THE IMPLICATIONS OF FOREIGN OWNERSHIP IN NATIONAL BANKS

The polemics of foreign ownership in national banks rolled on. Recently Bank Indonesia issued a regulation on maximum limit of shares in banks. Investors of financial institutions were allowed to own shares in banks up the maximum of 40%. Investors of non-financial institutions may own 30% of shares. Individual institutions were allowed to own only 20% of shares.

It seemed that the restriction on shares ownership was not going to face any objections since the same policy had been applied in other countries and all was running well. Apparently before setting up limitations, BI had learned from other countries for reference.

Unfortunately there were some misperceptions of BI’s new policy. They perceived that the new regulation was some kind of restriction of share ownership by foreign investors. Not a wrong perception but not absolutely true, why? What was demanded by Bank Indonesia was restriction of shares ownership by domestic as well as foreign investors. So the rule applied not only on foreign investors but also domestic investors alike.

Admittedly there were two sides of a coin in foreign ownership of shares in banks. On the one side foreign ownership promised its benefits of capital and technology needed for jacking up growth of the banking sector, but on the other hand it might pose as danger to a nation’s economy in adverse times like crisis.

A document released by Fitch Ratings recently (1/6) disclosed plan of DBS Group Singapore who intended to acquire Bank Danamon of Indonesia and BI’s plan to restrict single majority share in banks to a maximum of only 40% against the previous 99%.

According to Fitch, fresh capital from sterling banks was needed to support Indonesia’s economic growth. The challenge for BI was how to control risk management of the financial system in such a way to be able to draw fresh capital while making sure that accumulation of risk did not affect stability of the financial system as a whole.

It was mentioned that the magnetic force of Indonesia’s economic growth had drawn big foreign investors including those of the banks sector. However, to learn a lesson from the case of the banking sector in Europe, foreign owner ship might serve as “double eged blade” that might injure the financial system. In Europe, a well balanced structure of ownership between foreign and local ownership contained a high degree of sensitiveness for the central bank.

In East Europe, the Central Bank from Western Europe had procured significant capital by throwing out fund in large amount before crisis came. But as crisis stormed in, the foreign banks put brakes on their funding so local banks were forced to restrict credit which had its negative impact on local growth.

About sovereign debt (debt in foreign currency) bank owners helped minimize obligations of potential contingency on the banking system and increased sophistication through product, system and process of management risk.

The Regulator, in this case the Central Bank, was expected to have the capability to manage linkages between the international financing system and local system beyond the rules of ownership restriction.

With reference to Fitch Ratings report, in fact ownership of bank shares was no serious problem provided that foreign investors had their high commitment that foreign investors had their high commitment to the banks. It must be understood that banking business was the kind of business where strong capital was prerequisite so capitalizing became a pressing necessity. Within this context, capacity of candidate investors was the key factor to future power of banks.

Without underestimating shares ownership by local investors, it was reasonable to conclude that shares ownership by foreign investors lead the way to possible strategic alliance between local banks and foreign banks. It would also make transfer of know how in banking management possible.

Foreign investors having shares in local banks could also facilitate access to overseas candidate customers through networking of banking correspondence.

Through sophisticated electronic connectivity, the principle of branchless banking could be implemented and connections with overseas or domestic customers could be well maintained based on one bank service.

Furthermore the efficient connectivity would enable business synergy among domestic and overseas customers as well as to support international trade financing. Transfer of money within the context of payment transactions between two parties could be exercised through connectivity between local banks and overseas banks.

From the above picture, the point to make was: there should be no allergic attitude to foreign ownership in national banks. Unconditional rejection to foreign ownership might injure the principle of openness adopted by Indonesia over a long period of time.

Based on the sprit of equity and the reciprocal principle, Indonesian banks had the opportunity to own shares in overseas banks through mechanism of the local capital market. So it was not necessary to put the case of foreign ownership in contradictory position since it was completely senseless.

Certainly the Central Bank knew exactly how to properly manage a healthy and sterling bank in order to be an effective intermediary body for the acceleration of national economic growth with all the positive impacts. Perhaps there was more advantage than disadvantage in the share owned by foreign banks as long as the Central Bank could safeguard national banks with rules that protect national interest.   

 Business News - July 13, 2012