Local banks to face stiff competition due to liberalization

Local banks to face stiff competition due to liberalization

By Hendarsyah Tarmizi

JAKARTA (JP): The agreement of the World Trade Organization
(WTO) last Friday to open up global trade in the fast-growing
financial services sector will mean a better deal for consumers.

But the pact, which will gradually liberalize the world's
banking industry, will mean Indonesian banks will be facing
fiercer competition.

The Indonesian banking industry is not as closed to foreign
operations as those in neighboring nations. Foreign banks can
operate in Indonesia by establishing joint ventures with local
banks.

Foreign banks established in Indonesia before the introduction
of the joint venture requirement in 1989, are also permitted to
open branches in six major cities besides Jakarta.

However, most banking executives still fear that the
liberalization of banking services could end their banking
activities even though they are already used to the relatively
freer market.

"Local banks not only lack capital but also technology to
compete with banks from developed economies," said Iwan R.
Prawiranata, the president of state-owned Bank Bumi Daya.

His fear is shared not only by executives of other domestic
banks but also by bankers in other members of the Association of
Southeast Asian Nations (ASEAN).

ASEAN groups Brunei, Malaysia, the Philippines, Singapore,
Malaysia, Vietnam and Indonesia.

In fact, ways to face the globalized banking industry were on
the main agenda of the recent meeting of the ASEAN Banking
Council (ABC) in Bali.

The Bali meeting failed to reach a consensus on a possible
common action in dealing with the fiercer competition, which
could result from the introduction of WTO's financial pact. But
ASEAN bankers agreed to nudge their respective governments into
first opening the region's banking industry to their own banks
before providing greater access to banks from industrialized
countries.

Special treatment

"The special treatment is essential. Otherwise, we will be
killed in the fiercer competition," the council's secretary-
general, Tay Kah Chye, said of the position of the ASEAN banking
industry in the era of globalization.

Rafael B. Buenaventura, a noted banker from the Philippines,
said that establishing a common market arrangement within ASEAN
would not only provide a great training ground for facing
globalization, but would lead to the injection of fresh blood
into the regional banks before they became engaged in a full-
contact fight with those from industrialized nations.

"Giving regional banks special treatment so they can benefit
from the growing financial services in their own home is fair
enough before the region's banking industry is fully opened to
outsiders," he said.

For most Indonesian banks, the liberalization of the banking
industry, whether it is regional or global in nature, is a
nightmare, local bankers said.

"We are even far behind those of neighboring Malaysia and
Singapore both technologically and financially," said Gunarni
Soeworo, the president of publicly listed Bank Niaga.

She said that the capital adequacy of most Indonesian banks is
much lower than those of the branches of foreign banks in
Singapore.

"How can we compete with most of the banking systems used by
local banks being second-hand, bought from foreign banks
operating in the country," Iwan of Bank Bumi Daya said.

Full liberalization should, therefore, be cautiously
introduced despite the Indonesian government's commitment to the
globalization of the financial services, Gunarni said.
"Otherwise, many local banks would collapse."

The share of the foreign and joint venture banks in
Indonesia's lending market (in both local and foreign currencies)
is still relatively low, reaching only around 8.05 percent as of
April. But their activities have markedly grown since the
deregulation of the banking industry in 1989.

Their combined outstanding credit, for example, grew by nearly
eight fold to Rp 16.14 trillion (US$7.1 billion) as of April from
a mere Rp 1.91 trillion at the end of 1988.

In the same period, their funds in terms of rupiah rose by
3.25 percent to Rp 4.19 trillion, while those in terms of foreign
exchange increased by over 327 percent to Rp 6.09 trillion from
Rp 1.42 trillion.