This article first appeared in The Edge Malaysia Weekly on July 24, 2017 - July 30, 2017

INDONESIA would like to see the banking gap between Malaysia and itself reduced more significantly before it allows more Malaysian banks to enter its market, says Muliaman Hadad, former chairman of Indonesia’s Financial Services Authority, better known as OJK (Otoritas Jasa Keuwangan).

Last Thursday, Muliaman ended his five-year term at OJK, the government agency that regulates and supervises the country’s financial services sector. He handed the reins to Wimboh Santoso, former president commissioner of Indonesia’s largest bank, PT Bank Mandiri Tbk.

In an interview with The Edge in Kuala Lumpur just before concluding his term, Muliaman highlighted the fact that while Malaysia’s top two lenders, Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, have had a presence in Indonesia for a long time and made strong headway in the market, Indonesian lenders are yet to have commercial banking operations in Malaysia.

“Under the Asean Banking Integration Framework (ABIF), we have certain principles. The first principle is reducing the gap. Now, Malaysian banks’ market share in Indonesia is around 7% already, and that’s just the two banks (PT Bank Maybank Indonesia Tbk and PT Bank CIMB Niaga Tbk) ... it’s quite significant.

“But, we don’t have any Indonesian banks here (in Kuala Lumpur). So, it is important to reduce the gap. I think we still need to work very hard to support Indonesian banks (in Malaysia), reducing the gap, before we accept other (Malaysian banks) to participate in Indonesia,” says Muliaman.

What this means is that it may take a while longer before Malaysian banks that have been seeking to widen their footprint in Indonesia — RHB Bank Bhd, Affin Bank Bhd and Bank Islam Malaysia Bhd, to name just a few — get to do so.

State-owned Bank Mandiri is currently waiting for Bank Negara Malaysia’s approval to operate as a Qualified Asean Bank (QAB) in Malaysia. Once approved, it is expected to be the first from Indonesia to have full banking rights in Malaysia. It is understood that the QAB status may be accorded early next year.

Having QAB status means it will be treated as a local entity and be given more flexibility than if it were to hold a foreign banking licence here.

Muliaman says  another state-owned bank — PT Bank Rakyat Indonesia Tbk — has also expressed interest in setting up operations in Malaysia as a QAB. However, OJK has yet to receive a formal application from Bank Rakyat on the matter. PT Bank Negara Indonesia Tbk is also reportedly keen on Malaysia.

Asked if OJK had received any applications from Malaysian banks to set up operations in Indonesia, he says: “There is quite a lot of interest ... people have been coming to visit on the Islamic banking side and so on. But, we will see first ... let’s reduce the gap first and then see what happens.”

He stresses, however, that Indonesia continues to be open to foreign lenders seeking to expand there, particularly if they are Islamic banks or focused on areas like trade finance and infrastructure.  “We are quite open, [but] we have a more selective way of dealing with foreign investors in banking because we would like to have more value-added participation from them. For example, we need Islamic banks because our Islamic banks are very small. We need [banks that are focused on] trade financing. We need those that are focused on infrastructure. If they fit these requirements, then, in our view, their presence in Indonesia will create some value to the local economy,” he says.

Muliaman points out that Malaysian banks seeking to operate as a QAB in Indonesia would need to be endorsed by Bank Negara first before seeking OJK’s approval.

Speculation had been rife last year that RHB Bank would be the third banking group from Malaysia to enter Indonesia after the two countries inked a bilateral agreement in August under the ABIF to allow banks greater access to each other’s jurisdictions.

This is because, according to Indonesian news reports at the time, the agreement would result in Malaysia allowing three Indonesian banks to operate in the country, with Indonesia allowing the same number of Malaysian banks there.

While RHB already has a presence in Indonesia in terms of its securities and asset management business, it has yet to have commercial banking operations. Recall that in mid- 2014, the group had to abort plans to acquire a 40% stake in PT Bank Mestika Dharma after failing to get approval from OJK, after five years of pursuing a stake in the bank.

Earlier this year, it was reported that Affin Bank was keen on a stake in public-listed PT Bank Bukopin Tbk’s Islamic unit, Bank Syariah Bukopin. As for Bank Islam, it is no secret that it has been looking for many years now for an opportunity to expand into Indonesia.

Malaysian banks’ interest in Indonesia is not surprising. The Indonesian banking sector is highly attractive — it has the highest margins and return on assets (ROA) in Asean, and the country’s huge but underbanked population offers lenders vast room for growth and expansion.

Indonesian banks’ average net interest margins (NIM), despite increasingly coming under pressure from tighter competition, is still one of the highest in the world. Last year, the banking sector enjoyed NIM of 5.63%, up from 5.39% in 2015. This compares with just above 2% in Malaysia.

Muliaman believes the sector will continue to enjoy high margins and ROA. “This is because the room for growth is very high ... and the growing middle-income class demands more variety of financial products.”

He adds that Indonesia’s banking sector has started to recover from a two-year period of heavy provisions for bad loans, particularly from the mining sector. “The mining sector had problems two years ago because of the [weaker] global economy, creating a lot of non-performing loans (NPLs). But now, the worst of the NPLs is over,” he remarks.

The sector is on track for loan growth of between 9% and 12% this year, compared with 7.87% last year.

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