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Financial Evolution and Regulatory Reform in Indonesia
Hendri Saparini, PhD
CORE InstituteECONIT Advisory Group
Independent tink tank in Economic DevelopmentJakarta - Indonesia
[email protected] and [email protected]
Financial Evolution, Regulatery Reforn and Cooperation in AsiaSeoul National University – 17-18 May 2013
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Outline
• Indonesian Financial Structure• Regulation in Financial Sectors• Roles of banking sector in economy• Roles of capital market in economy
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1. Indonesian Financial Structure
• Dominated by banking sector
• Banking regulation has changed over the New Order to Reformation Era
• Increasing foreign ownership in banking sector after the liberalisation of banking regulation
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Asset Composition of Finance CompaniesBanking industry dominates Indonesian financial system
Commercial
Banks; 75.2
Insurance Companies; 9.9
Finance Companies;
6.2
Mutual Funds; 3.3
Pension Funds; 2.7Rural Banks; 1.2Securities Companies; 0.8Pawn Brokers;
0.600000000000001Venture Capital Firms; 0.1 Loan Companies; 0.1
* March 2012
Source: Bank Indonesia
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Total Number of Financial Institutions‘Out-spread’ banks
Type of Institution June 2012
Commercial Banks 120
Rural Banks 1,667
Insurance Companies* 139
Pension Funds* 271
Finance Companies 197
Venture Capital Firms 89
Securities Companies* 119
Mutual Funds* 685
Loan Companies 4
Pawn Brokers 1
* December 2011
Source: Bank Indonesia
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Regulating and Supervising Body The establishment of OJK (Financial Service Authority) - 2012
Bank Indonesia(Central Bank)
Banking regulation & supervision
Monetary, Payment Systems & Foreign
Exchange
Bapepam-LK under MOF
Capital MarketNon Bank Financial
Institutions*
Bank Indonesia
Macro Prudential Regulation
Monetary, Payment
Systems & Foreign
Exchange
Financial Service Authority
Banking regulation & supervision
Capital MarketNon Bank Financial
Institutions
*NBFI includes Pension, Insurance, Finance Companies, Venture Capital, Guarantee Companies
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Phases of Indonesia financial developmentStill consolidating?
(1966-72)formative
period
(1973-82) policy-based
finance period under soaring oil
prices
(1983-91) financial-
reform period
(1992-97) period of expansion
(1998-2004) financial
restructuring
(2004-now)period of
consolidation
Source: Hamada (2003) dengan tambahan
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Time-line of Number of banks in Indonesia From over-regulated to consolidation after liberalization
Financial reform
(deregulation)
consolidationrestructurisation
Source: Bank Indonesia
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
50
100
150
200
250
State Owned Banks National Private BanksRegional Development Banks Joint Venture & Foreign Owned Banks
formative period Policy-based finance period
expansion
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Ownership of Banks Restriction in Asia vs. liberalisation in Indonesia
Country Maximum Foreign Ownership (%)
China 20
Malaysia 30
Vietnam 30
Pakistan 49
Thailand 49
Philippines 60
India 74
Indonesia 99
Australia, Taiwan, Japan, Singapore, South Korea
Not limited, but highly regulated
http://in.reuters.com/article/2011/08/02/idINIndia-58571120110802
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Big Banks Domination in IndonesiaTen banks hold 65% of national banking assets
*Data Desember 2012 kecuali Bank Panin Sept. 2012**Bank BUMN (38%) & 6 bank swasta (27% )
Source: Laporan Keuangan Perusahaan2
No BankAsset
(triliun Rupiah)
Majority ShareholderComposition
(%)
1 Bank Mandiri 635,6 • Government 60,00
2 BRI 551,3 • Government 56,75
3 BCA 442,99 • FarIndo Investments Ltd (Mauritius) 47,15
4 BNI 333,3 • Government 60,00
5 CIMB Niaga 192,7 • CIMB Group Sdn Berhad (Malaysia)• Santubong Investment Sdn Berhad
(Malaysia)
56,116,65
6 Bank Danamon 141,93 • Asia Financial (Indonesia) Pte Ltd---Fullerton Financial Holdings ---Temasek
67,37
