Hamud M. Balfas

Hamud M. Balfas

For almost the last two decades since the last financial crisis hit Asian’s emerging market countries in late nineties, Indonesia banking industry has been flooded with foreign investors entering into its financial industry like it has never seen before. Foreign banks and others investors grabbed the countries’ banking industries that left paralyzed during the crisis and pumped the money to the undercapitalized banking sectors and eventually controlled the industry in such a way that public finally complains that this “important” and profitable sector of the country economy have been controlled by foreign investors. 1
The Indonesian government has long been welcoming foreign investors and provided infrastructure that allows foreigner easy access to the sectors. The government warm welcome to foreign investor is due to the fact that it sees a lack of professional industry as well as the need for fresh money after the crisis. As part of its efforts to attract more foreign investors into its banking sectors that still cater only a fraction of the country bourgeoning populations of around two hundred fifty million people, the government, for instance, allows foreign investor to control up to 99% of the banks. 2
The incoming flood of foreign investors into the countries’ banking seems to have not been unstoppable until recently when, as a result of its rapid development, the Indonesian indigenous banking which is mostly controlled by state owned enterprise is faced with the reality that unlike its foreign counterparts from other countries that has set up their shops in Indonesia, the Indonesian banks which are going to invest in other neighboring countries such as Singapore, Malaysia and People Republic of China have not been nicely welcome like those countries banks that invest in Indonesia. In other words there is no such thing as reciprocal treatment to the Indonesian banks that would like to establish branches or setting up subsidiaries in those countries.

Rise of Nationalism
Under the current prevailing laws, foreign majority owned banks (either set up by foreigner as a joint venture with local Indonesian business partners or as a result of foreigners taking over the local Indonesian banks) or branches of foreign banks are basically treated as Indonesian banks. These banks like Indonesian state owned or private banks that are majority controlled by Indonesian shareholders (“Indigenous banks”) are free to open branches or automated teller machines (ATM) and compete with Indigenous banks in the country. These foreign owned banks may set up as many branches and ATM as in this sprawling country without any restrictions like what some countries do to foreign banks. Malaysia or Singapore, for instance, only allows one branch or one ATM for foreign whilst China only allows foreign banks to deal in foreign currency only.
This so-called restrictive and “foreign versus national” treatment is only recently realized by the Indonesian public and those in parliament and has resulted in the recent nationalistic attitude toward banking industry in the country. Bank Indonesia (“BI”), the country central bank, has in 2012 issued several regulations that require banks’ shareholders to reduce their individual ownership to forty percent at maximum gradually over a period of time.3 Under this BI Regulation No. 14/8/PBI/2012 regarding Share Ownership in Commercial Bank (“Reg. 14/2012”), maximum limit of share ownership in a Bank for every category of shareholder shall be determined as follows: 4
a.40% (forty percent) of the Bank's Capital, for the category of shareholder in the form of bank financial institution and non-bank financial institution legal entities;
b.30% (thirty percent) of the Bank's Capital, for the category of shareholder in the form of non-financial institution legal entity; and
c.20% (twenty percent) of the Bank's Capital, for category of individual shareholder.

Reg. 14/2012 even limits such ownership in the country shariah compliant banks to only twenty five percents of the Bank's Capital to any category of shareholder.5 For each category of shareholder, Reg. 14/2012 imposes certain strict requirements either on how they are supervised in their country of origin, commitment to the Indonesian banking industry, rating requirements, financial soundness, whether or not it is a public company as well as commitment to invest for certain length of time in the bank that it owns in Indonesia. Although Reg. 14/2012 allows foreign shareholder to increase its shareholding beyond 40% threshold, Reg. 14/2012 imposes certain strict requirements namely whether the Bank obtains rank in position 1 (one) or 2 (two) in soundness level of bank and good corporate governance rank for 3 (three) consecutive years period within 5 (five) years as of BI approval for the acquisition.6

