Banks need info incentives, disincentives

Banks need info incentives, disincentives

By Suwiryo Ismail

JAKARTA (JP): The recent liquidation of 16 insolvent banks is
one of the worst incidents in the history of the country's
monetary communication during the New Order era.

The main reason for the incident does not merely stem from the
lack of depositors' awareness of information about the banks but,
more significantly, from the imbalance of Indonesia's monetary
communication system.

The imbalance of the information system is caused by the
centralization of information distribution, which has no
orientation to the depositing public. The depositing public is
treated like an entity with no rights of communication or, at
least, rights to receive information.

According to Law No. 7/1992 on banking, the rights of
communication are concentrated with banks (whether they are
creditors or debtors among themselves) as well as Bank Indonesia
(the central bank) and the Ministry of Finance, both government
institutions being authorized to develop and supervise the
banking industry.

Depositors, therefore, found it difficult to get clear
information about the conditions of their banks when the monetary
development was in a critical situation prior to the liquidation
of the 16 banks early this month. Meanwhile, Bank Indonesia as
the authorized supervisor of commercial banks was not required by
law to disclose any information which was needed by the
depositors.

The reticence of the government could be recognized from Bank
Indonesia's acknowledgement that the government had not disclosed
its plans to liquidate the insolvent banks to avoid a public
rush.

Based on a banking evaluation, as reported by Bank Indonesia's
circular No. 30/2/UUPB and Bank Indonesia directors' letter No.
30/11/KEP/DIR dated April 30, 1997, a number of banks were
unhealthy in terms of their capital, productive assets,
management, profitability and liquidity.

The tight-lipped policy of the government raised further
questions among the public after Minister of Information R.
Hartono "blocked" information by prohibiting private television
stations from broadcasting live a hearing between the House of
Representatives and Minister of Finance Mar'ie Muhammad. Such an
incident has not only hindered the provision of direct
information but also encouraged the spread of rumors which might
even provide misleading information to the public.

Commercial banks are not required to disclose information on
the health of their operations to the public, because the banking
law only obligates them to file routine reports to Bank Indonesia
and the Ministry of Finance. That is why when commercial banks
are blamed for not being transparent, they tend to regard this as
being the responsibility of the government.

Such an argument is partly correct because the relationship
between the public and the government, who is mandated by the
public to supervise commercial banks, has never been clear. Bank
Indonesia and the Ministry of Finance even refer to articles 33
and 40 of the banking law, which stipulate the secrecy of the
banking business, when they refuse to meet requests for
transparency.

There is, therefore, a strong need for the review of the law
in line with the demand for open availability of information and
the development of ethics in society. Facts have shown that the
ruling on banking secrecy gives reasons to the central bank and
the Ministry of Finance for not providing information on the
health of commercial banks.

Some other articles in the law also restrict the public's
opportunities to get information to monitor the way banks manage
their funds.

The law actually does not show the reciprocity of interests
among the government, commercial banks and the public. Articles
41, 42, 43 and 44, for example, give an unlimited mandate to
banks to disclose information about the financial conditions of
their clients when such information is needed, particularly by
the police, prosecutors and judges.

When applying for credit, a client is required to disclose all
information about his or her health, business and family members.
But he has no rights to seek information about the condition of
the bank where he deposits his funds.

Banks, as stipulated by article 40 of the law, are only
required to announce their balance sheets and profitability.

The recent bank liquidations have shown the necessity of
revising the monetary communication system in the country. The
law, when revised, should allow the public to have access to
information about the conditions of the banks where they put
their money, and require the government to establish a
communication system with the public.

Thus, Bank Indonesia should develop a mechanism for disclosing
information about the health of banks.

Such openness will encourage banks to improve their management
and accountability because these practices will deter banks from
violating rules and promote banks operating healthily. Depositors
will also feel safe to have their money managed by the banks they
trust.

But this will all depend on the political will of the
government to improve the transparency of banking information.

The writer is an executive at the Indonesian Legal Aid
Institute Foundation.