Reforming the banking system<\/p>\n
The following is the first of two articles by I Putu Gede Ary
\nSuta, the former chairman of the Indonesian Capital Market
\nSupervisory Agency. It is based on his presentation at the
\nlaunching of his two new books Foundations of our Capital Market
\nand Menuju Pasar Modal Modern (Toward a Modern Capital Market) on
\nJune 22 in Jakarta.<\/p>\n
JAKARTA: We are in the 35th month of a serious crisis. Those
\nwith resources still visit luxury shops in Senayan Plaza, but
\nordinary people are facing hard times. Teachers, factory workers
\nand soldiers, among others, must support families on an income
\ndepleted by inflation. Millions are jobless. Sectarian violence
\nand strikes have become routine. College graduates are entering
\nthe ranks of the unemployed.<\/p>\n
It would be nice to be able to say that there is a light at
\nthe end of the tunnel and that foreign investment, which is so
\nnecessary to growth, is returning. Some believe that with
\npositive statements, our troubles will vanish. If only it were
\nso. Road shows, seminars and optimistic forecasts cannot change
\nreality. Words may fool some -- for a while -- but permanent
\nmoney flows depend on convincing those whose job it is to be
\nskeptical.<\/p>\n
It is fashionable to blame the crisis on the International
\nMonetary Fund (IMF). The IMF has prescribed medication that seems
\nto have done more harm than good. However, let us not forget that
\nevery letter of intent signed with the IMF has had two parties.
\nCertainly, as a sovereign nation, those who have accepted these
\npolicies on behalf of Indonesia are as responsible as the IMF.<\/p>\n
Many suggest that the situation will improve when civil
\nviolence stops and political stability returns. But this confuses
\ncause with effect. Riots and political upheavals followed -- not
\npreceded -- the banking crisis. A defective banking policy was
\nthe cause. Violence and political turmoil were the effect.<\/p>\n
The international media tells us that foreign investors have
\nturned away from Indonesia. Some funds will flow into the
\ncountry, even in the worst of times. However, the amount of the
\ninvestment falls short of what is needed to sustain growth and
\nprovide jobs for our people. A recent economic report of a major
\ninternational bank has characterized our nation as \"teetering on
\nthe brink\" and is representative of current opinion.<\/p>\n
Nevertheless, there are still optimists that consider any
\nfractional improvement in economic statistics is a sign of
\nrecovery.<\/p>\n
Some say that unless the problems which caused the crisis are
\nfixed, the country is in for even worse times. Whether or not
\nthis is so, the country cannot risk a wait-and-see policy. We
\ncannot afford the luxury of a learning curve for economic policy.
\nA rethinking of some economic planning is now necessary. Some
\npolicies, especially with respect to banking reform, are not
\nworking.<\/p>\n
There is no mystery as to the cause of our current troubles.
\nThe economic system collapsed because of a corrupt and
\ninefficient banking system. Government-controlled banks
\ndistributed people's money in massive amounts to financially
\nunsound schemes of cronies and relatives of those in power.<\/p>\n
Private banks, owned by economic conglomerates, used
\ndepositors' funds for personal benefit, ignoring the fiduciary
\nresponsibility of sound banking and exhibiting deplorable
\nbusiness ethics. Foreign creditors and bankers channeled billions
\nof dollars of short-term hard currency loans to dubious, long-
\nterm, rupiah-based projects that could not be repaid.<\/p>\n
In August 1997, the house of cards collapsed. The government
\nannounced the end of support for the rupiah. Foreign debts were
\nnot repaid and foreign investment ceased. There were runs on
\nbanks, causing the government to guarantee deposits, thereby
\nindirectly assuming the burden of bad loans which were the result
\nof unethical conduct by the nation's bankers.<\/p>\n
It was clear at the time, as it is today, that a defective
\nbanking system was to blame for our woes. The cause was not just
\na few bad banks or bad bankers, but a whole system based on
\nflawed policies.<\/p>\n
However, the remedies prescribed by our economic advisors have
\nbeen directed to secondary problems -- the effects rather than
\nthe causes. We have yet to build the clean and sound banking
\nsystem that is needed. Let's look at the facts.<\/p>\n
First, instead of privatizing state banks, thereby removing
\nthe temptation of corrupt lending for political purposes, we have
\nincreased the number of government-controlled banks, insuring the
\ncontinuation of practices that brought about the crisis.<\/p>\n
If money is the mother's milk of politics, state banks are the
\ncash cows that feed our political system. Most government
\nofficials and politicians cannot even conceive of a nation
\nwithout state banks. Does anyone really believe that it was the
\nIMF and not our own officials that insisted on recapitalization,
\nrather than privatization of state banks?<\/p>\n
Second, instead of rigorously separating ownership of private
\nbanks from borrowers and putting banks on a professional basis,
\nthere is an eagerness to return banks to their original owners --
\nas long as they raise the capital to repay government loans.<\/p>\n
Bankers should stick to the banking business and should not be
\npreoccupied with channeling depositors' funds to their own
\nenterprises. When bankers approve loans based on impartial and
\nskeptical analysis of credit, the overall quality of loan
\nportfolios will improve.<\/p>\n
In the United States, which has one of the most successful
\neconomic systems, laws rigorously separate bankers from
\nborrowers. The cost to our nation for not making this separation
\nhas been severe, and the price may even be greater if we do not
\nexercise wisdom in making the necessary reforms.<\/p>\n
Third, instead of recapitalizing sick banks with real money
\nwhich could be loaned to businesses and provide people with jobs,
\nwe have performed cosmetic surgery by artificially writing up the
\ncapital accounts of banks with overvalued, nonmarketable
\ngovernment bonds.<\/p>\n
It is obvious that these government bonds must be redesigned
\nif they are to be sold, but Bank Indonesia has fiddled and
\ndelayed for over a year and still shows no sign of understanding
\nhow to solve a problem that would be routine to any competent
\ninvestment banker.<\/p>\n
Of course, foreign bankers and investors can see what is
\nhappening. It is possible to fool some people with misleading
\nstatistics and half-truths, but we cannot fool the market for
\nlong. If optimistic statements were the solution, we would be in
\nprosperous times. The banking system is broken, and effective
\nmeasures have not yet been taken for true reform.<\/p>",
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