Local banks asked to unite on foreign competition

JAKARTA (JP): Minister of Finance Mar'ie Muhammad called on local banks yesterday to join forces in facing the growing competition from foreign financial institutions.

"If it is necessary, it would be a good step for banks to merge with each other to strengthen their capital structures and professional skills," he said in his written address at the opening of a three-day financial workshop of the Association of Indonesian Journalists.

In his speech, read by Director General of Financial Institutions Bambang Subianto, the minister said that Indonesia has to gradually liberalize its banking industry to comply with the globalization trend in the banking sector.

"It means that Indonesian banks should prepare appropriate steps to anticipate the expected fiercer competition both domestically and globally," he said.

The World Trade Organization, without support from the United States, signed last week an initial agreement on the liberalization of the world's financial services.

The pact, also supported by Indonesia, will guarantee foreign banks wider access to emerging markets, which mostly still impose restrictions to protect their local financial institutions.

Local bank analysts and executives said that merging with larger banks will be the best solution for small commercial banks in entering the era of free competition in the banking industry in the coming years.

However, they said that taking such a measure will not only take time but could also be counter-productive, given the poor conditions of the country's small banks.

"If an unhealthy bank is merged with a solvent bank, its disease could make its partner sick," Bank Nusa's president, Bangun S. Kusmulyono, said about the possible negative effect of merging.

Minister Mar'ie acknowledged that it is, indeed, not easy for banks to merge because such a deal will involve not only the transfer of assets and management but also the fate of the employees.

The number of commercial banks grew to around 240 last year from only 112 in 1987, following the introduction of a banking reform in 1989.

The reform has allowed the opening of new banks with a capital requirement of only Rp 10 billion for a non-foreign exchange bank and Rp 15 billion for a foreign exchange bank. The measure also allowed foreign banks to operate in the country in partnership with local banks. (hen)