TECHNOLOGY AND ITS ABILITY TO SUPPORT FINANCIAL SERVICE INDUSTRIES IN THE 21st CENTURY
By:
Rahardi Ramelan
Vice Chairman of The National Development Planning Agency
(BAPPENAS)
INTERNATIONAL SEMINAR ON THE 50 TH ANNIVERSARY
OF BANK BNI
Jakarta Convention Centre, 9 July 1996
Ladies and Gentlemen, bankers, business leaders and Distinguished Guests;
INTRODUCTION:
It is an honor to address you today. The growth in our country and this region are part of the growing linkages in a rapidly globalizing economy. I believe that we stand at the gateway to a new era. As I look ahead I am increasingly confident that this era will allow us to continue the successful economic development we are known for. However, we must also keep in mind that this new era will also bring new and greater challenges. The new technologies, rising competition, and threats to social cohesion and the environment accompanying rapid growth are the domestic and international challenges that we are already aware of, and it is certain new challenges will
arise.
Let me provide a bit of the policy maker's perspective on where we have been coming from in the economic and financial areas, some general thoughts about technological developments in the banking area, before concluding by setting the banking sector in the current macroeconomic context.
In anticipation of the globalization era Indonesia has been rapidly deregulating its economy. Since 1983 major deregulations have ranged from banking to trade and investment. In general the strategy has been to liberalize the economy step by step allowing the economy to largely adjust to each set of measures before the major impact of the next set of measures.
INDONESIA PREPARES FOR THE 21st CENTURY - FINANCLAL DEREGULATION:
As you may remember Indonesia in 1982 was a high-growth, low-income country, highly dependent on oil revenue. A tightly controlled financial system was especially vulnerable to fluctuating oil prices with the impact of these fluctuations especially sharp on the current account balance.
Collapsing oil prices and a world wide recession in 1983 led to a large trade imbalance. To counter this a significant currency devaluation was undertaken, along with the cancellation of several large public projects and a tax increase.
Prior to 1983, the financial system was constrained by ceilings on interest rates and on the expansion of credit. Since interest rates were often at or below inflation this policy resulted in a low rate of return on financial savings. Thus the reforms in 1983 were directed towards improving the efficiency of the financial sector. In order to attract and utilize domestic savings and redress the allocative inefficiencies created under the existing system, the government announced the first financial reforms in June 1983. These reforms were a partial step toward strengthening market mechanisms in financial areas. Credit ceilings were eliminated, controls on most deposit rates and on all loans were removed. Liquidity credits began to be scaled down.
The next major economic shock was in 1986, with a fall in oil coupled with a strong yen. This again caused a significant trade imbalance and a sharp devaluation. The savings/investment gap was largely funded by the World Bank, the Asian Development Bank, and Japan to support ongoing trade reforms which initially consisted largely of import tariffs. Despite this, the trade deficit remained high and additional action was required.
In October 1988, the government announcesl the second set of financial reforms, including such measures as: simplifying the issuance of new bank licenses, allowing the formation of new banks as long as they met minimum capital requirements, simplifying the rules around the process governing foreign exchange licenses to encourage the formation of foreign exchange banks and attract foreign deposits and direct lending. Allowing domestic banks to add branches as long as prudent standards were met. Reducing the Required Reserves on Deposits from 15 to 2 percent, thereby vastly increasing the amount of loanable funds. Foreign banks were allowed to participate in joint ventures. State enterprises deposits were somewhat freed allowing them to hold up to 50 percent of their assets in private banks.
The overall goal of these efforts was to promote competition. More prudent lending was fostered by restricting the amount an individual or group could borrow as a percentage of the bank's capital. The reforms improved the competitive status of private banks and removed the costs of holding reserves in excess of 2 percent of deposits.
I can continue with some other measures that are no less important which supports the deregulation but I don't want to drawn you into much detail. It is enough for me to say that financial deregulation in Indonesia has created great opportunities as well as challenges for banks and competition will be the key word for the banks that survive. Aggressive competition and the need to reduce operating costs will drive the development and the diffusion of innovations in attracting and servicing customer accounts and in developing new services.
TECHNOLOGY AND GLOBALIZATION IN THE BANKING SECTOR:
In the view of many, the globalization we see around us is being driven by very fundamental technological forces. In particular, rapidly falling costs in telecommunications, and transportation are driving the latest round of economic integration. The benefits of increased openness to trade, investment and more fundamentally ideas, have become increasingly clear, and more and more countries, especially in our region, are taking advantage of the opportunities created. Increased economic interaction and growing awareness is driving demands for increased openness not only in trade sector but increasingly in financial services in general and banking in particular.
