Jakarta – The third quarter financial reports of Indonesia's biggest banks show that the banking industry in the country remains one of the world's most profitable, as banks retained their high net interest margins (NIM) despite campaigns by Bank Indonesia (BI) to push down lending rates to expand banking in the country.
The average NIM of Indonesia's top 10 banks was 6.11 percent, according to the banks' third quarter financial reports, most of which were published last week. NIM, the difference between lending rates charged to customers and interest rates paid to deposit holders, is used to measure a bank's profitability, as a bank with a higher NIM normally sees higher interest income.
The NIM in Indonesia's banking industry is the highest in ASEAN, and among the highest in Asia. For comparison, data from IBCA Bankscope shows that the average NIM for banks in Thailand and Malaysia is currently around 2.5 to 3 percent, while the average NIM for banks in China and India is around 2 to 2.5 percent.
"This [the high NIM of Indonesian banks] is the problem for which we will seek the solution," BI deputy governor Halim Alamsyah said recently.
"We do not want banks to suffer losses, which would cause the public to lose access to credit. However, we also do not want the channeled credit to exploit the public – we should find the balance between these two," he added.
The central bank introduced the "prime lending rate" policy earlier this year, which requires banks to publicly announce the rates they charge to their most valued customers. The policy is aimed at increasing transparency so that customers can choose the best rates, consequently boosting competition in the lending market and, eventually, pushing down lending rates.
"The fact that Indonesian banks' NIM remain high shows that the prime lending rate policy issued by BI is not yet optimal," Banking expert Paul Sutaryono said over the weekend.
Analysts have also argued that the high rates charged by Indonesian banks are caused by the fact that the banking industry is controlled by a only few big banks, which are deemed as influential enough to steer lending rates in the country.
At the moment, of all the 120 banks operating in Indonesia, the 10 biggest banks control 63 percent of total banking assets of Rp 3,652 trillion (US$378 billion).
"There's an indication of monopoly," University of Indonesia economist Lana Soelistianingsih said. She explained that the monopoly occurred due to "unintentional collusion", a condition where banks operating in a country used the industry's market leaders as the benchmark for setting their lending rates, instead of the benchmark rate set by the central bank.
"Such a thing could occur based on the market mechanism. They [the banks] may not set the agreement together, but there is an indication that they are closely monitoring each other [in setting their rates]," she added.
Local bankers, however, shrugged off notions of monopoly, arguing that a high NIM is still needed to support Indonesia's fast-growing banking industry, given the fact that banking penetration in the country remains low.
"Compared to other countries, banks in Indonesia are still relatively small in terms of assets, if we don't have a large NIM, then we will see small profits that will not be enough to support our 20 to 30 percent asset growth every year," said Bank Central Asia (BCA) president director Jahja Setiaatmadja. (sat)