Another blow to the Indonesian banking sector<\/p>\n
David Sumual, Analyst, Danareksa Research Institute, Jakarta<\/p>\n
The Indonesian banking sector, which has suffered a
\ndevastating series of setbacks since the economic crisis broke
\nout in 1997, received another blow last week with the revelation
\nof a case of fraud at Indonesia's fourth-largest bank, Bank
\nRakyat Indonesia (BRI). Nonetheless, thanks to the government's
\nblanket guarantee program, the scandal did not lead to a
\n"banking-rush" that could have paralyzed Indonesia's banking
\nsystem.<\/p>\n
The US$34.5 million in irregular loan transactions at the
\nbank, which last month raised around $490 million in its Initial
\nPublic Offering (IPO), was the second loan scam involving a
\nstate-owned bank in less than two months. Earlier, banking
\nauthorities had uncovered a $200 million lending scam at the
\ncountry's second largest bank, Bank Negara Indonesia (BNI).<\/p>\n
The scandal at BRI has highlighted by weak supervision of the
\ncountry's banking sector, confirming previous suspicions that the
\nBNI scam was only the tip of the iceberg. Also raising concerns
\nare the rumors of the alleged involvement of several prominent
\npoliticians in the scandal. However, there is also the
\npossibility that these reports were due to negative campaigning,
\nwhich is typical ahead of general elections.<\/p>\n
However, if the scandals are similar to the Bank Bali scandal
\nin 1999, they may, of course, rock the country's fragile banking
\nsector, jeopardizing the nascent recovery in investor confidence
\nas well as the nation's economic stability. This is apparent
\nsince the outcome of a case that allegedly involves politics
\n(like the Bank Bali scandal) may end up with a political
\ncompromise rather than with a legal solution to settle the
\nmatter.<\/p>\n
The suspicion of collusion between senior politicians and bank
\nexecutives has emerged since the scam at BNI was apparently
\ndiscovered one year after it had begun. It is hard to believe
\nthat the cases were only caused by poor internal controls since
\nsome suspects are clearly blacklisted for their involvement in
\nBank Indonesia's liquidity fund (BLBI) abuse cases.<\/p>\n
It is also impossible for a bank's headquarters to have no
\nknowledge of the disbursement of such huge amounts of funds at
\nthe branch offices. As such, it only strengthens the allegation
\nthat a culture of graft and collusion, backed by political
\npatronage, may have coaxed the bank's internal officials to have
\nbecome involved in the scandal.<\/p>\n
There are also indications that both banks tried to cover the
\nloan fraud cases up. According to the Attorney General's Office
\n(AGO), both cases only came to light after the public and
\ninsiders at the banks informed Bank Indonesia and the AGO. Also
\nraising many eyebrows was the apparent difficulty that the police
\nhad in arresting the key suspect in the BNI scandal, Adrian
\nWoworuntu, considering how easy it was for some journalists to
\ninterview him.<\/p>\n
Only after 28 days was Adrian, who is known to be close to law
\nenforcement officials, arrested. Moreover, one of the suspects in
\nthe BRI case, Yudi Kartolo, was also a suspect in the BNI case,
\nhinting that the two scandals may be linked.<\/p>\n
The revelation of the scandals at the two state-owned banks
\ndoes not mean, however, that the problem is endemic within the
\nbanking sector. First of all, the loan scams may only reflect
\nweak human resources at those two banks. Also, the cases do not
\nrepresent an inherent risk to the whole of Indonesia's banking
\nsystem since the scandals only occurred at state-owned banks.<\/p>\n
But both scandals emphasize the urgent need for the government
\nto speed up the privatization of the nation's banks. At least the
\nforeign investors, who have been allowed to purchase a
\ncontrolling interest in some Indonesian banks, have brought new
\nstandards of best practices and a new mindset into the industry.<\/p>\n
Nonetheless, these scandals are, of course, complicating the
\ngovernment's attempts to convince investors to place their money
\nin this country. As foreign investors prepare to take a bet on
\ncontrolling stakes in BII, Bank Permata and Bank Lippo, the
\nscandals will provide investors with another reason to lower
\ntheir bidding price or even rethink their investment plans in
\nIndonesia.<\/p>\n
Some lessons can be learnt from the scandals, mainly that
\nIndonesia still has much to do in reforming the banking system.
\nFirst, efforts to improve the corporate governance in the banking
\nsector must be intensified in order to establish a sound banking
\nsystem. The central bank must also intensify its spot checks and
\nimprove its surveillance system. A specific regulation may be
\nrequired to guarantee that the board of directors of the banks
\ncertify any significant banking transactions that occur in a
\nbranch office.<\/p>\n
Also of importance is that bank officials' competency is
\nimproved through strict fit and proper tests, as any system would
\nbe sure to fail if the people working within them remain
\nunqualified. Moreover, by improving both the corporate and
\noperational governance, the employees' behavior can at least be
\nmonitored by the banks' policies and procedures. In this case,
\nthe central bank's move to push banks toward better compliance
\nand risk aversion must be supported.<\/p>\n
The government authorities must also have the political
\ncommitment to combat nepotism, collusion and graft to break the
\nvicious circle linking the sluggishness of economic recovery,
\ncorruption and a lack of law enforcement. Otherwise, these
\nrampant abuses of power will hurt the Indonesian economy, which
\nis now in the middle of a dramatic evolution from a New Order
\nstructure to a Reform structure.<\/p>\n
Political will in combating corruption has at least been seen
\nin the establishment of the Corruption Eradication Commission. As
\nsuch, the police and AGO must expedite the investigations and
\nbring to justice all the perpetrators in the BNI and BRI loan
\nscams.<\/p>\n
In order to clear up these scandals in an open and transparent
\nmanner, the new corruption commission could take over the BLBI,
\nBRI and BNI cases from the ordinary courts in order to regain
\ncredibility and improve the tarnished image of Indonesia's
\nbanking system. An underlying reason for this maneuver is the
\nreality that people have lost confidence in the courts as many
\nhigh-profile corruptors remain free until the Supreme Court's
\ndecisions on their appeals.<\/p>\n
Finally, the government must also pursue the signing of an
\nextradition treaty, particularly with Singapore, which has been
\naccused of sheltering Indonesia's white-collar criminals,
\nincluding the key suspect in the BNI scandal.<\/p>",
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