Indonesian Banking Industry: Getting Bigger, Staying Healthy and Profitable
Synopsis:
A good overall picture of banking industry in Indonesia has encouraged existing players and new comers to exploit the available opportunities. With the increasing competition, it has become vital to maintain a high customer loyalty index. Having high savings account is not only a booster for third party funds, but also an indication of excellent customer loyalty. Which prominent banks are maintaining and continuing to top the (IBLI) Customer Loyalty Index?
The Portrait Banking Industry in Indonesia
According to the Indonesian Banking Law , the banking sector is structured into two categories; commercial institutions with 122 establishments, and rural banks with 2296 units. Commercial banks can be further divided into private national banks, state banks, Islamic commercial banks and Government regional banks. Since 2004, Bank Indonesia has taken numerous initiatives to create a sound, strong and efficient banking industry, by promoting industry consolidations to create a smaller number of commercial banks with greater assets and encouraging the implementation of Basel II and high standards of risk management.
On the other hand, having to learn the hard way during the Asian financial crisis in 1997-1998, the banking industry has fortified themselves from the worst economic situation by implementing Bank Indonesia's advice for a higher level of CAR that is even higher than the minimum level required in Basel II, and a relatively low level of NPL. Concerted efforts by industry players and Bank Indonesia have brought about -in general- a better financial ratio or indicator of Indonesian banking industry compared to its peer industry in neighboring countries. Some of the highlights of the Indonesian banking industry in 2009 are as follows:
- Since 2006, the banking industry has maintained to record high growth, in terms of total assets and third party funds, even during the global financial crisis in 2008.
- Although it is still facing high inefficiency, Indonesia’s banking industry continues to achieve higher profitability than its peer industry in other countries.
- Due to its competition to grow more rapidly and gain higher profitability than their competitors, many players in the Indonesian banking industry have developed good loyalty strategies.
- Few banks have succeeded in implementing excellent loyalty strategies as shown in their ability to collect a good proportion of large third party funds and achieve high scores in the latest IBLI survey.
High Growth
Indonesian banking sector is booming and this is evident from the growth in the assets and third party funds in commercial banks. The sudden growth is witnessed particularly in 2008 and is expected to continue. Similarly with third party funds, many banks are now looking more into retaining the savings deposits of customers. This indicates their increased levels of activities are undertaken to retain customers.
Source: Bank of Indonesia
Bank wise Rating of Third Party Funds in December 2009
Banks |
Total Assets (in Rupiah) |
| Bank Mandiri |
375239 |
| BRI |
318447 |
| BCA |
283182 |
| BNI |
226911 |
| CIMB Niaga |
106889 |
| Bank Danamon |
96806 |
| Bank Pan Indonesia |
76270 |
| Bank International Indonesia |
58737 |
| Bank Tabungan Negara |
58481 |
| Bank Permata |
56213 |
Source: Bank of Indonesia
From the table below, which shows the composition of total assets by commercial banks in 2009, it was found that State owned banks followed by the foreign exchange commercial covers more than 75 percent of commercial bank assets.
Profitability and Stability
Targeting low inflation as well as maintaining stable growth are two of the many prominent aspects of the monetary policies in Indonesia. However, it is highly crucial to maintain stability in the financial sector, especially when there is a need to create a favorable investment climate. Maintaining financial stability would depend on the performance of the overall banking industry. With a high Capital Adequacy Ratio (CAR), high profitability and liquidity ratio, the Indonesian banking sector is sure to successfully sustain and be more resilient in the future.
Source: "Indonesian Financial System: Balancing Stability
and Growth" by
Suhaedi & Pungky. Wibowo of Bank Indonesia
From the above country wise comparison of operational costs and net interest margins, Indonesia is ranked at the top of the list. As the number one, in terms of the costs, Indonesia requires proper corporate governance. High net interest margins are a few indicators of a healthy industry, but this could be set off by high costs, which require proper and delicate attention. Therefore, in order to curb this inefficiency and increase growth, it is essential to adhere to policies that focus on stability and the increase of profitability and efficiency.
