Foreign banks gain currency

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ONE striking aspect of a recent fraud case that targeted wealthy customers at American lender Citibank earlier this year is that it has not led to a backlash against foreign banks. This is despite protectionist sentiment being an important theme in Indonesia’s modern history.

Since March 23, when Citibank wealth manager Malinda Dee was detained on suspicion of embezzlement, Citibank’s Jakarta office has faced a public relations nightmare. Bank executives have also had to deal with an unrelated case in which Mr Irzen Octa, a bank customer, was found dead in a Citibank branch office. Mr Octa had allegedly been interrogated by third-party debt collectors about his credit card debts.

South-east Asia’s largest economy offers many opportunities for foreign financial institutions. Bank credit as a proportion of GDP stood at 28 per cent last year, compared with 92 per cent in Thailand, 113 per cent in Singapore and 120 per cent in Malaysia. More than 90 per cent of Indonesia’s adult population do not have credit cards. Corporate lending, although growing at double-digit rates, remains underdeveloped.

Current bank ownership rules are very liberal, permitting 99 per cent foreign ownership of domestic banks. About half of the nation’s banking sector assets are owned by foreigners.

Dee is accused of abusing her customers’ trust by obtaining blank signed forms or blank cheques that she used to withdraw higher amounts of funds than what her clients requested. The embezzlement was discovered when three of her victims approached Citibank over unauthorised fund transfers totalling 17 billion rupiah (S$2.4 million). Police later said Dee had embezzled funds from 123 former clients, from as early as 2003.

Bank Indonesia (BI) investigators say bank executives failed to comply with banking regulations that might have prevented the fraud. Citibank has been slapped with several sanctions, including being barred from adding new clients to its wealth management business for a year.

Fraud of the type perpetuated by Dee is not uncommon. In May, for example, two cases of missing funds at Taiwanese-owned Bank Mega involving 191 billion rupiah emerged. Banking sources say that such matters are usually settled quietly in order to avoid unsettling depositors. The BI investigates and imposes appropriate penalties on the bank involved. Embezzlers are also charged in court.

The fraud at Citibank became a public issue because Parliament’s Commission XI (on banking and finance) raised the matter in the context of the need for more effective banking regulation. It also looked at debt collection practices following the death of Mr Octa.

State banks are frustrated at the difficulty in expanding branch networks overseas, and they complain that foreign banks in Indonesia face few restrictions. The media also takes an occasional swipe at foreign banks. Late last month, the influential Indonesian-language Kompas newspaper published a front-page report detailing the increasing foreign domination of the banking industry.

Overall, however, resentment against foreign investment remains muted. “To sell the idea that foreign banks should be controlled, you need people to be discontented,” Standard Chartered’s senior economist Fauzi Ichsan explained to me in Jakarta. Mr Octa’s relatives may be upset, but they hardly constitute an influential political voice. And Citibank has agreed to compensate Dee’s alleged victims.

Many Indonesians remember the chaos in the late 1990s, when local banks dominated the financial system. Resistance to banking reform and controversial International Monetary Fund prescriptions during the period was much lower in Jakarta than in Seoul and Bangkok.

Today, foreign banks are needed in Indonesia because they have the capital to ensure that local institutions are able to meet Basel standards – a critical requirement if the banking sector wishes to maintain its international financial links.
Commission XI members, meanwhile, are preoccupied with a debate about a proposal to strip the BI of its regulatory powers and hand them to a specially created financial regulatory body. Given these circumstances, economic nationalist sentiment is unlikely to gain much traction.

Copyright © 2011 Singapore Press Holdings Ltd

Key Political Risks

The inability of the government led by Prime Minister Yingluck Shinawatra to bridge the deep divisions between her populist government and its royalist opponents in the military and bureaucracy remains a major concern.

Prime Minister Yingluck has selected a competent economic team, but it is difficult for these technocrats to deliver on the new government's campaign promises without triggering inflation or hurting business. 

The government has also been unable to resolve the ongoing insurgency involving ethnic Malay Muslim rebels in the south.

 

WATCH OUT FOR:

  1. Attempts by the government to amend the constitution. The proposed rewrite is aimed removing legal measures initiated by the royalist generals who overthrew former Prime Minister Thaksin Shinawatra, the current prime minister's elder brother, in 2006.
  2. Ballooning government debt as officials seek to finance government programmes aimed at subsidising rice prices in order to retain the support of farmers.
  3. The relationship between Prime Minister Yingluck and senior generals. Coups have been a common means of regime change in Thai history, and any attempt by the government to purge royalist elements in the top brass could trigger yet another. Thailand

About Me

My name is Dr Bruce Gale and I am a senior writer with the Singapore Straits Times. I studied at  LaTrobe University (BA Hons) in Melbourne and later at the Centre for Southeast Asian Studies at Monash University (MA). My PhD thesis, which focussed on Malaysian political economy, was completed at the Malaysian National University (Universiti Kebangsaan Malaysia) in 1987.

From 1988 to 2003 I was Singapore Regional Manager for the Hong Kong based Political and Economic Risk Consultancy (PERC). 

I have written several books and articles on Southeast Asian affairs, including Political Risk and International Business: Case Studies in Southeast Asia (Pelanduk Publications, 2007). Books on language include Mastering Indonesian: a guide to reading Indonesian language newspapers (Pelanduk Publications, 2008)

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