Dealing with closed banks
Entrepreneurship, the process of organizing, managing and assuming the risks of a business, can thrive if society, especially the business community, regards a business failure as an inherent component of the process.
An entrepreneur who fails in business after he or she has done his or her best is not treated like a pariah but is instead given another chance. No wonder, in many countries such as Japan, South Korea or the United States, thousands of businesses fail every year but thousands of new ones sprout.
This premise, however, does not apply to specially regulated businesses such as finance companies in view of their fiduciary responsibility. Therefore, in Indonesia, as in most countries, bank licensing regulations require rigorous assessment not only of the capital and business plan but also of the integrity of the shareholders (owners) and the integrity and competence of the management.
Based on licensing regulations, the shareholders and managements of the 16 banks which were closed on Nov. 1 for insolvency, cannot automatically reenter the banking business.
The supervisory authority (central bank) should first establish whether or not the owners or managements of the closed banks were responsible for the insolvency.
A controversy, however, arose last week with reports that Bambang Trihatmodjo, the 25 percent owner of the now-closed Bank Andromeda, had acquired, with prior approval from the finance ministry, 99 percent of Bank Alfa.
Bambang himself confirmed in an interview with the Kontan economic weekly tabloid that he had actually bought only Bank Alfa's license, because its assets and liabilities had already been taken over by Bank Risjad Salim International, which is controlled by the Soedono Salim family, the former controlling owner of Bank Alfa.
Bank Indonesia Governor Soedradjad Djiwandono avoided replying in a straightforward manner to a barrage of questions raised by House members and reporters last week about whether Bambang's business deal conformed with the law.
Soedradjad and other central bank directors simply repeated a clause of the regulations, which says owners and directors of closed banks are allowed to manage or own other banks as long as they are not blacklisted for being responsible for their former bank's insolvency.
We understand the hesitancy on the part of the central bank directors to straighten out the controversy. They are not the only high officials to have suddenly looked silly, become tight lipped or gone to great lengths to deflect questions about the business deals of the politically well-connected. But such a stance is not fair to Bambang himself nor is it conducive to the viability of his new banking operations.
Until the central bank ascertains whether or not Bank Andromeda's shareholders are responsible for the bank's insolvency, Bambang's reputation in the market will remain in doubt, and this does not augur well for his new investment in Bank Alfa. After all, the fundamental asset of a bank is public trust.
Since the decision to close the 16 banks was not an abrupt, nor unexpected move but was the culmination of a series of assessments and warnings, we don't think it will take a lot more time for the central bank to establish which of the shareholders and managements of the closed banks are to be blacklisted and which will get a clean bill of health, thereby entitled to reenter the banking industry.
Bank Indonesia needs to explain in a transparent manner whether the closed Bank Andromeda and the other 15 closed banks had met all the requirements for their liquidation process as stipulated in Government Regulation No.68/1996; the finance minister's ruling No.448/1997; and Directive of Bank Indonesia No.30/1997 regarding the technical details for the process.
All these follow-up measures are required to provide fair treatment, according to the law and regulations, to the shareholders and directors of the closed banks. They are also essential to improve the central bank's reputation for technical competence, integrity and political autonomy in supervising the banking industry.
Bank Indonesia has significantly bolstered its reputation by closing the 16 banks, some of which were owned by politically well-connected people. But botching up the follow-up measures could affect the public's trust in its autonomy and integrity as the supervisor, and even the effectiveness of the move to strengthen the financial sector.