With ASEAN banking integration less than a decade away, Indonesia’s new banking ownership rules aim to separate poorly governed banks from the rest.

In the end, it was a takeover bid that probably pushed Indonesia’s banking authorities into action. After vacillating for what seemed to be ages on issuing new banking ownership rules, it was Singapore’s DBS’ much-talked-about $7.3 billion bid for a stake upwards of 67 percent in Indonesia’s Bank Danamon in early April that forced Bank Indonesia into making an announcement. In late May, rumours abounded that Indonesia’s central bank would limit the maximum stake a single shareholder can take in the country's banks to below 50 percent. But those fears, as it turned out, were unfounded. In July, Bank Indonesia announced that while it would cap single ownership of domestic banks at 40 percent, it would allow exemptions that could pave the way for the Danamon bid to proceed.

Without specifying exactly how much, Bank Indonesia said that listed banks that are financially strong and have tier-1 capital ratio of more than 6 percent will be allowed to own stakes of more than 40 percent in Indonesian banks. Reuters reported that while the announcement was on expected lines, it came as a relief not just  DBS, which was aiming for the  biggest-ever takeover of an Indonesian company, and for foreign banks such as Standard Chartered that own substantial stakes in the nation's lenders. According to industry watchers, the central bank rule is aimed at ensuring the financial health of majority owners in local banks in Indonesia, after a slew of bankruptcies in the 1998 financial crisis. “The rule is aimed at consolidation of the banking industry,” says Theodoor Bakker, foreign counsel at Ali Budiardjo Nugroho Reksodiputro (ABNR). “It hopes to make the local banking industry more competitive by ensuring good corporate governance.” Bakker adds that with full ASEAN financial integration expected in 2020, Indonesia wants to do what it can to bring its banks up to speed.

In the 14 years since the financial crisis, Indonesian banks have generally become relatively well capitalised, with the sector a magnet for foreign investment. As foreign entities are currently allowed to hold up to 99 percent of local banks, eight of Indonesia's top 11 banks by market value are either controlled by foreign banks, business families, private equity firms or wealth funds in one of the region's most open banking sectors. Some analysts have speculated that the new banking rules thus target foreign investors, but Iwan Setiawan, senior partner at Makes & Partners does not agree. “The rule does not discriminate between foreign and local,” he says. “The goal is to reduce the influence of majority shareholders in banks, in order to lessen the amount of risks they are exposed to.” Under the new rule, financial institutions can hold up to 40 percent of local banks, while non-financial institutions can hold up to 30 percent, and individuals only 20 percent. Existing majority owners failing to meet Bank Indonesia's top standards for financial health will have to reduce their stakes to comply with the limit by January 2019.

What a lot of experts agree on, however, is that implementation of the rule might not be entirely straightforward. Shortly after it was announced, Bank Indonesia stated that more than 10 Indonesian banks do not meet new standards on financial health and corporate governance, although these lenders are likely to be small. Setiawan says that he is still waiting for some “clear guidance” on when and how the rule will be implemented, and how it could shape the local banking industry. Bakker admits that there is certainly some uncertainty in the sector now, but adds that the restrictions imposed by Indonesia compare favourably with restrictions on banking sectors in other countries. “The news of the 10 banks failing to meet the criteria was probably good news,” he says. “When you think of how many banks there are in the country – and there are a lot – just 10 affected banks means that the Indonesia’s banking system is in very good shape.” However, a strong regulatory infrastructure, and the ensuing legal certainty is vital for foreign investors, he says, who will “vote with their feet” if they do not feel comfortable. “If you look back to the Asian Financial Crisis of 1998, you will remember how the entire system was laid bare,” he says. “Indonesia has certainly come a long way from there, but there’s still much it can do to dispel serious doubts.”

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