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sector, such as insolvency and subsequent failure of a bank, might result in liquidity problems as deposits were withdrawn.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)