Last week, it was reported that Indonesia is set to open up its banking sector to foreign investment. Currently, foreigners can own a maximum stake of 40 percent in a local bank. However, Indonesia's financial authorities announced last week that a foreigner can have a majority stake provided that they buy two banks and merge these. This would be a win-win situation: the foreign investor obtains more access to a lucrative industry, while the government gets to see consolidation, making the banking sector in Southeast Asia's largest economy more stable.

However, when this news spread last week it seemed that any of the 118 banks active in Indonesia could be majority-owned by a foreigner if he would merge two local banks. Now, it has become clear that it only involves small banks categorized under the BUKU 1 system. BUKU (Bank Umum Kelompok Usaha) is a categorization system introduced by Bank Indonesia. This system divides Indonesian banks into four categories based on the banks' capital. Banks categorized under BUKU 1 are those banks that have capital of less than IDR 1 trillion (approx. USD $73 million).

BUKU System Indonesia:

Category Core Capital Number of
BUKU I < IDR 1 trillion        40
BUKU II IDR 1 trillion - IDR 5 trillion        42
BUKU III IDR 5 trillion - IDR 30 trillion        20
BUKU IV > IDR 30 trillion         4
Banking Sector
IDR 872.31 trillion       118¹

¹ including 12 sharia banks

Indonesian financial authorities feel that there are currently too many local banks categorized under the BUKU 1 system. Per September 2015, 40 of the total 118 banks active in Indonesia were BUKU 1 banks.

Earlier this year, the China Construction Bank announced it bought Jakarta-based Bank Windu Kentjana International and Bank Antardaerah. Meanwhile, South Korea-based Shinhan Bank said it received approval to purchase a more than 40 percent stake in Jakarta-based Bank Metro Express and Surabaya-based Bank Centratama Nasional. Furthermore, South-Korea based Apro Financial Co Ltd plans to acquire a 40 percent stake in Bank Andara.