Page 21 - Preview (IND)

FInAnCE & BAnKInG oVERVIEW
Once aTurbulent Market for International Funds, Indonesia’s Financial Services Sector is Fast Becoming a Go-To Destination.
Indonesia’s financial services industry has shrugged off the challenges of the late 1990s, and now has the potential to develop into the region’s leading banking and capital sector.
Indonesia’s financial services has experienced more than its fair share of difficulties over the years, particularly during Asian market turbulence of the late 1990s. However, today the sector is truly bouncing back and proving to be one of the most dynamic of markets, with something to offer domestic and international inves- tors alike. With only around 20% of adults in what is the world’s fourth most populous nation having any kind of relationship with a financial services provider there are opportunities aplenty for companies willing to seek them out, something that prescient or- ganisations, such as Citigroup and HSBC, have long recognised.
Core Stability
For those corporate organisations that do enter the Indonesian marketplace, they will find a sector that has proven remarkably resilient to events in the wider economic world. So while in recent years banks in Europe and north America were seeking bailouts from their respective governments, in contrast Indonesia’s lenders were posting record profits. With the market becoming ever wider and deeper, and with interest rates continuing to fall, the financial environment market could yet get more exciting.
just who exactly will take up the shares that must be released to comply with the new directive. despite such uncertainties, the untapped nature of the Indonesian marketplace spells profit, al- though this is unlikely to be accompanied by the type of Wild West feeding frenzy experienced in some parts of the world. This is largely because of the conservative approach the banking sector has adopted in the wake of the financial problems of 1997 and 1998. However, that conservative approach, while helping bring a degree of stability to the marketplace, has to some extent ham- pered growth and activity.
This has meant that most of Indonesia’s banks are focused on short-and medium-term lending that provides them with a fast re- turn generates confidence. But while this may limit their exposure to risk, it is of little use when it comes to funding large projects that require longer-term finance. It is this lack of availability of long-term funds that has been one of the stumbling blocks to improving Indo- nesia’s far from efficient infrastructure, something that continues to constrain its economic development. In an attempt to encourage additional lending, in September 2010 the government modified loan-to-deposit ratios, setting a lower level of 78% LdR, though establishing a 100% upper limit to prevent banks taking unneces- sary lending risks.
Continuing Consolidation
The numerous mergers and acquisitions that took place af- ter the financial crisis saw considerable consolidation within the
In August 2011, the central bank, Bank Indonesia (BI) reported that there were 120 commercial banks in Indonesia possessing assets totalling more than $390.3 billion USd, with some 15 of them responsible for about 70% of the nation’s credit. Most of these are privately-run local enterprises, along with a number of regional development banks, and more major banking organisa- tions, four of which are, at least in
part, state-owned – with three of
these ranking among the top four
In the country. However, the future
of banking ownership is currently
the subject of much discussion.
Thanks to the government’s deci-
sion in 1999 to open up the financial sector to foreign financial institutions, saw an influx of international interest, which meant that by the middle of 2011 of all the banks operating in Indonesia, nearly one third were either partly or entirely foreign-owned. In all, this meant that foreign lenders were responsible for 27% of all out- standing loans.
Concerned that banking power might become too concentrated in just a few hands BI, which also has the authority to issue policy rules and regulations, is considering capping ownership of any one bank’s shares at 50% rather than the current 99%. It is not yet clear what this might mean in practice, or whether it would be applied just to privately run banks or state-owned banks as well. Should this new regulation come into force, the sector might find itself thrown into turbulence and confusion as investors worry about the prospect of massive dumping at discounted prices and
sector. This is something that is likely to continue as land better capitalised banks buy up special- ist operators to access specific market segments, and is certainly something that BI is keen should continue. For the moment though,
rural banks and micro-finance initiatives are still the significant mechanism for lending, particularly to the many small entrepre- neurs who are looking to do business in what is one of the most commercially-minded regions of the world. Indeed, credit for small businesses is an important element of the Indonesian banking system and accounts for over 50% of total lending in the system, with lending to this sector experiencing significant growth. Howev- er, there has been some weakening of credit quality, with the ratio of non-performing loans slightly higher for small business lending than for the sector as a whole.
Consumer lending is also on the rise, with individual loan values on the increase, an indicator that is giving some cause for con- cern. As a result, BI has been giving a steer to banks by suggest- ing that they should be aiming their lending at productive invest- ments rather than towards encouraging consumer spending. The
Indonesia’s banking sector delivered consistently strong profits for investors even during the global economic down- turn.
STRATEGY
IndonESIA 2013
19