W

hen Indonesia announced that it will limit foreign ownership of local banks from almost 100 percent to just
50 percent in 2011, it took no time at all for ASEAN co-members to cry foul.

After all, this flew in the face of the regional group’s grand plan to liberalize services for a more prosperous ASEAN. Worse, according to other comments, Indonesia’s announcement seems to be welching on its promise to the IMF when it bailed out the country during the darkest hours of the 1997 Asian financial crisis.

It was easy enough to invoke the cries of “nationalism” and “protectionism” from parties who had aspirations to tap into Indonesia’s largely under-exploited banking business.

In the end, the Bank Indonesia proposal was shot down by President Susilo Bambang Yudhoyono himself but not before Indonesia’s image took a beating, especially from free market champions within ASEAN.

The issue provided a high ground for newspapers to shoot arrows at Indonesia. The general tone adopted by newspaper sharpshooters was that of indignation and when the proposal was axed, it was ramped up to self-righteous indignation.

That would have been the end of it, had it not been for the small but important part. The self-righteous indignation was undeserved.

Before everything else, even at the 50 percent cap, no other ASEAN member has banking ownership policies that can match Indonesia’s very liberal set of rules.

In Malaysia, foreigners can only own 30 percent of local banks and in Singapore the maximum limit is 30 percent.

Thailand and the Philippines allow foreigners to own up to 100 percent of local banks, but the catch is you have to reduce that by 50 percent after several years.

Eight of Indonesia’s top 11 banks by market value are now either controlled by foreign banks, business families, private equity firms or wealth funds and, here’s another statistic, foreign-controlled assets in 47 banks have breached the 50 percent mark.

Against Indonesia’s regulation that allows foreigners to acquire up to 99 percent of any bank, its neighbors are closed protectionist hermits by comparison. In fact, Indonesia is the closest in the region to complying with ASEAN’s roadmap to market liberalization.

When ASEAN fathers laid down the framework to set up its single market by 2015, it produced the ASEAN Economic Community Blueprint that spelled out what was needed to be done by members to achieve that single market, mainly through liberalizing goods, services, investments, capital and skilled labor.

Of course the banking sector would have its own blueprint in this roadmap. It was called the ASEAN Framework Agreement on Services, or AFAS to ASEAN diplomats, and it was endorsed and signed by all members in 1995.

The agreement was refined with subsequent negotiations which are then stapled on to the original agreements as commitments. So far, there have been eight of these.

In one of these stapled sheets, it was clearly stated that Indonesia would allow foreigners to own its banks on a reciprocal basis.

This means that if Indonesia allows 99 percent ownership, it expects the country of the foreign party to allow Indonesians 99 percent access too.

In fact the addendum says the condition was necessary “to guarantee equal treatment to Indonesian nationals wishing to establish and operate banks abroad”.

Now why this point was lost when House of Representatives (DPR) legislator Harry Azhar Azis said earlier this month that Indonesia will do exactly that in a response to the takeover bid for Bank Danamon by Singapore’s DBS Group, is anyone’s guess.

Harry Azhar, who is from a rival party, is simply invoking the reciprocal terms in AFAS when he raised his objection to the takeover bid and this should have been a cut and dried case.

However, the fact that Harry Azhar had to raise the objection also raises the question of who is really in charge of enforcing this ASEAN blueprint, the same one that has been signed and sealed by ASEAN ministers including the one from Singapore and Indonesia.

Now that SBY has waded in and scrapped Bank Indonesia’s capping proposal, it is likely that the DBS bid will come to pass.

For better or worse, that will be water under the bridge in a few years time. Indonesia’s tarnished image, however, seems likely to last longer unless ASEAN as a whole take its words more seriously.

In this case, not only is Indonesia not closing its borders as accused, it is not even getting what is promised by its ASEAN partners as spelled out under AFAS.

So maybe it is time ASEAN critics of Indonesia say they are sorry and stop giving it dirty looks when it comes to liberalization policies.

The writer is analyst and Operations Manager at CIMB ASEAN Research Institute, Kuala Lumpur, Malaysia. The views expressed are her own.