Transcript Mutual Funds Market Structure

Unlocking Indonesia’s Domestic Financial
Resources : The Role of Non-Bank Financial
Institutions
P.S. Srinivas
Lead Financial Economist
The World Bank Office, Jakarta, Indonesia
January 11, 2007
Overview of Indonesian Financial Sector
•Indonesia’s financial sector is currently dominated by commercial banks
•Indonesian banking sector is not yet a source of long-term capital
Type of institution and year
Assets (Rp trillion)
Banks (2005)
Percent of assets
Percent of GDP
1,470.0
79.7
53.9
374.5
20.3
13.7
Finance companies (2005)
67.7
3.7
2.5
Insurance companies (2005)
75.1
4.1
2.8
Pension funds (2004)
107.1
5.8
4.7
Securities firms (2004)
10.1
0.5
0.4
4.8
0.3
0.2
Rural institutions (2004)
14.7
0.8
0.6
Mutual funds (2005)
29.4
1.6
1.1
2.7
0.1
0.1
62.8
3.4
2.3
1,844.5
100.0
67.6
Non-bank financial institutions
Pawnshops (pegadaian) (2005)
Venture capital companies (2005)
Outstanding corporate bonds (2005)
Total
Equity market capitalization (2004)
680
N/A
30.1
Equity market capitalization (2005)
801
N/A
29.4
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Why focus on NBFIs?
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Countries need both banks and NBFIs to have a well–developed financial system
NBFIs mobilize and allocate long term domestic resources for financing development
– Indonesia needs an additional annual infrastructure investment of US$ 5 billion to reach the
government’s 6 percent per year medium term economic growth target. Domestic resources
help mitigate financing risks.
– Government’s borrowing strategy calls for increasing share of long-term domestic debt
NBFIs help meet Government objectives:
• Improving access to financial services
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Reducing the cost of financial services
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Leasing increases the financing available for SMEs
Venture capital firms support entrepreneurship and job creation
Pension and insurance companies offer risk mitigation products for individuals and companies
Increased competition between financial service providers lead to more efficient products and
services offered at reduced costs
Improving the stability of the financial system to support sustained growth and poverty
reduction
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NBFIs are a critical part of the development of a diversified financial sector
Helps reduce the potential for future crises
The report focuses on the NBFI sector in Indonesia with two key outcomes in mind
•improved mobilization and allocation of long-term domestic resources for development
•development of a diversified financial sector
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Highlights of the Report
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Non-Bank Financial Institutions (NBFIs) control over Rp. 375 trillion in assets (of which pension funds and insurance
firms control about half).
– At 14% of GDP this is significant – and these need to be better managed
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Pensions and insurance assets are increasing annually at over 20%
– Implies about Rp. 40 trillion per year of fresh resources being generated
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Asset allocation needs to be substantially improved
– Insurance firms are investing one-third of their funds (Rp. 23 Trillion) in short-term deposits and mutual funds
– Pensions funds invest 40% (Rp. 42 trillion) in short-term deposits and mutual funds
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Indonesia’s NBFIs are still small
– compared to its banks (about Rp. 1500 trillion) and
– to NBFIs in other countries (Malaysia 138%, Thailand 32%, Singapore 170 % of GDP)
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There is tremendous potential for growth of these institutions
– Slightly more than 10% of Indonesians have a life insurance policy
– Only 15 million Indonesians have formal pensions or retirement savings – including nearly 5 million civil servants
– Around 100,000 domestic retail investor accounts in the stock market
– Just 255,000 mutual fund investors
– Leasing and venture capital firms are yet to play a major role in funding entrepreneurs and SMEs
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What is needed are sound policies for the development of NBFIs. This report provides some recommendations.
