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13 February 2015
Since the financial crisis that hit Asia's emerging market economies in the late 1990s, the Indonesian banking industry has seen an unprecedented influx of foreign investment. Foreign banks and other investors snapped up banks that were left paralysed following the crisis, pumping money into the country's under-capitalised banking sector and eventually gaining such substantial control that the public is now complaining that the industry has become dominated by foreign interests.(1)
The Indonesian government has long welcomed foreign investors and allowed foreign enterprises easy access to various business sectors. This warm welcome is largely due to what the government sees as a lack of professional industry, as well as a need for fresh money after the economic crisis. As part of its efforts to attract more foreign investment into the banking sector – which still caters to only a fraction of the country's 250 million-strong population – the government has, for instance, allowed foreign investors to control up to 99% of domestic banks.(2)
This flood of foreign investment seemed to be unstoppable until recently. As a result of rapid development, domestic banks – which are mostly controlled by state-owned enterprises – are now faced with the reality that, unlike their foreign counterparts that have set up shop in Indonesia, Indonesian banks intending to invest in neighbouring countries (eg, Singapore, Malaysia and China) have not been welcomed as warmly as foreign banks investing in Indonesia. There has been no reciprocal treatment for Indonesian banks wishing to establish branches or subsidiaries in those countries.
Under the existing law, foreign majority-owned banks (established either by a foreign enterprise as a joint venture with local Indonesian business partners or as a result of a foreign takeover of a local bank) and branches of foreign banks are essentially treated as Indonesian banks. These banks – like Indonesian state-owned and private banks that are majority controlled by Indonesian shareholders – are free to set up as many branches and automated teller machines (ATMs) as they wish and compete with indigenous banks with no restrictions, unlike in other countries. Malaysia and Singapore, for instance, allow foreign banks to establish only one branch or ATM, while China allows foreign banks to deal only in foreign currency.
This restrictive foreign-versus-domestic approach has only relatively recently been taken up by Parliament and the Indonesian public, fuelling an increase in nationalistic attitudes towards the country's banking industry. In 2012 Bank Indonesia, the Indonesian central bank, issued several regulations requiring bank shareholders gradually to reduce their individual ownership to no more than a 40% stake. Bank Indonesia Regulation 14/2012(3) sets the following share ownership limits:
Regulation 14/2012 further limits ownership of Indonesian Sharia-compliant banks to 25% of the bank's capital for all categories of shareholder.(5) For each shareholder category, Regulation 14/2012 imposes strict requirements governing the shareholder's:
Although Regulation 14/2012 allows foreign shareholders to increase their shareholding beyond the 40% threshold, it also imposes strict requirements that the shareholder must meet before doing so. In particular, the bank must rank in one of the top two levels of soundness and good corporate governance for three consecutive years in the five years preceding its application for Bank Indonesia approval of the acquisition.(6)
With the introduction of the new Banking Bill, the Indonesian banking industry is set to enter a new phase. Unlike the existing banking law – Law 7/1992 (as amended) – the new bill is clearly underpinned by a spirit of nationalism. The bill stresses a desire for reciprocal treatment of Indonesian banks operating in other countries, requiring the Financial Services Authority (OJK) and Bank Indonesia to ensure reciprocity in the implementation of international banking relations.(7) This spirit of nationalism is further stressed in Article 6 of the bill, which stipulates that countries whose native banks have been operating in or are planning to operate in Indonesia must provide the same treatment to Indonesian commercial banks planning to operate in those countries, including with regard to licensing and branch openings.
Given that many foreign banks operate in Indonesia and have controlled a large number of Indonesian commercial banks for years, it remains to be seen how the OJK and Bank Indonesia will regulate and treat such foreign-controlled banks after the bill has become law. Other industries – primarily natural resources extraction – have already begun to exhibit strong nationalistic tendencies to the detriment of foreign enterprises. These industries have, to a certain extent, undergone the same process of 'Indonesianisation' in recent years.(8)
Unlike the existing law, the new bill instructs Bank Indonesia and the OJK to categorise banks in accordance with their capitalisation, scope of business and scope of regional activities. Bank Indonesia has accordingly already introduced what it refers to as a 'BUKU' scheme(9) comprising four categories (BUKU 1 to BUKU 4), which will affect how banks conduct their business and serve their customers – for example, a BUKU 1 bank will not have the same ability to conduct business as a BUKU 4 bank.(10) The BUKU scheme will also affect a bank's ability to enter into capital investment/participation (eg, a BUKU 1 bank's ability to channel loans will not be the same as that of a BUKU 4 bank).