Today's technological innovations have confronted us with the economic availability of a powerful technological package for the handling and processing on information. This development is not a sudden event, but the result of decade of scientific discoveries. One could say that it is the result it is the result of synthesis of many scientific disciplines: physics of materials and light, chemistry, optics, engineering, mathematics, logic, etc.
Although the potential of information technology has existed since the development of the first computers in the early 1950s, realization is only possible today through the invention of the microprocessor and microcomputer which together constitute the 'nuts and bolts' of the information revolution. At the same time, the cost of telecommunication is decreasing through the use of satellites since the distance of communication has virtually no effect on the price. ..
Decreasing cost have also been accompanied by a tremendous increase in the speed of transmission due to digitalization of messages. Thus the speed of transmission of the Satellite Business System (IBM, COMSAT, etc) is 6.3 million bits per second or 200,000 words as compared to nearly 10,000 bits per second for a normal telephone line.
Adding to the cornucopia of developments is the arrival of the fibre optics, which consist of a tube of self-reflecting glass no thicker than a human hair which caries messages in digital form using laser beams. One fibre-optic cable can transmit 30,000 simultaneous telephone calls, as opposed to a package of copper wires ten inches in diameter.
The concurrence of components, computer and telecommunications will transform profoundly many human activities. The digitalization of different forms of information permits the use technology in many areas. It is explicitly an organizational and production technology and as such it affects:
(i) Production, by the transformation of products (watches, cash registers, etc) and processes (batch production, robotics, distributed intelligence, etc);
(ii) Office work, by further automating formalized work (billing, invoicing, world processing) and by increasing the independence from traditional information channels for those who work in a less formalized environment (management, R and D, etc);
(iii) Services, by increasing self-service and by replacement of human-to-human services by goods;, and
(iv) Information flows, due to economic development of vast networks and easy access to stored information.
This information technology is a reality, and a rapidly expanding one. The question, therefore, is how to master the changes and deal with these issues to the best advantage for the financial sector communities.
Today's financial environment is characterized by increasing demand for productivity enhancements in retail delivery systems. Investments in bank facilities need to be strategically structured and matched with branch service offerings. This more than ever, drives the need for a total information system to assist in monitoring account movements, analyzing service offerings and delivering consumer services.
The revolution in computer and telecommunication technology is creating a system that can transmit audio, video, and data simultaneously and at very high speed. This system, known as Integrated Services Digital Network or (ISDN) may be able to support the requirements of the banking sector in servicing customers more quickly. However, competition may not be limited to the existing players. Several outsider - technology, software and consultancy companies- are trying to edge their way in. Technology is used to provide the competitive advantages to deliver services in traditional banking areas. Over the years in developed countries and increasingly_in Indonesia, the retail customer has benefitted by rising competitions in the industry, aided by electronic technology, solicit business by offering credit cards, debit cards, minimum-balance checking, free checking package services, telephone bill payment, and automated teller machines. And retail customers have readily accepted these new services.
Financial institutions want to respond to these consumer demands, but they face other considerations as well: how to reduce the cost of processing transactions, increase productivity, improve control, while providing improved service. It is certain that technology has a very important role to support the banking system.
New systems are being developed to address these issues for the banking industry. Such systems are designed to automate the teller and other functions at the branch offices. Many commercial banks have invested heavily in new technology in their bids to become more competitive at home. In particular communications links are an important competitive edge. In this era of fierce competition Banks can only survive if they provide their customers easy access and transactions wherever and whenever they want. The recent rapid increase in ATMs is a response to this trend to provide easy access to customers.
Another invention that will be in the market soon is the Credit Procurement System which is a state of-the-art system for processing loan applications and monitoring loan performance. It is an entirely integrated, image-based system. All application documents and other paper records are digitized and stored on optical disk. As a result, users of the system have immediate access to documents, allowing much faster processing than previously achieved. The bank can also use the digitally stored data to monitor performance and to combine with other computer systems to perform sophisticated analytical tasks. In addition, the system is much more secure, so v that there is no danger information being lost or files being damaged.
The financial deregulation and new technology in recent years are changing the type of services offered by financial institutions, and the manner in which those services are delivered. Competition throughout the industry has been encouraged, and has resulted in rapid change in institutions. Traditional banks have modified their charters. Mergers and acquisitions have become commonplace. Banks are moving ever more rapidly into international markets.
