The liberalisation of rules on foreign ownership allowing up to 99% ownership in the finance sector in the past decade has seen foreign players entering the market with 10 majority foreign owned banks including HSBC, ANZ and Rabobank as well as 28 foreign joint venture banks. Foreign investors took significant stakes in the banking sector during 2002 to 2005 which saw the sales of a number of state owned institutions. The robust performance of the banking sector during the global economic downturn and continued growth at a 26.74% increase in profits for 2010 is once again piquing investor interest. This comes at a key time as Bank Indonesia seeks to further consolidate the banking sector under the Indonesian Banking Architecture (API).
Foreign interest in the banking sector picked up with the enforced consolidation of the sector following the introduction of The Single Presence Policy (SPP) in 2006. Under Regulation No.8/2006, Bank Indonesia enforced the rule preventing a shareholder from having more than one controlling stake in a bank. Any banks with the same beneficiary were therefore under obligation to merge or to sell the controlling stake. The policy was designed to bring greater transparency to the sector, as well as encourage consolidation. Within the private sector, the measure has seen the merging of Bank Lippo and Bank Niaga to form CIMB Niaga and the selling off of the Singapore sovereign wealth fund’s share in BII to Malaysia’s Maybank. While the deadline for the SPP was set at the end of 2010, the challenge of enforcement in the public sector has led to an extension of the deadline. The four state owned banks, namely Bank Mandiri, BRI, BTN and BNI are positioned within the top ten banks of the country and a merger would require mammoth restructuring by centralising 39% of total commercial banking assets within one body on top of reorganisation of thousands of personnel. In March 2011 Bank Indonesia announced a two year postponement of SPP and that state owned banks may be exempt from the policy altogether; although a final decision on the matter has not been reached.
As the banking sector matures, Bank Indonesia is keen to see greater consolidation in the sector to encourage specialisation among the banks. Pressure for consolidation is also coming from the need to boost capital adequacy ratios (CAR) with the largest banks planning rights issues to meet funding requirements. Bank Indonesia has stated that is will offer incentives to banks that choose to make public offerings which will spur further actions in the near future. Smaller sized banks with less that $11 million USD in capital face the need to merge or be acquired. This end of the market therefore represents a key opportunity for foreign investors seeking access and exposure to the Indonesian market’s highly profitable banking sector.
An immediate opportunity in the banking sector is Bank Mutiara, formerly Bank Century which was bailed out during the financial crisis in November 2008. Currently the Indonesian Deposit Insurance Corporation owns a majority stake but as per the regulation plans to sell this by the second half of 2011. President Director of the bank, Mr Maryono, has completely restructured the company’s corporate governance and culture with the vision of being a leading retail bank in the country. The results have been positive with assets almost doubling to 12.6 trillion RP and net profit up by 86.08% in the first quarter of 2011. GBG spoke to Mr Maryono about the benefits of the bank as an investment opportunity; ‘Bank Mutiara has an established network throughout Indonesia with 99 branches, as well as offering a broad range of products for consumer and business needs. We are looking for an investor with expertise in the banking sector’. Another interesting opportunity is the announcement in June 2011 of Avenue Cap, an American hedge fund, which plans to sell its nearly 30% stake in Bank Mayapada. The bank, which is mainly held by the Tahir family, has a long term rating of A- from Fitch following a rights issue of 400 billion RP at the end of 2010. Both represent well timed opportunities considering the global interest in Indonesia’s banking sector.
Rural banks and micro finance initiatives that serve the rural population outside the main cities of Java are seeing impressive growth in credit lending, particularly for working capital use (see Agriculture Overview of Indonesia). Indonesia was the pioneer in commercial micro finance in South East Asia. State owned BRI began micro lending facilities in 1978 and had outstanding micro loans to the value of $7.4 billion USD at the end of 2010. Bank Tabungan Pensiunan Nasional is a further example of such success. On entering the micro market in 2008 after a takeover by Texas Pacific Group, the bank has seen their micro loan portfolio double to $500 million USD in 2010 and the numbers of branches triple to over 1,000. This growth in rural lending and micro finance has been boosted by the adoption of new technology that allows agents to keep track on borrowers through portable card swiping machines that allow cash to be administered and deposited on the spot. Finger printing technology for identification of illiterate borrowers is also expanding access by facilitating data control for micro lending.
Shariah banks (see Indonesia’s Islamic Banking Sector) are another area of potential interest for investors considering the size of the Muslim population in the country and the rapid growth of the sector over the past 5 years. Strategic investment and partnerships are to be found in expanding the product base that shariah banks are able to offer consumers. Limited knowledge of more sophisticated banking products presents collaboration opportunities. Islamic hedging products for inter currency transactions or tahawwut are an example of this; being recently approved by the International Islamic Finance Market in Bahrain, Indonesian banks will be keen to execute these products once it is approved by the National Shariah Board. Hedging in Islamic finance will encourage inflows of foreign capital into the shariah banking sector.
Future opportunities can be expected as existing shariah windows of conventional banks come to be spun off as standalone banks under Law No. 21/2008. South Sulawesi Development Bank is one such bank that will spin off its shariah unit in the next five years, as of mid 2011. This prospect is an even more lucrative opportunity under Bank Indonesia Regulation No.11/2009 whereby the minimum capital requirement for a standalone Islamic bank was lowered from 1 trillion RP to 500 billion RP.
The future growth of Indonesia’s banking sector is placing it firmly in the limelight for strategic investments. However while the current legislation allows up to 99% foreign ownership this may well be revised in the near future. In July 2011, the Minister of Finance, Agustin Martowardojo made a request to Bank Indonesia to curb the amount of shares that a single foreign investor can hold in order to give Indonesians a larger stake in the sector. This is creating uncertainty for foreign investors while Bank Indonesia mulls what action to take. This may also trigger the selling off of shares in banks that do not comply with the requirements so investors should be watching closely.
Extract of Negative Investment List 2010
For further information on approaching the sector for investment, please see Methods of Entry into Indonesia’s Banking Sector.
Global Business Guide Indonesia - 2012
Contribution to GDP: 2.87% (2016)
Return on Assets: 2.30% (Q4 2015)
Number of Commercial Banks: 120; 4 State/Partially State Owned, 10 Foreign, 16 Joint Ventures, 32 Non Foreign Exchange, 35 Foreign Exchange, 26 Regional Development Banks (August 2015).
Number of Islamic Banks & Units: 13 Banks, 32 Units (2016)
Total Assets: 6,244 trillion IDR (Q3 2015)
Government Bodies: Bank Indonesia, Ministry of Finance, Financial Services Authority (OJK).
Relevant Law: Bank Indonesia Regulation No. 14/8/PBI/2012 on Share
Ownership in Commercial Banks limits ownership by a single local/foreign financial institution to 40%, by a non financial institution to 30%, and by an individual to 20%. Larger stake is possible with the approval of Bank Indonesia.
Indonesia’s Islamic Banking Sector
The Prospects for Indonesia’s Insurance Industry
Capital Markets: Widening the Local Investor Base
Methods of Entry into Indonesia’s Banking Sector
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