Jurisdiction - Indonesia
Reports and Analysis
Indonesia – Recent Banking Developments.

3 May, 2013

Over the course of the last 12 months Bank Indonesia ("BI"), the Indonesian central bank has issued a number of important new regulations changing the rules relating to the ownership and control of banks in Indonesia and their ability to operate and expand in the future.


Indonesia has been widely regarded as having one of the most liberal regimes in the Asian region for foreign ownership of banks. This was in part a legacy of the Asian financial crisis of the late 1990s when foreign ownership was opened up to help capitalise many of the struggling banks at that time. However, over the past few years there has been a growing move from certain bodies within Indonesia to put in place more controls on the ownership of Indonesian banks. This had created uncertainty and speculation over the form such new controls would take and how they would be implemented which in turn impeded M&A activity in the sector.


The new Regulations consist of the long anticipated new BI rules on limits to bank ownership in Indonesia ("Bank Ownership Regulation"), the new Business Activities and Office Network Regulation ("BAON Regulation") and the 2012 BI Regulation on Single Presence Policy ("New SPP Regulation"). These together constitute a significant overhaul of the regulatory landscape for banks in Indonesia and have helped reduce to an extent, although not completely, the regulatory uncertainty which has clouded the banking sector in Indonesia in recent years. Importantly, the new rules are not specifically directed at foreign controllers of Indonesian banks, but aim to restrict the ability of single controllers to dominate banks unless the bank continually achieves high "health ratings" and good corporate governance standards.


The extent to which the newly established regulatory landscape will facilitate M&A transactions in the Indonesian banking sector remains to be seen. However, the number of deals in the financial services sector in Indonesia is certainly increasing and 2012 saw almost twice the number of reported deals as 2011 and a third more than 2010. It is expected that as the new Regulations are better understood they will provide the clarity needed to facilitate M&A transactions in the sector.


Indeed the general feeling within the industry is that in principle the new regulations are well intended and should have a positive effect on the Indonesian banking sector in the years ahead. The Regulations provide incentives for existing controllers of banks with poor good corporate governance ("GCG") ratings to improve the corporate governance of their banks. This philosophy appears to be guided by principles of good corporate governance and the promotion of a healthy banking sector in Indonesia rather than an attempt to curb foreign investment.


The new SPP Regulation is also expected to provide greater flexibility to parties looking to control more than one bank, which may help facilitate the consolidation of the banking sector in Indonesia.


However, one potentially significant hurdle which could still undermine recent developments is the possibility of a new Banking Law being passed, which is currently being considered by the Indonesian Parliament. It is suspected that debate around the draft Banking Law will engender more nationalistic sentiment than the recent Regulations introduced by BI. It will be interesting to see how BI responds to this political initiative in due course.



For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
Haydn Dare, Partner, Herbert Smith Freehills
Bryan Scott, Partner, Herbert Smith Freehills


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