Information technology has also accelerated competition in other areas. In wholesale and investment banking, corporate customers are performing more treasury and capital market functions themselves and demand more competitive pricing from banks. In the capital markets, buyers are increasingly powerful. There has been an increase in the number of market participants. Individuals can set up investment operations of their own. This is all supported by technologies which facilitate remote access to specialists.
From this competition emerges several network providers to support the banking industry. A bank does not have to install its own network to connect all the branches and their ATMs. In Indonesia there is Lintas Arta and for international links networks such as Cirrus or Plus. These networks enable the customer to bank anywhere in the world.
Another powerful network is the much discussed Internet. Ever since the Internet burst into public realm, it has held aloft the promise of a commercial revolution. The promise is of a radical new world of business. A market where millions of buyers and sellers complete their transactions cheaply, instantaneously, and anonymously. Cut free from the layers of middlemen, companies will be able to sell their product directly to their customers. On the other hand, consumers will be able to interact with the companies that supply them and customize products to their needs. Customers can do business from their homes. Internet can bring customers and companies together thus widening markets, increasing efficiency, and lowering costs. Those are radical promises, and on their strength thousands of companies have already joined a massive scramble to cyberspace. For the banking industry there is cost-cutting potential of electronic payment using the Internet. Banks in particular have a considerable interest in cutting the cost of intermediate transactions and moving directly to electronic payments systems. As banks and other financial service institutions increasingly compete on the basis of transactions rather than relationships these payment systems will become critical to their success.
THE BANKING SECTOR IN MACRO PERSPECTIVE:
As a planner and government policy maker an important part of my speech today is to convince you that the government is committed to macro economic policies that will assist you in achieving your vision for BNI.
In macroeconomic terms our task is to keep economic growth as high as possible, while avoiding overheating and maintaining equity and stability. As all of you probably know the Indonesia economy performed very well last year. New GDP estimates indicate that growth slightly exceeded 8 %, up from 7.5 % in 1994. The growth was led by a recovery in agriculture and continued high investment growth. In fact, investment has reached the highest level in recent history, ie. 28.8 % of GDP, from 27.8 % of GDP in 1994 and 26.3 % in 1993. This investment is rapidly increasing capacity, raising our ability to produce and export in the future, as well as creating employment, and raising standard of living.
Since the Indonesian economy is an open economy, this rapid increase in investment has inevitably raised demand pressures. When demand exceeds potential supply, excess demand results in a higher current account deficit, and creates infrastructure bottlenecks resulting in increasing domestic inflation. To control aggregate demand growth, we have been running policies designed to reduce aggregate demand pressure (especially consumption) to make room for the rising investment thus reducing pressure on the current account, and keeping the inflation within a safe range.
Monetary policy has been tightened, but because conventional monetary policy is difficult in an open economy, we have taken a number of other monetary and financial measures to slow the growth in aggregate demand. Among other things, BI has increased its prudential regulation of banks. In particular, they closely examining loans by banks to affiliated companies and using moral suasion to restrain lending to the property sector. BI and Ministry of finance also restricted credit growth by Non-Bank Financial Institution (NBFI) and moved them under improved monetary and financial supervision.
However, since we remain concerned with the situation, we are moving to make monetary policy more effective for future operations. For example, in December 1995, BI raised the required reserve ratio from 2 % to 3 % and changed the accounting for cash in bank vaults. This should reduce excess reserves, raise the costs of funds and strengthen the impact of changes in reserve money on other monetary variables.
The net effect of this policies has been to push up interest rates and slow property and consumer durable demand growth. Inflation has been maintained at roughly the same level as recent years and, if anything, shows signs of declining. The price level fell in March and June for the first time in years.
We believe that, baring unforeseen circumstances, the economy is healthy, and the inflation rate and the current account will be acceptable, while growth is maintained above 7% and interest rates fall.
CONCLUSION
I assume that all of these changes have been anticipated by the Bank BNI 1946 understand that BNI is putting an increased emphasis on retail services as a strategy to maintain its leading role in the country's banking Industry. The target is that lending to corporate and retail will be 50-50. Given competition from capital markets, banks, and BNI's traditional strength in its branches and retail lending are expected to generate a competitive edge. Given our concern for the healthy development of small and medium industries we welcome this strategy as it can simultaneously assist BNI and the overall. And the retail sector is much promising, given the rapid growth in the country's small and medium-scale companies