Banking in Indonesia

Far-reaching and traumatic economic developments have resulted in compelling fundamental changes in the Indonesian banking sector. Headlines about major banking issues appear weekly in mass-circulation newspapers. Bank reform, as essential as it is in getting the economy to work again and as revealing a stage as it provides for examining ways of doing business under the previous regime, has become a spectator sport for the Indonesian public. The economic stakes in the changes now taking place in the industry are simply enormous.

The Banking Future

Change is occurring so fast on so many fronts that it is impossible to forecast how Indonesian banking will look even 12 months from now. The only certainty is that the Indonesian financial sector, and banking in particular, will be constituted a year from now in a way unimaginable even 18 months ago. However, the overall direction in which a combination of powerful forces is currently pushing Indonesian banking seems clear. The future will most likely see a smaller number of banks operating in Indonesia, a greater share of the banking market held by foreign and/or joint venture banks, and surviving banks operating with the increased efficiency and transparency demanded by global economic forces.
The difficulties facing the banking sector itself are enormous. Estimates of non-performing loan rates for Indonesian banks range from 60-80%. They could be higher. There is little relief in sight as the indebted Indonesian corporate sector continues to struggle. Almost all banks have stopped making new loans. Credit is either unavailable or unaffordable to most Indonesian companies. Banks continue to bleed as negative spreads persist between their cost of funds and their return on funds. Indonesian banking woes are deepened by a legal and cultural framework that has traditionally favored debtor over creditor. Legal and cultural practices also reflect a different understanding of the concept of the contract. A lack of transparency in corporate financial practices further complicates efforts to negotiate debt repayment or re-structuring. A newly revised bankruptcy law has produced mixed results. Capital requirements for banks, though temporarily eased from international standards, would appear out of reach for a number of the remaining institutions pending recapitalization by the government or by outside investors.
Although it seems fairly clear that the Indonesian banking sector is headed toward a period of consolidation, restructuring, and increased efficiency, projecting time frames for the progress - even the survival -- of individual banks is extremely difficult. Individual business opportunities are easier to assess. However, even those individual opportunities exist within the larger context of considerable uncertainty.