Indonesia banking bill: proposed restrictions on foreign investment

Publication | July 2014

Introduction

Indonesia’s House of Representatives is currently considering a new draft banking bill (the Banking Bill) which, if passed into law in its current form, will:

  1. prohibit foreign banks from operating in Indonesia through branch offices; and
  2. cap foreign ownership of an Indonesian bank at 40 per cent of the total issued share capital of that bank.

Cap on foreign ownership

In July 2012 Bank Indonesia published a new regulation, Regulation No. 14/8/PBI/2012, limiting the ownership by a single shareholder or corporate group (whether domestic or foreign) of Indonesian banks (the New Bank Ownership Rules).

The New Bank Ownership Rules apply to both foreign and domestic shareholders and, subject to certain exemptions, limit the ownership of an Indonesian bank as follows:

  1. a single bank or non-bank financial institution can hold up to 40 per cent of the issued share capital of an Indonesian bank;
  2. a single non-financial institution can hold up to 30 per cent of the issued share capital of an Indonesian bank; and
  3. individuals can hold up to 20 per cent of the issued share capital of an Indonesian bank. The limit is 25 per cent of the issued share capital for individual shareholders if the Indonesian bank is an Islamic bank.

The New Bank Ownership Rules do not cap foreign ownership of Indonesian banks (although these rules do have a disproportionate impact on foreign shareholders compared to domestic shareholders) and therefore currently a foreigner can still own up to 99% of the issued share capital of an Indonesian bank. However, the Banking Bill takes the New Bank Ownership Rules further and propose to cap foreign ownership of an Indonesian bank at 40 per cent of the total issued share capital of that bank.

The House of Representatives have made public statements that the Banking Bill will not apply retrospectively and that therefore it will not affect existing foreign shareholdings in Indonesian banks that are greater than 40 per cent. However, if the Banking Bill is passed into law in its current form then shareholders who today hold more than 40 per cent of an Indonesian bank would be required to divest their shareholding down to 40 per cent within a defined grace period (which in the current draft of the Banking Bill is stated to be somewhere between 5 and 10 years).

Regardless as to whether the Banking Bill is intended to apply retrospectively or not, it does provide the Indonesian Financial Services Authority (the OJK) with the power to amend, on a case by case basis, the 40 per cent cap but subject to:

  1. the relevant Indonesian bank/foreign shareholder having (amongst other criteria) a good track record of compliance, corporate governance and capital adequacy; and
  2. the OJK obtaining the prior approval from the House of Representatives – how this will work in practice is unclear. However, the Banking Bill does introduce into law the concept of reciprocity (which was first proposed by the OJK/Bank Indonesia during the DBS/Bank Danamon saga). In this regard, the decision of the OJK and the House of Representatives to increase the foreign ownership cap above 40 per cent would appear to depend on how Indonesian banks would be treated if they were to try and invest in a bank in the ‘home jurisdiction’ of the relevant foreign shareholder.

Foreign bank branches

The Banking Bill will prohibit foreign banks from operating in Indonesia through branch offices. If the Banking Bill is passed in its current form, existing branches of foreign banks will need to be converted into an Indonesian incorporated bank within 5 years.

The conversion would require the foreign bank to incorporate a new bank in Indonesia and then transfer the business of the existing branch into that newly incorporated bank – a process which is not straight forward in Indonesia and can be both time consuming and costly. Presumably, the foreign bank will only be allowed to hold 40 per cent of the issued share capital of the newly incorporated bank in light of the new proposed cap on foreign ownership.

Commentary

It is important that our clients note that the Banking Bill is a draft bill and may not be passed into law in its current form. However, this is the latest proposal by Indonesia to try and limit foreign investment in the country’s banking sector. In that regard, we are advising clients to be prepared for the possibility that Indonesia may impose some form of cap on foreign ownership in the banking sector. Based on the public comments made by the House of Representatives to date, it is unlikely that any such cap will have retrospective effect but we will need to wait and see the final version of the Banking Bill in the coming months.

If Indonesia does impose a cap on foreign ownership in the banking sector then some foreign capital may leave Indonesia and flow into other SE Asian economies such as the Philippines which is on the cusp of allowing 100 per cent foreign ownership of banks.


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Anna Tipping

Anna Tipping

Singapore
Craig Loveless

Craig Loveless

Singapore