend to
be risk averse in facing positive domain
prospects, but they tend to be risk loving
in facing negative domain prospects
• In contrast to the other studies, this
study shows that informal traders in
Yogyakarta do not follow RDEU/Loss
Averse.
Gains
Losses
Value
36
Modeling Loss Aversion
•
A logistic regression was used to estimate
factors attributable to loss aversion
behaviour of the participant
•
Dependent Variable: binary variable (1 =
reflection effect, and 0 = otherwise)
•
Independent variables: gender, experience,
types of goods, education and the size of the
business
•
Gender was the only statistically significant
variable and the sign was negative (male
participants followed loss aversion, whereas
female participants did not).
37
Evidence of Homoeconomicus… (Pradiptyo et al, 2013)
 Various experiments on Prisoners’ Dilemma show the evidence of tacit cooperation,
even if the game is played simultaneously both for one shot and finitely repeated
settings.
 Selten and Stoecker (1986); - Bereby, Meyer and Roth (2006)
 Cooper et al (1991, 1996) ; - Garapin, Llerena and Hollard (2010)
 This paper aims to conduct experiment on prisoners dilemma under evolutionary
setting:
 In particular, the experiment aims to explore the willingness to cooperate by
experimental participant. Does the concept of ‘gotong royong’ is a reality or is it
just a myth?
 If Indonesian love to do ‘gotong royong’ (working together), then when
participants who were exposed to play prisoners’ dilemma game under
evolutionary setting, ideally, the results will show the existence of tacit
cooperation among the participants.
38
Design of Experiment
 The subjects of the experiments were students and staff of Universitas Gadjah Mada,
Indonesia
 96 subjects were participated in the experiment which was devided into three shifts (32
subjects in each shift).
 32 subjects were divided into two groups, namely Sriwijaya and Majapahit, two biggest kingdom in the
history of Indonesia and they never involved in a war between them as their reigns were in different
period.
 The experiment consists of two sessions. In each session, sixteen one shot prisoners’
dilemma were played, whereby in every stage every player in a group is randomly assigned
to play with a player in the other group but they only play the game together once (random
matching players)
 In every stage, the payoffs of the game were changed however the structure of the game
remain the same, namely Prisoners’ Dilemma. (payoffs perturbation)
 In the first session, the strategies were labeled ‘A’ and ‘B’, however in the second session, the
labeled of the strategies were replaced by ‘cooperate’ and ‘reluctant to cooperate’,
respectively (framing effect).
39
•
•
•
•
•
•
•
•
M1
M2
M3
M4
.
.
.
M16
Sriwijaya
Majapahit
Setting of Experiment
•
•
•
•
•
•
•
•
S1
S2
S3
S4
.
.
.
S16
40
Example of Payoffs Matrix in Session 1
Player 2
B
P1: Rp100,000
P1: Rp0
P2: Rp100,000
P2: Rp200,000
P1: Rp200,000
P1: Rp50,000
P2: Rp0
P2: Rp50,000
B
Player 1
A
A
41
Example of Payoffs Matrix in Session 2
(Framing Effect)
Cooperate
Cooperate
Do not
Player 1
Player 2
Cooperate
Do not cooperate
P1: Rp100.000
P1: Rp0
P2: Rp100.000
P2: Rp200.000
P1: Rp200.000
P1: Rp5000
P2: Rp0
P2: Rp5000
42
Payoffs Perturbation Distribution of 16 Games
d/a
75% and b = 0
d/a
25% and b = 0
(low benefits of cooperation)
(high benefits of cooperation)
Combination R
Combination S
(high cost of cooperation )
(Stage I, V, IX, XIII)
(Stage II, VI, X, XIV)
[(c-a)/a] 25% and b = 0
Combination T
Combination U
(low cost of cooperation)
(Stage III, VII, XI, XV)
(Stage IV, VIII, XII, XVI)
[(c-a)/a]
75% and b = 0
Notes:
- If a = ¥1,000.-, then for [(c-a)/a] 75%, the maximum value of c is ¥2,000,- and the minimum value of c is ¥1,750. In case
of [(c-a)/a] 25%, the maximum value of c is ¥1,250 and the minimum value of c is ¥105,000. In case of d/a 75%, the
maximum value for d is ¥950 and the minimum value for d is ¥750. For the case in which d/a 25%, the maximum value of
43
d is ¥25,000 and the minimum value for d is ¥50.
Expected Behaviour
 Nash equilibrium will not be reached instantly, there will be a learning process moving from
Pareto optimum (‘cooperative‘) strategy to Nash equilibrium (‘defect’) strategy.
Cooperate

Defect
Payoffs Distribution:
 Minimum payoffs: Rp0
 Maximum payoffs: Rp200,000 (average lunch price in the university canteen: Rp5000)