The new bill also answers many of the questions raised regarding the range of business in which banks in Indonesia may engage. While the existing law lists 13 business fields in which banks may engage, the bill extends this to 23 business fields.(11) In addition, the bill clarifies the definition of certain business fields and the range of business for rural banks (ie, small-scale banks that provide only limited services and operate mostly in rural areas).(12)
The bill also addresses relations between commercial banks and rural banks. For the past few years, commercial banks have often used rural banks as de facto branches to penetrate remote regions of the country where they have no presence for various reasons (eg, lack of adequate lines of communication or the size of the local economy). In such relationships, the commercial bank essentially provides a loan to the rural bank, which then channels the loan to its own customers.(13) This cooperation provides banks with the necessary means to meet the bill's mandate that the banking industry facilitate greater public access to banking services.(14)
The bill provides that foreign enterprises may own only up to 40% of shares in a commercial bank (foreign ownership of rural banks is prohibited). Further, it stipulates that a foreign enterprise can become a controlling shareholder only of a commercial bank.(15) Under the existing Bank Indonesia regulation, a 'controlling shareholder' is defined as a party which:
Interestingly, the bill also regulates the drafting of banks' articles of association. In addition to the requirements under company law and capital markets laws and regulations (for public companies), the bill requires that a bank's articles of association include:(17)
The bill further requires the OJK to scrutinise articles of association and give appropriate recommendations as needed before they are submitted to the Ministry of Laws and Human Rights for validation.
The OJK also regulates the selection of bank management and shareholders. In practice, this is done by conducting a fit and proper test. The controlling shareholder's failure to pass this test may lead to it being forced to relinquish all of its shares. If such an "unqualified" controlling shareholder fails to do so, the bill provides that the following actions may be taken:(18)
However, the OJK's regulatory reach extends beyond conducting the fit and proper test. If the OJK finds that controlling shareholders or management have engaged in activities contrary to prudential and good governance principles, it may instruct the controlling shareholder to dispose of part or all of its shares or instruct management personnel to resign from their respective offices.(19)
The bill also includes provisions that allow the OJK – as an industry regulator and supervisory institution – to gain control over a bank's operations where it experiences operational difficulties. The long arm of the OJK in managing a bank's operations may extend to the following actions:(20)
The bill includes 10 articles covering prudential issues in banking operations and management. Of these, risk management is one of the primary concerns,(21) particularly with regard to a bank's ability to acquire and keep collateral provided by its defaulted customers as part of the bank loan. The bill provides a surprising degree of flexibility for state-owned banks disposing of collateral assets. Such banks are allowed to dispose of the acquired assets even where they incur losses in doing so, provided that an independent adjuster has assessed the asset price obtained by the bank and deemed it to be fair.(22) This provision has raised serious concerns among government law enforcement bodies such as the Office of the Attorney General and the newly established Commission on the Eradication of Corruption, which consider state-owned bank assets acquired from defaulted debtors to be state assets. In this case, the sale of such assets at a loss would amount to a loss for the state, which may be considered a form of corruption.(23)
Customer protection is another issue not covered under the existing law which is specifically addressed in the new bill. As the OJK is now entrusted with customer protection in the financial services industry pursuant to the OJK Law (21/2011),(24) it comes as no surprise that the bill also includes customer protection provisions.
The bill's customer protection provisions address not only banks' conduct towards customers, but also steps which banks must take to make its customers better informed of the banking products on offer. This issue was also addressed by the OJK in recent regulations. Including customer protection issues in both the OJK Law and the new banking law will give the OJK strong impetus to police the banking industry more effectively in order to extend greater protection to customers and provide them with appropriate legal tools to defend themselves against banks.
For further information on this topic please contact Hamud Balfas at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125), fax (+62 21 250 5121) or email (firstname.lastname@example.org). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.
(1) Five of the largest Indonesian banks are foreign majority controlled; Kontan, November 6 2014, page 1.
(2) Regulation 29/1999. Article 3 of this regulation stipulates:
"Total bank share ownership by Foreign Citizens and or Foreign Legal Entities acquired through direct purchase or through the Stock Exchange shall be no more than 99% (ninety-nine percent) of the total shares of the Bank concerned."
Regarding publicly listed banks, Article 4 of this regulation stipulates that foreign enterprises may acquire up to 100% of the shares that are listed and traded on the relevant stock exchange (which under the regulation is limited to 99% of the issued stock).
(3) Bank Indonesia Regulation on Share Ownership in Commercial Banks (14/8/PBI/2012).
(4) Article 2(2) of Regulation 14/2012.
(5) Article 2(3) of Regulation 14/2012.
(6) Articles 5, 6 and 8 of Regulation 14/2012.
(7) Article 6 of the Banking Bill.
(8) Law 4/2009 on coal and mineral mining, for instance, requires foreign shareholders in joint venture mining projects to begin a gradual process of selling/divesting their shares to Indonesian enterprises (ie, government, regional or state-owned enterprises or their partners) gradually as of the sixth year following exploration.
(9) Bank Indonesia Regulation on Banks' Business Activities and Core Capital-Based Office Networks (14/26/PBI/2012); for further details please see "New bank regulations on minimum capital requirements and multiple licensing".
(10) Id, Articles 4 and 5.
(11) Article 8 of the bill.
(12) Articles 14 and 17 of the bill.
(13) Article 18 of the bill.
(14) Article 19 of the bill.
(15) Article 35 of the bill.
(16) Supra note 9, Article 1(3).
(17) Article 39 of the bill.
(18) Article 69 of the bill.
(19) Article 70 of the bill.
(20) Article 53 of the bill.
(21) Articles 75 to 84 of the bill.
(22) Article 83 of the bill.
(23) Law 31/1999 on the eradication of corruption (as amended by Law 20/2001).
(24) Articles 28 to 31 of the OJK Law.
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