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Monday, October 20, 2003

Jakarta banks vulnerable to corruption: World Bank

Reuters
Jakarta, October 20

Indonesia's commercial banks, which have recently received strong interest
from foreign investors, remain vulnerable to corruption, despite one of the
world's costliest bank bail-outs, the World Bank said on Monday.

The World Bank, often criticised for working closely with the corrupt former
Suharto regime, also urged lenders to get tougher on rampant corruption,
which it said could threaten the success of the country's political and
economic transition.

The remarks, contained in a thick report on corruption in Indonesia released
on Monday, followed growing frustration among the public, including
investors and religious leaders, over graft in one of the world's most
corrupt countries.

"Insolvent banks have been recapitalised, and majority share ownership has
been sold to private interests in a few key banks... All this contributes to
a more stable banking system, but one that remains vulnerable to
corruption," the World Bank said.

Anecdotal evidence suggested that the banks continued to face pressure to
lend to favoured groups from political interests and from their own
employees, who benefited from the so-called commissions that borrowers paid
to loan managers, the bank said.

That had prompted worries that non-performing loans -- at 7.5 per cent of
total loans by end of 2002, from almost 50 per cent at the height of the
Asian financial crisis -- might rise again.

The report also said that "Indonesia's current blanket guarantee of banks'
liabilities creates significant problems of moral hazards, causing private
banks to adopt high risk strategies, favour clients who provide
'commissions', and leaving the government to bail out depositors if the risk
materialises."

The World Bank, however, said a deposit insurance scheme should be
established first before removal of the guarantee, to prevent loss of public
confidence.

The guarantee was introduced as part of bank restructuring worth some 700
trillion rupiah ($83 billion), or some 40 per cent of annual GDP, to keep
banks afloat following the Asian financial crisis of the late 1990s and amid
political upheavals following the fall of former President Suharto after 32
years in power.

The World Bank report, which also touched on corruption in sectors other
than banking, such as justice and government agencies, comes at a time when
Jakarta is in the process of selling stakes in some key banks.

Underwriters have said there have been strong interest from investors for a
stake of up to 45 per cent that the government is offering in the country's
fourth-largest bank, PT Bank Rakyat Indonesia.

Jakarta is also currently selling majority stakes in sixth-largest lender PT
Bank Internasional Indonesia and a medium-size PT Bank Lippo. The sales of
stakes in the three banks are expected to raise some $1 billion.

Worries over the widespread corruption have been among key reasons behind
dissatisfaction toward Megawati Sukarnoputri administration, a factor that
could affect her chance in the country's first direct presidential election
mid-next year.

Respected national newspaper Kompas on Monday released a survey in which 91
percent of 1,752 respondents said they were dissatisfied with the
government's handling of corruption cases.

Indonesia's biggest Muslim groups Nahdlatul Ulama and Muhammadiyah, with
total followers accounting for about 40 per cent of 210 million population,
vowed in a rare cooperative move last week to form a united front to fight
against rising graft.

© Hindustan Times Ltd. 2003.
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