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Key Findings and Recommendations (1)
Macro stability is a prerequisite for the development of the NBFIs – this report assumes a stable
environment and focuses on the sector specific issues
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Regulatory framework is broadly reasonable
– Passing new laws and/or regulations is not the priority
– Implementation and enforcement of existing framework needs
improvement
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Make Bapepam-LK more independent as soon as possible
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Strengthen regulatory and supervisory capacity
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Harmonize regulation across sectors
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Tax treatment plays a key role in sector development
– Rationalize taxation across all NBFI sectors
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Major driver of future market development will be consumer education and
improvement of skills of market participants
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Develop Public private partnerships with industry and SROs
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Key findings and recommendations
(2)
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Debt markets
– Improve coordination between Bank Indonesia and the Ministry of Finance
– Enhance the certainty of issuance
– Improve market infrastructure for government bonds (for eg: KSEI participate in BISSSS as a subregistry – already implemented)
– Improve the collection and dissemination of secondary-market pricing information
Equity markets
– Improve corporate health and governance
– Improve market structure by demutualizing and merging the Surabaya and Jakarta
stock exchanges
– Improve market infrastructure by implementing straight-through processing and full
remote trading
– Improve the environment for IPOs
Mutual funds
– Restructure the mutual funds industry – after the 2005 debacle
– Strengthen enforcement and market discipline
– Develop, implement and enforce sound net asset valuation procedures
– Strengthen custodians to protect investors
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Key findings an drecommendations
(3)
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Pension funds
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Improve offsite supervisory capacity
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Improve capacity of pension fund managers
Taspen
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Jamsostek
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Improve governance and management
Encourage outsourcing of activities at Jamsostek to improve efficiency, i.e. outsource the management of a portion of
Jamsostek’s assets (i.e. 5 –10%)
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Employees and financial pension funds
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Formulate a coherent master plan that focuses on the implementation of SJSN and determines the
respective roles of private and public sector
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Implicit civil service pension liability likely to be large
Continue on a pay-as-you-go basis and simplify administrative structure
Allow prefunding of severance benefits under Law 13 through tax sheltered vehicles such as a registered pension plan
Insurance firms
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Rationalize the industry
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Close down companies whose licenses have been revoked
Develop strategy, regulation and procedure for closing large and small insolvent companies
Defer establishment of any policyholder protection scheme until after industry is rationalized
Improve enforcement
Promote the industry
Establish a commission of key stakeholders including industry to guide future industry strategy
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Key findings and recommendations
(4)
• Leasing/multifinance
– Develop credit information systems to extend access to SME’s and
new borrowers by relying on their reputation credit
– Encourage BI to support private sector participation in consumer
credit information systems.
– Allow depreciation of leased assets
– Increase the diversity of funding away from the banking sector to
create a more competitive and diversified financial sector
• Venture capital
– Unfortunately, no quick wins here, a lot depends on improving the
investment climate and corporate governance of companies
– To make the industry more attractive improve exit opportunities and
a stronger IPO environment
– Increase sources of funds for VC firms from institutional investors
such as pension funds
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Report dissemination, ongoing
initiatives, and expected impact
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Dissemination
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Ongoing initiatives
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Parts of the report disseminated at four workshops in 2005/05 and feedback incorporated
Report circulated to Bapepam-LK and feedback incorporated
The Government has initiated a broad reform program through the financial sector policy package
in June 2006 – covering both banks and NBFIs
Bank Indonesia/MoF are working on a Financial Sector Architecture for Indonesia
Several blueprints for individual sectors are being developed – capital markets, pensions,
insurance, etc.
Industry associations and other stakeholders are also interested in supporting efforts for future
development of sectors.
We hope that the report will serve as a basis for informed discussion about
the role of NBFIs, their ability to meet Indonesia’s objectives, and policy
actions necessary to stimulate their sound development
The World Bank considers it a privilege to work with the Government in this
critical area of financial sector reform and we stand ready to further support
the Government in its future efforts
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ANNEX
Background information and key
issues
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Fixed Income Market Structure
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Relatively small
– Outstanding fixed income instruments* Rp 506 trillion (19% of GDP),
compared with Rp 695 trillion in banking loans and Rp 800 trillion in
stock market capitalization
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Evolving trading infrastructure
– Government bonds: BI-SSSS linked with BI-RTGS and IDM’s Bloomberg
terminal improved secondary trading, but access can be expanded
– Corporate bonds: Secondary trading is thin, bid-ask prices difficult to
obtain
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Concentrated market
– The government is the dominant issuer
– Banks are major players as holders of recap bonds, investors and
intermediaries
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Few infrastructure bonds
– Indonesian infrastructure needs significant investment, however, fixed
income instruments have played a very minor role so far (i.e. corporate
bonds issued by Jasa Marga, PDAM Jaya)
* Includes government bonds, corporate bonds and BI certificates
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Fixed Income Market Key Issues
• Illiquid market
– Limited access to BI-SSSS
– Narrow participation in the repo market
• Collection and distribution of pricing information
– Post trade pricing is not mandated
– SSX charges the providers of trade price, disincentivizing
reporting
• Legal issues
– Creditor rights and collateral repossesions need to be
strengthened
– Role of trust agent needs to be further clarified and strengthened
to protect investors
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Pension Funds Market Structure &
Key Issues
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Rp 107 tr assets (4.7% GDP) in 2004. Low comparatively. Half of
the total assets are public programs, half private
Jamsostek, has about 1/3 of total assets, suffers from low level of
participation, lax enforcement and high expenses
Taspen, the civil service pension plan, is almost entirely unfunded
and operated on a pay-as-you-go basis
Private pension plans are growing but operate in an unlevel
regulatory environment with the public plans and mutual funds and
under an unclear tax framework
The recent national social security law (Law no. 40 of 2004/SJSN)
addresses a real need but proposes a potentially unaffordable and
ambiguous structure
Pension plans pool long-term assets but do not invest them in longterm. Jamsostek and private pension funds invest 43% and 33% of
their assets in short term bank deposits.
