Indonesia's banks may lose out to their regional competitors when the free trade and services agreement among Southeast Asian nations is fully implemented in 2015.
Syamsul Arifin of Bank Indonesia's international affairs unit said Thursday that most of the country's banks were still far from being efficient or capable of going head to head with their regional rivals.
He said that the local banking industry's average interest rate spread -- the margin between its lending rates and deposit rates, which is used to cover operating costs and produce profits -- was among the highest in the region.
"The spread stands at between 5 and 7 percent in Indonesia, while in other countries -- like Singapore and Malaysia -- it's only between 2 and 3 percent," Syamsul said during a discussion hosted by BI Thursday.
"This clearly raises the question of whether Indonesian banks -- with all their inefficiencies -- will really be ready to compete in the upcoming ASEAN single market?"
The interest rate spread is perhaps the simplest yardstick for gauging competitiveness in the banking industry. While banks that offer higher deposit rates may be able to attract more funds from the public, bank profits actually depend on the ability of lenders to extend more loans. Naturally, businesses seeking loans will be drawn to those banks that offer the lowest lending rates.
Syamsul further said that the matter was a cause of major concern to BI, and had to be quickly resolved through the setting out of policies to make local banks aware of the situation and encourage them to run their businesses in a healthier manner.
BI director for banking policy and regulation, Halim Alamsyah, had previously warned of the inefficiencies plaguing local banks.
He pointed out that their overheads were often up to 1.5 times those of banks in Singapore, Hong Kong and Japan, while many Indonesian banks still applied risk premiums -- additional lending surcharges to take account of specific risks on the part of particular borrowers -- of up to 2 percent, while international best practice limited such surcharges to only 1 percent.
Accordingly, Halim said BI was planning to issue regulations to encourage greater efficiency in the banking system.
Inefficiencies in the banking industry may explain why lending rates have been relatively slow to come down -- they still stand at an average of 14 percent -- even though the central bank's benchmark rate -- and the Deposit Insurance Agency (LPS)'s maximum rate for guaranteed rupiah deposits -- have both declined to 9 percent.
The slow progress in improving Indonesia's investment climate and infrastructure, and in reducing red tape, all of which have increased the cost of doing business here, only adds to the problem. Indonesia is ranked among the world's least competitive nations and as one of the riskiest places for doing business.
High lending rates and an uncertain business environment only serve to discourage businesses from borrowing.
All this comes on the back of the decision by ASEAN to bring forward its plan to form a European Union-style single market allowing for the free movement of goods, services and investment in 2015. In January, ASEAN also signed a free-trade agreement with rising global economic giant China, which will come into effect this July.
Analysts have long been warning that Indonesia could lose out badly in the services sector -- which also includes the banking industry -- with the country already running a deficit of up to $10 billion even without the free market -- and have urged the government to take action to improve the situation.
The head of the Finance Ministry's Fiscal Policy Agency, Anggito Abimanyu, recently said the government would continue harmonizing its taxation and customs regulations with the other ASEAN countries.
Thursday's discussion at BI was held in advance of the central bank's planned launching today of three books highlighting the challenges facing Indonesia in the ASEAN and global free-trade markets. BI Governor Burhanuddin Abdullah and Trade Minister Mari Elka Pangestu will address a seminar on the topic to mark the launching of the books.