Indonesia sets foreign ownership cap in local banks

Indonesia is limiting single ownership of domestic financial institutions to 40% under new rules but with certain exceptions.

Bank Indonesia, the banking regulator, said financial institutions can hold up to 40% of local banks. Non-financial institutions can hold up to 30% and individuals, 20%. The limits do not apply to state-owned banks, however.

Approval from BI is required in all cases. Owners will still need to have 20% listed after five years. Foreign entities were previously allowed ownership of up to 99%.

To own more than 40% of a local bank, the owning bank must obtain BI approval; must be publicly-listed and fulfill minimum capital obligations according to its risk profile.

The owning bank must also have more than 6% of tier-1 capital and be committed to holding the purchased bank for a certain amount of time, according to a regulation signed July 13.

The foreign bank must obtain a recommendation from its local financial institution authority. Following the implementation of the regulation, the purchased bank will need to sell off at least 20% of its shares to the public within five years of the acquisition.

Under the new rule, existing majority owners failing to meet BI's top standards for financial health will have to reduce their stakes to comply with the limit by January 2019.

Bankers said the regulator had balanced the need for financial health in the sector and a demand by nationalist politicians to limit foreign ownership against the industry's concerns that a lack of exemptions would stop future investment.

The new rules are likely to benefit Singapore's DBS, which embarked on the biggest ever takeover of an Indonesian company three months ago by making a bid to buy Bank Danamon.