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.