Some analysts have again expressed serious concern over increasing foreign ownership of banks in Indonesia, arguing this makes it more difficult for Bank Indonesia (the central bank) to guide monetary policies and bank lending for national economic development.
The issue surfaced again when Infobank monthly magazine announced the results of research last week showing that foreign ownership of the country's banking assets has increased to 47 percent as of June this year, compared to less than 20 percent prior to the 1997 economic crisis.
Foreign investors have expanded their ownership of banks in the country after the economic crisis forced the government to nationalize all major private banks and bail out the state banks.
When economic rationality and the need for good corporate governance eventually required government to sell almost all of the nationalized banks to the private sector, it was mostly foreign investors who won the competitive bids, thanks to their financial strength and technical and managerial competence.
But we don't see the increasing foreign ownership of banks as really being the issue. Rather the trend indicates the positive perceptions of foreign investors as to the country's long-term economic prospects. Foreign investors would not have been interested in putting up a larger capital stake in our banking industry if economic conditions had not been improving, because a bank can only be sure of robust growth in an expanding economy.
We instead welcomed the government's decision in the early part of the decade to gradually reduce its direct involvement in the banking industry and instead focus resources on strengthening the regulatory framework and supervisory systems for the whole financial service industry.
The experience of many countries including South Korea, Thailand, Malaysia and Mexico highlights the positive benefits of entry into domestic financial services markets of major international banks with a sound reputation in terms of development of good governance.
Look at how almost all of our best professional bankers were formerly executives of foreign banks in Indonesia or overseas, or have built up years of working experience with foreign banks.
A bank is not simply an ordinary business entity, given its vital role as a purveyor of lifeblood (credits) for the economy as well as its fiduciary responsibilities and the multiplicity of transactions it is involved in.
This is precisely why the principles of good corporate governance for banks are much tougher and more elaborate than those for many other business sectors. That is why not everybody who can put up adequate capital can have the controlling ownership of a bank. Those who want to become controlling owners and members of the management and supervisory boards of banks (as commissioners) have to pass the "fit-and-proper test" by the central bank to assess their technical competence, business vision and philosophy and integrity.
Put another way – banks are among the most heavily-regulated and supervised industries in the world.
Good governance and corporate responsibility are prerequisites for the integrity and credibility of financial market institutions. Banks are institutions founded on trust. By building confidence as well as good governance banks can gain access to external finance and are able to make reliable commitments to depositors, creditors and shareholders.
Given the special role and character of bank operations, banks are put under a multilayered supervisory mechanism and are subject to the Indonesian Banking Sector Code of Corporate Governance.
This code requires banks to set up audit and risk policy committees and the internal auditor of a bank must be approved by its commissioners. The audit committee has to ensure the adequacy and effectiveness of internal control systems to facilitate prudential banking practices and in compliance with auditing standards.
On top of all this, a bank must still have a compliance director specially in charge of ensuring that bank activities comply with laws and regulations, internal procedures and directives from the central bank.
No other businesses are required to have a compliance director in the same way. So why worry about the nationality of bank owners.
All these supervisory and regulatory frameworks mean we can rest assured that it is not the nationality of bank owners that matters as much as the capital resources, business philosophy, technical competence and integrity of the bank and its major or controlling interests.
Even if a bank is controlled by national interests, neither the government nor the central bank can intervene directly, for example, to direct its lending to particular clients, because this would take us back to the bad old days and to banking practices that could lead to another banking crisis, like the one in 1997-1998.
It is of paramount importance that the government should continue to strengthen the legal and regulatory framework of the banking industry and steadily improve the investment climate by reducing business risks and attendant risks of non-performing bank lending.