7 Panin Bank 133,71 • PT Panin Financial Tbk• Potrayn No 1103 Pty Ltd---ANZ Banking
Group (Australia)
45,4638,82
8 Permata Bank 131,80 • Standard Chartered Bank (UK)• PT Astra International Tbk
44,5644,56
9 Bank BII 115.77 • Sorak Financial Holdings Pte. Ltd---Mayban Offshore Corporate Service (Malaysia)
• Mayban Offshore Corporate Service (Labuan) Sdn. Bhd
54,3342,96
10 BTN 111.75 • Government 61,35
Total 2764.95
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Further Banking Regulation Indonesia ready for Basel III Regulation in 2019
Requirements Under Basel II Under Basel III
Minimum Ratio of Total Capital To RWAs* 8% 10.50%Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00%
Tier I capital to RWAs 4% 6.00%
Core Tier I capital to RWAs 2% 5.00%
Capital Conservation Buffers to RWAs - 2.50%
Leverage Ratio - 3.00%
Countercyclical Buffer - 0% to 2.50%
Minimum Liquidity Coverage Ratio - TBD (2015)
Minimum Net Stable Funding Ratio - TBD (2018)Systemically important Financial Institutions Charge - TBD (2011)
Indicator 2008 2009 2010 2011 2012
Capital Adequacy Ratio (%) 16.76 17.42 17.18 16.05 17.43
Return On Assets Ratio (%) 2.33 2.60 2.86 3.03 3.11
Loan to Deposits Ratio (%) 74.58 72.88 75.21 78.77 83.58
Operating Expenses/Operating Income (%)
88.59 86.63 86.14 85.42 74.10
Indonesia Banks Performance* Risk Weighted Assets
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2. Limited Role of Banking Sector in Economic Development
• Poor policy of monetary authority in managing interest rates
• High interest rate of loan has restricted public access to banks
• Indonesia national banking tends to take the capitalists side than the whole economic development
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Monetary Policy Transmission MechanismAimed at inflation rate management?
Source: Bank Indonesia
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BI rate & loan rateUnable to induce loan rate to lower level
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Working Capital Loan, 11.45 Investment Loan,
11.27
Consumer Loan, 13.22
BI Rate 5.75
Time Deposit 6 month 6.10
Perc
ent
Source: Bank Indonesia
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Headline Inflation Rate (yoy, %)Still high, but went lower
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
PRC 2.64
Indonesia 4.28
South Korea 2.18Malaysia 1.66
Philippines 3.13Thailand 3.01
Source: World Bank
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Lending interest rate, 2010Indonesia, the highest among some Asian countries
Malaysia Singapore Korea, Rep. China Thailand India Indonesia0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
4.95.4
5.8
6.66.9
10.2
12.4
%
Source: World Bank
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Net Interest MarginIndonesia also the highest among ASEAN countries
Singapore Malaysia Thailand Phippines Indonesia0
1
2
3
4
5
6
7
8
2
2.8
3.43.7
7.5
1.9
2.7
3.3 3.4
7.1
1.8
2.6
3.13.3
6.6
2010 2011 2012E
%
Source: Maybank Kim Eng, 2013
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Fee Based Income, 2011Poor creativity, relying on interest based income
Indonesia Philippines Malaysia Singapore Thailand0%
5%
10%
15%
20%
25%
10%
12%
14%
20%21%
Source: Maybank Kim Eng, 2013
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Limiting factors of investmentHigh interest rate, main obstacle for investment
tax5%
security5%
labor7%
regulation9%
acces to bank credit14%
administration17%
infrastructure18%
rate26%
Source: Bussiness Survey, Bank Indonesia, QIV-2012
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Prime Lending RateWide gap of interest rates (microfinance vs. other loan)
Bank
Prime Lending Rate (%)*
Corporate Loan
Retail LoanMicrofinance
Loan
Consumer Loan
Housing Non Housing
Mandiri 10.00 12.00 22.00 10.75 12.00
BRI 9.75 11.75 19.25 10 12
BCA 9.25 10.60 N/A 9.50 8.18
BNI 10.00 11.60 11.60 10.65 12.25
CIMB Niaga 9.85 10.75 19.00 10.80 10.70
Danamon 10.00 11.00 19.76 11.75 12.49
*per 31 March 2013
Source: website perusahaan
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Share of Loans to SMEs: Very Small The Number of SMEs is very huge
Bank Financing for SMEs
Type Kredit (Rp Triliun)
UMKM (Rp Triliun) Percent