Draft Law on Banking

With the introduction of new banking bill (the “Bill”), the landscape of the Indonesian banking industry in the future will certainly enter new phase. Unlike the prevailing banking law namely Law No. 7/1992 (as amended, the “Prevailing Law”) the Bill clearly bears the “nationalism” spirits in its provisions. The Bill stresses that it wants a reciprocal treatment by other countries to the Indonesia banks when the country’s banks wants to open branches or set up its subsidiary. The Bill is serious in that its states that in order to achieve its banking objective, the country’s Financial Services Authority (Otoritas Jasa Keuangan, “OJK”) and/or BI must observe the reciprocal principal in the implementation of its international banking relation.7 This spirit of nationalism is further stressed by the elucidation of Article 6 in which it stipulates that Indonesia wants that the country which banks have been operating or is going to operate in Indonesia to provide the same treatment to the Indonesian commercial banks that are going to operate in those countries. Such a treatment is applicable either in the process of licensing and branch openings.
Given the fact that there have been so many foreign banks that are present in this country and have controlled majority of many Indonesian commercial banks for years, it remains to be seen how the regulators of the industry namely OJK and BI will regulate and treat such foreign controlled banks in the country. Especially the fact in other sectors of the industry, primarily natural resources extraction that has resulted in strong “nationalism” sentiments toward foreigners. These industries have, to a certain extent, undergone the same process of “Indonesianisation” in many forms in recent years.8
Unlike the Prevailing Law, the Bill instructs both BI and OJK to differentiate and group banks in accordance with their capitalization, scope of businesses and its scope of regional activities. BI has developed this scheme by introducing a concept of what BI calls as “BUKU” scheme.9 Categorization of banks into BUKU I up to BUKU IV will influence how the banks will conduct their businesses and serve their customers as banks within its BUKU I will not have the same ability to enter into businesses as a bank within a category of BUKU IV.10 The BUKU will also influence a bank’s ability to enter into capital investment/participation, its ability to channel loans as a bank in BUKU I will not be able to channel as much as loan compared to that of a bank in BUKU IV.
On the scope of businesses issue, the Bill also clears much of the questions that public ask on the scope of businesses that a bank in this country may engage in. Unlike the Prevailing Law which details some 13 business fields that a bank may engage, the Bill stipulates 23 lines of business that a bank may engage in.11 Those are in addition on some clarification made by the Bill on certain line of business. Further, the Bill also clears the scope of businesses of the rural banks (Bank Perkreditan Rakyat, “BPR”) namely small scale banks that only provide limited services and operates mostly in rural areas within a province.12
The Bill also recognizes the relations between the two segments of the banks namely commercial banks and the BPR. These relations have been in existence for a few years in which the commercial banks use the BPR as its “branch” to penetrate the remote region of the country where the commercial banks does not have branches due to certain situation such as no communication or size of the local economy. The commercial bank basically provide loan to the BPR which will then channel the loan to its customers.13 The cooperation between banks and the BPR would also provide banks with instruments to achieve of what the Bill require that banking industry has to provide more financial access to public.14
On foreign ownership of commercial banks, the Bill set forth that each foreigner can only own up to 40% of shares in a commercial (no foreign ownership is allowed in BPR). Further the Bill stipulates that a foreigner can only become a controlling shareholder in a commercial bank.15 Under the current prevailing BI regulation, a controlling shareholder is defined as a party which owns 25% or more of the bank’s shares or owning 25% or less of shares in a bank but is considered to have controlling the banks either directly or indirectly.16

Long Arm Reach of the Regulator
What is interesting in the Bill is that it also regulates how a bank’s articles of association have to be drafted. The Bill requires that in addition to fulfilling the requirements in the company laws and the capital market laws and regulations (for a public company), the articles of association of a bank must include, among others, the following provisions:17
a.appointment of a member of the board of directors and the board of commissioners must acquire approval from OJK;
b.an obligation to dismiss commissioners, members of the board of directors, and executive officers of the Bank failing their fit and proper test;
c.a prohibition against pledging shares owned by shareholders of the bank;
d.an obligation for a controlling shareholder to transfer its shares in the event the controlling shareholder fails to pass a fit and proper test; and
e.other matters that OJK may determine in accordance with its discretion.
The Bill goes even further to require OJK to scrutinize and give its recommendation before the articles of association is submitted to the Ministry of Laws and Human Rights for its validation.
In its effort to regulate the industry, OJK is also involved in the selection of both new management and new shareholders of a bank. Under the current practice this is done through what OJK calls as “fit and proper” test. As this procedure is basically an “examination” of both the management and shareholders of a bank before they enter into the bank, failure to pass this test may result in the controlling shareholder is required to decrease its shareholding down to zero. If no such measure is taken by such an “unqualified” controlling shareholder, the Bill basically subjects the share of a controlling shareholder into the following situation:18
i.voting right of the shares held by the controlling shareholder are not recognized for a quorum calculation in a General Meeting of Shareholders (“GMS”) and therefore voting power of the shares are not recognized;
ii.the bank has to hold dividend distribution for such a shareholder; and
iii.OJK will announce the name of the controlling in two widely distributed newspapers in the country.
Authority of OJK goes even after a controlling shareholders already passed the fit and proper in that if OJK considers that if a controlling shareholders or the management engage in activities that are not in accordance with prudential and good governance principle, OJK has the authority and power to instruct a controlling shareholder to dispose part or all shares that they own in the bank or instruct the management to resign from each of their office.19
The Bill further stipulates various provisions that allow OJK, as a regulator and supervisory institution of the industry, to have a control over bank’s operation in the event there is problem on the bank’s operation. The “long arms” of OJK into operation and management of a bank include the ability for OJK to do the followings: 20
a.to require the founder and/or the ultimate shareholders to demonstrate a commitment in the letter of commitment that they have already signed;
b.to limit the authority of the GMS, commissioners, and the board of directors, and shareholders;
c.to require the Bank and/or the shareholders take steps to address the liquidity problems;
d.to require the Bank and/or the shareholders take steps to address the solvency problems;
e.to require the Bank to write off the bad fund channeling and apply the loss of the Bank to its capital;
f.to require the shareholders to increase their raise capital;
g.to require the GMS to replace the board of commissioners and/or the board of directors of the Bank;
h.to take over the rights and authority of the GMS to replace the whole or any part of the commissioners and/or members of the Board of Directors of the Bank where the shareholders as referred to in point (g) fails to make replacement thereof;
i.to appoint statutory managers;
j.to confirm the use of the statutory manager;
k.to place a Bank supervisor and/or the party representing the direct supervision where the Bank is subject to special supervision;
l.to require the Bank to merge or consolidate with other bank(s);
m.to require the shareholders to sell the Bank to a buyer who agrees to take over all its liabilities;
n.to require the Bank to refer the whole or any part of the management of the Bank to the other party;
o.to require the Bank to sell the whole or any part of the assets or liabilities of the Bank to the other party; and/or
p.to require Bank to or not do activities or any other acts.
Prudential issue in banking operation and management also become important matters that are regulated in a more detail manner by the Bill. There are ten articles in the Bill that deals with this issue. Risk management is one of crucial matter that the Bill highlights.21
One of the issues that are raised in the risk management is the ability of a bank to acquire and keep collateral provided by its defaulted customer as part of the loan that the bank provides to its customer. What is surprising is a provision in the Bill that provides flexibility for state-owned banks when disposing ex collateral assets that they control. The state bank is basically allowed to dispose the acquired assets even when the banks suffer losses as a result of such a sale of the assets provided that the best prices that the Bank achieves for the assets has been assessed by an independent adjuster as a fair prices for the assets.22 This is clearly attributed to long term concern of many members of management of state owned companies as law enforcement such as attorney general office and the newly established commission on the eradication of corruption (known for its famous abbreviation as KPK) which consider that the bank’s acquired assets from the defaulted debtors that a state owned bank as state assets and the sale of such assets below the its price as a loss for the state and therefore may be considered as corruption.23

