Bank divestment continues

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.