IBRA's place in history

IBRA's place in history

When IBRA closes its doors on Feb. 27, the curtain will come down on one of the most controversial chapters in Indonesia's recent economic history.

IBRA (the Indonesian Bank Restructuring Agency) was established during the Asian crisis in 1998 to rehabilitate Indonesia's devastated banking sector, recover the Rp 650 trillion (S$130 billion) the state pumped into ailing banks, restructure thousands of Indonesian companies and rebuild the economy.

The record shows many IBRA successes but also points to some failures. In rehabilitating the country's major banks, IBRA's success has been little short of remarkable. Over the past six years, it raised the capital adequacy ratio (CAR) of the country's banks from minus 20 percent during the height of the crisis in 1998 to a positive 20 percent today -- which is almost double that of other crisis-hit countries such as Malaysia, Thailand and South Korea.

Non-performing loans (NPLs) have fallen from over 50 percent in 1998 to just 5 percent today, while the profitability of banks has increased more than 20 percent over the same period. The agency, especially under its seventh chairman, Syafruddin Temenggung, has also sold off some of the country's premier banks to foreign investors such as South Korea's Kookmin Bank, Germany's Deutsche Bank and Singapore's Temasek Holdings, despite tremendous political pressure to sell these banks to local investors.

Given the market conditions and the risk premium attached to Indonesian corporate assets, IBRA's 28 percent rate of return compares favorably with those of similar agencies in Thailand and South Korea, which achieved returns of just above 30 per cent.

But, sadly, IBRA has also been dogged by controversy. The agency, for example, is alleged to have been too cozy with some of the country's biggest debtors, whose corporate assets it controlled. One of the most glaring failures of IBRA has been its inability to bring any of these individuals to book, despite the fact that many of them blatantly lied about the value of the assets they transferred to the agency. The social cost -- as well as the cost to investors -- of letting these individuals off the hook can only be guessed at, but it is likely to have been huge.

Questions remain also about the real health of Indonesia's banking system, given that some crucial reforms have yet to be implemented, including a new deposit protection scheme to replace the discredited blanket guarantee scheme introduced in 1998 to protect the banking system from systemic risk.

In the final analysis, IBRA's legacy will depend on how well Indonesia's economy and banking system fare after the agency is liquidated.

-- The Business Times, Singapore