Banking Sector of Indonesia to Become Less Open to Foreign Investment
Commission XI of Indonesia’s House of Representatives (DPR), which oversees the country’s banking sector, will soon propose a new draft of a bill that sets to limit foreign ownership in Indonesian banks at 40 percent (from 99 percent currently). Established banks that are majority-owned by foreigners will be given a 10-year period to divest their shares after the bill has been passed into law (reportedly an earlier draft only provided a five-year transition period for this mandatory divestment).
Previously, Indonesia has been liberal regarding foreign ownership in the domestic banking sector as the country required huge investment to support the ailing banking sector during and after the Asian Financial Crisis in 1997-1998. The country’s banking sector was at the heart of the crisis due to weak monitoring and a high degree of corruption. In recent years, however, the Indonesian banking sector has been labelled as the world’s most profitable banking industry, growing at double digits (average return on equity/ROE and average net interest margins/NIM). The new draft bill will also stipulate that foreign banks that are currently still operating in Indonesia under branch status are required to become legal entities according to Indonesian law (Perseroan Terbatas, abbreviated PT) within the ten-year period. These banks include Deutsche Bank, HSBC Bank, Citibank JPMorgan Chase and Standard Chartered.
However, the new bill also still provides room for foreign ownership in Indonesian banks at a higher than 40 percent ratio. Depending on the track record of the foreign bank (which includes matters such as corporate management, capital and contribution to the domestic economy), Indonesian parliament and the Financial Sector Stability Coordination Forum (FKSSK) will have the authority to decide whether a foreign investor is allowed to own a +40 percent stake. The FKSSK is an agency that consists of the Financial Services Authority (OJK), Bank Indonesia, the Finance Ministry and the Deposit Insurance Corporation (LPS).
In 2012 Indonesia’s central bank (Bank Indonesia, BI) had already set maximum foreign ownership in domestic commercial banks at 40 percent for finance-related institutions, 30 percent for non-finance firms and 20 percent for individuals. However, contrary to the new draft, this regulation was not retroactive.
The draft bill, which will impact heavily on foreign investment in Indonesia’s banking sector, is to be included in the priority bills to be passed into law in 2015.
Meanwhile, Malaysian authorities have announced to be committed to ease licensing procedures for the opening of local branches of Indonesian banks in Malaysia. Although three Malaysian banks - CIMB Niaga, BII Maybank and Maybank Syariah Indonesia - are locally incorporated in Indonesia, it is much harder for Indonesian banks to expand to Malaysia (for example due to large capital requirements imposed by Malaysia’s central bank). However, after Indonesian President Joko Widodo visited Malaysia Prime Minister Datuk Seri Najib Razak to discuss this situation, Malaysian authorities announced to be committed to ease regulations for Indonesian banks. This is also part of the integration of financial services in ASEAN nations ahead of the implementation of the ASEAN Economic Community in late 2015.