Indonesian bank executives on Monday called on the government to use licensing restrictions to limit foreign investors’ expansion in the domestic banking industry.
Agus Martowardojo, chairman of the Indonesian Bankers Association (IBI), said Bank Indonesia should follow the lead of neighboring countries by granting foreign banks limited licenses, based on geography or type of banking activity.
“For the revision of the Indonesian Banking Architecture, or API, we recommend the central bank have multiple licenses because now we only have a single license for banks, which is a full license,” said Agus, who is also president director of PT Bank Mandiri, the country’s largest bank by assets. “[This will ensure that] if a foreign bank or investor wants to own a bank here they cannot obtain a full license.”
He added, “This will give local lenders an opportunity to prepare themselves before foreign banks get a further grip on the industry.”
Domestic bankers are growing increasingly concerned about the rapid expansion of foreign banks in Indonesia. The total foreign-owned stake in the banking sector has soared to 48 percent from 11 percent in 1997, and nine of the nation’s 15 largest lenders are now majority-owned by foreign companies.
Bankers say this is a result of regulations that allow foreign entities to own up to 99 percent of any local bank, and the attractive profit margins offered by the domestic banking sector.
In Hong Kong and Malaysia, by comparison, foreign investors cannot own more than 30 percent of any fully licensed bank. However they are allowed full ownership of banks that have a limited license.
“In terms of activity, for example, they are only allowed to hold public funds with a minimum deposit of $25,000 or they are only allowed to give loans to the corporate sector, so they are not allowed to have access to retail customers. In term of geography, they cannot enter rural areas,” Agus explained.
Sigit Pramono, chairman of the Indonesian Banks Association (Perbanas), said that while the national interest should be protected, the country does not want to appear to be too protectionist or opposed to foreign investment in the sector.
“It would be very wrong if we do not regulate more clearly foreign ownership in the banking sector - other countries have done the same. Small banks and rural banks are already complaining that they cannot keep up with the foreign lenders,” Sigit said.
Currently, foreign banks are prohibited from doing business in rural areas.
However, Sigit said the definition of foreign bank is not clear enough, enabling many foreign investors to buy majority stakes in local banks to operate in rural areas.
Investment bankers believe Indonesian banks remain attractive to foreign suitors although high valuations may put off some possible buyers.
“Many foreign banks may still want to buy Indonesian banks, but it is challenging and they are not cheap,” noted Kate Richdale, co-head of investment banking at Morgan Stanley in Asia-Pacific.