A stronger financial sector

The Jakarta Post ,  Jakarta   |  Mon, 07/10/2006 5:08 PM  |  Opinion

The strategic importance of the new financial-sector reform package introduced last week lies in its broadening of the policy agenda beyond the banking industry, to include nonbank financial institutions (NBFs), the capital market and export financing infrastructure.

This new package will go a long way toward building a stronger and more diversified financial sector, covering banks, leasing and venture capital companies, pension funds, insurance firms and mutual funds.

Certainly, the package also contains detailed measures that correctly focus on accelerating consolidation within the banking industry, because like it or not, banks still dominate the financial industry, holding over 85 percent of all financial assets.

Foremost among these measures are policies designed to promote good governance in the banking industry and to remove legal barriers encountered by state banks in restructuring their nonperforming loans (NPLs). Resolving NPLs at state banks would greatly contribute to expanding lending operations, because state banks still account for more than 50 percent of the banking industry's total assets and are responsible for more than 60 percent of all NPLs.

Loan restructuring by state banks has been rendered very slow and is often made almost impossible by the banks' inability to provide discounts or debt reduction, which are key to restructuring bad loans and helping borrowers reduce their debts to sustainable levels.

But a dynamic economy such as Indonesia's needs access to different kinds of capital, while banks typically provide mostly short-term credits to borrowers because the majority of their funds are short-term deposits of less than one year.

For example, many investment projects in public housing, infrastructure or manufacturing require long-term capital, equity and risk capital, which all require a well-functioning capital market, nonbank financial companies and institutional investors.

Here lies the strategic importance of the detailed reform measures regarding NBFs, the capital market and export financing.

The government's recognition of the vital role of nonbank financial institutions and the capital market in the country's economic development will surely help accelerate the development of a more diversified financial-service industry.

More importantly, the package also shows government awareness of the importance of strong market infrastructure, which underlies the sound operations of financial institutions.

The recent launch of a full-fledged credit bureau, the promotion of good corporate governance, the strengthening of creditor rights and the enforcement of sound accounting and auditing regulations are sorely needed to improve the market infrastructure for a healthy financial sector.

Likewise, action to strengthen export financing through special legislation is also essential in helping improve Indonesia's export competitiveness.

Exporters need financial services at different stages of their operations -- pre-tender and post-tender in the case of contract bidding, and pre-shipment and post-shipment for manufacturers and exporters. Because during each of these stages exporters require different types of financial assistance, a special financial institution is necessary to meet their financing needs.

Exporters also often require guarantees at the various stages of export financing. For example, a contractor needs a financial guarantee at the time of bidding. Importers need guarantees as coverage for advance payments to the customs, tax and other authorities for the clearance of raw materials from bonded warehouses.

There is a real need for a special financial institution (bank) to fulfill the various financing needs of exporters. The government had set up an export bank to replace the export-import bank that, with three other state banks, was merged to form Bank Mandiri after the 1997 banking crisis.

However, this new export bank is still financially and structurally weak. New legislation dealing specifically with export-financing institutions, which is scheduled to be enacted later this year, will provide a stronger legal foundation for the export bank.

The new package of financial-sector reforms is the third this year, after the infrastructure and investment reform measures introduced in the first quarter.

These three reform packages are good policy, but they will be meaningless without implementation. Unfortunately, policy delivery is still the weakest point of the government.

For this reason, we welcome the government's decision to establish an independent surveillance team in charge of monitoring the implementation of the reform packages.

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