Banks acquired for good

Banks acquired for good

Many will see foreign investors' preliminary agreements to
acquire a controlling ownership in Bank Buana and Bank Lippo as
more strong evidence of an improving economic outlook. Other more
narrow-minded nationalists, meanwhile, may instead express
concern that Singaporean and Malaysian investors are further
strengthening their control of the country's important banks.

Khazanah Nasional Bhd, Malaysia's state investment company,
has yet to get approvals from Bank Indonesia and the Jakarta
Capital Market Supervisory Agency (Bapepam) to close a deal to
acquire a 52.1 percent controlling stake in Bank Lippo from a
Swiss First AG-led investor group. However, Khazanah has obtained
support for the deal from Minister of Finance Jusuf Anwar.

Likewise, United Overseas Bank Ltd. (UOB), Singapore's second-
largest, is waiting for final approval from Bapepam for its deal
for an additional 30 percent equity holding -- a 53 percent
controlling ownership of Bank Buana.

These impending transactions indicate significant improvements
in the economy. Foreign investors would not be so willing to put
more capital into the financial sector if the economic conditions
were not thriving. A bank can only grow soundly in an expanding
economy.

Khazanah, which already has operations in Indonesia through
its 22 percent holding in Malaysia's second-largest financial
group, Commerce Asset-Holding Bhd -- which in turn owns 62
percent of Indonesia's ninth-largest bank, Bank Niaga -- must
foresee an increasingly brighter outlook for the country's
economy, otherwise it would not commit so much fresh capital.

On the other hand, Bank Lippo, a good banking franchise with
nearly 400 branches across the country and with a strong customer
base, should be a suitable platform for Khazanah to expand its
financial services here. Likewise, UOB will have synergies with
Bank Buana when it expands its operations.

Khazanah and UOB are based in neighboring countries where the
financial service industries are more developed. But mature
markets no longer allow for significant growth and these banks
must find new places with better prospects. Indonesia, the
largest economy in ASEAN with a population of around 230 million,
is one of those places.

The proposed transactions will undoubtedly increase Malaysian
and Singapore investors' stake in Indonesia's financial service
industry. The Overseas Chinese Banking Corp. already has a
controlling stake in mid-sized Bank NISP, while the Singapore
government investment company Temasek Holdings (Pte. Ltd)
controls Bank Danamon and has significant shareholding in Bank
International Indonesia, respectively the fifth- and sixth-
largest banks by assets.

But there is nothing wrong with that. Nor this should worry
anybody. After all, state banks remain in control of our banking
industry in terms of assets.

The proposed transactions should instead be seen as part of an
accelerated consolidation process within the banking industry,
propelled by the new tough requirements for anchor banks. The
phasing out of government blanket guarantees on bank deposits and
claims starting next year is likely to unleash even stronger
competitive forces pushing further consolidation as it will make
depositors more wary when choosing banks.

The experiences of countries such as Thailand, South Korea and
Malaysia, which like Indonesia were hit by the financial crisis
in 1997, point to the great benefits of the entry of major
international banks with high reputations and strong capital to
the development of a sound domestic financial industry. Banks
are, after all, the heart of our economy.

Strategic investors with good reputations will accelerate the
operational restructuring of banks, enabling them to devote more
resources to marketing loans to the corporate sector and
rebuilding the trust of borrowers.

This is possible because new investors can bring in
credibility, synergies and better management and provide easy
access to fresh capital.

Look at how major nationalized banks, which have been acquired
by investors from the U.S., Singapore, Malaysia, Germany and
Britain, have improved significantly under new management, while
state banks like Bank Mandiri and Bank BNI are still plagued with
lending scandals.

Most importantly, the finance ministry and Bank Indonesia must
focus on strengthening the regulatory and supervisory systems of
the financial service industry.