This content is from: Local Insights

Indonesia: Tightening foreign ownership restrictions

Oene MarseilleEmir Nurmansyah
The People's Representative Council of Indonesia (DPR) has issued draft legislation on banking which would cap foreign ownership in Indonesian banks to 40% and require the incorporation of any foreign bank operating in Indonesia.

In addition to restricting foreign ownership to 40%, the draft legislation would also require the Financial Services Authority (OJK) to report to a specialised forum in the event that foreign ownership in a bank is less than 40%. It appears that the 40% ownership threshold is considered a desirable goal by the Council, although its exact intention in requiring this threshold is still unclear.

Additionally, a foreign bank would no longer be permitted to operate via a branch in Indonesia. Any foreign bank would need to incorporate its operation as a local company (in a PT or limited liability form). It is being debated whether this requirement should be applicable retroactively to the existing branches of foreign banks in Indonesia.

The draft legislation would have a far-reaching effect to the banking business in Indonesia, if it is passed in its existing form.

The existing law allows a foreign bank to own up to 99% of a qualified Indonesian bank, provided that the foreign bank complies with the so-called single presence policy, which forbids a single entity from holding a majority stake in more than one Indonesian bank. The existing law also allows qualified foreign banks to operate under a branch status (KCBA).

The draft legislation threatens to change all of these.

If the draft legislation is passed into law, and no grandfathering provision is introduced, an estimated 11 foreign branches would need to be incorporated into an Indonesian PT, including Citibank, Deutsche Bank, HSBC, JPMorgan Chase and Standard Chartered, all of which now operate as KCBAs.

Further, many of Indonesia's largest banks are controlled by foreign entities, including CIMB Niaga (majority ownership held by Malaysia's CIMB Group), Bank Danamon Indonesia (Temasek), Panin (ANZ Bank Group), Bank Permata (Standard Chartered), and Bank Internasional Indonesia (Maybank).

Oene Marseille and Emir Nurmansyah

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