How will Indonesia’s new bank merger regulations affect the sector?

Indonesia is to implement changes to bank merger rules later this year, with a view to encouraging greater consolidation across the industry.

The banking sector will be strengthened by new regulations, aimed at boosting domestic mergers as well as facilitating foreign investment in local institutions. At present, the sector is over-served, with more than 1500 mostly rural banks in operation across the country.

Heru Kristiyana, chief banking supervisor at the Financial Services Authority, announced on the 31 July that the new rules are designed to give rise to the creation of bigger, stronger banks. Larger banks have access to greater credit reserves and can therefore improve access to credit, which in turn could drive broader economic growth.

The new development will ease the “single-presence” policy, which stipulates that a single investor cannot have a controlling interest in more than one bank.

First introduced in 2006, the single-presence rule served to encourage consolidation in a sector that was even more overpopulated than it is today. However, it proved unpopular with some foreign lenders, who felt it limited their opportunities to expand in Indonesia.

The new rules will enable a larger bank to acquire a controlling interest in a smaller bank that has less than Rp5trn ($34.7bn) in paid-up capital. Under current rules, the smaller bank would have to merge with the acquiring entity.

In the case that a larger bank attempts to acquire a controlling stake in another large institution, the financial authorities may apply the existing single-presence rule, obliging the two to merge.

Foreign and local banks will be treated equally under the regulations. However, foreign banks will have to show a commitment to financing infrastructure projects and small and medium-sized enterprises. In addition, they must appoint Indonesian residents to the two most senior corporate roles, those of president director and president commissioner.

See also: The Report – Indonesia 2019

Support for sector consolidation

These moves have been welcomed by stakeholders. “There is a strong urge for consolidation on both a competitive and a liquidity level. Realistically, there is only space for 40-50 banks in Indonesia,” Kartika Wirjoatmodjo, president director and CEO of Jakarta-headquartered Bank Mandiri, told OBG. “Thus far, consolidation has largely been driven by foreign players.”

This sentiment was echoed by Kostaman Thayib, president director of local institution Bank Mega. "Compared to other ASEAN countries, Indonesian banks are small in size,” Thayib told OBG. “Bank Rakyat Indonesia, Bank Mandiri, Bank Negara Indonesia and Bank Central Asia are huge players, but the country needs bigger-sized banks to compete regionally.”

The drive towards consolidation comes at a time when the finance ecosystem is maturing fast, with new players stepping into the ring. Financial technology (fintech) firms in particular have begun to offer considerable competition.  

"Liquidity in the industry is still limited, and banks are not only competing with each other but also with non-financial institutions, government and fintech players. The pie is becoming more and more divided," Thayib told OBG.

Disruptive innovations drive sector growth

The new regulations are partly a response to the opportunities occasioned by banking digitalisation and other disruptive new technologies.

Real-time payments, faster mobile speeds and the expansion of e-commerce are just three of the developments that are driving digitalisation, helping banks become more agile and responsive.

Globally, smartphones are replacing bank tellers, but in Indonesia the vast majority of daily monetary transactions are still cash-based. In 2016 Morgan Stanley identified it as the ASEAN country with the second-most-extensive network of branches, after Thailand, with 12.56 branches per 100,000 people.

Running an extensive network of branches weighs heavily on banks’ expenditure, and digitalisation offers them an opportunity to cut costs, as well as to break into the growing e-payment field.

Monetary policy responds to global volatility

Efforts to strengthen the banking sector are taking place against a backdrop of economic headwinds buffeting not just Indonesia but the Asian region at large. A notable external factor affecting the outlooks of these economies is the US-China trade war, which shows few signs of abating.

While Bank Indonesia (BI), the central bank, expects Indonesia’s GDP will have grown by 5.1% year-on-year in the second quarter of this year, this is still slower than the 5.3% growth rate recorded in the same quarter in 2018. In an effort to stimulate economic activity, BI made back-to-back interest rates cuts in July and August, reducing the rate from 6% to 5.5%.

A more competitive banking sector will help the country weather setbacks, and help guarantee a more stable and successful economy in the medium term.

Read Next:

In Indonesia

Peter Ong, Chairman, Enterprise Singapore

What advantages does Singapore offer tech companies seeking a springboard into ASEAN?  

In Financial Services

Will Ghana’s financial sector clean-up build a stronger banking system?

The Ghanaian authorities have continued their efforts to clean up the country’s financial sector following a fresh round of financial institution closures.

Latest

Prime Minister Mahathir Mohamad, Malaysia

Which main structural challenges to the Malaysian economy are being addressed by the government’s Shared Prosperity Vision 2030?