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.