The Financial Services Authority (OJK) has provided an assessment regarding the stability of Indonesia’s banking sector amidst global challenges, particularly in the commercial property market.
Dian Ediana Rae, the Executive Head of Banking Supervision at OJK, highlighted that as of January 2024, three key economic sectors have been major contributors to the credit sector. These include the household sector, accounting for 23.67%, wholesale trade at 15.8%, and manufacturing industry at 15.65%.
During the recent Basel Committee on Banking Supervision (BCBS) meeting held in Madrid, Spain, Rae emphasized that the Real Estate sector constitutes a smaller portion, contributing only 5.09% to the total banking sector credit. The BCBS gathering aimed to discuss the evolving landscape of global banking, focusing on the challenges faced by banking sectors worldwide.
BCBS’s evaluation pointed out a significant downturn in the commercial property market, notably in the United States and Canada, triggered by the continued trend of hybrid working post-pandemic. This trend has resulted in high office vacancy rates, posing potential risks to banking credit.
Meanwhile, in Europe, particularly in the UK, the rising benchmark interest rates have led to an increase in the cost of funds. This scenario is anticipated to impede the growth of private equity and private credit companies.
Acknowledging the potential risks, global banks with exposure to non-bank financial institutions were urged to exercise caution to prevent adverse effects on the banking sector.
Despite the challenges, various indicators suggest that Indonesia’s banking sector remains resilient. As of January 2024, the Capital Adequacy Ratio (CAR) stands at 27.54%, with Tier 1 capital to CAR ratio at 94.41%. In comparison, US banks have a Tier 1 capital ratio of 14.41%, while that of the European Union is 17.03%.
Moreover, Indonesia’s banking sector maintains strong liquidity performance, with a Liquidity Coverage Ratio (LCR) of 231.14%. This liquidity position surpasses that of other jurisdictions, such as the European Union, where LCR ratios are at 158.78% and 125.8%, respectively.
Dian mentioned that OJK has taken proactive measures to ensure that regulations in Indonesia’s banking sector align with global initiatives led by the BCBS. These efforts aim to strengthen the resilience of Indonesia’s banking sector amidst evolving global financial landscapes.