Subjects





96 subjects: students and staff of UGM
Average age: 23.9 years old
Gender: 65.6% Male
Undergraduate students: 70%
Average Monthly income: Rp932,552/month (US$100)
44
General Results
Session 1
A:A (%)
A:B & B:A (%)
B:B (%)
Game 1-4
Game 5-8
Game 9-12
1,05
2,10
1,1
22,9
16,7
20,4
76,0
81,3
78,6
Game 13-16
0,5
8,4
91,2
Game 1-16
1,2
17,1
81,8
Session 2
Game 1-4
Game 5-8
Game 9-12
Game 13-16
Game 1-16
A:A
A:B & B:A
3,2
0,0
0,0
0,0
0,8
16,2
13,6
16,7
11,5
14,5
B:B
80,7
86,5
83,3
88,5
84,8
45
Proportion of Individuals’
Strategy in Each Payoffs
Combination
Session 1
R
A
11.7
S
T
8.3
4.9
Proportion of cooperative
strategy in Ahn et al. (2001)
U
Finitely Repeated Games
13.8
B
88.3
91.7
95.1
86.2
Strategy
Session 2
R
S
T
U
Cooperate
10.9
7.6
3.9
9.6
Cooperat
ive
Not to
cooperate
89.1
92.4
96.1
90.4
Session Session
1
2
44%
37%
Session
3
Session
4
32%
35%
46
Cooper et al (1991)
Stage
Proportion of
(A:A)
Bereby, Mayer and Roth (2006)
Stage
Number of
Subjects
Proportion of
(A:A)
1
10
18.7%
1-5
43%
2
10
22.3%
6-10
33%
3
18
21.3%
11-15
25%
4
18
12.6%
16-20
20%
5
10
21.6%
47
Between-Treatment Hypothesis Testing
Session 1
p-value
Session 1
Session 2
p-value
Session 2
Combination R
0.119
Combination S
Combination R
0.106
Combination S
Combination R
0,001*
Combination T
Combination R
0,000*
Combination T
Combination R
0,387
Combination U
Combination R
0,553
Combination U
Combination S
0,060***
Combination T
Combination S
0,030**
Combination T
Combination S
0,016**
Combination U
Combination S
0,303
Combination U
Combination T
0,000*
Combination U
Combination T
0,002*
Combination U
48
Variables
Benefit
Cost
1 if strategy A (cooperate), 0 otherwise
-1.691***
-0.22
-0.861***
-0.209
-1.697***
-0.234
-1.239***
-0.235
-1.700***
-0.234
-1.240***
-0.235
-1.694***
-0.247
-1.356***
-0.251
Logistic Regression
Fear
Greed
Framing
-0.293*
-0.151
-0.334**
-0.163
-0.533
-0.476
-1.787***
-0.57
-1.563***
-0.464
-0.335**
-0.164
-0.529
-0.476
-1.776***
-0.57
-1.551***
-0.464
0.659
-0.413
-1.934***
-0.236
96
-0.475
-0.537
96
-0.93
-0.615
96
A:B in previous game
B:A in previous game
B:B in previous game
Gender
Economics student
Constant
Number of id
-0.551***
-0.174
-0.616
-0.498
-1.611***
-0.587
-1.410***
-0.484
0.487
-0.471
-1.588***
-0.415
0.0342
-0.695
87
-1.557***
-0.261
-1.119***
-0.411
-0.286*
-0.149
-1.409***
-0.268
-1.757***
-0.449
-0.335**
-0.161
-0.486
-0.468
-1.733***
-0.564
-1.362***
-0.454
-1.409***
-0.268
-1.758***
-0.45
-0.335**
-0.161
-0.481
-0.467
-1.727***
-0.563
-1.355***
-0.453
0.664
-0.409
-2.324***
-0.229
96
-1.083**
-0.516
96
-1.536***
-0.594
96
-1.356***
-0.281
-1.932***
-0.478
-0.548***
-0.172
-0.577
-0.488
-1.584***
-0.579
-1.211**
-0.472
0.471
-0.469
-1.550***
-0.419
-0.605
-0.675
87
49
Further Agenda
• A division of market conduct supervision should be formed within the OJK
in order to improve the quality of financial sector supervision
• The market conduct supervision division is the complementary for the
existing prudential supervision which already in place for banking, capital
market and non-banking industries.
• A series of further researches in the area of experimental
economics/behavioural economics should be conducted to improve our
understanding on the rationality of Indonesian
–
–
–
–
–
Fairness and altruism
Decision making under ambiguity
Intertemporal decision making process
Bargaining
Decision making in negative domain, etc.
50
51