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Intrigue Behind Ownership Restrictions On Indonesian Banks
Malaysia Perspective | 22 October 2012
By:

By MIGB

If one were to mention that Indonesia has a population of 240 million, his audience may not be able to visualise the significance of this number; however, when one mentions that it is equivalent to 10 times of Malaysia’s population or half the population of Southeast Asia, the picture would become clearer. No wonder, then, that many foreign banks are scrambling to enter the Indonesian financial market in a bid to share this huge pie. Neighbours Singapore and Malaysia have already made headways: Singapore’s largest bank, DBS Bank, announced in April this year its acquisition of Bank Danamon for US$ 7.2 billion; Malaysia’s leading bank, Maybank, already owns 97% of Bank International Indonesia, while CIMB also owns 97% of CIMB Niaga.

Just as everyone was ready to jump into the fray, Indonesia’s central bank announced a set of new regulations in July that limits foreign buyers to own up to only 40 percent of any domestic commercial banks in Indonesia. This requirement forced DBS to renegotiate its acquisition plan, while Malaysia’s RHB (RHBCAP, 1066, main board, finance sector) will have to cut back on its acquisition of Indonesia’s PT Bank Mestika Dhama.

RHB hopes to complete the transaction in the first quarter of 2013. RHB’s senior management disclosed at its Extraordinary General Meeting that “even 40% in shareholding can be considered a good entry opportunity.”

As early as 2009, RHB had indicated its interest in the acquisition of an 80% stake in PT Bank Mestika Dharma for about RM 1.16 billion. The proposal was later shelved due to restrictions on foreign shareholding in Indonesia.

RHB will not give up on its desire to acquire PT Bank Mestika Dhama as it is part of its plan to expand its regional business; if it succeeds in acquiring both OSK Holdings’ (OSK, 5053, mainboard financial sector) investment bank arm and PT Bank Mestika Dhama, it would have a presence in 7 out of the 10 ASEAN countries. RHB raised a total of RM1.9507 billion to acquire OSK Holdings’ investment bank. If approved by all relevant parties, the deal is expected to be completed in fourth quarter this year. As for RHB’s acquisition of PT Bank Mestika Dhama, both sides are engaged in a long tug of war over the price, in addition to negotiations to circumvent the 40% ownership cap. RHB hopes to achieve a win-win agreement in the near future.

The fact is, the new regulation in Indonesia is not exactly set in stone. It is understood that, if any foreign bank has achieved a high capital ratio, is publicly listed or carries a letter of recommendation from the the Indonesian central bank, it will be exempted from the restriction. Maybank and CIMB are confident of the Indonesian central bank’s decision in their cases, whereas RHB is arguing on the ground that foreign banks are not motivated purely by profiting themselves, and their holding a stake in local banks will contribute to the economic development of Indonesia. In recent years, Indonesia has been expanding its economic construction and urgently needs the support of foreign investments. This is one reason why it will exercise flexibility in enforcing the shareholding restriction. So far, Indonesia’s gross domestic product (GDP) and purchasing power has been on the rise, and is set to move up from the 15th largest economy in the world ranking to be among the top 10.

One reason why Indonesia cannot afford to rigidly regulate investments of foreign banks is its status as one of the anchor ASEAN countries, in which it must provide a leadership model. At the ASEAN Economic Ministers’ Meeting held in Siem Reap, Thailand, on August 30, a resolution was passed to set up a Regional Comprehensive Economic Partnership. The purpose of this agreement is the elimination of trade barriers, the creation of a free investment environment and the protection of intellectual property rights. The region that is encompassed by ASEAN-Plus-Six countries boasts a total population of 3.5 billion, and constitutes a single market with a combined GDP of US$ 2.3 trillion, which accounts for one-third of the world’s combined annual GDP. It is only natural, then, that Indonesia seeks to be an integral part of this market and is opposed to trade protectionism. Of course, we cannot say that the 40% cap on bank stakeholding is a false alarm. In fact, the various consortiums now need to work harder and raise their stakes in order to cater to the specific requirements of Indonesia.


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