Ardian Wibisono – While the global financial crisis was swallowing lenders whole and engulfing economies worldwide this year, Indonesia's banking sector did a good job of navigating the troubled waters, although the PT Bank Century scandal remains a threat.
According to the central bank, the nation's financial institutions are set for a strong start to the new year, with bad loans at a manageable level, healthy capital reserves and rising earnings.
The reason for the surprising performance? A "lack of sophistication" of financial systems, said Boediono, the former Bank Indonesia governor who was elected vice president this year.
Boediono said in February that domestic banks were largely unaffected by the crisis because they did business sparingly with their international counterparts and stuck to conservative investment options overseas, rather than gambling on the complicated financial products that devastated the West, with sub-prime mortgages being the prime culprit.
Purbaya Yudhi Sadewa, an economist at the state-run Danareksa Research Institute, said banks were also shielded by stricter rules on lending, a result of the 1997-98 Asian financial crisis, during which the nation's entire banking industry collapsed.
After the global downturn struck, domestic lenders opted to shore up their capital adequacy ratios, a measure of a bank's soundness in relation to risk, rather than pursue new lending.
The average ratio for the sector measured 17.51 percent this year through October, well above the 8 percent minimum required by the central bank.
Bankers' caution paid off, with sector profits rising 18.2 percent to Rp 38.3 trillion ($4.06 billion) in the first ten months of the year, from Rp 32.4 trillion in the year-earlier period. While the results were good for the banks, they did little to help the wider economy.
To help the nation weather the downturn, Bank Indonesia gradually cut its benchmark rate to 6.5 percent in August from 9.5 percent last December. Commercial banks, however, were slow to reduce their lending rates in kind, a move that would have boosted economic activity. At the height of the crisis, distrust ran rampant and banks stopped lending to one another. This lack of liquidity translated into a premium for depositors' funds, with banks competing to raise interest rates on deposits to attract fresh capital, while keeping lending rates high to pay depositors.
The situation began to improve in August, when more than a dozen of the largest domestic banks agreed to gradually decrease their deposit rates to no more than a half-point above Bank Indonesia's key rate. Lending was also lifted by rising exports and domestic demand in the third quarter.
Bank Indonesia director of banking research and regulation Halim Alamsyah said credit demand had definitely suffered this year as a result of the crisis.
Sigit Pramono, chairman of the Indonesian Banks Association (Perbanas), said the Rp 279 trillion of undisbursed loans as of the end of October showed persistent low demand for credit.
"It indicates that the real sector has not needed external capital for expansion. In fact, the high undisbursed loan figure might indicate that they are not running at full capacity, so low credit growth is not only caused by lenders," he said.
Before the downturn, the government had hoped credit expansion would top 20 percent this year. BI figures show lending up only 5.3 percent to Rp 1,377 trillion in the first ten months of 2009 compared with the year-earlier period.
"However, we have begun to see significant loan growth in the first week of December," Sigit said. "It may indicate that credit growth may rise further [in 2009] and signal higher loan demand next year." Full-year loan growth may reach 7 percent this year, below the central bank's downwardly revised expectation of a 10 percent rise, he added.
However, not all domestic banks were so fortunate this year. Some people may have forgotten small lenders PT Bank IFI and PT Bank Tripanca were liquidated by the government this year for failing to maintain positive capital adequacy ratios.
It is highly unlikely, however, that people would have forgotten that the government decided to step in and save midsize lender Bank Century in November 2008 because of worries its failure would pose a systemic threat to the financial system. The political fallout of the Rp 6.7 trillion ($710 million) bailout has loomed over the banking system this year, with the House of Representatives and the Corruption Eradication Commission (KPK) both initiating investigations.
The probes are looking at why Bank Century was allowed to operate after frequent breaches of banking rules since 2001, and if the rescue funds found their way into political parties' coffers.
Financial analysts and executives have argued that the Bank Century probes are politically motivated, targeting two of the country's key economic architects – Vice President Boediono and Finance Minister Sri Mulyani Indrawati, who were key players in rescuing the lender.
"The case has become a fight among the political elite. The public's interest in transparency and accountability in the bailout decision has been put aside," Yanuar Rizky, an independent financial analyst, told the Jakarta Globe.
Another expert blamed the political tensions over the Bank Century row for sluggish lending.
"Demand for loans from the real sector has not increased quickly after the presidential election, and this is probably due to big corporations delaying expansion because the political situation has heated up," Mirza Adityaswara, chief economist at PT Bank Mandiri, said. If political infighting continues to dominate the headlines, the government's goal of 5.5 percent economic growth may not be met, he added.
Sigit, who is also the publisher of the Jakarta Globe, said the Bank Century case remained the biggest challenge for the finance industry as well as the broader economy next year.
"To reach the 5.5 percent growth target in 2010, we will need credit growth of around 22 percent. While there is room to reach the [credit] target, the Century case could mean expansion does not happen as quickly as we expect." Bankers were also worried the probes could lead to the account information of innocent depositors being revealed, leading to a collapse of trust in the financial system, he said.
"Public trust toward the banking system should be maintained by guarding client confidentiality. If there are legal problems, we encourage them to be solved, but please do not sacrifice the trust that we have built up at a huge cost since the 1998 crisis," Sigit said.