The net interest margin (NIM) is the difference between interest income generated by banks and the amount of interest paid out to the lenders, implying that a higher NIM boosts profitability of banks. In Indonesia, the NIM is high (compared to the situation in neighboring countries). Overall, the NIM in Indonesia's banking sector averages 5.39 percent, significantly higher compared to NIMs in the banking sectors of Malaysia (2.35 percent), Thailand (2.60 percent), and the Philippines (3.35 percent). The average NIM for Indonesia's state-owned banks is even higher in the range of 7 - 8 percent.

Some analysts claim that - although banks' profitability is estimated to decline if the NIM drops (which would also imply lower dividend payouts to shareholders of banks) - access to credit becomes easier (due to lower lending rates) and thus the customer base of banks enlarges. However, given that Indonesia is still characterized by a high degree of financial illiteracy (with millions of people living without banking services), especially outside the cities, it remains unclear whether banks' customer base can indeed be enlarged significantly in the short term.

Given that banking services in the ASEAN region are set to be liberalized to a high degree in 2020 (part of the ASEAN Economic Community), the NIM of Indonesian banks should be cut in order to enhance Indonesia's competitiveness (for example Indonesia's real sector will face more difficulty to obtain loans for business expansion and has therefore more trouble expanding). Compared to other ASEAN markets Indonesia still has a low loan-to-GDP ratio.

Profile Banking Industry Indonesia & Regional Peers (2015):

Risk Free Rate   7.25%  1.50%   3.25%    4.00%
Credit Interest Rate  12.86%  7.10%   6.85%    6.86%
Net Interest Margin   5.39%  2.60%   2.35%    3.35%

Source: Bisnis Indonesia

Sigit Pramono, Chairman of The National Banks Association (Perbanas), expressed his concern if Indonesia's financial authorities decide to force a lower NIM in Indonesia's banking sector. Pramono prefers to see lower lending rates (single digit margins) by improving the efficiency in Indonesia's banking services. He also agrees to the incentives proposed by the OJK. For example, banks deemed efficient (an assessment based on banks' cost-to-income and net interest margin) will obtain a 40 percent discount on their existing core capital allocation (AMI) requirement for the establishment of new branches.

Pramono added that - regarding corporate credit - several Indonesian banks have already been offering loans at single digit rates, particularly to those companies that have a good profile (such as the Astra Group, Garuda Indonesia and Pertamina). Moreover, regarding consumer credit, lending rates have also been on the decline. For example, several banks have been offering house ownership credit (kredit pemilikan rumah, abbreviated KPR) at single digit rates. However, not all rates can be pushed into single digits margins rapidly as these rates are dependent on several factors such as the cost of funds, overhead costs, risk premiums, and inflation.

Credit Profiles Indonesian Banks at End-March 2016:

Bank Corporate
Bank Mandiri 10.25% 12.00% 19.25% 10.75% 12.50%
Bank Rakyat Indonesia 10.75% 11.25% 17.00% 10.25% 12.50%
Bank Central Asia 10.00% 11.00% 10.25%  8.63%
Bank Negara Indonesia 10.25%  9.95% 10.50% 12.50%
Bank CIMB Niaga 11.00% 11.75% 19.25% 11.00% 11.25%
Bank Permata 11.50% 11.75% 11.50% 11.50%
Bank Pan Indonesia 11.35% 11.89% 19.59% 11.67% 11.67%
Bank Danamon Indonesia 11.00% 11.75% 19.00% 11.50% 16.00%
Bank Tabungan Negara 11.25% 12.00% 10.75% 11.75%
Bank Internasional Indonesia 10.75% 12.00% 18.30%  9.75% 11.50%

Source: Bank Indonesia

Overall Profile Indonesia's Banking Sector:

Net Profit
(IDR trillion)
  92.53  106.71  112.16  104.63     17.95
Interest Income
(IDR trillion)
 391.28  458.19  568.01  646.16    111.87
Total Assets
(IDR trillion)
4,262.59 4,954.47 5,615.15 6,132.58   6,119.35
(IDR trillion)
2,707.86 3,292.87 3,674.31 4,057.90   3,967.91
Third-Party Funds
(IDR trillion)
3,225.20 3,663.97 4,114.42 4,413.06   4,437.52
Net Interest Margin
   5.49    4.89    4.23    5.39      5.47
Loan-Deposit Ratio
  83.58   89.70   89.42   92.11     89.50
Capital Adequacy Ratio
  17.43   18.13   19.57   21.39     21.93
  74.10   74.08   76.29   81.49     84.22

Source: OJK


Lex McGuir |

Indonesian banks are the most profitable in the world! If government banks lower their interest rates then others must follow. So just do it.