Indonesian central bank regulates multiple banking service licenses

The Indonesian central bank will soon issue a regulation on multiple banking service licenses to primarily ease foreign expansion into the local banking industry, a top official said Tuesday.

The plan came as the Central Bank Governor Darmin Nasution had voiced his concern on several occasions about the aggressive expansion of foreign banks into the Southeast Asia’s largest economy while local banks lacked the ability to compete with them in the long run.

Under the planned rule, local and foreign banks operating in the country or seeking to open multiple businesses within the banking sector in Indonesia or to expand services will be required to seek approval from the central bank.

Banks will also be required to meet minimum core capital requirements.

Banks that fall short of the minimum must invite other investors or merge with bigger banks to meet the requirement.

Darmin said the bank officials have met with banking industry stakeholders to receive their input before finalizing the regulation.

“Finalization for the regulation will be set for the end of October or early November,” he was quoted by the Jakarta Post as saying.

“Expansion of the banking industry will be briefly halted. But this is good, because BI (central bank) wants to ensure that banks wanting to expand have the qualifications to do so. In the long term, prudence in the country’s banking industry will be improved significantly,” Standard Chartered economist Fauzi Ichsan said.

Fauzi said that the central bank had to be consistent in implementing the prudence requirement as the main factor to determine whether a bank could expand after the regulation was issued.

“I hope that the multiple licensing regulation will not be used to hinder foreign banks from expanding,” Fauzi said.

Darmin has urged that Singapore and Malaysia apply a reciprocal approach to Indonesian banks wanting to expand into the nations.

Singaporean and Malaysian banks operating in Indonesia currently receive treatment similar to that received by local banks.

All require one license to provide banking services.

However, foreign banks currently do not require any approval from the central bank to expand their branches or services, while Indonesian banks operating overseas must obtain licenses from their host country’s banking regulators.

The central bank and analysts have said that the planned regulation would complement a previous regulation on bank ownership.

Bank Mandiri chief economist Destry Damayanti said that the combination of the ownership regulation and the planned multiple licensing regulation showed that the central bank had a strong commitment to improving prudential standards within the industry.

Destry also said that the regulations would naturally trigger consolidation in the banking industry as they would force banks to meet certain capital requirements before expanding.

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