I

ndonesia may proceed in limiting foreign ownership in local banks, the House of Representatives having prioritized the banking bill to be passed this year in a move that will tighten the world'€™s most profitable banking industry.

Foreign ownership in domestic commercial banks will be capped at 40 percent and existing offshore investors will have 10 years to divest their shares after the bill is passed into law, according to the most recent banking bill draft obtained by The Jakarta Post. The previous draft formulated by the House of Representatives in the 2009-2014 term initially set the transition period at five years.

Foreign banks operating under branch status in Indonesia '€” including Citibank, Deutsche Bank, HSBC Bank, JPMorgan Chase and Standard Chartered '€” must also become legal entities (PT) within the 10-year transition period, the draft bill reads.

Unlike the old draft, the latest bill drafted by new legislators specifies in detail the role of the Financial Services Authority (OJK) and the Financial Sector Stability Coordination Forum (FKSSK) to ensure that all investors comply with the new regulations.

The new bill states that the House and the FKSSK will have the discretionary power to decide whether some foreign investors may own more than 40 percent depending on their track record, governance, capital and contribution to national economy. The FKSSK includes the OJK, Bank Indonesia (BI), the Finance Ministry and the Deposit Insurance Corporation (LPS).

This discretionary power was exerted by BI when in 2013 the then banking regulator quashed Singapore-based DBS Group Holdings Ltd.'€™s plan to acquire more than 40 percent of shares in Bank Danamon.

'€œIn the case that ownership in commercial banks by foreign individuals and / or legal institutions as stipulated in the first clause is more than 40 percent, the OJK reports such conditions to the FKSSK accompanied by the [relevant] data and documents,'€ the House states in Article 35, Clause 2, of the bill.

The bill will replace the existing 1998 Banking Law, which was made after the 1997/1998 Asian financial crisis when the country needed massive investment to resuscitate the ailing banking sector.

Gus Irawan Pasaribu, the deputy chairman of House Commission XI overseeing the economy and banking, said the draft would be included in the priority bills to be passed into law this year in the National Legislation Program (Prolegnas).

The clauses included in the draft, including the foreign ownership cap in local banks, had gone through detailed academic research into the possible impact on the banking sector, he said.

'€œWe do not want foreign investors to become controlling shareholders in local banks,'€ said Gus, a politician from the Gerindra Party who heads the House'€™s working committee for the Banking Bill.

Currently, the Indonesian banking industry is among the world'€™s most profitable but also the most liberal, with the law here allowing foreign investors to own up to 99 percent shares in local banks, while countries such as the Philippines, Malaysia and Vietnam all restricts foreign ownership in local banks.

'€œThis 40 percent foreign ownership cap is not something unusual because every country in the region is trying to protect their banking industry,'€ noted Alka Anbarasu, a senior analyst covering banks at Moody'€™s investors service.

BI has since 2012 capped maximum ownership in domestic commercial banks at 40 percent for finance-related institutions, 30 percent for non-finance firms and 20 percent for individuals. But the BI regulation was not retroactive.

Indonesia boasts a highly profitable banking sector, where the average return on equity (ROE), a measure of how well shareholder money is reinvested, is 23 percent for the five big banks with market value of more than US$5 billion, more than double the 9 percent in the US. Meanwhile, the average net interest margins (NIM) for Indonesia'€™s big banks is 7 percent, the highest of 20 economies surveyed by Bloomberg.

Some countries in the region are moving in different directions to Indonesia. The Philippines senate, in a bid to attract more investment to the capital-hungry banking sector, last year approved a bill lifting a foreign ownership cap of 60 percent and allowing overseas investors to own up to 100 percent in local banks. Malaysia has finally agreed to ease restrictions imposed on Indonesian banks to operate in the neighboring country as part of its commitment to the integration of financial services in ASEAN nations.

The foreign ownership cap would be a big deterrent for new investment in the banking sector, said JPMorgan Chase managing director Haryanto T. Budiman, who pointed to the global Basel III banking regulation, which he said was punitive for banking investors with no majority control in shareholders'€™ meetings.