DECEMBER 6, 2011, 1:18 P.M. ET
Jakarta Heads in the Right Direction
Contrary to what critics say, a proposed banking rule can leave the industry stronger and still relatively free.
By KARIM RASLAN
One consequence of Indonesia’s rising global prominence is that its policies will come under increased scrutiny. This is naturally a good thing, but sometimes the attention can be misplaced, as evidenced by talk about a possible regulation in the banking industry.
Indonesian authorities recently suggested that they may propose an ownership cap on banks forbidding one entity to hold more than a certain amount—many speculate less than 50% stake—down from the current threshold of 99%. This plan has drawn various criticisms, with some recent commentary even suggesting that Jakarta is now poised to roll back the reforms embarked upon after the Asian financial crisis. Such criticisms are off the mark and the assumptions behind them need to be questioned.
Let’s start with a few facts. First, current critiques of Indonesian policy make it seem that the country’s recent boom is all because of economic reforms undertaken in the past decade. While these reforms undoubtedly helped open the economy and stabilize it, most multinationals are drawn to Indonesia because of its huge domestic demand and its abundant natural resources.
In the banking sector, the ample investor interest is thanks to a fast-growing yet under-banked market that offers high profits. What’s more, this is part of a general trend of investors looking for emerging markets with such characteristics.
Second, critics of the banking proposal misunderstand its impact. The law would probably affect both foreign and domestic owners. The caps may not necessarily be imposed immediately but over the space of a few years, meaning businesses have enough time to make changes. All the same, foreign investors would still be able to own up to 99% of Indonesian banks. What the new law will do is to restrict how much any single entity can own.
Third, even after this change, Indonesian banking would remain far more open than that of many other Southeast Asian countries. Neighboring Malaysia imposes a 30% cap on foreign ownership of banks and restricts the number of branches such banks can open. This has led some foreign banks like Indonesia’s Bank Mandiri to halt plans for expansion there.
In Singapore, it is theoretically possible for a foreign entity to own 100% of a local bank, but increases in shareholding thresholds (at the 5%, 12% and 20% levels) require ministerial approval. The Singaporean government has stated that it will not allow foreigners to control its domestic banks.
In contrast, Indonesia’s financial sector is extremely liberal. Ten of its 121 commercial banks are majority foreign-owned and another 28 are foreign joint ventures. This means that nearly a third of Indonesian banks are “foreign” in some form or another, while five out of the top 10 banks by asset size are majority foreign-owned. Here, critics have noted that a possible reason behind Indonesia’s banking proposal may be to send a message to its Asian neighbors to let in the likes of Bank Mandiri.
But is protectionism for Jakarta so unreasonable? Banking is a strategic sector for any country. If the last couple of years of financial turmoil have taught us anything, it’s that the poor health of this industry has dire implications not only for individual countries but their regions and beyond. If foreign financial institutions pull back their capital because of trouble at home, countries like Indonesia will be affected.
Even if Indonesia becomes more protectionist, the political system is still open enough to ensure economic dynamism. Policy making in Indonesia is increasingly less top-down. Moreover, sentiment on the ground plays a critical role. The system is lively, often raucous, but by no means a closed shop.
If foreign banks feel the proposed changes are onerous, then the onus is on them to make their case to the Indonesian public. As it is, the fecklessness of some foreign banks, like Barclays’ ill-fated Indonesian strategy—hastily acquiring the local Bank Akita in 2008 and then pulling out almost immediately a year later—has not helped their cause very much.
Finally, it’s possible that the proposed changes could be a good thing for the banking sector. Limiting single ownership will prevent many of the abuses of the Suharto era when banks’ lending and investments were more often than not dictated by family or political considerations rather than good business sense. This is what the banking regulator wants.
One can detect a genuine desire among regulators to not to let Indonesia revert to those dark days. The controversial bailout of the troubled but politically connected Bank Century in 2008 is a grim reminder of the lingering governance issues in the sector.
The proposed changes are hence moves to forge ahead rather than to step back. Regulation to weed out cronyism and ensure a level-playing field can help rather than hurt the economy.
What’s more, businesses have to conform to the political realities of modern-day Indonesia, instead of the other way around. They have to realize that succeeding in Indonesia will require patient and assiduous engagement with Indonesia’s many stakeholders. This process can sometimes seem byzantine and frustrating, but the rewards will ultimately be great.
Mr. Raslan is a syndicated columnist and the CEO of KRA group, a regional public affairs consultancy. He is the author of “Ceritalah Indonesia” (KPG, 2010).