BI to ban banks from investing in mutual funds

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)