Banking Liberalization : An Indonesian Experience

1. Banking Liberalization : An Indonesian Experience Presented in the symposium of the Assessment of Trade in Services held by WTO Secretariat Geneva, March 2002

2. AGENDA • I. INTRODUCTION • II. BANKING REFORMS & LIBERALIZATION • III. BANKING LIBERALIZATION SINCE THE OUTBREAK OF THE FINANCIAL CRISIS • IV. LESSONS LEARNED FROM INDONESIA EXPERIENCE • V. BANKING LIBERALIZATION IN THE CONTEXT OF MULTILATERAL AGREEMENTS

3. I.INTRODUCTION DEREGULATION PACKAGE • in the real sector : invite foreign direct investment (Act No.1 of 1967) • in banking sector (Act No.14 of 1967) : October, 1988 policy package (the policy on foreign entry in banking sector) • liberal regime for foreign exchange flows • Crash of the international oil market (the mid-1980s) • Deteriorated economy • Issued a series of deregulations by the Government MULTILATERAL AGREEMENTS (WTO, APEC, ASEAN) Liberalization process in banking sector : • to strengthen the banking regulations and oversight framework • should be integral part of any liberalization program

4. II. BANKING REFORMS & LIBERALIZATION SERIES OF FINANCIAL AND BANKING DEREGULATION PACKAGE 1. June 1983 policy package : • 3 main points i.e. lifting credit ceiling and liberating deposit interest rates and phasing out Bank Indonesia liquidity credit. • The aim of policy : to reduce limitation for banks to extend credits and to eliminate provisions on bank deposit interest rates previously prescribed by Bank Indonesia. 2. October 1988 policy package • This package set forth financial, monetary and banking policies, especially easing of restrictions relating to banking institution covering the opening of new private banks, bank offices and non bank financial institutions and various prudential banking regulations. • The impact of policy package : the establishment of large number of new private banks, both domestic and joint venture banks

5. II. BANKING REFORMS & LIBERALIZATION (Cont.) 3. The March 25, 1989 policy package • Foreign exchange banks and non-banks financial institutions were required to maintain a net open position at not more than 25% of stockholders equity; • Offshore borrowing ceilings for foreign exchange banks and non-bank financial institutions were eliminated; • Commercial banks, development banks, and non financial institutions were permitted to lend investment credits and to undertake equity participation with a certain requirement.

6. II. BANKING REFORMS & LIBERALIZATION (Cont.) 4.   The February 28, 1991 policy package This package sets forth : • The Basic Scheme for Bank Supervision; • Provisions related to : • Licensing, ownership, and management of banks, covering the foundation, ownership and management banks, opening of offices, and equity participation of banks in overseas financial institutions; • Prudential principles, covering capital adequacy requirements, legal lending limit, and net open position; • Supporting factors for banking operations. 5.   The May 29, 1993 policy package This package covers prudential measures that should be fulfilled by bank i.e. Capital Adequacy Ratio, regulation concerning allowance for earning assets losses and provision on legal lending limit.

7. II.BANKING REFORMS & LIBERALIZATION(Cont.) 1. The enactment of new Banking Act No. 7 of 1992 to replace Banking Act No. 14 of 1967. • the function of banks as a development agent is continued. • the purpose of banking system is to support national development in order to improve equitable distribution of wealth, economic growth, and national stability 2. The main distinction • Banking structure : • Banking Act No. 14 of 1967 : consist of several types of banks depend on the core bank business such as Development Banks, Commercial Banks, and Regional Development Banks. • Banking Act No. 7 of 1992 : there are only two kinds of banks i.e. Commercial Banks and Rural Banks. This Act does not classify banks based on their core businesses.

8. BANKING REFORMS & LIBERALIZATION 3.The enactment of the ownership of banks on Banking Act No. 7 of 1992 • Classification of commercial banks : domestic commercial banks, joint venture banks, foreign banks • Geographical limitation • joint venture banks and foreign banks may only open their offices in eight major cities with limited number of offices in each city. • Foreign participation in the ownership of commercial banks, • foreign employees could engage in the management of joint venture banks and foreign banks. • the foreign employees should conduct a transfer of knowledge to Indonesian employees.

9. III. BANKING LIBERALIZATION SINCE THE OUTBREAK OF THE FINANCIAL CRISIS The Bank Reform Program Banking Crisis • Exchange rate turbulance • The fragility of banking system • The liquidation of 16 banks The Strategic Measures • Government Guarantee Scheme • Banking restructuring • re-capitalization • corporate restructuring • legal framework improvement • enhance banking supervision

10. BANKING LIBERALIZATION SINCE THE OUTBREAK OF THE FINANCIAL CRISIS A New Banking Act No. 10 of 1998 and Its Implementation Regulations 1. Relaxation of foreign participation in the establishment of new banks. • foreign citizens and or foreign legal entities together with Indonesian citizens and or Indonesian legal entities may establish a new locally incorporated bank based on a “partnership” principle. 2. Relaxation of foreign participation in existing banks Foreign investors may also participate in existing banks through : • direct acquisition ; and or • purchasing bank’s shares through stock exchange 3. Opening of foreign bank branches. • a foreign bank may open a new branch and sub-branch • requirements : • having good rating and reputation from the International rating agency; • possessing total assets included in the list of top world rank 200; • placing the operational funds in Rupiah or foreign currency with the minimum equivalent value of Rp. 3 trillion (+ USD 300 Million).  

11. IV. LESSONS LEARNED FROM INDONESIAN EXPERIENCE *) Position of March **) Position of December In the year 2001 : 1 U$ is equivalent with Rp. 10.000,- Source : Bank Indonesia

12. V. BANKING LIBERALIZATION IN THE CONTEXT OF MULTILATERAL AGREEMENTS 1. Indonesia has made a moderate commitments in the international fora. 2. The process of liberalization should be properly managed and overseen in order to secure domestic interest and to avoid unnecessary negative impact of liberalization process. 3. The assessment of trade in services : • Undertaking an assessment of trade in services at the national level • Difficulties : lack of data, analytical and methodological problems • Enable developing countries to have a better picture relating to the course of their countries’ liberalization process. 4. The treatment of autonomous liberalization : • Having an agreed criteria and modalities for the granting of credit for autonomous liberalization

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