“If you can’t beat them, join them”: Commercial banks are now allowed to invest in fintech companies – Fin Tech
Introduction
Technological developments have led to rapid, radical changes in the financial industry around the world, and Indonesia is no exception. While the country’s market for financial products was previously dominated by the banking sector, the banks now have to share it with financial technology companies (fintech).
In response to the rapid rise of fintech, Indonesia’s Financial Services Authority (OJK) have concluded that cooperation between commercial banks and the fintech sector is desirable in order to create a more sustainable digital ecosystem. To further encourage such cooperation, the OJK recently issued Regulation No. 22 of 2022 on Equity Investments by Commercial Banks (Reg. 22).1
The main features of Reg. 22 are:
1. Share investments from commercial banks
Prior to the issuance of Reg. 22, commercial banks (“Banks“) were only permitted to invest in a limited range of financial institutions, including other banks; leasing, venture capital or securities companies; and clearing, settlement and depository institutions.
With the issuance of Reg. 22, banks are now for the first time allowed to invest in companies whose main business involves the use of IT to produce financial products (read: fintech companies), together with other financial institutions and credit reporting agencies. Investments can be based on land or offshore.
Share investments can be made either directly or through share purchases on the stock market. Reg. 22 specifically states that such investments must be long-term (not just for short-term gain). Before making an equity investment, a bank must (i) submit an equity investment plan (as part of their wider business plan) to the OJK; and (ii) seek OJK approval for the investment.2 Failure to approve may result in administrative sanctions and fines of up to IDR 100 million (USD 6,400) per non-compliant investment.
2. Restrictions on share investments
A bank’s equity investments must not amount to more than 35% of its capital.3 If this number is exceeded for 3 consecutive months, the bank must send an action plan to rectify the situation to OJK by the end of the fourth month. Failure to submit a plan may result in an administrative penalty of IDR 1 million (USD 64) per business day of delay, capped at IDR 50 million (USD 3,200) in total.
3. Ban on share investments
Reg. 22 prohibits cross-ownership by banks, which means that it is not permitted for a company in a bank to be a shareholder in the bank or for a bank to be a shareholder in its own shareholder. In addition, it is prohibited for a bank to make an equity investment that would “impose an unlimited liability towards the invested enterprise” (an example of this could be where the investor bank makes an open commitment that it will always top up its investment if the enterprise needs additional capital). Failure to comply with these requirements may result in the bank (i) being prohibited from making further equity investments, or (ii) having its financial health rating downgraded.
4. Disposal of share investments
Reg. 22 provides that a bank may dispose of its shares in an undertaking either (i) voluntarily or (ii) compulsorily at the request of the OJK in a situation where:
- equity investments reduce, or can be expected to reduce, the bank’s capital,
- equity investments increase, or can be expected to significantly increase, the bank’s risk profile, or
- (a) a share investment has not received prior approval from OJK; (b) an equity investment can be expected to harm the national economy or conflict with national interests, or (c) an equity investment can be expected to cause supervisory difficulties for the OJK.
A disposing bank must send a disposal plan to OJK at least 7 working days before the date of the proposed share disposal.
5. Other key features
- Temporary equity investments
Reg. 22 provides that a bank may make a temporary equity investment for the purpose of securing a loan or providing financing. However, such an investment must be disposed of within five years, or before five years if the company has accumulated profits on its books.4
- Reporting claims
A bank must submit a realization report online to OJK within 5 working days of the effective date of (i) an equity investment or (ii) disposal of an equity investment. Failure to submit such a report may result in an administrative fine of IDR 1 million (USD 64) per business day of delay, capped at IDR 50 million (USD 3,200) per report.
ABNR comment
As highly regulated businesses, banks have found it difficult to keep up with the rapid growth of the lean and mean fintech sector, which has left them with essentially two options: (i) either up their game and emulate fintech- their rivals. , or (ii) to merge with them. OJK has previously stated its position on option (i) in OJK Regulation No. 12/POJK.03/2021 on commercial banks,5 which allows banks to establish digital operations (referred to as “digital banks”) – these operations are allowed to operate solely in cyberspace without the need for conventional brick-and-mortar premises.
Reg. 22 now addresses option (ii) through its facilitation of mutually beneficial cooperation between banks and fintech companies by allowing the former to invest in the latter (and earn dividends as well). After all, a delicious cake tastes even better if it is shared by agreement instead of fighting over it.
Footnotes
1. BOY No. 22 Tahun 2022 tentang Kegiatan Penyertaan Modal oleh Bank Umum
2. Dividends in the form of shares are exempt from the requirement to obtain approval from the OJK
3. The percentage rate is calculated on the basis of a bank’s total equity investments in all its affiliated companies, including increases in the value of investments as a result of things such as earned profits, exchange rate fluctuations, increases/decreases in fair value, and dividends in the form of shares.
4. The explanation of Reg. 22 defines “accumulated profit” as the company’s result after deduction of previous years’ losses
5. Regulation OJK No. 12/POJK.03/2021 about Bank Umum
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
