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Why restricting profit distribution is important for Indonesian banks
With dividend restrictions, banks can enlarge their capital and strengthen their resilience in the face of various risks.
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Oversight body: The Financial Services Authority (OJK) is facing mounting calls for it to require financial institutions to report implementation of their respect for human rights. (Kontan/Baihaki)
The Financial Services Authority (OJK) plans to regulate banks' dividend distribution. This bold step will no longer give banks the freedom to set the amount of dividends from their profits.
The OJK will limit the amount of dividend payouts. As an illustration, the dividend payout from the profit (dividend payout ratio) in 2022 for state-owned Bank Rakyat Indonesia (BRI) reached 85 percent, Bank Mega 70 percent and BCA 62 percent.
The OJK's plan immediately triggered a heated debate. One side said that dividend restrictions would have a negative impact on banks, especially on their share prices. The attractiveness of bank shares will shrink because stock investors make dividend distributions as additional income on top of profits due to rising stock prices (capital gains). Dividends seem to be sweeter for stock investors. In the stock exchange, some investors specifically hunt for dividends.
But other opinions say banks can take full benefit of limiting dividends. Bank capital will increase. The bank's business scale will be higher. Business competitiveness will be stronger as well. Thus, in the long run, the valuation of shares will be even greater. These have positive implications for the increase in stock prices. Stock investors will eventually benefit.
Despite the debate, we should support the OJK's plan to regulate bank dividend payouts for several reasons.
First, dividend restrictions are indispensable for current conditions. With dividend restrictions, bank capital will enlarge. This step has an impact on strengthening bank resilience in the face of various risks. Moreover, many uncertainties continue to haunt the Indonesian economy and banking industry.
