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Empowering foreign bank branches in Indonesia's financial landscape
Foreign bank branches should integrate sustainable financing practices and align with ESG standards to meet the expectations of regulators, investors and the community.
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A Deutsche Bank logo is seen in front of buildings. Deutsche Bank is one of the few foreign lenders that operate in Indonesia. (Bloomberg/Ralph Orlowski)
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oreign bank branches play a crucial role in the global financial system by facilitating cross-border transactions, providing financial services and contributing to economic growth in host countries. However, in some cases, foreign bank branches may face challenges in expanding their intermediation activities in the real sector of the host country despite experiencing an upward trend in profitability.
Foreign bank branches are instrumental in channelling funds from surplus units to deficit units, thereby fostering economic activities and investments in the real sector. By offering a wide range of financial products and services, foreign bank branches help bridge the gap between savers and borrowers, promote financial inclusion and enhance the efficiency of the financial system. Moreover, foreign bank branches bring in expertise, technology and best practices that can benefit the host country's financial industry and overall economy.
Despite these potential benefits, some foreign bank branches may struggle to expand their intermediation activities in the real sector of the host country. This limitation can stem from various factors, including regulatory constraints, market conditions, competition and internal challenges within the foreign bank branch itself.
The moderation of credit from foreign bank branches with a declining contribution was noted in June 2024. The growth of credit from foreign bank branches stood at around 3.04 percent, significantly below the credit growth of other bank groups, ranging from 7.50 to 14.65 percent. This situation is influenced by several factors, such as the competitiveness of interest rates, funding capacity and environmental, social and governance (ESG) policies.
The three main factors affecting this situation include foreign bank branches' foreign currency loan interest rates not being favorable for domestic credit, thus reducing competitiveness with other banks, especially domestic banks in Indonesia.
Furthermore, the current stronger growth in domestic bank foreign currency funding capacity compared to foreign bank branches gives domestic banks more capacity for foreign currency credit allocation. Additionally, prerequisites of ESG policies and the declining business activities of specific corporate entities in Indonesia are affecting the decrease in foreign currency credit dominating the market share of foreign bank branches.
Amid constant credit distribution, foreign bank branches are reallocating assets into securities and reverse repos. Additionally, foreign bank branches are also more focused on foreign currency loans to banks, with the foreign currency loan market share among banks reaching 58 percent.
