Bad bank governance<\/p>\n
Lending irregularities at state-controlled Bank Mandiri, which
\nled to the dismissal and arrest of its president and two vice
\npresidents last week, once again shows how fragile the banking
\nindustry is, how vulnerable it is to fraud and how deficient the
\ncentral bank is in its supervisory capacity.<\/p>\n
The alleged banking crimes in the largest domestic bank follow
\non the heels of a huge scams at Bank Global, which was closed
\ndown last December, and lending scandals at Bank Dagang Bali and
\nBank Asiatic, which were given the axe in April 2004.<\/p>\n
It is too early to ascertain as to whether the criminal
\ncharges being investigated by the Attorney General's Office (AGO)
\nagainst Mandiri's executives and several of its borrowers will
\nhold up in a court of law here. But the fact that the arrests of
\nthe bankers and borrowers was made after just two months of
\ninvestigations could, in itself, be seen as a strong indicator
\nthat there was some solid evidence of serious banking crimes.<\/p>\n
We do not think the AGO would stake its reputation on weak
\ncases, especially because the investigations were led by the
\nDeputy Attorney General for Special Crimes, Hendarman Supanji,
\nthe leader of President Susilo Bambang Yudhoyono's special
\ncorruption combat team. Moreover, the investigations were made to
\nfollow up on the findings of some \"28 lending irregularities\"
\nmade last year by the Supreme Audit Agency's (BPK) audit of the
\nbank.<\/p>\n
Since Bank Mandiri is the largest domestic bank in terms of
\nassets -- and thus has the sheer size to create systemic risks
\nwithin the whole banking industry -- the bank must have been
\nunder special scrutiny from Bank Indonesia's supervisors.
\nFurthermore, as the bank is also listed on the Jakarta Stock
\nExchange its financial reports are supposed to be much more
\ncredible and reliable than private companies, in view of the
\nstringent disclosure requirements and audit standards supposedly
\nimposed on publicly traded companies.<\/p>\n
However, if a such a large and blatant lending scandal could
\nstill occur at Bank Mandiri, that should raise greater concerns
\nover the condition of all state-controlled banks -- more than 40
\nacross the country. That also raises great doubts about the
\nintegrity and technical competence of the central bank's
\nsupervision department.<\/p>\n
A bank is not simply a business entity in an ordinary sense,
\ngiven its fiduciary responsibility, the multiplicity of
\ntransactions it is involved in and its key function within the
\neconomy. That is why the principles for good corporate governance
\nfor banks are much more elaborate than those for other commercial
\nentities. That is why not everybody who can merely put up the
\ncapital is able to have a controlling ownership in a bank. Those
\nwho want to become controlling owners and commissioners of a bank
\nhave to pass a series of \"fit-and-proper tests\" carried out by
\nthe central bank to assess their technical competence and
\nintegrity.<\/p>\n
Given the special role and characteristics of their
\nactivities, banks are put under a multi-layer supervision
\nmechanism. And on top of that, banks also are subject to the
\nIndonesian Banking Sector Code of Corporate Governance.<\/p>\n
This code requires banks to set up audit, nomination,
\nremuneration and risk policy committees. The internal auditor of
\na bank must be approved by its commissioners and have functional
\ncoordination with the board of commissioners and the audit
\ncommittee. The audit committee has to ensure adequacy and
\neffectiveness of internal control systems for prudential banking
\npractices and comply with all auditing standards.<\/p>\n
On top of all this, a bank must still have a director
\nspecifically in charge of ensuring that all bank activities
\ncomply with laws and regulations, internal procedures and
\ndirectives from the central bank.<\/p>\n
The government last week replaced the boards of directors and
\ncommissioners of Bank Mandiri and Bank Rakyat Indonesia and
\nsimilar management shake ups and are expected to do the same at
\ntwo other state banks -- Bank BNI and Bank Tabungan Negara.<\/p>\n
The screening of candidates for the posts of director or
\ncommissioner of state companies, including state banks, has now
\nbeen put under a special inter-ministerial team directly chaired
\nby the President. That was different from the previous system
\nwhereby the appointment of state company directors was almost
\nentirely under the jurisdiction of the minister for state
\nenterprises.<\/p>\n
This new system would help secure the appointment of directors
\nand commissioners with high technical competence and impeccable
\nintegrity. This alone would not, however, prevent a recurrence of
\nbanking crimes, unless and until Bank Indonesia improves the
\ncapacity and integrity of its bank supervisors and the government
\nacts decisively to establish a strong system of good governance
\nat all state companies, particularly the banks.<\/p>\n
Good governance and corporate responsibility are absolute
\nprerequisites for the integrity and credibility of market
\ninstitutions. By building confidence and trust, good governance
\nallows banks to have access to external finance and to make
\nreliable commitments to creditors, employees and shareholders.
\nBut when this trust is undermined, lenders and investors lose
\ntheir appetite for risk, and shareholders unload their equity.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bad-bank-governance-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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