F

oreign banks operating here say that political noise and nationalistic sentiment in the deliberation process of the new Banking Law have delayed new investments and hampered their main business of supplying foreign exchange loans for Indonesia’s infrastructure projects.

Joseph Abraham, the chairman of the Foreign Banks Association of Indonesia (FBAI), said that many executives of foreign banks operating here had found it “less easy” to convince their headquarters overseas to enlarge their investments in Indonesia.

The headquarters were concerned with the ongoing debates on the new Banking Law, with lawmakers having already declared their intention to restrict the operations of foreign banks and to close Indonesia’s banking sector, according to him.

“In banking, it’s about creating certainty. I think all the noise has created uncertainty in the external environment and as a result has delayed investment decisions,” Abraham said on Friday.

Abraham, who is also the president director of Bank ANZ Indonesia, a foreign bank headquartered in Australia, explained that foreign banks had a vital role in developing Indonesia’s infrastructure projects due to their foreign exchange liquidity.

“The infrastructure projects — ports, roads, railways — require long-term funding and a lot of them involve US dollars,” he said. “And most of the foreign currency loans come from the foreign banks because the domestic banks do not have the capability to raise long-term foreign currency funds.”

Members of the FBAI comprise overseas-based lenders operating in Indonesia under legal entities or branch status, such as ANZ, Citibank, Commonwealth Bank, HSBC, JP Morgan Chase, Rabobank, Royal Bank of Scotland (RBS), Standard Chartered, Bangkok Bank, UOB and Bank of Tokyo-Mitsubishi UFJ, among others.

In an apparent attempt to target the operations of foreign banks, the House of Representatives has drafted a new banking bill to replace the 1998 Banking Law, requiring all foreign banks operating here to become legal entities (PT).

Abraham argued that, if all foreign banks were forced to become PT, their credit profile would be degraded in adjustment to the risk rating of Indonesia — a situation that would drive up the banks’ forex funding costs and make infrastructure credit more expensive. As branches, banks can borrow US dollars from their headquarters without being charged risk premiums.

Lawmakers have also stated that they planned to revise a clause in the 1998 Banking Law that allowed foreign investors to control up to a 99 percent stake in a bank, claiming that they would cap the limit to between 40 and 49 percent.

“Banks such as Standard Chartered and Citibank are panicking right now because of that,” a representative of an Asia-based foreign bank, who requested anonymity due to the sensitivity of the issue, said.

“Say, for example, the bill is passed into a law. Why should those foreign banks transform into PT [legal entities] when they can only own shares up to 40 percent and won’t be able to control their own banks?” the source said, describing the new banking bill as “crazy”.

Analysts, meanwhile, argued the ownership cap was necessary to close Indonesia’s banking sector. Ratings agency Moody’s Investors Service stated that allowing foreigners to control up to a 99 percent stake in a bank meant that “no other banking industry in the world is as open as Indonesia”.

Destry Damayanti, the chief economist of state-run Bank Mandiri, argued that the law requiring all foreign banks to become PT was necessary to protect Indonesia’s banking industry from the contagious effect of the financial crisis occurring overseas.

“By transforming into PT, they will become independent from their parent companies overseas. This is important because the risk in the global financial sector is still very high as the world will not return to its pre-crisis level, at least for the next five years,” she said.

Nevertheless, despite the strong growth in Indonesia’s banking industry last year, foreign banks have not been sowing the maximum benefits. Foreign banks operating here saw their bottom line profits decline 3 percent to Rp 5.1 trillion (US$527 million) in 2012 from a year earlier, according to the latest data from Bank Indonesia (BI). In contrast, overall commercial banks experienced 23.6 percent profit growth.

Citing stalling development in Indonesia’s banking industry, specifically in agribusiness lending, earlier this year Dutch-based Rabobank announced its intention to quit doing business in the archipelago and had planned to sell its Indonesian unit, Bank Rabobank International Indonesia.