T

he Federation of Private Domestic Banks (Perbanas) made a lot of sense when it recommended to the House of Representatives that the banking bill, which will begin to be deliberated in August, should not stipulate a fixed percentage for a cap on foreign ownership in banks.

The suggestion is relevant because the latest version of the banking bill after its last revision early this year stipulates a 40 percent cap on foreign ownership in banks and requires foreign investors who now control local banks to divest their majority shares within 10 years after the law takes effect.

Perbanas chairman Sigit Pramono reminded the House on Wednesday that the foreign investors, who now control 11 publicly listed banks, had been invited by the government during the height of the Asian financial crisis in 1998 to help strengthen the banking industry.

Pramono warned that the compulsory divestment by foreign investors into minority ownership even within 10 years after the enactment of the new law could shock the stock exchange and the banking industry in general.

The next big question is which national investors will be able and willing to spend billions of dollars to take over the banks'€™ shares.

The Perbanas recommendation boils down to a demand that whatever restrictions on foreign ownership of local banks will be stipulated in the banking bill should include a grandfather clause (not retroactive).

The House should also realize that a bank is a capital-intensive and capital-hungry business that requires steady capital replenishment to be able to grow and expand. Hence, partnerships between local and foreign banks are good for the whole banking industry.

Regarding bank capital, for example, the Basel-based Bank for International Settlement (BIS), which oversees the global banking industry, has launched what it calls Basel III capital requirements. This rule requires two liquidity ratios which are designed to ensure that banks can survive liquidity pressures. The liquidity ratios are Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

The LCR focuses on a bank'€™s ability to survive a 30-day period of liquidity disruptions. Basel III regulations require the LCR to be greater than 100 percent so that the bank'€™s liquid assets are sufficient to survive these pressures.

The NSFR focuses on liquidity management over a period of one year and the NSFR should be greater than 100 percent so that the calculated amount of stable funding is greater than the calculated required amount of stable funding. The above new rules are tough and have the potential to dramatically change bank balance sheets, and are scheduled to be enforced in 2018.

Indeed, many analysts and politicians have expressed grave concerns over the increasing foreign ownership of banks in Indonesia, arguing that would make it extremely difficult for Bank Indonesia (the central bank) to guide monetary policies and bank lending for national economic development.

The latest data showed that 11 of the 41 banks listed on the stock exchange are controlled by foreign shareholders and six other banks had minority foreign shareholders. Foreign investors held almost 41.5 percent of the total market capitalization of the publicly traded banks.

But we should not blame foreign investors for their dramatic increase in ownership of banks in the country. Foreign investors (mostly banks) entered Indonesia upon the invitation of the government which was forced by the 1998 economic crisis to nationalize all major private banks and bail out all state banks.

But when economic rationale and the need for good corporate governance eventually required the government to sell almost all of the nationalized banks to the private sector, it was mostly foreign investors who won the competitive bids thanks to their financial strength, technical and managerial competence.

We do not really see the increasing foreign ownership of banks as an issue. It instead indicates positive foreign investor perception of the country'€™s long-term economic outlook. Foreign investors would not have been interested in staking out more capital for our banking industry if the economic conditions had not been improving because a bank can thrive and grow robustly only in an expanding economy.

The experiences of many countries, such as South Korea, Thailand, Malaysia and Mexico, point to the great benefits of the entry of major international banks with high reputation for the development of good governance practices.

Look how almost all of our best professional bankers were formerly executives of foreign banks in Indonesia or overseas, or had built up years of work experience with foreign banks.

True, a bank is not simply a business entity in an ordinary sense, given its vital role as the purveyor of lifeblood (credits) for the economy, its fiduciary responsibility and the multiplicity of transactions it is involved in.

This is precisely why the principles of good corporate governance for banks are much tougher and more elaborate than those for other business entities. That is why not everybody who can put up adequate capital can have controlling ownership of a bank.

Those who want to become controlling owners and members of the management and supervisory (commissioner) boards of a bank have to pass a '€œfit-and-proper test'€ from the central bank to assess their technical competence, business vision and philosophy and integrity.

Put another way, banks are the most heavily regulated and supervised industries. Good governance and corporate responsibility are the prerequisites for the integrity and credibility of market institutions as banks themselves are institutions of trust.

All these supervisory and regulatory frameworks can make us rest assured that it is not the nationality of bank owners that matters, but the capital resources, business philosophy, technical competence and integrity of the major or controlling shareholders.

Of utmost importance is for the Financial Services Authority to strengthen the legal and regulatory framework for the banking industry and issue guidelines for foreign banks to increase their contribution to the national economy, not only through lending but also the transfer of expertise in risk management and dissemination of best prudential practices.