INDONESIA - OPINION - One Way to Break Indonesian Banks

Jakarta’s financial circles are atwitter over a proposed change to banking ownership laws. In August, the government announced that it would soon be imposing a limit on the proportion of a bank that could be owned by any single entity. The time frame for the rule’s introduction was undefined, as was the concentration threshold — but 50 percent is the figure being bandied about.   (source)

Many are concerned that the law would apply retroactively, prompting large divestments in banks, including BCA (substantially owned by the Hartono family), Danamon (67 percent owned by Temasek), CIMB Niaga (98 percent owned by Malaysia’s CIMB) and BII (97.5 percent owned by Malaysia’s Maybank.)

Why would Indonesia uproot the ownership structure of its banking system? The plans were leaked in the more tranquil days of May. But a week and a half ago the Indonesian stock market plummeted by 8.9 percent (climbing back just 5.3 percent in the week following) and the rupiah briefly touched 9,350 to the dollar, a near 10 percent drop from its high a week earlier.

Part of this is the shortage of greenbacks in Europe, which is driving a pullback of dollar credit lines from Southeast Asia. But it’s also a reminder that Southeast Asia remains a “risk-on” trade, subject to capital flows when the good times are rolling, and to teeth-chattering fear when the end is nigh.

Regulators cannot take investor sentiment for granted.

If no bank owner can own more than 50 percent, then everybody is a minority shareholder, which Bank Indonesia says would improve corporate governance. Others are less certain. “I don’t understand how spreading accountability will make banks safer,” one local tycoon with substantial banking assets told me.

Here it pays to understand an Indonesian regulator’s mental universe: In it, the 1997 banking crisis was primarily caused by a surfeit of related-party loans, in which tycoons channeled funds into whichever businesses they saw fit (happily termed “piggy banking”).

While this is true, most troubled banks in the developed world had dispersed ownership patterns. There is more than one way to blow up a bank.

Predictably, nationalism is also in play. Indonesia has some of the freest banking laws in the world. There are more than 120 banks in the system, and foreigners can own 99 percent of any financial institution. Today about a third of banks in Indonesia have some foreign ownership. Yet executives at Mandiri, a state-run bank that is Indonesia’s largest, often complain to me of being overcharged for banking licenses in Malaysia, i.e. priced out by regulators. Related grumbling about the need to “protect” Indonesian depositors from “evil” foreigners are legion. Restricting ownership could force reciprocity in Malaysia and Thailand.

But any proposed ownership law is worrying. Retroactive application after years of welcoming foreign participation decreases future predictability. It penalizes the foreign companies willing to take a punt on Indonesia in the aftermath of the 1997 crisis. It also looks silly. Indonesia went through the entire process of creating the Indonesian Bank Restructuring Agency (IBRA) in 1998 to sell off confiscated assets to willing, mostly foreign, buyers, and now is effectively forcing those buyers to dispose of those assets. It’s like a game of “pass the parcel” — and just as childish.

In addition, the move may prevent consolidation of the banking sector by removing potential suitors from the pool. Consolidation has been a stated goal of bank regulators for several years.

Not only is this a hasty change of course, but it is a wrong one. Most countries with healthy banking systems have a concentrated banking sector; Singapore, Australia and Canada each have just a handful of major banks. This arrangement allows for a closer relationship between regulators and the regulated, and allows banks to have higher underlying earnings to help them recover from bad loans more quickly.

Restricting ownership will make the market less competitive by slowing the spread of ideas. This is a harder case to make, but it ought to be made. Banking services in Indonesia have improved dramatically over the past 10 years, in part due to ideas brought by foreign banking groups. Improvements include superior ATMs, speedier processing and online banking with security tokens. An Indonesian banking system run solely by Indonesians would likely be worse for Indonesian consumers.

As the law is being discussed, regulators will no doubt be under the cosh from foreign investors, who have been uniformly negative about it. Bank Indonesia should ditch these proposals in the interests of financial stability.

Sahil Mahtani is a management consultant and writer based in Jakarta. 

Source : http://www.thejakartaglobe.com/opinion/one-way-to-break-indonesian-banks/469069  - Oct 3, 2011