Are Indonesia's Banks Clean as a Whistle?

Corporate governance is very much on the radar screen of banks and corporates in Indonesia these days. The recent successful listings of Bank Mandiri and Bank Rakyat have added to a growing realisation that, in addition to spiritual rewards, there is money in virtue.

The state of an institution’s transparency, its responsibility and responsiveness to shareholders, as well as good governance in general, were questions investors increasingly asked on pre-IPO roadshows.

But Indonesian financial institutions have had a chequered history with regards to proper corporate conduct.

Bank BNI was the first state-owned financial institution to go public before the 1997 financial crisis. It was wiped out by the currency collapse in 1998, aided by the failure of most of its predominantly corporate customers to service their loans after interest rates rocketed to 70%. The bank was recapitalized by the government with a re-privatisation stock issue scheduled for the following year.

Before the financial crisis, Bank BNI had lent nearly US$1 billion to the Texmaco business group, a textiles-to-machinery conglomerate run by a local family of Indian origin that has close connections to all of Indonesia’s recent politicians-in-power.

Texmaco had obtained US$1 billion in pre-shipment credits from the bank in an unusual way: with the help of two letters from then President Suharto. The first was to the BNI board ordering the disbursement and the second to the then governor of the central bank (Suharto’s son-in-law), advising that he had “approved” the transaction. Suharto’s involvement was revealed in 1999 by minister of state enterprises Laksamarna Sukardi, who was sacked at the time but reappointed to the job under current leader Megawati Sukarnoputri.

In August, Bank BNI president director Saifuddien Hasan told Asiamoney he thought he’d established a good risk management system with the help of a number of foreign consultants. Apart from rebalancing the lending structure to reduce risky corporate loans, the bank had established much tighter controls on accounting within each division, he said.

But it seems the new system is already showing signs of wear and tear. Last year a series of small scams involving certificates of deposit began to crop up at a number of the bank’s branches.

While the latest problems at the bank don’t implicate the Texmaco group, it added to Bank BNI’s woes in April by defaulting on a US$25 million letter of credit. The Indonesian Bank Restructuring Agency (IBRA), the government body set up to recapitalize assets after the Asian crisis, was forced to step in and make good the bank’s losses, becoming the major shareholder.

The current difficulties also feature a parade of depressingly familiar names whose reputations have been tarnished – whether guilty of impropriety or not – by association with banking or other financial problems in the past.

The most recent troubles are a variation on a simple letter of credit scandal alleged to have originated in one branch, which issued 41 letters of credit worth US$200 million over a period of six months backing fictitious exports to Kenya and the Congo. They involved banks in Kenya, Switzerland and the Cook Islands, none of which had a correspondent relationship with BNI.

Eight people have been arrested, including two senior branch officials, after Bank Indonesia – the central bank that regulates the sector – received a tip-off. The main suspect, an Indonesian woman with Dutch nationality, has fled abroad.

Included on the lists are several associates of the collapsed Bank Pacific group, set up by the Ibnu Sutowo family, whose patriarch was for many years Indonesia’s oil minister. He was responsible for the near collapse of the Indonesian economy in the 1970s after running up more than US$10 billion in unauthorized foreign loans in a misguided effort to fast track the country’s development. His daughter was the main controller of the banking group, which collapsed after the financial crisis in 1997 and has been in IBRA’s care. An effort to buy back some of the confiscated assets is believed to be behind the scam.

Working with them was an equally well-known financial-scandal star, Dicky Iskander di Nata, who was jailed in the 1990s for 10 years after more than US$400 million went missing from Bank Duta, a large private bank controlled by former president Suharto. The money was lost through misjudging exchange-rate movements in foreign exchange dealing for the bank’s own account, and Di Nata was forced to take responsibility. Now CEO of a company suspected of being a recipient of the funds illegally removed from Bank BNI, he denies that he was aware of their provenance or any other wrongdoing.

Meanwhile, as police and prosecutors continue their inquiries, a number of politicians have denied any involvement in the scam.

Should a political connection be confirmed in the Bank BNI case, observers may find it hard to believe that much has changed since the scandal over funds extracted from Bank Bali in 1999 led to the collapse of the presidential re-election bid of former leader B.J. Habibie.

Yet analysts believe much has improved. They point to the role of Bank Indonesia as whistleblower in the BNI case, compared with its involvement in the Bank Bali affair. “BI is now united under its new governor and the risk to bankers playing games is serious,” said one senior banker. “The effect on them individually – if they break the legal lending limit, for instance – would make anyone think twice.”

Investors have also been impressed by a growing awareness in the market of the importance of corporate governance and compliance. When the Bank BNI case became public, Bank Mandiri executives rushed to brief investors about their own internal compliance systems, which were set up from scratch with the help of Deutsche Bank when the bank was formed from four collapsed banks four years ago.

Meanwhile, a new board has been appointed at Bank BNI. It includes as CEO Sigit Pramono, a well-regarded “bank doctor” who was drafted in to clean up Bank Internasional Indonesia before its sale to foreign investors last year. With the help of consultants Ernst & Young, he has already identified one cause of the trouble: not the bank’s headquarters but an internal supervision unit that was under branch control. It has now been placed under the bank’s central compliance director.

Pramono has launched a three-month crash programme to clean up the bank, hoping that the glare of publicity and top-level political disapproval will galvanise staff. He sees the fraud scandal as a “blessing in disguise”, one that could force change in a bank needing to shrug off a decades-old tradition of disruption by government and other powerful individuals. “We are now in the aquarium,” he says. “Everyone is watching us. I don’t think anyone will dare to interfere with the process of change.”

But Syafruddin Temenggung, outgoing chief of IBRA, which acted as a de facto regulator over the banks under its control until its closure in late February, fears that there may still be problems in the future. “It’s true that there has been considerable improvement in the governance of individual banks,” he says, “but more reform is needed over the independence of bank supervision and this is not on the agenda of the government or the parliament. Without more reform, there’s a worry we could go back to the old system.”