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Confusing signal for Indonesian banks
Publication Date : 25-01-2013
Indonesia’s banking industry has fully recovered from the 1997 crisis to become a strong financial service sector due in no small part to the big role of foreign banks, which have been thriving in Southeast Asia’s largest economy, under what analysts and bankers consider the most liberal market in the region.
But concern has grown over the continued high-pace expansion by foreign banks, lured by Indonesia’s robust economic growth and great banking market opportunity. This has been whipping up nationalist sentiments and setting off strong political pressures for stringent restrictions on foreign bank operations.
Bank Indonesia (the central bank) responded quickly by issuing a string of new regulations last year on restrictions for bank ownership, multiple-licenses and good corporate governance.
These new rules have been designed to accelerate the consolidation of the banking industry as the central bank believes that there are still too many banks (120), which are mostly small, weak and highly vulnerable to stresses. But the rules also curb the pace of foreign bank expansion.
Many national bankers and most politicians at the House of Representatives still see the banking regulatory framework as too liberal for foreign banks to expand their role in the country.
The House initiated draft legislation, but it was revealed last week that the parliament had completed the draft of a banking bill designed to replace the 1992 Banking Law.
Outstanding among the articles of the draft legislation are tighter restrictions on foreign bank operations, re-quiring foreign banks operating under branch status to set up legal entities under Indonesian laws and prohi-biting a single investor from holding controlling shares in two banks.
Even though some of these provisions are more restrictive than the latest regulations issued by Bank Indonesia, the banking market in Indonesia is still more open and liberal than most other countries in the region.
Our biggest concern is that if the House-initiated draft banking bill is passed into law, it will weaken competition, which is needed to decrease the oligopoly of the five largest national banks, which are dominated by the four state banks.
Despite the remarkable achievements made over the last decade, Indonesian banks remain the most inefficient in the region in almost all financial ratios, yet the top ten largest banks enjoy the highest profitability in the region due to the unhealthy high net-interest margin.
Indonesian banks also are way under-capitalised compared to other banks in major Asean countries. For example, Bank Mandiri, the largest in the country, had total assets of only US$60 billion, even much smaller than the smallest national bank in Singapore, let alone compared to DBS’ $293 billion, the largest in the Asean region.
How could our banks compete in the liberalised Asean financial service market after 2020?
Banking penetration in the country also has remained low, as shown by the low credit-to-GDP of around 30 per cent. In addition, only half of Indonesia’s households and less than 20 per cent of small businesses have access to banking and other financial services.
Hence, what is badly needed is more, not less, fair competition to force national banks to consolidate and to become more efficient.
The high number of banks in the country does not allow for effective supervision, especially when you look at the fact that banking supervision will be transitioned from the central bank to the Financial Service Authority next year.
What is sorely needed are more bank branches throughout the country.
We are afraid that given the political sentiment that led to the drafting of the banking bill and the new wave of strong nationalistic sentiments in the upcoming 2014 elections, the new Banking Law emerging from the upcoming House deliberations will stifle competition, thereby strengthening the oligopoly in the banking market and maintaining gross inefficiency in the industry.