In 2010, the Bank of Indonesia decided to maintain the Bank rate at 6.5%. The present monetary policy is considered to be conducive to the economic recovery process as well as the operation of bank intermediation functions. Overall conditions in the global economy and financial markets have witnessed steady improvement.
Third Party Funds
There has been growing importance in third party funds in Indonesia. Many banks are considering various attractive measures to retain customers. Promotional campaigns as well as other measures, such as lucky draws, are offered to customers with savings deposits at the respective banks. Only customers who hold high savings deposits with the banks will have assurance of third party funds. Therefore, it is absolutely important and critical to retain customers with attractive offers as well as maintain cordial partnerships and transactions with them.
Source: Bank of Indonesia
Source: Bank of Indonesia
The increasing amount of the third party funds has created an overall improvement in the banking sector, particularly from 2008. If banks maintain good and healthy customer relationships, this will in turn increase third party funds. There is an increasing competition among banks to retain customers through their savings deposits.
Bank wise Rating of Third Party Funds in December 2009
Banks |
Total Third Party Funds (in Rupiah) |
| Bank Mandiri |
299722 |
| BRI |
254790 |
| BCA |
244666 |
| BNI |
188656 |
| CIMB Niaga |
86258 |
| Bank Danamon |
67782 |
| Bank Pan Indonesia |
56307 |
| Bank International Indonesia |
47515 |
| Bank Permata |
45751 |
| Bank Tabungan Negara |
40216 |
Source: Bank of Indonesia
The above chart depicts the bank wise rating of third party funds in Indonesia. Bank Mandiri has been the top ranked bank in terms of its third party funds, and it has continued to maintain this position since 2006. For most banks, high third party funds are mainly due to higher compositions of savings from its customers, while a few have shown higher trends due to higher compositions of time deposits or current deposits. The top five banks that have shown higher trends of third party funds are Mandiri, BRI, BCA, BNI and CIMB Niaga. Prominent banks, such as Bank Mandiri, Bank Rakyat, Bank Central Asia and BNI, have shown a higher trend of the funds due to savings deposits, while few other banks have high trends of funds mainly from their time deposits. It has become important for customers to have a higher level of savings with banks, and in return banks should ensure and maintain good relationships with its customers.
When the number of savings accounts increases in banks, it will provide a wider scope to increase the third party funds. Many banks are looking at ways to boost or increase the proportion of savings in their composition of third party funds. Credit expansions as well as other promotion campaigns are a few ways to spur their savings accounts.
Rise in the Customer Loyalty Levels
On the whole, this year's banking industry has shown an increase in customer loyalty levels among the customers with their respective banks. The study conducted by MarkPlus Insight on Indonesian Bank Loyalty Index (IBLI) 2010 regarding Saving Account of Conventional Banking resulted in some of the findings below:
- At the overall level, there has been a rise in the loyalty indices of banks, portraying healthy customer transactions (satisfaction), relationships as well as their partnerships. However, banks have been placed in different positions based on its performance in all aspects of Customer Loyalty.
- “Partnership dimension” is the main factor seen to drive as well as retain maximum customer loyalty among saving account holders. Following this are relationship and transaction with the banks.
- BCA is in the first position for Customer Loyalty with 78.1, showing a steady progress in its customer loyalty from 2006 to 2010. In its customer satisfaction index there has been a slight decline, however, it has been performing very well in others aspects, such as transaction, relationship and partnerships with its customers. Its high loyalty index could be due to its performance on all aspects, such as customer partnership, transaction as well as partnership.
- Following BCA is Bank Mandiri with a loyalty index of 77.6. Mandiri has recorded a slight decline in its loyalty due to the slight fall in its customer transaction index. However, it has shown significant improvements in customer partnership and relationship. Its satisfaction index, though significantly high, has shown a slight dip, which could have possibly resulted in the overall loyalty index of 77.6 in 2010.
- Other banks with a Loyalty Index within the 77 ranges are BRI and BNI. For BRI, customer relationship has been at its highest in 2010 at 79.4. Contributing to the loyalty index are other aspects, such as transaction, where it has shown a consistent trend, and partnership that has shown a significant improvement from 2009.
Source: Indonesian Bank Loyalty Index (IBLI), MarkPlus Insight
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