I

ndonesian bankers have learned the hard and expensive way about the importance of internal control from recent cases of fraud and violence involving banks in the country.

Bank Indonesia (BI) Governor Darmin Nasution highlighted the importance of internal control to mitigating deviancies in the banking industry.

“The first line of defense in such issues is the internal controls at each bank. Then comes public accountants as the second line of defense. The third line will be BI, which supervises banks,” Darmin said in his opening remarks before hundreds of bankers at the Indonesia Banking Expo 2011 at the Jakarta Convention Center.

Separately, BI deputy governor for banking research and regulation Muliaman Hadad, said the implementation of banking regulation and operating procedures (SOP) were still lacking because of weak first lines of defense that were the responsibility of banks’ operational staff.

“BI does not meet customers on a daily basis, banks do. So the first line of defense should be the operating staff.”

Citibank and Bank Mega have been among the most discussed banks after billions of rupiah were allegedly embezzled from client funds. Citibank has also become the subject of a police investigation over the death of one of its credit card customers, allegedly in the presence of bank debt collectors.

“We have to admit there are things we did not focus on properly. We are talking about risk management, which includes operational risks. We should [also] focus [on this]. It seems we need to pay closer attention to banking [standard operating procedures], human resources, etc.,” Darmin said, adding that the central bank would thus hold more dialogues on how to fix these issues.

National Banking Association (Perbanas) chairman Sigit Pramono also urged banks to “sit together to find solutions to issues instead of blaming each other for mistakes”. “Considering the sensitivity of the banking industry, which is different to other industries, we urge banks to trust [each other] and support BI in tackling banking issues because, by law, BI is the agency that supervises banks.”

Zulkifli Zaini, president director of the nation’s largest lender Bank Mandiri, considered the recent cases a wake-up call for the bank to improve its human resources and SOPs. “With the Citibank case, all banks are given the opportunity to evaluate their wealth management practices to avoid similar cases in the future.”

Bank Negara Indonesia (BNI) president director Gatot M. Suwondo said he was rather disturbed by the fact that “one bank messes and all has to suffer”. “It’s about the [internal control] system. Has it been implemented or not.”

“There is daily quality control in banks, supervisors randomly check on banking activities periodically. It depends on the banks’ SOPs, but I think our banking industry has done them well. And BI’s supervision has also been tight,” Gatot said on the sidelines of the bank expo event.