Indonesian House Ratifies AFAS Law to Bolster Up Local Banks Go International

Minister of Finance Sri Mulyani Indrawati in the 23rd Plenary Meeting of Parliament, in Jakarta (26/04) - Photo by Finance Ministry

JAKARTA (TheInsiderStories) – Indonesian House of Representatives has agreed to ratify a protocol to implement the Sixth Package of Commitments on Financial Services under the ASEAN Framework Agreement on Services (AFAS) on Thursday (26/4).

The Sixth Protocol of AFAS is a stage of cooperation in the opening of ASEAN financial services market access. Currently, there are still few national banks that have branch offices or business units abroad due to various terms and conditions made by each country.

Therefore, with the legalization of AFAS as the Act, it opens the opportunity for Indonesian banks to go international. Furthermore, by ratifying the protocol, Indonesia will commit to liberalizing its banking market by allowing banks from other ASEAN countries to open branches.

Minister of Finance Sri Mulyani Indrawati said AFAS will compliment the ASEAN Banking Integration Framework (ABIF), which seeks to provide market access and operational flexibility for ASEAN’s banks that have met the requirements agreed by member states are also called Qualified Asean Banks (QAB).

ABIF provides a guideline for ASEAN member countries to support the ASEAN Economic Community (AEC), which aims to liberalize the banking market by 2020.

“Based on this principle of equality, it is agreed that a number of facilities for national banks to enter ASEAN countries starting with Malaysia,” she said after meeting with the parliament on Thursday (26/04)

Currently there are still few national banks that have branch offices or business units abroad due to various provisions and requirements deemed troublesome from countries where national banks are interested in expanding.

Before the ratification, Indonesian state-owned lender PT Bank Mandiri Tbk (IDX: BMRI) has started initiation to open full branch office in Malaysia last year. The bank has been appointed by the Financial Services Authority as a QAB from Indonesia to Malaysia on May 22, 2017. In the early stages, Bank Mandiri operates two branches serving wholesale and retail banking business.

The role of financial and insurance sector in ASEAN countries is very diverse. In Indonesia, the financial and insurance sector contribute 8.9 per cent to the country Gross Domestic Product (GDP) by 2017, lower if compared to Singapore that reach 12.87 per cent.

This shows the opportunity of financial services investment is widely tremendous in Indonesia. In terms of the ratio of credit distribution to GDP, banks in Indonesia are also the lowest among ASEAN member countries.

The low ratio of bank credit to GDP is likely due to the high net interest margin. This reflects the need of banks in the Indonesia to cover higher operational costs as a result of the country’s unique geographical conditions.

This is also evident from the high cost to income ratio of banks in Indonesia among the ASEAN countries, which reached 75.4 per cent. Meanwhile the Philippines 64.2 per cent, Thailand 48.8 per cent, Malaysia 48.2 per cent, and Singapore 43.7 per cent.

Although the role of the financial sector to GDP is still small, the condition of banking in Indonesia is much better than the banks in the ASEAN region. At least this is reflected in the capital adequacy ratio (CAR) and return on assets (ROA).

CAR of Indonesian lender in average 22.67 percent in March 2018, while the ROA reached 2.55 per cent. Both ratios are well above banking in ASEAN member countries.

Currently, there are two Malaysian banks operating in Indonesia, PT Maybank Indonesia Tbk (IDX: BNII) and PT Bank CIMB Niaga Tbk (IDX: BNGA). Based on the ratification, if Malaysia wants to expand banks in Indonesia, then Indonesia must first open three banks in Malaysia.