The Indonesian Financial Services Authority (OJK) is attempting to accelerate the consolidation of the country’s state-owned banks and their shariah subsidiaries under a single holding company.  If the merger is approved by the government, four banks; Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI) and Bank Tabungan Negara (BTN), will merge by the end of 2018. The OJK deems this to be one of the most effective measures to strengthen the country’s banking industry and to compete within the ASEAN Economic Community (AEC), and its plan for an integrated financial sector by 2020. The AEC aims to shift the ASEAN towards a single market for goods, services, freer movement of labour and investment (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration).

Indonesia has become one of the most profitable lending markets in the world (Bloomberg). Yet, banking penetration in the country stands at only 30% as a proportion of GDP. The industry has experienced steady loan growth of approximately 20%, contributing to the total growth of banking assets and enjoying an average net interest margin of 5% (Moody’s). Currently, conventional banks in Indonesia stand at 120 in number as well as hundreds of secondary banks in rural areas, yet the top ten banks control some 80% of the market share and 60% of the combined total of the country’s banking assets (See Indonesia’s Banking Sector; Under Pressure But Staying Strong). Indonesia, being the region’s largest economy and with the largest population has yet to fully optimise this position in the ASEAN market. Bank Mandiri is the country’s largest state-owned bank by assets, yet is only the 11th biggest lender in the region (Bloomberg).  This has created a fragmented, oligopolistic sector in which the largest banks hold sway to keep interest rates high as well as interest rates on deposits and savings which have become the highest in the ASEAN. However, consolidation of Indonesia’s state-owned banks is perceived as a necessary step in this sector’s development towards becoming a Qualified ASEAN Bank (QAB); upon achieving QAB status, the bank will not need special permission to expand their business in other ASEAN countries. Through this course of action and by tackling operational inefficiencies, one of Southeast Asia’s most lucrative banking sectors can fulfil its potential to become a regional financial powerhouse.

State-owned banks’ shariah subsidiaries have become an increasingly important component in the country’s banking sector (See Indonesia’s Islamic Banking Industry: Bright Prospects Ahead Despite Constraints). The OJK is also initiating a consolidation process to develop Indonesia’s Islamic financial market. Through such consolidations, the OJK aims to create the largest sukuk market in the AEC (See The Rise of the Sukuk in Indonesia’s Islamic Finance Industry). Indonesia’s Islamic finance sector has grown in excess of 30% a year since 2005 (Wall Street Journal), but commands only 5% of market share in terms of assets domestically, compared with Malaysia which accounts for 20% of banking assets. The lack of an extensive sukuk market in the country due to limited branch networks makes it difficult for Islamic banks to raise non-deposit funding and long-term maturity assets such as home financing (Moody’s). This means that Islamic banks have a much smaller capital base and focus primarily on retail, small and medium-sized enterprises rather than corporate companies, making Indonesia’s Islamic banking sector less profitable than their conventional counterparts. However with such a small capital base, the country needs to develop large-scale Islamic banks to compete with other banking institutions within the AEC.

The consolidation of Indonesia’s state-owned banks can lead to a more efficient banking system in the country.  However, oversight is needed; the four banks would control 60% of overall assets of the top ten banks (The Jakarta Post) and due to the sector’s interconnectedness to other institutions, this too-big-to-fail entity could bring greater risk to the financial system. It is also worth considering as to whether consolidation is needed since Indonesian banks already have access to the largest market in the ASEAN, and therefore have a competitive advantage over their ASEAN counterparts. In creating a large holding company, Indonesia runs the risk of reducing competitiveness in the sector, at a time when consumers and businesses require greater choice for financial products and services. A more streamlined banking system however will reduce operational costs and provides the opportunity for banking institutions to offer better financial services and increase the size of capital bases and boost profitability levels. This will ultimately attract foreign investors and funding for infrastructure projects, small and medium enterprises and consumer loans. As banks become larger through consolidation, there will be greater lending capacity which will enable shariah banks to expand their business reach across the archipelago and the ASEAN.

As Indonesia’s banking industry continues to develop, the sector has the potential to reach new heights as the country becomes more inclusive in the AEC. The OJK hopes there will be a domino effect among other banks in the country and further consolidation takes place, aiming to reduce the 120 or so banks to 60. Having fewer but better capitalised banks, along with a large market, can attract foreign banks and investment, especially as the country tries to compete regionally. Through these synergies, local banks can support long-term projects in infrastructure and utilities, and bring growth to other integral sectors of the economy.

Global Business Guide Indonesia - 29th April 2016

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Indonesia Finance Snapshot - Banking

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.

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