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.