Integrity at stake in bank closure aftermath

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.