Banks need structural change, diversified ownership<\/p>\n
Rizal Ramli, Former Coordinating Minister for the Economy, Jakarta<\/p>\n
Although the Indonesian banking sector has been recapitalized
\nto the tune of Rp 650 trillion, structural weakness remain a
\nserious problem. These have not yet been handled in a systematic
\nway. Instead, and at the behest of the IMF, top priority was
\ngiven to selling off state banks and banks held by IBRA.<\/p>\n
The sale of banks without first reaching a consensus on an
\nappropriate banking landscape to be achieved over the medium term
\nhas a number of economic, financial and sectoral consequences.
\nWhat would the characteristics of this banking landscape be? To
\nbegin with, the first objective of banking reform should be to
\ncreate a banking system that is consolidated but not
\nconcentrated. Such a structure would provide consumers with
\nsecurity, convenience and all of the benefits of a diversified
\nrange of financial products.<\/p>\n
Pre-crisis data from 1996 indicates that most of Indonesia's
\nbig banks were affiliated to other banks and financial
\ninstitutions through cross-ownership and cross-management. Taken
\nas a whole, the concentration of ownership in the banking sector
\nbefore the crisis was extremely high.<\/p>\n
According to a study by ECONIT and the Indonesian Bankers'
\nInstitute in 1997 entitled Structure and Strategic Policy for the
\nIndonesian Banking Sector Post-2000, the concentration of
\nownership and management was associated with violations of intra-
\ngroup legal lending limits, thus increasing systemic risk to
\nunacceptably high levels. There were many loopholes to get around
\nlegal lending limits such as loan swaps between group banks, the
\nuse of finance companies and layers of corporation, as well as
\nownership and management nominees.<\/p>\n
The crisis itself revealed the many structural weaknesses of
\nthe banking sector and the ineffectiveness of external
\nsupervision by Bank Indonesia. Based on this experience, the
\nmonetary authorities in the post-crisis period should have placed
\na high priority on achieving a diversified ownership structure.
\nThis would have helped to reduce the incidence of violations of
\nlegal lending limits and thereby reduce systemic risk in the
\ndomestic banking sector.<\/p>\n
A diversified ownership structure brought about through
\nownership limits would encourage self-monitoring as shareholders
\ndefend their interest in transparency, profitability and risk
\nminimization. Many advanced countries limit bank ownership to a
\nmaximum of 20 percent to promote self-regulation. Australia, for
\nexample, limits bank ownership to 17 percent.<\/p>\n
But not the Megawati government, which plan to sell 51 percent
\nof BNI shares to one buyer. The future new majority owner of BNI
\nalso, coincidentally, owns Bank International Indonesia (BII) and
\nBank Danamon. The government has thus promoted concentration of
\nownership as well as cross-ownership and cross-management. The
\nplan clearly contradicts the principle of diversification of bank
\nshare ownership.<\/p>\n
State ownership of the entire banking system cannot be
\njustified on the grounds of efficiency or effective management
\nand governance. On the contrary, the sale of minority stakes in
\nstate banks would promote positive changes in corporate culture,
\nefficiency, accountability and transparency.<\/p>\n
Yet the disposal of these assets must be carried out on the
\nbasis of a broad consensus on the desirable banking landscape to
\nbe achieved over the medium term. The sale of these shares should
\nnot be conducted in a random fashion for the sole purpose of
\nrevenue-raising in the short term.<\/p>\n
This landscape should aim for a structure of ownership that is
\nconsolidated but not concentrated in order to promote self-
\nmonitoring and regulation and to provide consumers and investors
\nwith security, high quality services and choice.<\/p>\n
In many cases, it is not state ownership that is holding back
\nstate-owned firms, but rather the quality of management. In many
\nother countries state-owned companies perform exceptionally well.
\nSingapore Airlines, Keppel and DBS Bank are just a few examples
\nof well-run state-owned firms in Singapore.<\/p>\n
The key to success is the quality of management combined with
\nsuperior oversight and supervision. To argue that the performance
\nof Indonesia's state-owned firms would automatically improve
\nafter privatization would be a naive, ideologically-inspired
\nposition that ignores the substantial governance and efficiency
\nproblems that plague Indonesia's private companies.<\/p>\n
The hurried sale of a majority stake in Bank BNI-46 would be
\nirresponsible. The state minister is behaving like a minibus
\nconductor recklessly chasing fares to cover immediate costs, not
\nunrelated to the upcoming general elections. The distress sale of
\nBank BNI-46 at a time when the bank is reeling from the recent
\nletter of credit scandals will not maximize government revenue
\nover the long term. We would expect the state minister of state
\nenterprises to first improve the performance of Bank BNI-46,
\nwhich, after all, is still under his supervision.<\/p>\n
It is not always clear whose interests are served by the
\nMegawati government's program of privatization. It is often said
\nthat while the New Order raised revenue through investment, the
\nMegawati government relies on divestment. There is much truth in
\nthis. With state and private investment rates at historic lows,
\nthe present government has decided to meet short-term obligations
\nby selling the family silver.<\/p>\n
The tendency of the state minister of state enterprises to
\nrely on strategic sales and private placements rather than public
\nshare offerings suggests a preference for backroom dealing over
\npublic scrutiny. At the moment the necessary controls and
\nsupervision are not in place, and the risk that these deals are
\ndisadvantageous to the state is high.<\/p>\n
Until more credible and accountable procedures can be put in
\nplace, the legislature and the public must insist on a temporary
\nmoratorium on the sale of state assets. The moratorium should
\nextend through the upcoming general elections until the new
\ngovernment is formed in order to ensure that the elections do not
\ncreate perverse incentives for politicians and bureaucrats. Such
\na move would help reestablish credibility and prevent
\nirreversible distress sales that impose heavy financial losses on
\nthe state.<\/p>",
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