Study on the
Organization of the Thesis
Yüklə 0,82 Mb.
|
- Bu səhifədəki naviqasiya:
- Chapter II. Financial System in Indonesia
Organization of the ThesisThe organization of the thesis is as followsL: Chapter I will cover the purpose and overview of this thesis Chapter II will examine the structure of the financial industry, monetary policy and the securities market. This chapter will focus on explaining the distinctive characteristics of the financial system and serial financial system reforms, which later triggered the financial crisis. Chapter III will analyze the Indonesian financial crisis in connection with the problems of the financial system. Chapter IV is the conclusion. In this chapter, I will review the thesis briefly and give my opinion on the core problems of the financial system in Indonesia and Korea. Chapter II. Financial System in IndonesiaStructure of the Indonesian Banking IndustryThe Banking System The Indonesian banking system had incorporated a strict regulation on entry, interest rate, foreign exchange transaction, reserve requirements, establishment of branches, and so on. Some serial financial reforms, i.e., liberalization of interest rates, elimination of credit ceilings and introduction of indirect monetary instruments since 1983 had released a number of regulations. The Indonesian banking system can generally be divided into three parts, such as, the Bank Indonesia, state-owned banks and private commercial banks. The Bank Indonesia The Bank Indonesia is the central bank of the Republic of Indonesia. The Bank Indonesia controls the overall financial system and has responsibility as being the lender of the last resort. Although the Ministry of Finance has authority to grant and revoke bank licenses, the Bank Indonesia has authority over the bank supervision and regulation. The Bank Indonesia has adopted a supervisory system similar to the U.S. CAMEL system (Capital adequacy, Asset quality, Management, and Liquidity) and annual on-site examination of banks. The major functions of the Bank Indonesia are as follows: First, it controls the aggregate amount of liquidity and stability of the currency, the Rupia, through the reserve deposit. Second, it endeavors to contribute in supporting the productivity and development of every economic sector. Third, it supervises and regulates all the financial institutes except the insurance companies. Fourth, it issues money and holds the official foreign reserve. Lastly, it develops and implements monetary policies according to the decision of the Economic Stabilization Committee. The State-Owned Banks The state-owned banks have been dominant players in the banking industry, though domestic private banks and joint venture banks with foreign banks have grown rapidly in recent years. Initially, business areas of state-owned banks were restricted to their traditionally specialized areas pursuant to the Bank Act of 1968. The Banking Act of 1968, which was replaced by the Banking Law of 1992, defined the major areas of concentration for each stated-owned bank. In practice, this restriction was not strictly implemented. The new banking law that was introduced in October of 1988 released a functional specialization for state- owned banks. In addition, the Bank Act No.7 of 1992 converted the state- owned banks to limited liability companies and allowed them to lend to non- priority sectors. Although the distinction has faded after the reform of the bank law, the seven state-owned banks consist of five sectarian banks, a developed bank and a savings bank. Specifically, they are, Bank BNI, Bank Dagang Negara(BDN), Bank Bumi Daya(BBD), Bank Rakyat Indonesia(BRI), Bank Ekspore Impore Indonesia(Bank Eksim), a development bank, Bank Pembanguman, and a saving bank, Bank Tabungan Negara(BTN). The state- owned banks possess a number of problems, such as, overstaff in-efficiencies and under-capitalization. Despite the fact that state-owned banks legitimately became private entities pursuant to the new bank law, the Ministry of Finance announced that no state-owned banks might default on its obligation under the government umbrella. In fact, the government still maintains the majority of the stockholders and intervenes in every function of the bank, especially in the decision process of fund distribution and personnel affairs. Such environment caused the state-owned banks to become morally hazardous and inefficient. The main role of Bank BNI is to support the development project relating to industry, agriculture, transportation and export of domestic commodities. Bank Dagang Negara(BDN) supports the mining industry and export industry Bank Bumi Daya(BBD)’s specialty is to support the agriculture, forestry and plantation Bank Rakyat Indonesia (BRI) is responsible for the development of rural areas and their residents. Bank Ekspore Impor Indonesia (Bank Ekxim) is a specialized bank for international