Fri, 05 Dec 2003

Bank scandals may destabilize economy

The Jakarta Post, Jakarta

Loan fraud at state-owned banks could further shatter public confidence in the country's banking sector and put the overall economy at risk if such cases were not immediately curbed, Minister of Finance Boediono warned on Thursday.

"The fraud may have an impact on the country's economic stability if it cannot be contained immediately," he told reporters.

He explained that there were three factors needed by banks to help prevent such fraud from reoccurring in the future, which included improvement in banks' internal control, removal of corrupt officials and better implementation of the "know your customer" principle.

"This is the time for us to remove corrupt officials who could harm public confidence in our banking sector," he said.

He was commenting on the revelation on Wednesday of a Rp 294 billion (US$34.5 million) lending fraud at the giant state-owned Bank Rakyat Indonesia (BRI), the second case to hit a state-owned bank in just less than two months. In October, banking authorities uncovered that Bank Negara Indonesia (BNI) was involved in a Rp 1.7 trillion lending scam allegedly masterminded by top officials of a branch of the bank and a number of businesspeople. Certain top politicians were also reportedly involved in the BNI scandal.

The BRI scandal is similar to that of the BNI case. It centers on the channeling of loans by three bank branches to local companies supported by cash collateral deposits that they falsely claimed as theirs.

The BRI and BNI cases underscore the weak supervision in the country's banking sector, which has just started to recover from the late 1990s financial crisis. It also highlights the fact that the old habit of corruption die hard. The financial crisis, which had forced the government to spend around Rp 450 trillion in tax payers money to bailout ailing banks, was mainly due to poor lending practices and violations of banking regulations.

The fraud cases occur at a time when the government is trying hard to sell state-owned companies and to win the confidence of investors and foreign donors to help fix the country's economic woes.

"This scandal is further proof that the supervision of the banking sector especially in state banks is still weak," said economist Rizal Ramli, who is also a former finance minister.

Vice President Hamzah Haz also voiced similar concerns, saying there was an urgent need for banks and the central bank to improve their supervisory system which had been proven to be spineless.

He also said there must be strong legal measures taken against those involved in the scandal to prevent similar cases from occurring in the future.

State Minister of State Enterprises Laksamana Sukardi concurred. "We must be resolute against those violating banking regulations. Otherwise they'll continue to commit such crimes."

As of now the Attorney General's Office has detained three officials of BRI, but businessmen Yudi Kartolo, whose company obtained part of the loan is still free. Yudi was also allegedly involved in a Rp 1.1 trillion fraud at BNI in 2001, a Bank Indonesia senior official has said.

BRI internal supervisory officials uncovered the fraud in September, two months before the bank's IPO in November. The BRI management has claimed that it had informed investors about the loan problem prior to the IPO, and had allocated sufficient funds to cover the potential losses.

Indeed, the case for the time being seems not to have had a negative impact on BRI shares in the stock market. The shares ended higher at Rp 1,050 on Thursday, after falling by Rp 25 at Rp 1,025 on Wednesday.

Investment director of state-owned PT Jamsostek Samuel Tobing said that BRI shares remained strong because investors were neither surprised nor worried about the fraud as they had already been informed of it in BRI's IPO circular, and that the bank had set aside Rp 294 billion as a provision.

"Investors have already calculated the risk, and that it will not impact BRI profit," said Samuel, who manages around Rp 24 trillion of Jamsostek's investment portfolios, and had invested some money in the BRI shares.

President of the Jakarta Stock Exchange Erry Firmansyah said that the bourse would not suspend trading in BRI shares because investors had already been informed of the fraud.