The banking industry in Indonesia has increased significantly after the 1998 global economic crisis up until 2004 where there were improvements in the overall macroeconomic environment. This was seen as a steady and stable movement towards better economic sentiments in Indonesia until the recent instability of the global oil prices which are set to dampen these efforts and have created problems in the Indonesian Rupiah. The Bank of Indonesia has since implemented increase in interest rates to curb such problems.
Over the past few years, there has been a lot of changes in the banking industry in Indonesia. A lot of privatization took place where some non performing banks had to go through recapitalization which resulted in the government privatizing the banks. It was reported that the government has since privatized more than 15 banks which calculates to more than 70% of the total assets in the industry. This was seen as an effort to benefit the local industry of banking where it will definitely boost competition while promoting technology transfer, governance and risk management.
Subsequently, the government has gone on to divest its stake in at least 9 local private banks and then sell them to foreign investors. This way, it will further boost the banking industry by injecting foreign direct investments which have since expanded the industry tremendously. The 9 banks, which are now controlled by foreign stakeholders have since commanded more than 40%of the industry's assets.
Apart from privatization, there has also been a number of mergers and consolidation of banks over the past few years to face the uncertain economic environment in Indonesia as well as around the world.
The Bank of Indonesia, in its efforts to create a sound domestic banking structure that is capable of meeting the public needs as well as to promote a sustainable national economic development, it has promoted the enhancing and strengthening of a capital base. This can be achieved through merging and the joining of bigger capitals which will then reduce risk to a certain extent. The Central Bank then issued a requirement for banks to have a minimum capital requirements where commercial banks must have at least 80 billion Indonesian Rupiah by end-2007 and Indonesian Rupiah 100 billion by end-2010. With this regulation in place, all the commercial banks would be expected to obtain the minimum requirements in 5 years failing which will leave them having to bear the consequences like licence revocation or branch closures. Hence this leaves them with not much choices but to merge with other banks to find the required capital.