trade The 27 province governments own the Regional Development Banks (RDB) that operates as the commercial bank or fiscal agent. . Private Banks Indonesia has a very generous policy in establishing a financial institute. The banking industry reforms of 1988 lifted many restrictions. The policy of the low barrier to enter has resulted in a surprising increase in the number of banks. The number of banks reached about 240 in March 1994. Almost all of the large business conglomerates and many pension funds of state-owned companies have their own banks. Though Korea had a 2.5 times bigger scale of economy than that of Indonesia before the foreign exchange crisis in 1997, Korea now has only 26 banks. At present day, the Indonesian authorities place stricter limits on the granting of new license in order to stabilize the financial situation and to prevent newly established banks from going bankrupt. Commercial banks are not allowed to engage in securities undertaking, brokerage or trading. As a result, many banks established subsidiary companies to participate in the securities markets. The regulation to limit the extent of business areas of commercial banks precipitated the emergence of financial conglomerates. There were 77 licensed foreign exchange banks as of December 1995. The requirements for domestic foreign exchange banks to open branch offices overseas have been relaxed. Twenty Indonesian foreign exchange banks have branch offices and representative offices in 14 foreign countries. All of these banks have off-shore banking units in the Cayman and the Cook island. The main operations of foreign exchange banks are presumed to be to launder obscure and illegitimate transactions of their customers at home. Foreign banks can establish banks through a joint venture with local banks and the acquisition of shares of domestic banks that are floating in the stock market. The foreign banks may hold a maximum equity ownership of 80 percent. The only way for the foreign banks to do so is through a joint venture. The Indonesian authorities prohibited foreign banks from establishing wholly owned subsidiaries. In addition, the Indonesian authorities imposed a higher initial capital requirement on foreign banks compared to that of newly established domestic banks. The private national banks may open branch offices anywhere in Indonesia and the requirements for domestic foreign exchange banks to open branch offices overseas have been relaxed. However, foreign banks and joint venture banks whose operations were confined to activities conducted within Jakarta may still open sub-branches in seven other major areas. The main customers of joint venture banks and foreign banks are generally multinational companies from their own countries. The American companies are engaged in the natural resource sector while Japanese companies and ANIEs (Asian New Industrializing Economics) are mainly related to non-oil manufacturing sectors. Many newly established joint venture banks are associated with the Japanese banks. The American banks have secured major customers and retail markets through their advanced technology, products and networks. One of the most important roles of foreign banks are, coordinating the private sectors’ loans to Indonesian companies and government, and acting as a channel for obtaining assistance in official development from their respective governments and from multinational institutes. There are about 8,000 villages or regional banks in Indonesia. These banks are Bank Perkeditan Rakyat (BPR), which may not even have branch networks nor issue demand deposits. Their asset portfolio, especially in deposit accounts, is severely limited. Accordingly, it is highly vulnerable to solvency. These banks represent an aspect of instability in the Indonesian financial system. Characteristics of the Banking Industry Composition of the Banking System The banking system holds a core position in the Indonesian financial system in terms of total assets and the number of offices. Although the NBFIs including securities companies, leasing companies, insurance companies and pension funds have grown rapidly in recent years, the banking system had held over 90 percent of the gross assets in the financial system in 1991. Table 1. Structure and Growth of the Financial Sectors, 1969-94
Source: 1. Bank Indonesia, Indonesian Statistics and Annual Reports 2.Department of Finance, Statistics of the Finance Companies,1991 3.WIDER, Research for Action 27, The Banking System and Monetary Aggregates Following Financial Sector Reforms, Lesson from Indonesia, Anwar Nasution. In particular, state-owned banks have held the largest portion in the banking system. Although the assets of private banks surpassed those of state-owned banks after the reform of the banking system in the 1990’s, the state-owned banks still maintain their dominant status in the Indonesian banking system Table 2. Market Share of Banking Institutes by Ownership (unit: percentage of total)
