Private banks must be reformed to avoid sanctions in the form of limits on share ownership. Indicators of banking management must be transparent.
It looks as if the limits on share ownership to be imposed by Bank Indonesia will do little to change the map of bank ownership in Indonesia. There will be no changes to the proportion of foreign shareholdings as long as the banks they own are still rated healthy and use the best management practices. Foreign and domestic investors will still be allowed to own up to 99 percent of private banks, as long as the banks are healthy.
The spirit behind this policy is good, and the focus is on giving unhealthy private banks an early warning so they can take corrective measures to avoid sanctions. These limits will act as an incentive for owners of healthy banks and as a disincentive for owners of less healthy banks. Customers will benefit. They will avoid the risk of doing business with banks that are not bona fide, and will have an opportunity to obtain low interest loans.
The real objectives of this new policy should be explained. Is it merely to improve the health of the banking sector, or is there a hidden agenda, because of the growing foreign ownership of national private banks? In other words, is the policy designed to reduce the increasingly worrying foreign domination of private banks? Since the 1997/1998 crisis, many national banks have been taken over by foreign investors. This phenomenon has triggered negative sentiment, especially since the response to facilitating foreign investment in Indonesia has been problematic for Indonesian banks wanting to expand overseas.
For example, Bank Mandiri is the only state-owned bank that only recently has opened a branch in China, after waiting since 2003. Mandiri is only allowed to conduct transactions in local currency. And if our banks want to expand to Malaysia or Singapore, they eperience extraordinary difficulties. It is this bad news that seems to have pushed Bank Indonesia to issue the policy restricting foreign banks and protecting the interests of the national banking sector.
But the central bank is looking for compromise. There needs to be a transitional policy that ensures we are not seen to be breaching the rules of the World Trade Organization or other agreements. Therefore, this policy is not aimed only at foreign investors, but also to the owners of all banks, including domestic ones. The problem is that it is private banks controlled by foreigners that are well-managed.
This policy will not be easy to implement. The central bank must provide a transparent explanation as to which indicators of healthy banks and corporate governance are to be measured by the Bank Indonesia regulation. Thinking logically, is the central bank ready to guarantee that these banks will be better managed if share ownership is limited or is reduced through divestment?
There could be other obstacles. A shareholding limit would prevent abuses by owners of dubious character, but it will not be easy to find people to buy the shares the previous owner has had to sell, while there are few domestic investors with sufficient capital. If there is divestment, hundreds of trillions of rupiah would be needed to buy up the shares.
Bank Indonesia would do better to wait before implementing the policy. It needs to coordinate with the government and the Financial Services Authority, whose members are about to be selected by the House of Representatives. After all, Bank Indonesia is to hand over banking regulations and oversight to this authority at the end of 2013. This strategy needs careful planning to ensure that business uncertainty does not emerge in Indonesia as a consequence. If it does, foreign investors will flock to neighboring countries which are considered to offer better investment climates.
No. 42/12, June 13, 2012