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Financial Evolution and Regulatory Reform in Indonesia Hendri Saparini, PhD CORE Institute ECONIT Advisory Group Independent tink tank in Economic Development.

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Presentation on theme: "Financial Evolution and Regulatory Reform in Indonesia Hendri Saparini, PhD CORE Institute ECONIT Advisory Group Independent tink tank in Economic Development."— Presentation transcript:

1 Financial Evolution and Regulatory Reform in Indonesia Hendri Saparini, PhD CORE Institute ECONIT Advisory Group Independent tink tank in Economic Development Jakarta - Indonesia and Financial Evolution, Regulatery Reforn and Cooperation in Asia Seoul National University – 17-18 May 2013

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

3 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

4 Asset Composition of Finance Companies Banking industry dominates Indonesian financial system * March 2012 Source: Bank Indonesia

5 Total Number of Financial Institutions Out-spread banks Type of InstitutionJune 2012 Commercial Banks120 Rural Banks1,667 Insurance Companies*139 Pension Funds*271 Finance Companies197 Venture Capital Firms89 Securities Companies*119 Mutual Funds*685 Loan Companies4 Pawn Brokers1 * December 2011 Source: Bank Indonesia

6 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 Market Non Bank Financial Institutions *NBFI includes Pension, Insurance, Finance Companies, Venture Capital, Guarantee Companies

7 Phases of Indonesia financial development Still 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

8 Time-line of Number of banks in Indonesia From over-regulated to consolidation after liberalization Financial reform (deregulation) consolidationrestructurisation Source: Bank Indonesia formative period Policy-based finance period expansion

9 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

10 Big Banks Domination in Indonesia Ten 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 NoBank Asset (triliun Rupiah) Majority Shareholder Composition (%) 1Bank Mandiri635,6Government60,00 2BRI551,3Government56,75 3BCA442,99FarIndo Investments Ltd (Mauritius)47,15 4BNI333,3Government60,00 5CIMB Niaga192,7CIMB Group Sdn Berhad (Malaysia) Santubong Investment Sdn Berhad (Malaysia) 56,1 16,65 6Bank Danamon141,93Asia Financial (Indonesia) Pte Ltd---Fullerton Financial Holdings ---Temasek 67,37 7Panin Bank133,71 PT Panin Financial Tbk Potrayn No 1103 Pty Ltd---ANZ Banking Group (Australia) 45,46 38,82 8Permata Bank131,80Standard Chartered Bank (UK) PT Astra International Tbk 44,56 9Bank BII 115.77 Sorak Financial Holdings Pte. Ltd---Mayban Offshore Corporate Service (Malaysia) Mayban Offshore Corporate Service (Labuan) Sdn. Bhd 54,33 42,96 10BTN 111.75Government61,35 Total 2764.95

11 Further Banking Regulation Indonesia ready for Basel III Regulation in 2019 RequirementsUnder Basel IIUnder Basel III Minimum Ratio of Total Capital To RWAs*8%10.50% Minimum Ratio of Common Equity to RWAs2%4.50% to 7.00% Tier I capital to RWAs4%6.00% Core Tier I capital to RWAs2%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) Indicator20082009201020112012 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

12 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

13 Monetary Policy Transmission Mechanism Aimed at inflation rate management? Source: Bank Indonesia

14 BI rate & loan rate Unable to induce loan rate to lower level Source: Bank Indonesia

15 Headline Inflation Rate (yoy, %) Still high, but went lower Source: World Bank

16 Lending interest rate, 2010 Indonesia, the highest among some Asian countries Source: World Bank

17 Net Interest Margin Indonesia also the highest among ASEAN countries Source: Maybank Kim Eng, 2013

18 Fee Based Income, 2011 Poor creativity, relying on interest based income Source: Maybank Kim Eng, 2013

19 Limiting factors of investment High interest rate, main obstacle for investment Source: Bussiness Survey, Bank Indonesia, QIV-2012