Customer Protection
Other matters that are not covered and addressed specifically by the Prevailing Law but very much covered in the Bill are customer protection. As OJK is now entrusted with customer protection in financial services industry by Law No. 21/2011 on Financial Services Authority (“OJK Law”)24, it is therefore no coincidence that the Bill also addressed this matter in its provisions.
What the Bill stipulates in the provisions regarding customer protection cover not only conducts of the banks toward its customers but how the banks are required to make its customer better informed of the products that the banks offer and sell to its customers. This issue has basically been applied by OJK in its recent regulations on the same subject matter. But putting this matter into both OJK Law and a new banking law will give a strong argument for OJK to police the banking industry much better for the protection of customers and provide customers with legal tools to defend themselves against the bank.*****

1. Five of the Indonesian biggest are foreign majority controlled. Kontan, Friday 6 November 2014, page 1.
2. Government Regulation No. 29/1999 (“PP”). Article 3 of PP stipulates that: “Total bank share ownership by Foreign Citizens and or Foreign Legal Entities acquired through direct purchase or through the Stock Exchange shall be no more than 99% (ninety-nine percent) of the total shares of the Bank concerned.” Further Article 4 of PP stipulates that for banks that are listed in a stock exchange, foreigner may acquire up to 100% of the shares that are listed and traded in the exchange (which under PP is restricted to 99% of the issued that may be listed in the exchange).
3. BI Regulation No. 14/8/PBI/2012 regarding Share Ownership In Commercial Bank
4. Article 2 section 2 of Reg. 14/2012
5. Article 2 section 3 of Reg. 14/2012
6. Article 5, 6 and 8 of Reg 14/2012
7. Article 6 of the Bill
8. Law No. 4 of 2009 on coal and mineral mining, for instance, requires that foreign shareholders in a joint venture mining has to start selling/divestment of its shares to the Indonesian (either government, regional, state-owned enterprise or its partners) gradually as of the sixth year after the exploration.
9. Bank Indonesia Regulation No. 14/26/PBI/2012 regarding Bank Business Activities and Office Networks Based on Core Capital
10. Article 4 and 5 BIR 14/26
11. Article 8 of the Bill
12. Article 14 and 17 of the Bill
13. Article 18 of the Bill
14. Article 19 of the Bill
15. Article 35 of the Bill
16. Article 1 section 3 of Reg. 14/2012
17. Article 39 of the Bill
18. Article 69 of the Bill
19. Article 70 of the Bill
20. Article 53 of the Bill
21. Article 75 - 84 of the Bill
22. Article 83 of the Bill
23. Law No. 31/1999 regarding Eradication of Corruption (as amended by Law No. 20/2001)
24. Article 28-31 OJK Law

Hamud M. Balfas is a counsel with RBS – Law Office in Jakarta, Indonesia. He may be contacted either at: hamud_balfas@rbslawoffice.com or hbalfas@abnrlaw.com. Hamud writes articles on various subject of the law extensively. He is also an author of a book on Indonesian Capital Market (Hukum Pasar Modal Indonesia), now in its second edition.

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