Notes: 1. Some non-foreign exchange banks became foreign exchange banks in this period The state-owned Bapindo is included in the category of Development banks Sources: 1. Bank Indonesia, Indonesian Financial Statistics. 2. WIDER, Research for Action 27, The Banking System and Monetary Aggregates Following Financial Sector Reforms, Lesson from Indonesia, The Indonesian financial authorities have implemented various financial reforms since 1983 for the purpose of lifting the numerous restrictions on the banking system. There were no competent or prudent supervisory institutes, nor a sound system, which could have brought a healthy development of the banking system. To be specific, the Indonesian financial system had not been equipped with a sound infrastructure to digest advanced reforms. The banking sector had to lower the credit standard due to severe competition provoked by the deregulation and continued to operate on the basis of the already outdated principles under the previous financial repression. Their valuation practices were mainly based on the historical book records instead of market value or quality of collateral. Credit risks and interest risk were not sufficiently considered. Banking regulation and supervision were enforced, which generally focused on judicial compliance rather than on risk evaluation of individual banks. A more restrictive CAMEL (Capital adequacy, Asset quality, Management, Earning, Liquidity) system and annual on-site examination of banks for regulating and supervising were introduced in February 1991, i.e., after more than 2 years since the introduction of the drastic banking reforms in October 1988. Above all, these problems imply that lending limits were abolished without any safety measures. As a result, the fragile infrastructure caused a huge amount of NPLs (Non-Performing Loans) of banks. The NPLs problem of state-owned banks was at a serious level. It can be shown by the recovery case of Bapindo, which had built-up overwhelming percentage of NPLs. Table 3. Commercial Banks’ Non-Performing Loans, 1993-95 (unit: percent of total credit)
Note: 1. Bad loans are the lowest quality of the three categories of non- performing loans, which are sub-standard, doubtful and loss Source: 1. Bank Indonesia, World Bank 2. IMF Working Paper, The Indonesian Financial System, John Montgomery Under-capitalization of banks and non-compliance with certain important rules demonstrate further serious problems of the Indonesian banking system. The Indonesian financial authorities were not able to improve nor forcefully and consistently implement their policies due to without necessary regulation regarding under-capitalization of banks. Table 4. Number of Banks in Non-Compliance with Prudential Rules, 1995
Source: Bank Indonesia, reported in “banks suffer U$4.5bn in bad loans, Indonesian Observer, January 26,1996, and Report of the Financial Year 1994/95. Most large banks are closely connected to the Indonesian private conglomerates. This situation has produced many problems for a long period of time. These banks are not able to evaluate their sister companies on a commercial basis. It also caused a moral hazard for both banks and their sister companies, enabling the raising of funds without much effort. Inefficiencies in the Banking System The Indonesian banking system had been comprised of many under-capitalized banks since the serial-banking reforms were enacted in 1980’s, because many initial obligations required for the establishment had been lifted. This resulted in the emergence of a number of problems which adversely affected the efficiency of the banking system First, the under-capitalized banks tend to pursue high yield and high -risk assets since they are unable to raise funds with low cost. Furthermore, even if they fail to indemnify their liabilities, the government gives an implicit guarantee of protection. There is no incentive for undercapitalized banks, especially state- owned banks, to adopt an optimal and safe lending decision. As a result, many Indonesian banks are under a heavy burden of non-performing loans due to their hasty lending policy. Second, the undercapitalized banks are very unstable and in a vulnerable position against exogenous variables. Such circumstance restrains monetary policies from being implemented for controlling the aggregate liquidity and the foreign short-term capital inflow due to banks with poor domestic capital. If the monetary authority wishes to raise the reserve requirement level with intention to decrease the aggregate liquidity, the under-capitalized banks should decrease their liabilities as well as their high yield and high-risk assets. The under- capitalized bank may experience a dilemma because their soundness was exacerbated in addition to the fact that they must meet the 