A legal study on the impact of foreign investment on national interests in Indonesia's banking sector

Abstract

Government Regulation (No. 29 of 1999) permits a foreign investor to own 99% of the shares capital of the national banks. Consequently, foreign investors now dominate Indonesia’s national private banks. This condition is considered not consistent with national interests as aspired by Pancasila and the 1945 Constitution. This thesis analyses whether Pancasila is still applicable in regulating Indonesia’s banking industry and ways to reinforce the dominance of foreign investment while considering national interest. The discussion employs a doctrinal perspective. This analysis applies to Indonesia’s regulations as primary sources. As for secondary sources, such as books, journals, official statistics, research documents, published articles, and reports of the government consist of works that write about or explain primary sources. Interviews are also conducted to support primary and secondary sources. The study finds that foreign investors hold almost 50% of the total number of Indonesian national private banks, but state-owned banks still have a significant role. Foreign investors are needed to support and strengthen Indonesia’s banking industry. They have brought benefits to the Indonesian economy. Banking institutions in Indonesia play a leading and strategic role in driving the national economy and supporting national development. However, national development planning in the banking sector is not entirely in line with the aspiration of Article 33 of the 1945 Constitution. The plan is more focused on strengthening and developing the banking institutions. Regardless of the existing level of foreign interest, Indonesia has to formulate a way forward to protect national interests and support increasing Indonesia’s participation while intensifying possible avenues to benefit the people. The alternative ways for reinforcement are through adjustments to the current provisions relating to the percentage of foreign share ownership with Indonesia’s commitment in GATS and AFAS; divestment of bank shares, implementation of ESOP and MSOP; pre-emptive rights and right of first refusal; bank consolidation; Indonesian employment and transfer of knowledge and technology. With the presence of foreign investors in national banking, Indonesia can utilize the presence of foreign investors to achieve banking objectives and protect Indonesia’s national interests following the Law and 1945 of the Constitution.