The rules on bullion banking were proposed by the government to be included in the broader financial sector development and strengthening (PPSK) omnibus bill initially drafted by the House of Representatives.

The rules would allow for various bullion services involving gold, namely saving, safe deposits, loans and trading, as well as over-the-counter (OTC) exchange, derivative trading and securitization, all of which would be subject to banking law and supervised by the Financial Services Authority (OJK).

Finance Minister Sri Mulyani Indrawati explained on Nov. 10 that the general concept would be similar to regular banking, but using gold instead of banknotes. She argued that, if one day more people sought to build savings in the form of gold, that should be accommodated.

However, experts have told The Jakarta Post that having banks offer bullion services may not be wise.

Doddy Ariefianto, associate head of the finance program at Binus University, said customers may confuse bullion services with savings and time deposits, falsely assuming that all of them offer stable and guaranteed returns simply because they were all provided by banks.

He noted that gold tended to fluctuate and that its price may rise during times of heightened uncertainty but fall when the situation reverted to normal, earning it the title of a safe-haven asset, rather than a safe asset that offered guaranteed returns.

Furthermore, he warned it may also lead to mis-selling practices, given that many potential customers still had rather low financial literacy.

“If banks are allowed to sell other than their core products, and then something untoward happens, we may expect it to be problematic, unless there is proper customer education,” Doddy told the Post, adding that, unfortunately, consumer education was often found wanting.

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Bhima Yudhistira, executive director of the Center of Economic and Law Studies (Celios), said that, given the fluctuation in gold prices, authorities would need to take into account risks to banks’ balance sheets, which could spill over to the financial system as a whole.

Bhima noted that, aside from providing safe deposits for physical gold, bullion banking extended to many derivative products like futures, which were more prone to price fluctuations.

“Authorities must watch this closely, because we would not want it to cause systemic risk to the financial system,” Bhima said.

To prevent such risks, authorities may want to consider limiting the exposure of each bank to bullion banking, or simply restrict such services to the nonbanking industry, he said.

The Basel Committee on Banking Supervision introduced Basel III as a precautionary framework in response to similar concerns about banks’ exposure to derivatives, including gold derivatives, by requiring banks to finance long-term assets with enough long-term money to avoid liquidity failures similar to those seen during the 2007/2008 global financial crisis.

Piter Abdullah, executive director of the Segara Research Institute, said on Monday that banks may provide bullion services but be limited to safe deposits for physical gold in their vaults.

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Febrio Kacaribu, head of the Finance Ministry’s Fiscal Policy Agency, reassured reporters on Nov. 17 that the country was not new to bullion banking, arguing that several entities had been running such activities, like state-owned sharia lender Bank Syariah Indonesia and state-owned pawnshop Pegadaian.

He said there was nothing to be worried about regarding the bullion services and emphasized that their inclusion in the PPSK bill was simply to provide certainty and a legal basis for financial firms running bullion businesses.

“Our aim is to provide assurance, so that bullion activities have a legal basis and can be developed further,” Febrio said.

Vera Febyanthy, a lawmaker from House Commission XI, said on Nov. 17 that the deliberation of the bill did not cover risks and concerns about bullion banking, arguing that it would be the OJK’s task to address that in the derivative regulation at its own discretion.

M. Misbakhun, a fellow lawmaker from the same commission, which oversees the financial system and institutions, said it would push for rules that would address the risks and concerns of bullion banking.

“We understand that there is always risk in the financial system. Sometimes, it can be volatile and cramped with uncertainty,” Misbakhun said on Nov. 17.