8% capital adequacy ratio. The unique ownership structure of the Indonesian banks has impaired the efficiency of the banking system. Under the Banking Act No of 1992, state- owned banks have been converted to limited liability companies. To be certain, however, the state-owned banks are still state enterprises. The government intervenes to allocate loan assets, in order that it mitigate the responsibilities of state-owned banks. This may bring a moral hazard in addition to an inefficient use of valuable funds. The state-owned banks hold a huge amount of non- performing loans compared to private banks. On the other hand, many big private banks are owned by affiliates of large conglomerates. Such situation has also distorted the financial efficiency of the Indonesian banking system. The banks are not interested in maximizing returns for them but rather in the gain and loss by the owners of the conglomerates. Furthermore, they frequently violate the permissible limit for lending in order to support their sister companies. The permissible limit for lending refers to an exposure to an individual borrower that is below 20 percent of the capital. In addition, the aggregate of the total exposure to all affiliated entities must not exceed 10 percent of the capital. The application of the relevant Indonesian laws to the financial system has aggravated the efficiency of the banking system. There are many aspects of law that may render certain issues illegal in the Indonesian financial system. The most obvious are collateral laws, which do not provide adequate frameworks for corporate restructuring and do not guarantee repayment through disposal of their collateral when borrowers go bankrupt. Loan officers of banks are not able to make rational decisions that bring the highest economic returns, so they focus on the borrower’s political background rather than on the borrower’s collateral or credit evaluation under the unreasonable legal system. In some occasions, the government forces the state-owned banks to lend huge amount of funds to strategically targeted industries, such as, the aircraft industry, automobile industry, and etc., without considering any economic factors. The state-owned banks are also compelled to lend funds to remotely appropriate corporates that are deeply involved with politicians. Stability of the Banking System The banking industry is a core sector of the national economy. The bankruptcy of the bank may result in massive disasters which may drastically damage the financial stability. Most Asian people have recognized the significance of financial stability through experiencing the Asian foreign exchange crisis in 1997. There are many factors, which may work as catalysts to trigger a serious crisis in the banking system. There is a systematic risk that exists in the banking system. One may ask whether there is any possibility that banks default on their liabilities. There is indeed such a possibility, as evidenced from what we have seen in many cases. However, this depends mainly on the government policy as well as on the legal system. If so, one may also ask whether there is any possibility that such bank’s default will cause other banks to default on liabilities of their own. Likewise, a failure by one bank may induce bank runs on other banks. A bank’s default, which depends on the governmental policy, may be cured by the central bank, which is considered as a lender of last resorts. What are the potential sources that trigger banks to go bankrupt in the Indonesian banking system? There are a number of factors which may lead to a disaster. The few obvious ones are as follows: First, most Indonesian banks prefer ‘property lending’. This refers to the banks’ lending to property developers, producers of construction materials and borrowers whose creditworthiness depends on assets, such as, real estate. If the economic cycle reaches the depression phase or if the bubble of overvalued real estate bursts, the borrowers and lenders will immediately go bankrupt. Second, no one is able to perceive the true situation of Indonesian banks due to the lack of transparency of the bank’s balance sheets. In other words, the value of banks may be over-stated compared to its true value through technical restructuring which may obscure the poor quality assets. The Indonesian financial authorities have tried to prevent such potential risks by applying a series of remedies First, the authorities had attempted to strengthen the bank’s capitalization by borrowing US$ 307 million in Financial Sector Development Project Loan from the World Bank on November 12, 1994 or by granting a government guarantee to banks in order that they may raise funds from the international market. Second, the authorities have encouraged the merging of weak banks into strong banks through various inducements, such as, favorable tax treatment, foreign exchange license, and