Bank divestment continues

The House of Representatives should approve immediately the government's request to sell its remaining stakes in four private banks that were nationalized at the height of the economic crisis in 1998. Additional divestment will not only help plug the big hole in the state budget, but will also speed up the restructuring of the banking industry ahead of the phasing out early next year of the government's blanket guarantee on bank deposits and claims.

Narrow-minded nationalists may oppose the divestment programs, greatly concerned that foreign investors would further entrench their control of the country's largest banks. They have also criticized the bank share sales for failing to procure high prices due to weak market response.

These arguments, however, seem to make little sense.

First of all, the shares sales will be made through the local stock market. Additional divestment at the four banks -- Bank Central Asia (BCA), Bank Danamon, Bank Niaga and Bank Internasional Indonesia (BII) -- will help the Indonesian Bank Restructuring Agency (IBRA), which will face the end of its mandate later this month, achieve this year's Rp 5 trillion revenue target.

The issue of foreign control is irrelevant anyway, as majority shares in the four banks already belong to foreign investors from the United States, Singapore, South Korea and Malaysia, which have clinched their acquisition deals with the government over the last two years.

In fact, in striking contrast from government-controlled banks, the four public banks have accelerated their restructuring programs under their respective majority shareholders. While state banks such as Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI) were plagued with lending scandals and Bank Mandiri threatened with more bad loans, foreign-controlled banks have hastened consolidation and strengthened good governance.

Moreover, the government will certainly get much higher prices for the additional shares they will sell, due to the significant improvements in the banks' shareholder value under their new owners and the bullish sentiment prevailing at the Jakarta Stock Exchange (JSX).

The fear of "market glut" -- some analysts foresee that large bank shares will be dumped on the market within a short period of time -- seems groundless. The government will divest, through drip sales on the JSX, only between 1.48 and 7.85 percentage points of its remaining stakes in the four banks -- 6.48 percent at Bank BCA, 28.35 percent at Bank Danamon, 26.15 percent at Bank Niaga and 22.49 percent at BII.

This is separate from the other government proposal to sell 71 percentage points of its 97.17 percent equity holding in Bank Permata to strategic investors within the next few weeks.

It is obviously not valid to compare the prices of banks here than, say, those in Thailand and South Korea, because the condition of domestic banks simply reflects the overall economic condition.

Our dilemma is that the longer government divestment is postponed, the more vulnerable the banks will be to another wave of financial distress, especially in light of the government policy to phase out its blanket guarantee early next year.

Phasing out the guarantee will certainly force a tougher consolidation of banks, as market forces will be more stringent in screening them. The national banking plan recently launched by Bank Indonesia for implementation within 10 years will further accelerate the consolidation process through mergers.

The government is well advised to phase out its direct involvement in the banking industry and instead focus its attention and resources on further strengthening the regulatory and supervisory systems for the financial service industry.

Experiences in many other countries point to the great contribution reputable, major international banks have made in the development of good governance within the domestic financial- service industry.

True, foreign investors' entry into major domestic banks does not automatically ensure the development of a sound, strong banking industry; nor should divestment at state-controlled banks be considered an end in itself, but rather an important stepping- stone to creating a sound financial system.