Foreign banking regulations in Indonesia seek to protect local institutions

In an effort to protect its domestic banking industry from foreign competition, the Indonesian government has imposed restrictions on foreign banks operating in the country, introducing ownership restrictions in 2012, and drafting new regulations that would oblige foreign banks to become locally incorporated entities. The nation’s banking sector has been criticised as too liberal compared to its regional neighbours, and restrictions on Indonesian banks in markets such as Malaysia and Singapore have led the government to adopt a more protectionist approach to financial services, while the authorities have increasingly emphasised reciprocity in international banking negotiations.

However, the next draft bill could see the most stringent requirements for foreign banks relaxed, as the nation moves to negotiate with its ASEAN neighbours in preparation for its integration into the ASEAN Economic Community (AEC). Recent developments have been promising, with Indonesia signing a reciprocity agreement with Malaysia in late 2014, while the government’s long-term growth strategy should support expansion and stability in the local banking sector, protecting domestic industry from global shocks and underpinning long-term economic development in the country.

Reform History

Recent reforms to Indonesia’s banking system began in July 2012, when the central bank, Bank Indonesia (BI), announced it had introduced new ownership caps for domestic banks, which aim to prevent lenders from being controlled by single interests, and create a diverse shareholder base that could hold management accountable. The regulations limit a single financial institution to 40% ownership of an Indonesian bank, while non-financial institutions are restricted to 30%, families or individuals to 20%, and family or individual ownership in an Islamic bank to 25%.

BI introduced some exemptions to the new rule with Regulation No. 14/24/PBI/2012, which brought in a single presence policy (SPP). SPP requires parties with controlling stakes in more than one bank to either merge their banks, establish a bank holding company for their shares, or establish a “holding function”, in which either the government or a bank consolidates all activities of its subsidiary banks under a single controlling entity. Under these rules, bank holding companies and controlling shareholders in a bank created by merger could receive an exemption from the 40% rule.

Further Restrictions

In July 2014, the Jakarta Post revealed the government’s latest draft bill on foreign banking, which would affect 10 foreign banks in the country, setting a deadline for banks to become limited liability companies (perseroan terbatas, PT) and retaining caps on single-entity ownership. First proposed in 2013 by the House of Representatives, the bill is expected to replace existing banking laws, which have been criticised as too liberal.

The draft bill stipulated that all foreign banks in Indonesia would be required to become PT, an effectively protectionist act aimed at enhancing growth and stability in the domestic banking sector. According to the bill, all foreign banks operating under branch status (kantor cabang bank asing, KCBA) – including Citibank, Deutsche Bank, HSBC, JPM organ Chase and Standard Chartered – would be given five years to comply with the new regulations following their enactment. A change in legal status from KCBA to PT would see foreign banks operating as an independent company, with offshore parent companies unable to withdraw money from Indonesian branches should their foreign headquarters require more liquidity, better insulating the domestic banking industry from contagious foreign crises.


The draft bill also keeps ownership limits introduced in 2012 at 40%, preventing foreign investors from becoming controlling shareholders in any Indonesian bank, though it is unclear whether these limits will be applied retroactively. If they are, the bill would also impact domestic banks including CIMB Niaga, Bank Internasional Indonesia (BII) and Bank Danamon, which are controlled by foreign firms holding a majority stake; Malayan Banking, for example, holds an 80% interest in BII, while CIMB Group Holdings owns a 97.9% stake in CIMB Niaga.

Although designed to protect the domestic economy, the draft bill met with a mixed reception, and economists have argued that it will discourage new foreign investment in the banking sector. Global Basel III banking regulations stipulate a 100% capital deduction charge, up from 50% under Basel II, and any investor acquiring a bank without acting as a controlling shareholder must deposit a significant amount as a safeguard against banking management risks. “The key issue here is the 40% stake; it’s uneconomic from a Basel III perspective, as such equity would be a deduction from Tier-1 capital. Indonesia must make itself attractive. If you put rules like this, it creates uncertainty – we need an environment where there is certainty,” Joseph Abraham, chairman of the Foreign Banks Association of Indonesia and president-director of Bank ANZ Indonesia, told the Jakarta Post in July 2014.


