B

ank Indonesia (BI), the nation’s central bank and ostensibly an independent institution, effectively said on Friday that it had succumbed to political pressure when evaluating the application filed in April by DBS Bank in Singapore to acquire almost a 67.5 percent stake in Bank Danamon, Indonesia’s sixth-largest bank.

 BI Governor Darmin Nasution told reporters that the purchase, which has an estimated price tag of US$7.2 billion, had become a political issue and that the bank needed more consultations with the Singaporean central bank, the Monetary Authority of Singapore (MAS).

Nasution’s remarks, strange though not unexpected, indicate that he does not have the stomach to face a mounting nationalistic sentiment in the House of Representatives and among the nation’s largest domestic banks.

It is the job of politicians to set Bank Indonesia’s goals, one of which is the development of a strong banking sector. However, politicians should keep their noses out of the business of banks and leave BI, with its large pool of technocrats, to choose the tools it needs to achieve its goals.

What has happened has been quite different. Immediately after DBS chief Piyush Gupta, for the sake of transparency, revealed the planned acquisition in early April, state-owned Bank Mandiri and BNI, supported by narrow-minded lawmakers, exhorted Bank Indonesia to link its decision on the deal to concessions from MAS to allow freer expansion by Indonesian banks in Singapore.

True, for DBS, Southeast Asia’s largest bank, the acquisition represents a once-in-a-lifetime opportunity that is not available elsewhere in the region. DBS, faced with a mature market at home, needs to expand in Indonesia, Southeast Asia’s largest economy.

DBS will never be able to become a leading bank in Asia without having strong legs in Indonesia, India and Hong Kong. For DBS, the acquisition would give it access to Danamon’s 3,000-branch network that serves six million customers, which is larger than the entire population of Singapore.

In terms of ownership, the transaction will not bring about any fundamental changes, as both DBS and Danamon are by and large controlled by the Singaporean government investment company Temasek through subsidiaries.

BI did announce in July new regulations that limit single ownership of local banks to 40 percent for financial service companies, but the central bank still retained discretionary power to waive the general ownership caps if the acquiring banks have high levels of corporate governance and are in strong financial health.

If the central bank held to the objective of the new ownership cap rules — strengthening good governance at banks — then the DBS-Bank Danamon deal should have been approved, because both banks met the basic requirements.

However, it is regrettable that BI has not been sufficiently transparent about the benefits of the DBS-Danamon merger for improving competition in the banking market, which seems to have been gripped by an oligopoly of the nation’s five largest banks, three of which are state banks.

The central bank should have made clear the economic logic of the deal to politicians and the general public, and educated people as to how the merger would contribute to strengthening the banking sector and invigorating Indonesia’s economy, which is still largely under-banked.

Such transparency and public education would have helped improve public opinion and protected the central bank from political meddling.

Indonesia, especially its banking industry, will benefit greatly from the transfer of skills from the merger, not to mention from the external expertise in risk management and other best practices of good governance and access to a new big source of international financing.

Such strategic investors and owners as DBS, with good reputations and huge capital resources, would accelerate the operational restructuring of Bank Danamon to provide financial services, notably credit — the lifeblood of the economy — across the archipelago.

Even Thailand, South Korea and Malaysia, which like Indonesia were hit by the financial crisis in 1997, have acknowledged the immense potential benefits to the rehabilitation and development of their financial industry from the local entry of major international banks, with their solid reputations and strong capital.

Unfortunately, BI seemed to succumb to political noise about the issue of reciprocity, which sounds confusing.

Suppose Bank Mandiri, BNI or Bank Rakyat Indonesia were assessed by the MAS as qualified for receiving full banking licenses. Would it then be commercially feasible for them to open dozens of branches and an ATM network across Singapore?

Certainly not, because that does not make any sense at all. They would find it extremely difficult to gain a broad depositor base in such a mature market.

We welcome the recent package of BI regulations that tie domestic and foreign bank licenses and operation expansions in Indonesia to higher standards of capital and good corporate governance.

The regulations, which require foreign banks to gradually allocate at least 20 percent of their loan portfolios to small- and medium-scale enterprises within the next five years, will be a boon to the
economy.

However, blocking the inflow of fresh capital, technology and expertise to the banking industry — the heart of the economy — mainly for reason of reciprocity seems a highly emotional and political decision.

We don’t think that the MAS would lower its standards and soften the terms and conditions it has imposed on foreign banks simply as a quid-pro-quo for BI to approve the DBS-Danamon deal.

Such a compromise would smack of discrimination.

Similarly, BI would not soften its terms and conditions and lower its capital and governance standards so that banks from Laos, Cambodia or Myanmar, for example, could be issued operational licenses in
Indonesia.

It is still less than 15 months away from the legislative and presidential elections in 2014. However, BI, a supposedly politically independent body, is already showing weakness when facing political pressure.