State Owned Banks 961 245 25%
Commercial Banks 1,221 217 18%
Regional Development Banks 223 43 19%
Joint Venture Banks & Foreign Owned Banks 331 10 3%
Total 2,737 515 19%
Number of SMEs & Large Enterprises
*Feb. 2013
Micro53,207,500
99%
Small1%
Medium0% Large
4,8380%
*2010
Source: Bank Indonesia, BPS
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Domestic Financing ProfileSources of business financing: mainly from internal source
Indonesia East Asia & Pasific
Internal Finance for Investment
88%
Bank Finance
for Investme
nt6%
Trade Credit Financing for Investment
1%
Equity, Sale of Stock For Investment
3%
Other Financing for Investment
1%
Internal Finance
for Investme
nt64%
Bank Finance for Investment
20%
Trade Credit
Financing for
Investment3%
Equity, Sale of Stock For Investment
6%Other Financing for
Investment8%
Source: Enterprise survey, World Bank, 2009
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Percentage of firms with a bank loanOne of the Lowest in ASEAN
Timor-Leste (2009)
Indonesia (2009)
Cambodia (2007)
Lao PDR (2012)
Philippines (2009)
Vietnam (2009)
Malaysia (2007)
Thailand (2006)
0
10
20
30
40
50
60
70
80
6.9
18.220.7
32.2 33.2
49.9
60.4
72.5
%
Source: World bank
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External Debt Outstanding
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
20
40
60
80
100
120
140
Government & Monetary Authority Private
Billions o
f U
SD
Source: Bank Indonesia
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Capital & Financial AccountGrew highly after 2008 crises
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
Current Account
Capital and Financial Account
Bil
lio
ns
of
US
$
Source: Bank Indonesia
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Domestic credit provided by banks*Banking roles in financing is the lowest
0
20
40
60
80
100
120
140
160
180
200
China
India
Indonesia
Korea
Malaysia
Philippines
Thailand
%
Source: World Bank*% of GDP
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Rate of Return on Commercial Bank EquityIndonesian banking: the highest
2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25
30
Indonesia 26
Malaysia 16
Thailand 10
Singapore 16
Philipines 17
PRC 18
India 13
South Korea 7
%
Source: ADB
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Component of Lending Rate Base Withheld by interests
Component Barrier
Cost of Loanable Fund
big depositors bargaining possition
Overhead Cost bank efficiency
Margin shareholders interest
Tax government regulation
Risk premium economy & politic stability
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Charactersitics of Indonesian BankingDominated by big depositors over Rp. 5 billion
Classification of deposit
Number of Account (%)
Value (%)
N < 100M 97.59 15.64
100M < N < 500M 1.83 14.64
500M < N < 1B 0.3 8.43
1B < N < 5B 0.24 17.92
N > 5B 0.05 43.38
Total 100 100
Source: Bank Indonesia
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Banking Loans Distribution Mining grew highly, manufacture sector slower
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
500
1000
1500
2000
2500
3000
Mining and Quarrying
Manufacturing Industry
Electricity, Gas and Wa-ter Supply
ConstructionTrade, Hotel, and Restaurant
Transport and Com-munication
Financial, Ownership & Business Services
Index, 2002=
100
Source: Bank Indonesia
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Loan Distribution by SectorDecreasing loans to manufacture, increasing to trade sectors
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Electricity, Gas and Water SupplyConstructionMining and QuarryingTransport and CommunicationAgriculture, Livestock, Forestry & FisheryServicesFinancial, Ownership & Business ServicesManufacturing IndustryTrade, Hotel, and Restaurant
Source: Bank Indonesia
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3. Limited role of capital market in financing
• Low attrectiveness of going-public from government and private enterprises
• Despite te fact of low attractiveness to go public, Indonesian capital market has highly performed, particularly in sectors with strong fundamental performance
• Foreign investment flow was still high as a result of high rate of return.
