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Business Desk

The Jakarta Post

Publication Date : 23-01-2013

The days when Indonesia’s banking industry was considered open and liberal may be at an end if the new banking bill, proposed under the House of Representatives’ initiative, is passed into law.

The new banking bill, which limits ownership and regulates the operations of foreign banks here, has gained support from local bankers and analysts, as well as the nation’s banking regulator Bank Indonesia (BI).

They argue that the time is right for Indonesia to have a “more regulated” banking system, considering how lucrative the banking business in Indonesia is at present.

“When our economy already has a strong footing and our financial sector is already attractive, it is necessary to reevaluate regulations that are considered ‘loose’, especially those [regulating the operations] of foreign banks,” Bank Central Asia (BCA) president director Jahja Setiaatmadja said in a meeting with legislators in Jakarta yesterday.

Legislators from the House’s Commission XI overseeing finance and banking were seeking feedback from local bankers and economists on the bill’s formulation and Jahja, who leads the country’s largest private bank, welcomed the idea.

This week, the House completed the draft of the new banking bill, which emphasised reciprocity issues and, according to analysts, was specifically designed to protect Indonesia’s banking industry by targeting the operations of foreign banks.

The bill stipulates that all foreign lenders operating in Indonesia under branch status must convert into legal entities (PT). The clause will apply retroactively, meaning existing foreign lenders such as Citibank and Standard Chartered will have to convert if they want to continue operating in Indonesia, Commission XI deputy chairman Harry A. Aziz told The Jakarta Post.

It also stipulates that no investor can have a controlling share in more than one bank, contradicting the new single presence policy unveiled by BI, which allows investors to hold 25 per cent of shares in two or more banks as long as they form a holding company to oversee the operations.

Given the high profitability and rapid growth that Indonesian lenders have enjoyed in recent years, BCA’s Jahja said that it was imperative for the authorities to regulate the banking system to promote the development of local banks — just as happened in neighbouring countries such as Singapore and Malaysia.

“Our banks are currently in expansive mode, meaning they have to establish many new branches every year [to tap new markets]. This is different from many banking industries overseas, whose markets are already saturated,” he told lawmakers.

Banking penetration in the country remains low, as evinced by the country’s low credit-to-Gross Domestic Product ratio of around 30 per cent. In addition, only a half of Indonesia’s households have access to banking and other financial services, providing lucrative business potential for banks.

Indonesia’s banking industry is also among the world’s most profitable, with the 10 largest lenders having a average net interest margin (NIM) of 6.1 per cent, almost twice that of other banks in Southeast Asia.

Following the 1997 Asian financial crisis, Indonesia introduced a series of loose, liberal banking regulations as incentives for offshore investors so that they would invest in the banking industry.

Bank Permata commissioner A. Tony Prasetiantono believed that such regulations must be reviewed at a time when Indonesia’s banking industry was already highly attractive. “Investors do not need incentives [in the form of loose regulations] anymore as our banking industry already has high profitability, as evinced by its high NIM,” he told lawmakers during the meeting.

Tony also supported the House’s plan to make all foreign banks become legal entities. He explained that, by becoming legal entities, the foreign banks must inject additional capital, a situation that will eventually invited more capital inflows to the country.

The need for Indonesia’s banking industry to have a new, stricter banking law is also supported by BI, the current banking regulator, which is slated to bestow its banking supervisory role on the Financial Services Authority in 2014.

Salient articles

• Article 16
Foreign banks operating in Indonesia under branch status must be legal entities.

• Article 27
The OJK can determine or change a person’s ownership limit in a commercial bank by performing share-buying while paying heed to good governance, capital adequacy and contributions to the national economy.

• Article 28
Every person can only become a controlling shareholder in one commercial bank. Central and local governments acting as controlling shareholders in banks are exempted from the clause.

• Article 42
OJK will coordinate with Bank Indonesia to formulate supervisory regulations in banking, among others: capital adequacy, a banking information system, overseas funding, banking products, determining banking institutions that are categorised as systemically important banks and others.