Ownership concentration is a problem in many emerging markets, as if a dominant shareholder seeks to sell this can undermine the bank’s share price. As a consequence the capital adequacy of the bank may be threatened, which will result in the bank having to reduce its assets by curtailing new financing. Hence there is a credit squeeze which can adversely affect the bank’s clients.
The move by the Indonesian caentral bank will ultimately strengthen Islamic banking in the country as having a diverse shareholder base reduces vulnerability. Shareholders can enter and exit at different times stabilizing share prices. The new regulation may be prompted by the need for the Indonesian central bank to prepare for the implementation of Basel III which tightens the rules for capital adequacy.
Islamic banks should not be mere prestige projects for rich investors but instead be open to middle class investors of more modest means who may also be the banks’ clients.
RODNEY WILSON
Emeritus Professor, Durham University UK
In my opinion, the newly announced New Bank Ownership Rules have brought certainty to the process of investing (and eventually acquiring) Indonesian Islamic and conventional banks. The essence of the requirements has not changed, as Bank Indonesia, the central bank, still has a lot of discretionary powers to allow investors (foreign and domestic) to hold more than the 40% limit as imposed on banks and non-bank financial institutions wishing to invest in Indonesian banks. Furthermore, publically listed banks may acquire up to 99% of an Indonesian bank, if they fulfill the fit and proper criteria as advertised by Bank Indonesia.
In essence, there is nothing in the New Bank Ownership Rules which may adversely impact the investing into Indonesian banking sector. The removal of uncertainty in the processes and procedures is definitely going to help investment into the sector.
PROFESSOR HUMAYON DAR
Chairman, president & CEO, Edbiz Consulting
Many developing countries have rules which restrict the proportion of a local bank which may be owned by a foreign shareholder, and often require a significant part of the local bank’s shares to be owned by domestic shareholders. Conversely such rules are relatively uncommon in advanced economies.
While such ownership restrictions are always justified on grounds such as prudential regulation, development of local enterprise etc. their effect is almost always negative. They make the country a less attractive destination for inward investments, and the main beneficiaries are typically well-connected local businessmen who can serve as the legally mandated domestic partners for foreign investors.
Against that general background, the new bank ownership rules announced by Bank Indonesia in July appear relatively well designed. For example, it is appropriate to require significant foreign shareholders to have good corporate governance. Upon first impression, the new rules do not require foreign shareholders who exceed the new standard 40% threshold to divest, provided that the Indonesian bank concerned continues to be financially healthy.
Accordingly the design of the rules is unlikely to harm the Indonesian Islamic banking sector or to inhibit its growth. While there will be a standard 40% limit on foreign ownership, with the advance permission of Bank Indonesia appropriately qualified foreign banks will still be able to set up or purchase subsidiary banks in Indonesia which are almost wholly-owned. This should enable the sector to continue to benefit from foreign Islamic banking expertise and avoid reducing competition in the Indonesian Islamic banking market.
MOHAMMED AMIN
Islamic finance consultant and former UK head of Islamic finance at PwC
Medium impact. While the regulation aims to promote financial stability, I feel that it does not reduce Indonesia’s competitiveness because the regulation provides for a myriad of exemptions (which can appear confusing to some). For example, the 40% maximum shareholding is not applied to all financial institutions across the board. It applies to certain categories of financial institutions deemed as ‘relatively healthy’ or ‘unhealthy’. The regulation also allows Bank Indonesia to provide approval for certain shareholders wishing to hold more than a 40% stake in financial institutions — if they meet the required criteria.
HANIM HAMZAH
Partner, Roosdiono & Partners, a member of ZICOlaw (Zaid Ibrahim & Co)