Tussle Over Indonesian Agency Raises Bank Supervision Risks

Tussle Over Indonesian Agency Raises Risks for Supervision
The Bank Indonesia logo is displayed at the central bank's headquarters in Jakarta. Bank Indonesia currently oversees 121 foreign and local commercial banks in the country, with total assets of 3,065.8 trillion rupiah. Photographer: Dimas Ardian/Bloomberg

A tussle between lawmakers and the government over Indonesia’s planned financial regulator has raised the risk of political interference in bank supervision, highlighting the nation’s struggle to eliminate corruption.

The Financial Services Authority parliamentary working committee, which is holding meetings this month to debate whether lawmakers can appoint two members to the nine-person board of commissioners for the agency, hadn’t reached a “compromise” as of yesterday, said Andi Rachmat, deputy chairman of the working group. The government’s proposal for the board would exclude members of parliament.

The outcome may influence the effectiveness and independence of an authority set to take over regulation of capital markets, insurers, pension funds and banks from the finance ministry and central bank. Indonesia spent 450 trillion rupiah ($53 billion) to rescue lenders during the Asian financial crisis, when anger over corruption during Suharto’s regime helped topple the dictator in 1998.

“With politicians on the board, it could make the supervision less effective,” said Iwan Wisaksana, an analyst in Jakarta at Fitch Ratings. “Bank Indonesia is concerned with this new authority because it could hamper their ability to supervise the banks and make speedier decisions.”

Call From Moody’s

The World Bank and Moody’s Investors Service are among those calling for financial regulators to be non-politicized in a nation that has for years attempted to rein in corruption. President Susilo Bambang Yudhoyono began his second term in October 2009 vowing to target the bribery and extortion that deter foreign investment.

The financial industry is dominated by banks that are products of a restructuring in the aftermath of the 1997-98 Asian crisis.

PT Bank Mandiri, Indonesia’s largest bank by assets, was formed from four state-owned lenders. In 2000, its president director Robby Djohan was removed months after the Indonesian Observer reported he refused to name the bank’s bad debtors, citing Djohan. Five years later, a successor was replaced and later put on trial for corruption charges, winning an acquittal in 2006. A director for compliance was removed in 2005 after a government probe into loans extended by the bank.

“Some government and non-government agencies are still beholden to powerful interest groups,” the Washington-based World Bank said in a 2008 report.

Suharto Clan

Former President Suharto, who ruled for more than three decades and whose family and friends had interests in businesses from trading cloves to transporting petrochemicals, was alleged to have stolen as much as $35 billion from the country, the United Nations Office on Drugs and Crime report said in 2007.

While Indonesia’s rank in Transparency International’s corruption perception index rose to 110 in 2010 from 126 in 2008, it is still in the category of countries perceived as corrupt.

In May 2010, Yudhoyono lost Finance Minister Sri Mulyani Indrawati, viewed as the public face of the drive to improve governance. She resigned to join the World Bank after she and Vice President Boediono became the subjects of an opposition campaign accusing them of abuse of authority during the 6.7 trillion-rupiah bailout of PT Bank Century in 2008.

“It is imperative that the Financial Services Authority is able to do its job properly according to its legal mandates, free from political intervention,” the World Bank’s Indonesia country office said in an e-mailed reply to Bloomberg News.

2013 Start

Parliament plans to approve the draft law for the regulator, known in the Indonesian language as Otoritas Jasa Keuangan, or OJK, “soon,” Achsanul Qosasih, vice chairman of the working committee, said last week. The agency is due to start operating in January 2013, he said.

“We need to find a way to have an oversight over the institution,” said Rachmat, a member of the Prosperous Justice Party. “We are creating an independent body but the process to recruit the members of the commission must express the balance of power between the executive body and the legislative body.”

Indonesia’s parliament wants two of its members on the financial supervisory authority’s board, alongside five government nominees proposed by the president and two former officials from the finance ministry and the central bank, said Rachmat. The government’s proposal is two former finance ministry and central bank members and seven presidential picks vetted by parliament, he said.

Deadlock Threat

The government may be worried there will be political interference, Rachmat said. Still, the law will limit the relationship between parliament and the board members, he said. A decision needs to be made before July and “if the government doesn’t accept our view, there will be a deadlock,” he said.

“Everyone is scrambling for power at the OJK: parliamentary members, the government, and naturally Bank Indonesia, as it wants first-hand information because otherwise it will be difficult to design monetary policy,” said Adrianus Mooy, Bank Indonesia chief from 1988 to 1993. “When everyone has different interests, that’s when you get into trouble.”

Bank Indonesia Governor Darmin Nasution didn’t respond when asked by Bloomberg News at parliament on June 13 about the new authority. Finance Minister Agus Martowardojo also didn’t answer questions posed by Bloomberg at parliament the same day.

Don’t ‘Intervene’

“It would be better if parliament doesn’t intervene in the OJK so that it can work more professionally,” said Anton Gunawan, chief economist at PT Bank Danamon Indonesia in Jakarta.

Moody’s said in January Indonesia’s financial supervisory framework is one of the main issues it’s studying as it determines the next move on the nation’s credit rating, which has climbed to one level below investment grade as the country rebounded from the Asian and global crises in the past decade.

“We are looking for some guidance whether or not financial regulation will be politicized,” something that may be affected by the addition of parliamentary representatives, Christian de Guzman, a Singapore-based assistant vice president at Moody’s, said in a telephone interview this week.

Bank Indonesia currently oversees 121 foreign and local commercial banks in the country, with total assets of 3,065.8 trillion rupiah.

The International Monetary Fund said in September the central bank should retain “significant access to information and to some extent a role in all supervisory issues” as the country reforms its financial regulatory framework.

Indonesia’s government in 2008 enacted regulations allowing the central bank to bail out lenders in need of liquidity. The country spent about 450 trillion rupiah, mainly in the form of government bonds, bailing out lenders to prevent them from collapsing when the rupiah lost three-quarters of its value during the Asian financial crisis.