Two years ago, when the government sold off part of Indonesia's biggest bank, Bank Mandiri, in a $330 million initial public offering, the event was hailed as a milestone in the country's emergence from the 1997-98 Asia financial crisis. The IPO of the bank, a combination of four money-losing institutions that had been taken over by the government at the height of the crisis, was supposed to usher in a new era of financial transparency, with loans made on the basis of rigorous risk assessment rather than politics and cronyism. In a sign of renewed confidence, Mandiri shares were snapped up by foreign investors, who now own 26% of the publicly traded stock.
But the era of good management appears to have been short. In mid-April four executives of trading and investment firm Cipta Graha Nusantara, a Mandiri client, were arrested for allegedly embezzling part of the loans the bank made to the company. No formal charges have been filed, but the detentions were just the latest bombshell in a longstanding probe of Mandiri -- still 69% owned by the government. Investigators have uncovered 28 corporate loans totaling $1.3 billion that, they allege, were made under suspicious circumstances. Officials at Indonesia's Supreme Audit Agency have begun a probe into the activities of Mandiri's executives, who are suspected of making loans on the basis of kickbacks and bribes. A spokesman for Mandiri says it is cooperating with the probe, but would not comment on the allegations.
The Mandiri scandal has also affected political circles. One of the suspect loans was made to Semen Bosowa, a small cement maker controlled by a nephew of Vice-President Jusuf Kalla, who has not commented publicly on the allegations. Kalla, as it happens, heads Golkar, the country's largest political party, which was also the party of longtime strongman Suharto. Another loan was made to Djarum, a privately owned cigarette maker. The Attorney General's office will only say it has found "procedural flaws" in Djarum's loan request.
It may sound like business as usual in Indonesia. But defenders of the seven-month-old government of President Susilo Bambang Yudhoyono maintain that, on the contrary, the bank probes prove the government is determined to crack down on corruption. "Yudhoyono is an honest, no-nonsense guy who is trying his best to rid Indonesia of its legacy of cronyism and corruption," says Ray Jovanovich, chief investment officer at Crédit Agricole Asset Management in Hong Kong. "So far there hasn't been a whiff of scandal surrounding him." Yudhoyono staffers also note that all the suspect loans were made from 2000 to 2002, before he took office.
Mandiri is by far Indonesia's biggest bank, with more than 800 branches and assets of $27 billion -- a fifth of the banking system. It's headed by outspoken CEO Edward Neloe, 62, who is credited with modernizing the bank by investing in new technology and promoting Internet banking. So far no charges have been filed against Neloe, who says he is co-operating with investigators. The attorney general's office says it has uncovered enough to find "strong indications of corruption" by bank officials, but it won't disclose any details.
Meanwhile, everyone from the President on down has taken pains to reassure the public that its savings are not threatened. On Apr. 28, Yudhoyono reminded Indonesians that their deposits were guaranteed by the government. "So do not assume the banking system is going to collapse or relapse into a crisis," he told reporters. "There is nothing wrong with Indonesian banks as institutions."
Indeed, despite the suspicions surrounding Mandiri, analysts say that Indonesian banks have never been healthier. Capital adequacy ratios are as high as 20%, and the consumer lending business is growing at 40% a year. And few seem to think the Mandiri scandal will expose new decay at the heart of Indonesia's financial system. For now the market agrees: Scandal or no, Mandiri shares are up 10% since late April.
By Assif Shameen in Singapore