etc. However, the policy of merging troubled banks has brought a substantial risk of bank failure on other banks. Third, the authorities have tried to accommodate good financial infrastructures, which may bring a high level of transparency of bank balance sheets through the CAMEL system, i.e., an annual on-site examination of banks by Bank Indonesia. One crucial issue that has been disregarded is the ALM (Asset Liability Management). Generally, banks borrow funds on a short-term basis and lend funds on a long-term basis. This showed that such mismatch could be a critical problem during the financial crisis period. However, such fact has continuously been ignored since the banks pay lower costs for short-term funding and earn higher profits for long-term loans. The stability of the banking system is easily affected by macroeconomic shocks, such as, the exchange rate or interest rate shocks. The aggregate of foreign currency denominated assets and liabilities of Indonesian banks have increased rapidly in recent years. Bank Indonesia limits its net foreign exchange exposure to 25 percent of the bank capital. In reality, the restriction is almost ineffective since the valuation of foreign exchange exposure is very difficult. In particular, the assets related exchange rate option written by banks and the low net exposure might work large gross exposure. In fact, Indonesian banks have a huge amount of foreign currency denominated loans, which are financed by the foreign currency deposits rather than their equity capital. If the Rupiah loses its value massively, serious difficulties will arise and any large default on foreign currency loans can depreciate the equity capital of banks. The increase in interest rates may perturb the bank’s stability. As the interest rates increase, non-performing loans will also increase because of the higher interest burden on borrowers. Meanwhile, the aggregate demand will decrease and the business profitability will be reduced. Another risk that emerged in recent years is the risk of derivative exposure. Under the relevant regulation, the bank’s derivative exposure is limited only to the extent of its interest rates and exchange rates, in addition to the fact that the potential losses may not exceed 10 percent of the bank capital. However, Bank Indonesia’s control of the derivative exposure is also a doubtful measure since the valuation of derivatives is a very complicated task. Table 5. On Balance –Sheet Bank Foreign Exposure, 1990/91-1994/95 (unit: trillion of Rupia)
Source: 1. Bank Indonesia, Indonesian Financial statistics, 1996 2. IMF Working Paper, The Indonesian Financial System, John Montgomery, April 1997 C. Financial Deepening Problems in the Indonesian financial sector have deepened with speed after a series of financial reforms that have been in force since 1983. However, development is not at a satisfactory level compared to that of neighboring countries. Ratios of M1/GDP, M2/GDP, and TAFI/GDP have risen substantially since the 1980’s. This suggests that the circulation speed and the use of money increased as a result of credit creation via financial institutes. There are a number of distinctive characteristics related to the financial deepening of the Indonesian economy. First, the ratio of the stock market value against the GDP rose rapidly. Second, the proportion of the US Dollar deposit and the share of the banks’ credit denominated in US Dollar of the total credit at commercial banks increased quickly and reached an apprehensive level. Because of the weak Indonesian economy and the Rupia, the increase in the amount of conversions of the Rupia to the US Dollar have made the interest rate become more easily alterable by the international interest rate. Such phenomenon has been proven to be a substantially dangerous factor to the Indonesian economy during the foreign exchange crisis period. Table 6 Size of the Financial Sector in Southeast Asia, 1989-94 (unit: in percent of GDP)
Source: International Financial Corporation, Emerging Stock Markets Factbook International Monetary Fund, International Financial Statistics, World book,. The Emerging Asian Bond Market. Table 7 Financial Deepening of Indonesian Economy (unit: %)
Source: 1. Bank Indonesia, Indonesian Financial Statistics and Annual Reports 2. WIDER, Research for Action 27, The banking system and Monetary Aggregates Following Financial Sector Reform, Anwar Nasution,1996 Note: 1. M1 (narrow money) includes currency, coins, demand or checking deposits and other current deposits which are highly liquid 2. M2 (broad money) is equal to M1 plus the less liquid savings and time deposits, money market mutual fund shares available for individuals, overnight repurchase agreement and foreign exchange deposits 3. TAFI is the total asset of financial institutes Yüklə 0,82 Mb. Dostları ilə paylaş:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||