Integrity at stake in bank closure aftermath

Bank Andromeda, one of the 16 banks being liquidated, has filed a lawsuit at the State Administrative Court against the government. Analyst Laksamana Sukardi discusses the consequences of the lawsuit.

JAKARTA (JP): The success of the International Monetary Fund's reform package to help restore confidence in the Indonesian economy will depend on the government's follow-up measures after its bank liquidation decision.

Andromeda's lawsuit filed last week by its shareholders is an interesting development because it creates a contest of interests and integrities.

The integrity of at least three groups have been put on the line -- that of the monetary authorities and the government, of the businessmen and shareholders of the liquidated bank (including a family member of President Soeharto), and of the courts and justice system.

If the court annulled the minister of finance's decision, the government would lose its integrity and would find it difficult to recover the trust of the public, particularly investors. The International Monetary Fund's multi-billion-dollar assistance to Indonesia, therefore, would be ineffective, the market would react negatively and share prices and the rupiah would continue to fall.

Bank Andromeda's decision to sue the minister of finance can actually be understood because reputation and integrity are the primary capital for doing business. As banking business depends very much on public trust, each shareholder of a bank makes all efforts to maintain his or her integrity.

Revocation of a banking license means that its shareholders are not trustworthy and hence no businesspeople would like to make a deal with them.

Banking law No. 7/1992 line 29 of article 29 says: "For the interest of clients, a bank must provide information on the possibility of loss risks that can emerge from making transactions through the bank."

Article 30 says: "A bank must give Bank Indonesia (the central bank) all information on its business in accordance with procedures set by Bank Indonesia," while line 2 of article 48 says: "All members of the board of commissioners and directors of a bank who fail to provide obligatory information as stipulated by article 30 will face sanctions of imprisonment and or a financial fine."

Based on the ruling, the public has expected the filing of lawsuits by depositors against the banks rather than by the banks against the government.

Depositors, in fact, can file lawsuits against Bank Indonesia for its negligence to carry out its task of developing and supervising banks, as stipulated in line 1 of article 29 in Law No. 7/1992.

Bank Andromeda's lawsuit against the minister of finance has political implications because Bambang Trihatmodjo, a son of President Soeharto who is also a commissioner of the bank with a 25 percent stake in its shares, has said that the liquidation of the insolvent banks was also aimed to discredit President Soeharto's family.

Probosutedjo, a half brother of the President, is owner of Bank Jakarta which has also been liquidated.

As Law No. 7/1992 stipulates the priority of the protection of depositors' interests, maximum efforts should be made for the repayment of their savings.

The government, therefore, should consider Bank Andromeda's intention to raise capital and to correct its mistake in violating the rule on the legal lending limit.

Similar intentions from the other liquidated banks, if necessary, should also be considered. This is the only way for the government to assure the maximum repayment of depositors' savings without having to disturb its budget.

If the State Administrative Court rejected Bank Andromeda's suit, that would not mean that the case would be over and the government's integrity would automatically remain intact.

The next arduous test would concern the integrity of the judiciary because the liquidation of the 16 banks would have to be followed up carefully with various steps. All responsible parties would have to be legally processed and the shareholders, commissioners and directors of the liquidated banks would have to repay their depositors in full.

The fact that many government officials, prominent businesspeople and politicians are commissioners and shareholders of the liquidated banks would also stand as a test for the integrity of the courts.

The government should consider allowing the liquidated banks to resume operations if their shareholders increase capital from their own funds, not from banking loans, to cope with their losses and to correct their violations on the legal lending limit.