The 40% ownership restriction introduced in 2012 was viewed as a move to block what would have been the largest banking acquisition in Indonesia’s history. Development Bank of Singapore (DBS) Group Holding, South-east Asia’s largest bank, pulled out of a $6.5bn acquisition of the privately owned Bank Danamon in August 2013 due to the 40% ownership cap; DBS had sought 99% ownership. The event was subject to lively debate among local banks, with Bank Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI) calling for more reciprocity between Singapore and Indonesia, as Indonesia’s banks had faced difficulties expanding their own operations in Singapore.

National Service

Undercurrents of nationalism, protectionism and expectations of reciprocity have been an intrinsic part of Indonesia’s ongoing banking reforms, with Indonesian stakeholders arguing that restrictions placed on their own expansion within the ASEAN community have mandated similar restrictions within Indonesia’s financial sector. Article 6 of the July draft bill, for example, stipulates that the Financial Services Authority (OJK) and BI must follow the principle of reciprocity in their approach to international banking negotiations.

Outside of Singapore, the reciprocity issue has been most pressing for Indonesian banks attempting to expand into Malaysia. Although there are three Malaysia-based banks operating in Indonesia, Malaysia still imposes strict restrictions on Indonesian banks. Bank Mandiri, the sole Indonesian lender operating in Malaysia, has been unable to operate as a full branch due to sizeable capital requirements – currently set at RM300m ($89m) – imposed by the Bank Negara Malaysia (BNM), the central bank of Malaysia. Instead, Bank Mandiri operates as a limited retail business, offering remittance services.

Second Draft

As a result of time constraints, lawmakers tabled a discussion of the 2014 draft banking bill. President Joko Widodo, known locally by his nickname “Jokowi”, won the presidential election in July 2014, and it appears so far as though government emphasis on reciprocity and protectionism will continue, although its recent success in international negotiations could relax some of the more onerous restrictions on foreign banks.

“There has been effort from the government to improve free trade and regional business ties, but there’s still a big debate whether we want to open to other countries quickly, or maintain moderate, step-by-step growth. Reciprocity is becoming a more visible effort under the present government. “Jokowi says, ‘We will open our market, but they have to open their market first.’ The first priority is to protect the domestic market,” Professor Didik J Rachbini, an economist with Institute for Development of Economics and Finance, told OBG.

In January 2015 members of the House of Representatives reiterated plans to protect the domestic banking industry, announcing that they would formulate a new draft bill within the next several months. Fadel Muhammad, chairman of Commission XI, which oversees the banking industry, told media that the commission could change a number of articles in the bill, a hint that some of the more stringent regulations could be relaxed. He also stressed that protection of local banks remains a top priority, telling the Jakarta Post that lawmakers will likely cap foreign ownership at levels similar to previous draft bills.

The January announcement came just weeks after Malaysia and Indonesia signed a reciprocity agreement for their banking sectors, as part of the ASEAN Banking Integration Framework (ABIF), which will act as a model for agreements with other ASEAN nations, most notably Singapore. The agreement, which should see Malaysia reduce its capital requirements for Indonesian banks, was signed by Agus Martowardojo, governor of BI; Muliaman D Hadad, chairman of OJK; and Zeti Akhtar Aziz, governor of BNM, in Jakarta. In January, Bank Mandiri announced it plans to expand into Malaysia and Singapore as banking restrictions among ASEAN nations are expected to be further relaxed.

Asean Integration

The ABIF will be increasingly prominent in ongoing banking reforms, as it will allow qualified ASEAN banks (QAB) to expand operations into other ASEAN members and receive the same treatment as local banks.

The AEC is slated to be established by the end of 2015, although the deadline for integration of AEC banking systems extends until 2020, giving central banks more time to negotiate the legal framework and determine which lenders qualify as QABs. According to Nelson Tampubolon, commissioner on banking supervision at OJK, large state-owned lenders including Bank Mandiri, BRI and BNI will likely become the nation’s first QABs. In the meantime, the government plans to draft a new bill covering foreign banking by the end of 2015.

Despite the challenges that it could pose for the future expansion of foreign banks in the country, the government’s stringent regulations bode well for the local banking sector, and they could ultimately prove to be critical should the global financial system face another far-reaching crisis in the future.