Financial Evolution and Regulatory Reform in Indonesia

Hendri Saparini, PhDCORE Institute

ECONIT Advisory GroupIndependent tink tank in Economic Development

Jakarta - Indonesiasaparini@econit.co.id and saparini@core-institute.co.id

Financial Evolution, Regulatery Reforn and Cooperation in AsiaSeoul National University – 17-18 May 2013

Outline

• Indonesian Financial Structure• Regulation in Financial Sectors• Roles of banking sector in economy• Roles of capital market in economy

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

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

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

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 Market Non 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

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

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

Ownership of Banks Restriction in Asia vs. liberalisation in Indonesia

Country Maximum Foreign Ownership (%)

China 20Malaysia 30Vietnam 30Pakistan 49Thailand 49Philippines 60India 74Indonesia 99Australia, Taiwan, Japan, Singapore, South Korea

Not limited, but highly regulated

http://in.reuters.com/article/2011/08/02/idINIndia-58571120110802

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 Shareholder Composition (%)

1 Bank Mandiri 635,6 • Government 60,002 BRI 551,3 • Government 56,753 BCA 442,99 • FarIndo Investments Ltd (Mauritius) 47,154 BNI 333,3 • Government 60,005 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

Further Banking Regulation Indonesia ready for Basel III Regulation in 2019

Requirements Under Basel II Under Basel IIIMinimum 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

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

Monetary Policy Transmission MechanismAimed at inflation rate management?

Source: Bank Indonesia

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

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

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

6.6 6.9

10.2

12.4

%

Source: World Bank

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

2.63.1 3.3

6.6

2010 2011 2012E

%

Source: Maybank Kim Eng, 2013

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

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

Prime Lending RateWide gap of interest rates (microfinance vs. other loan)

Bank

Prime Lending Rate (%)*

Corporate Loan Retail Loan Microfinance

LoanConsumer 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

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

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 Investment3%

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

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

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

140Government & Monetary Authority Private

Billi

ons

of U

SD

Source: Bank Indonesia

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

Billi

ons

of U

S$

Source: Bank Indonesia

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

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 17PRC 18

India 13

South Korea 7

%

Source: ADB

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

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

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

Inde

x, 2

002=

100

Source: Bank Indonesia

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

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.

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

74 7889

129137

% o

f G

DP

Source: World Bank*data tahun 2011

Number of listed companiesLess than 500 Indonesian companies go public

Philip

pine S

E

Indon

esia S

E

The S

E of T

haila

nd

Singa

pore

Exch

ange

Bursa M

alaysi

a

Shan

ghai

SE

Shen

zhen S

E

Hong K

ong E

xchan

ges

Nation

al SE

India

Korea

Exch

ange

Austral

ian SE

Japan

Exch

ange

Group

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

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, SingaporeKOSPI, Korea

Index, 100=Jan 2009

Source: Yahoofinance

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

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

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

USD

Bill

ions

Source: ADB

Asian LCY Bond Returns IndexIndonesian bonds’ return: the Highest in Asia

Jan-01 Jul-

01Jan

-02 Jul-02

Jan-03 Jul-

03Jan

-04 Jul-04

Jan-05 Jul-

05Jan

-06 Jul-06

Jan-07 Jul-

07Jan

-08 Jul-08

Jan-09 Jul-

09Jan

-10 Jul-10

Jan-11 Jul-

11Jan

-12 Jul-12

Jan-13

0

100

200

300

400

500

600

700

800

Indonesia ChinaKoreaMalaysiaPhilippinesSingaporeThailand

Source: ADB

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

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