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BI set to limit expansion
of banks with small capital

Banks with small capitalization may be limited in expanding their branches and services in Indonesia as Bank Indonesia (BI) plans to issue multiple licenses for banks operating in the country.

The multiple-license regulation will consider banks’ capitalization as a benchmark when issuing licenses, BI deputy governor Muliaman Hadad told a book launch panel discussion late on Wednesday.

“It’s because capital is the capacity to absorb shock or risks. If banks want to open a lot of branches in Jakarta, their capital needs will be greater. If local banks want to open up, they will be allowed to do so as it is our intention to boost [banking services in remote areas],” Muliaman said.

“It is the direction of our banking policy to have the power to direct banks. Banks will be able to open in the eastern part of Indonesia because the requirements will be looser.”

Only 50 percent of Indonesia’s population of about 240 million people has access to banking services because of the absence of banks in remoter areas due to high costs and risks, according to BI data.

The country currently has only a single license allowing banks to offer a full range of services and open as many branches as possible, while in other countries in the region like Singapore and Malaysia, multiple licenses are required. This has led to Indonesian banks wanting to operate in those markets facing difficulties in providing full services.

Muliaman said reciprocity issues would also be considered when issuing multiple licenses for foreign banks to operate here. “Reciprocity needs to be built [through multiple-licensing] so that everyone
benefits. There’s no standard for reciprocity but we must consider many implications.”

BI is currently seeking to discuss reciprocity issues with the Monetary Authority of Singapore in light of Singapore’s largest lender DBS Group Holdings’ high profile US$7.2 billion acquisition of Indonesia’s sixth largest bank Bank Danamon (BDMN).

Indonesia allows foreign investors to own up to 99 percent of local banks, but the central bank will issue a new cap on ownership of local banks for both domestic and overseas investors next month. The regulation will be issued together with, and be complementary to, the multiple license rules.

“Therefore included in [our banking industry’s future policies] will be banks’ capital management, governance rules through limitation of ownership, the approval process for banks’ products and activities, and the approval process for opening bank branch networks,” BI Governor Darmin Nasution wrote in his presentation material for the book launch.

Finance minister Agus Martowardojo, who is also a former banker at state-owned Bank Mandiri (BMRI) welcomed the central bank’s plan to cap investor ownership of local banks, especially for investors outside of the financial sector who are not highly regulated institutions.

“If the banking industry is owned by financial institutions, that’s a good thing because they are highly regulated,” Agus told reporters on Thursday. “For non-financial institutions, the cap should be set lower and for individuals lower still.”

Media reports have cited sources speculating that the ownership limit will be below 50 percent, but BI officials said the regulation was still being finalized and there was no fixed figure on the cap.

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