BI to ban banks from investing in mutual funds

JAKARTA (JP): Bank Indonesia (BI), the central bank, will ban banks from investing in mutual funds.

The central bank's governor, J. Soedradjad Djiwandono, said Monday night the central bank would continue to ban banks from buying stocks, lending for share purchases and taking securities as collateral.

"To be consistent, we are also going to prohibit banks from investing in mutual funds which put most of their funds in stocks," Soedradjad said at an Indonesian Issuers Association dinner.

The new ruling will also limit bank participation in mutual funds which focus on fixed-income instruments because banks are also required to comply with fixed-income investment rules.

Soedradjad said the central bank was still discussing the draft ruling with the Capital Market Supervisory Agency.

He did not say when the ruling would be issued.

Unlike banks, pension funds can invest 10 percent of their investment funds in any single mutual fund so can invest all of their investment funds in 10 mutual funds.

But the director general of financial institutions, Bambang Subianto, warned that once a mutual fund mismanaged public funds, pension funds would no longer be allowed to invest in mutual funds.

Soedradjad said he was concerned that the mushrooming of mutual funds would pose certain risks because of a lack of professional and experienced fund managers.

At the end of 1995 there was only one closed-end mutual fund. But since the promulgation of the 1995 Capital Market Law, mutual funds, mostly open-ended ones, have mushroomed.

There are now 33 open-end mutual funds and one close-end fund which manage funds worth Rp 3.71 trillion (US$1.5 billion).

The Capital Market Supervisory Agency's chairman, I Putu Gede Ary Suta, said mutual funds had helped increase the role of local investors on local stock markets.

Domestic investors make up 42 percent of daily trade on the Jakarta Stock Exchange. This was 30 percent in 1995.

He said his agency would ensure all mutual funds invested prudently to maintain the public's trust.

"We have developed the rules, which include severe punishment for those who commit offenses. We have 11 articles in the capital market law and 26 supporting rulings against various wrongdoings," Putu said.

The chairman of the Indonesian Issuers Association, Rosano Barack, said mutual funds had helped increase the liquidity of the domestic stock exchanges.

The domestic capital markets would be more liquid when banks could to invest directly in the market, Rosano said.

He said other countries had allowed this to encourage stock trade.

Rosano said the central bank should ease restrictions on banks participating directly in the capital market.

Currently banks' involvement in stock markets is limited to providing custodian services, extending credit to securities companies and using listed shares as additional collateral.

But Soedradjad said the central bank would not make a hasty decision and said stock investment was risky.

"Stock prices are always cyclical, and capital markets may go into a bust. But a bank may not go into a bust," Soedradjad said.

Besides the current consolidation of banks was not yet completed and several banks were still classified as problem banks.

Soedradjad promised to allow banks to be more active in the capital markets when the consolidation of banks was completed satisfactorily. (rid)