New lending rule helps protect our environment<\/p>\n
Jan Willem van Gelder and Fitrian Ardiansyah, Amsterdam\/Jakarta<\/p>\n
Let us hail the new regulation issued by the central bank (Bank
\nIndonesia or BI), which demands that banks assess their corporate
\nclients, does not do enough to protect the environment (BI
\nRegulation No. 7\/2\/PBI\/2005, concerning Asset Quality Rating for
\nCommercial Banks).<\/p>\n
This can be seen as a promising first step to stimulate the
\nfinancial sector to help save the environment as banks play
\nimportant roles in financing the forestry, plantation, mining and
\nother important sectors related to environmental issues.<\/p>\n
Few countries around the world have such an abundance of
\nnatural resources at their disposal as Indonesia has. Various
\nforest products, oil and gas, minerals and agricultural
\ncommodities: all these are produced in large quantities in
\nIndonesia.<\/p>\n
By exporting these commodities, Indonesia is earning valuable
\nforeign currency -- 56 percent of the export value was made up by
\nthe export of such commodities in 2003. These export earnings can
\ntheoretically be used to finance numerous development projects.<\/p>\n
But reality speaks differently in Indonesia. While the
\nabundance of commodities could be a blessing to all, for many
\nIndonesians as well as for its natural environment it is nothing
\nless than a curse. The United Nations Food and Agriculture
\nOrganization (FAO) said Indonesia was among the countries that
\nsuffered the greatest losses of natural forests.<\/p>\n
Precious ecosystems get destabilized and their functions and
\nservices ultimately disappear, causing the demise of many
\nwildlife species and valuable biodiversity as well as the loss of
\nrights and means of living for indigenous and local communities
\ndependent on extensive interaction forms of agriculture and
\nforestry.<\/p>\n
The question now becomes, why is this abundance of commodities
\nnot bringing wealth to the country as a whole, and improving life
\nfor all the poor people?<\/p>\n
There are many factors contributing to this. The insatiable
\ninternational demand for Indonesian commodities stimulates a
\ncontinuous increase in production capacity and exploitation of
\nnatural resources. Unfortunately, because of corruption and a
\nweakly enforced judicial system, irresponsible corporate behavior
\nis not controlled.<\/p>\n
Many actors (e.g. producers, buyers, financiers, government
\nofficials) are involved in these processes and each carries its
\nown responsibility and could contribute to a more responsible
\nmanagement of commodities.<\/p>\n
We must not forget the other actors -- banks and other
\nfinancial institutions (FIs) -- that play an indispensable role
\nin supplying capital to commodity producing companies by
\nproviding loans or buying their shares.<\/p>\n
In the past decade, for instance, more than US$10 billion was
\ninvested in the oil palm plantation sector by both national and
\nforeign investors. In pulp and paper industries, the growth over
\nthe past decade involved an aggregate capital investment of
\napproximately $12 billion.<\/p>\n
But many of the loans poured into natural resource
\nexploitation have become soured, thus bankrupting many Indonesian
\nbanks.<\/p>\n
It took the Indonesian government several years and billions
\nof dollars in public money to get straighten out these bad loans
\nand to reform the banking system. Learning lessons from this
\nepisode and trying to prevent these events from happening again
\ntherefore, is of the utmost importance. If not, problems with bad
\nloans and the financing of non-sustainable forms of commodity
\nproduction will resurface.<\/p>\n
It is thus very important that BI, the Indonesian banks'
\nsupervisor, issue a regulation that gives directions to banks on
\nhow they should rate the quality of their loans. The regulation
\nlists a number of aspects of the client's business, which need to
\nbe assessed by the bank. When a client scores negatively on one
\nor more aspects, the bank runs a large risk of ending up with a
\nnon-performing loan when it lends to this client.<\/p>\n
What is most significant here, is that BI explicitly lists
\n\"measures taken by the debtor to conserve the environment\" as one
\nof the issues that needs to be taken into account by the bank.<\/p>\n
BI clearly acknowledges that companies that do not pay
\nattention to their environmental behavior are more likely to
\nbecome bad debtors and therefore should be avoided.<\/p>\n
Outside Indonesia, several commercial banks have developed
\ndetailed forest, plantation and mining policies over the past few
\nyears. According to the policies, these banks strive to finance
\nonly companies which care for High Conservation Value Forests,
\nminimize their environmental impacts and respect the rights and
\nneeds of local communities.<\/p>\n
Building upon its existing regulation and information from
\noverseas, BI has the opportunity to further develop world-class
\nstandards and procedures on assessing the social and
\nenvironmental behavior of commodity-producing companies.<\/p>\n
In addition, BI's work can be strengthened by relevant
\nministerial agencies (i.e. the Ministry of the Environment, the
\nMinistry of Forestry, etc.) and environmental and social
\norganizations. They can contribute to the assessment of impacts
\non commodity-producing sectors, as well as helping the
\nidentification of company initiatives that merit financing and
\nthose that need to first adjust their business plans and
\npolicies.<\/p>\n
Avoiding future bad loans and banking crises as well as
\nenvironmental destruction and social conflicts needs to be
\neveryone's mutual interest.<\/p>\n
Jan Willem van Gelder is a financial sector specialist with
\nProfundo in the Netherlands. Fitrian Ardiansyah is a program
\ncoordinator for World Wide Fund for Nature (WWF) in Indonesia.<\/p>",
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"sponsor": "Okusi Associates",
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