Stronger banking reform<\/p>\n
The flurry of bank merger plans announced over the past two
\nweeks should be welcomed as part of a broad program to strengthen
\nthe banking industry. The steady plunge in the rupiah's exchange
\nrate since July and the quick increase in the amount of bad
\ncredits since early this year warrant an equally steep rise in
\nthe minimum capital requirement for banks.<\/p>\n
The minimum capital requirement of Rp 150 billion for a
\nforeign exchange bank is meaningless since it now amounts only to
\nan equivalent of US$11.5 million. This tiny sum, besides being
\nnegligible for a financial institution dealing in domestic and
\ninternational transactions, is not conducive to forcing
\nshareholders to be extremely prudent. Given the liquidity crunch
\nat present, mergers and strategic alliances with foreign banks
\nare indeed the best option for banks to strengthen their capital
\nbase.<\/p>\n
However, a merger in of itself is not a guarantee for
\nstrengthening a capital base unless the merging banks are
\nrequired to strip themselves of their bad credit to ensure that
\nthe assets of the new bank is based on internationally recognized
\naccounting standards regarding loan classifications, provisioning
\nand consolidation. A credible asset valuation is even more
\nessential to make the merged banks viable for a joint venture
\nwith a foreign bank.<\/p>\n
On the other hand, a strong capital base alone, though
\nnecessary, is not enough to ensure the growth of a sound bank. It
\nis instead only one of many other elements which make up an
\noverall framework for a sound financial system.<\/p>\n
We wonder, therefore, why the central bank, as the banking
\nsupervisory authority, has not yet enacted stronger rules on
\ninternal and external bank governance. The central bank must have
\nrealized that the weak, nontransparent banking system is one of
\nthe main causes of the persistent weakening of the rupiah to as
\nlow as 15,000 against the American dollar last week. Given the
\ninadequate depth and breadth of our financial market, banks are
\nstill the main pipeline of money, the life blood of the economy.<\/p>\n
It should have been quite obvious that the closing of the 16
\nbanks in early November, however bold it might have been, was
\nmerely a small part of what is supposed to be an overall
\nrestructuring of the financial sector. The liquidation should
\nhave immediately been supplemented with stronger measures to
\nstrengthen the capital, ownership, management and supervision of
\nthe remaining 220 banks.<\/p>\n
Shareholders should form the first cornerstone of a bank's
\ninternal governance. A good bank can exist even under an
\ninadequate supervisory framework but a good bank can never emerge
\nunder a bad system of ownership governance. Good management
\nstarts with the owners and extends down to the management
\nexecutives and employees. Set against this principle, it was,
\ntherefore, quite strange how the owner of one of the liquidated
\nbanks could have so easily opened a new bank.<\/p>\n
Government supervision of banks starts with a strong legal
\nframework in the form of internationally accepted standard
\nreporting, disclosure and accounting. But these rules cannot by
\nthemselves produce high-quality bank supervision if their
\nenforcement is not managed by a central bank with technical
\ncompetence and political autonomy.<\/p>\n
The situation is already quite critical. Domestic depositors
\nhave now shunned most private national banks, preferring to put
\ntheir savings in foreign bank branches or offshore banks. Another
\ndevastating condition is the tendency among many foreign banks to
\nstop honoring letters of credit issued by most Indonesian banks.
\nLetters of credit are the wheels of international trade and if
\nthese wheels stop rolling, the doors of international trade would
\neventually close to our companies precisely at a time when we are
\nseverely strapped for foreign exchange to get out of the current
\ncrisis.<\/p>\n
It is not an exaggeration to say that most of our banks are
\nnow living on borrowed time. Unless the government acts firmly
\nand quickly on the overall restructuring of the financial sector,
\nas stipulated in the reinforced reform package agreed with the
\nInternational Monetary Fund on Jan. 15, our economy is in for a
\ndeeper crisis from which it may take more than a decade to
\nrecover.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/stronger-banking-reform-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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