Bank domination has disadvantages: IMF official

Bank domination has disadvantages: IMF official

JAKARTA (JP): Bank domination of Indonesia's financial system
has several disadvantages despite its role in maintaining
macroeconomic stability and economic efficiency, an International
Monetary Fund (IMF) official says.

IMF senior resident representative Kadhim Al-Eyd said
yesterday that while the dominance of banks would facilitate the
operation of monetary policy, heavy reliance on bank finance had
its drawbacks.

"First, it increases the risk that a credit crunch would
magnify the effects of an economic downturn," Al-Eyd told a
conference on asset-backed securitization.

Second, poorly-capitalized banks tend to make "sub-optimal
lending decisions".

"A poorly capitalized bank has an incentive to make riskier
loans, especially if depositors and shareholders expect to get
bailed out if the bank fails," he said.

Third, he said, destabilizing shocks originating in the
banking sector, such as insolvency and subsequent failure of a
bank, might result in liquidity problems as deposits were
withdrawn.

The two-day conference which opened yesterday is sponsored by
the International Finance Corporation, the Asian Development Bank
and ABS Finance Indonesia.

Al-Eyd said Indonesia should foster domestic securities
markets to overcome these problems.

"These markets, particularly the stock market, have achieved
impressive progress in a short span of time. Nevertheless, a
clear next step on the agenda should be to deepen these markets,"
he said.

Al-Eyd said the country's banks financed about 45 percent of
private capital formation and provided more than three-fifths of
business finance. They intermediated about 40 percent of private
savings.

Modest

"The role of the bond and stock markets is modest by
comparison," Al-Eyd said.

According to Bank Indonesia, the central bank, the stock
market in 1995 provided about one-third of all business finance.

"However, this ratio may overstate the role of the stock
market, because capitalization includes shares that have never
been sold on the stock market," Al-Eyd said.

"According to one estimate, about 70 percent of total shares
are held by company founders, including those held by the
government after partial privatization," he added.

The bond market, by comparison, provided only 2.5 percent of
all business finance in 1995. Business finance made up about 6
percent of the country's gross national product, compared to 56
percent in Malaysia and 10 percent in Thailand.

Al-Eyd suggested that Indonesia keep developing its securities
market by streamlining legal frameworks, developing
infrastructure and promoting institutional investors.

He said asset-backed securitization, if managed prudently,
would help develop the domestic securities market.

"Securitization appears to be a rewarding activity for
institutions capable of measuring and managing credit risk well.
To the extent loan assessment and loan documentation are
standardized, the non-interest expenses associated with lending
are reduced," he said.

ABS Finance president Andre Abdi said the domestic
securitization industry faced many challenges.

"One of the greatest challenges relate to our regulatory
framework... and lack of proper and comprehensive asset profile
information," he said at the conference.

Andre said Indonesia had not yet established a highly
organized and efficient information management system to record
the quality of assets being securitized.

Andre said ABS Finance -- one of the first asset-backed
securitization institutions in Indonesia -- evaluated asset data
profiles by cooperating with international technology consultants
and specialists. (pwn)