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Market Capitalisation vs GDPLimited role of capital market to economy in Indonesia
Indonesia China India Philippines Thailand Korea, Rep.
Singapore Malaysia0
20
40
60
80
100
120
140
160
46 4655
7478
89
129137
% o
f G
DP
Source: World Bank
*data tahun 2011
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Number of listed companiesLess than 500 Indonesian companies go public
Philipp
ine
SE
Indo
nesia
SE
The
SE o
f Tha
iland
Sing
apor
e Ex
chan
ge
Bursa
Mal
aysia
Shan
ghai
SE
Shen
zhen
SE
Hong
Kong
Exc
hang
es
Natio
nal S
E In
dia
Kore
a Ex
chan
ge
Austra
lian
SE
Japa
n Ex
chan
ge G
roup
BSE In
dia
-
1,000
2,000
3,000
4,000
5,000
6,000
254 459 558
776 920 954
1,540 1,547 1,665 1,784 2,056
2,304
5,191
Source: World Federation of Exchanges
Data per 2012
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Asia Growth IndexIHSG, the most expansive after 2008 crises
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-130
50
100
150
200
250
300
350
IHSG, Indonesia
Hanseng, Hongkong
KLS, Malaysia
Nikkei, Japan
STI, Singapore
KOSPI, Korea
Index, 100=Jan 2009
Source: Yahoofinance
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Indonesian Indices by sectorConsumer good , the most attractive
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-120
50
100
150
200
250
300
350
400
AgricultureMining
Basic Industry
Miscellanous
Consumer Goods
PropertyInfrastructure
Finance
Trade & Service
Index, 100=Jan.2008
Source: Yahoofinance
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IDX Financial Data & Ratios, 2011Consumer goods went higher then the others
Industry EPS (Rp) BV (Rp) PER (x) PBV (x)
Consumer Goods Industry 5,679 13,813 16.2 8.7
Agriculture 1,298 1.79 3.9 2.2
Miscellaneous Industry 728 2,334 12.2 1.0
Mining 484 1,384 16.1 3.0
Basic Industry and Chemical 243 1,306 4.1 0.9
Finance 118 727 10.3 1.3
Infrastructure, Utilities & Transportation 91 952 11.0 2.0
Trade, Services & Investment 87 1,627 22.3 2.3
Property, Real Estate And Building Construction 64 417 23.1 1.4
Sumber: IDX Statistics 2012
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Issuance Volume of Bond Market, 2012Bonds as financing resources in Indonesia: Very Low
KR MY TH SG ID PH VN0
200
400
600
800
1000
1200
1400
1600
1800
Govt LCY Gov FCY Corp LCY Corp FCY
US
D B
illions
Source: ADB
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Asian LCY Bond Returns IndexIndonesian bonds’ return: the Highest in Asia
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
130
100
200
300
400
500
600
700
800
Indonesia ChinaKoreaMalaysiaPhilippinesSingaporeThailand
Source: ADB
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Foreign Holdings in LCY Government BondsHigh return attracted foreign investors
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-120.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Indonesia 33.0
Japan 8.8
Korea 9.5
Malaysia 29.8
Thailand 16.4
%
Source: ADB
Page 42
Foreign Ownership on Portfolio InvestmentForeign investors’ domination
Year
Bank Indonesia Certificat
e (SBI)
%
Tradable Governm
ent Securities
SBN
% Equity % Total
2008 8.4 10 87.4 17 452 60 548
2009 44.18 5 108 19 783 61 935
2010 54.93 27 195.76 31 1,184 63
1,435
2011 7.8 10 222.86 31 1,211 60
1,442
2012 0.41 0.3 270.52 33
1,484 59
1,755
Source: Bank Indonesia, MOF, KSEI