21 Prime Lending Rate Wide gap of interest rates (microfinance vs. other loan) Bank Prime Lending Rate (%)* Corporate LoanRetail Loan Microfinance Loan Consumer Loan HousingNon Housing Mandiri10.0012.0022.0010.7512.00 BRI9.7511.7519.251012 BCA9.2510.60N/A9.508.18 BNI 10.0011.60 10.6512.25 CIMB Niaga9.8510.7519.0010.8010.70 Danamon10.0011.0019.7611.7512.49 *per 31 March 2013 Source: website perusahaan

22 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 24525% Commercial Banks 1,221 21718% Regional Development Banks 223 4319% Joint Venture Banks & Foreign Owned Banks 331 103% Total 2,737 51519% Number of SMEs & Large Enterprises *Feb. 2013 *2010 Source: Bank Indonesia, BPS

23 Domestic Financing Profile Sources of business financing: mainly from internal source IndonesiaEast Asia & Pasific Source: Enterprise survey, World Bank, 2009

24 Percentage of firms with a bank loan One of the Lowest in ASEAN Source: World bank

25 External Debt Outstanding Source: Bank Indonesia

26 Capital & Financial Account Grew highly after 2008 crises Source: Bank Indonesia

27 Domestic credit provided by banks* Banking roles in financing is the lowest Source: World Bank *% of GDP

28 Rate of Return on Commercial Bank Equity Indonesian banking: the highest Source: ADB

29 Component of Lending Rate Base Withheld by interests ComponentBarrier Cost of Loanable Fundbig depositors bargaining possition Overhead Costbank efficiency Marginshareholders interest Taxgovernment regulation Risk premiumeconomy & politic stability

30 Charactersitics of Indonesian Banking Dominated by big depositors over Rp. 5 billion Classification of deposit Number of Account (%)Value (%) N < 100M97.5915.64 100M < N < 500M1.8314.64 500M < N < 1B0.38.43 1B < N < 5B0.2417.92 N > 5B0.0543.38 Total100 Source: Bank Indonesia

31 Banking Loans Distribution Mining grew highly, manufacture sector slower Source: Bank Indonesia

32 Loan Distribution by Sector Decreasing loans to manufacture, increasing to trade sectors Source: Bank Indonesia

33 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.

34 Market Capitalisation vs GDP Limited role of capital market to economy in Indonesia Source: World Bank *data tahun 2011

35 Number of listed companies Less than 500 Indonesian companies go public Source: World Federation of Exchanges Data per 2012

36 Asia Growth Index IHSG, the most expansive after 2008 crises Source: Yahoofinance

37 Indonesian Indices by sector Consumer good, the most attractive Source: Yahoofinance

38 IDX Financial Data & Ratios, 2011 Consumer goods went higher then the others IndustryEPS (Rp)BV (Rp)PER (x)PBV (x) Consumer Goods Industry5,67913,81316.28.7 Agriculture1,2981.793.92.2 Miscellaneous Industry7282,33412.21.0 Mining4841,38416.13.0 Basic Industry and Chemical2431,3064.10.9 Finance11872710.31.3 Infrastructure, Utilities & Transportation9195211.02.0 Trade, Services & Investment871,62722.32.3 Property, Real Estate And Building Construction6441723.11.4 Sumber: IDX Statistics 2012

39 Issuance Volume of Bond Market, 2012 Bonds as financing resources in Indonesia: Very Low Source: ADB

40 Asian LCY Bond Returns Index Indonesian bonds return: the Highest in Asia Source: ADB

41 Foreign Holdings in LCY Government Bonds High return attracted foreign investors Source: ADB

42 Foreign Ownership on Portfolio Investment Foreign investors domination Year Bank Indonesia Certificate (SBI) % Tradable Governmen t Securities SBN %Equity%Total 20088.41087.41745260 548 200944.1851081978361 935 201054.9327195.76311,18463 1,435 20117.810222.86311,21160 1,442 20120.410.3270.5233 1,484 59 1,755 Source: Bank Indonesia, MOF, KSEI

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