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Insurance Market Structure
• Small, fragmented and concentrated.
– Rp. 75 trillion in assets
– As of Dec-05, 152 insurance companies (51 life, 101 non-life)
– The 10 largest life insurance firms control nearly three-fourths of
industry assets
– Penetration, premiums as a % of GDP, is low, 1.4 %, compared
with 3.5% in Thailand and 5.4% in Malaysia.
– Density, premium per capita, is also low, $10.1, compared with
$52 in Thailand and $140 in Malaysia
• Institutional quality and demographics are more likely
explanations than cultural and religious ones
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Insurance Market Key Issues
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Some large insurance firms are considered to have solvency issues
Several companies lost their licenses but yet to be closed
26% of assets are invested in bank deposits
More than half of new life insurance sales replaces business lost
during the year. Lapses and surrenders account for most of the
terminations
Taxes arrest development of annuitization for pension assets,
regulatory treatment of unit-linked products is not consistent with the
treatment of the mutual funds.
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Mutual Funds Market Structure
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Two possibly structures:
– Collective investment contract (KIK) and corporate structure
– KIK is the predominant structure, corporate structure is harder to set up
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Investment managers
– Funds are managed by investment management companies, which are
securities firms licensed by Bapepam
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Investors
– 80% of subscriptions by individuals. Average unit ~Rp 300 million
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Fees
– Fees as much as 3.25 percent in annual fees, as well as well as up-front
and redemption fees. (Average expense ratio of 1.5 percent in the US)
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Sales and distribution channels
– Indirectly by commercial banks, insurance companies, and brokers and
directly by investment management companies
– Commercial banks dominant, selling more than 75% of net asset value
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Tax exemption
– Fixed-income mutual funds are tax exempted on interest income and
capital gains from bonds for the first five years after a fund is created
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Mutual Funds Market Key Issues
• Redemption run in 2005
– In March 2005, SBI rate was increased to counteract the rising
inflation due to hike in oil prices. Higher interest rates reduced
bond prices and NAV’s. Some investment manager did not
comply with Bapepam’s mandated mark to market regulations
and this eroded investor’s confidence and led to a redemption
run on fixed income funds
• Poor asset valuation
– Bapepam has a regulation for use of reference prices, however
some investment managers did not comply in 2005
• Misrepresentation of products
– Many sales agents failed to explain the nature of the product to
investors, and this created the impression that the product was a
banking product. Investors did not understand the relative impact
of income and capital gain or loss on their investment returns and
panicked when bond prices dropped
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Multifinance Market Structure
• Multifinance includes leasing, factoring, and consumer and
credit card finance
• Total lending Rp. 67.7 trillion
– 70% in consumer and credit card finance (Grown 5 times since
2000)
– Rest in leasing and factoring
• Sources of funds are equity, bonds and commercial bank
loans
• Performance is good, 23% return on equity in 2005
• Consumer finance is heavily concentrated on automobile and
motorcycle loans and is not well diversified
• Non-performing and doubtful loans were 0.5% for consumer
finance, 9.1% for credit cards, 6.2% for leasing and 22.7% for
factoring as of 2005
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Multifinance Market Key Issues
• Narrow funding sources:
– Banks are the dominant financiers and in increasing number of
cases, investors in multifinance companies. This has created a
situation in which commercial banks can influence multifinance
companies’ lending decisions.
• Leasing can become a strong source of financing for SME’s.
Several factors are holding back its potential:
– Inadequate enforcement of contracts and collateral repossession
– Weak project appraisal skills
– Unfavorable tax treatment.
• Leased assets cannot be depreciated.
• Leasing can only be offered to taxpayers with tax identification
numbers. Consumer finance is not subject to this.
• Operating leases are not exempt from VAT and withholding
taxes
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Venture Capital Market Structure
• History
– Started in 1973 with BPUI, later in 1988 BPUI created subsidiary
Bahana Artha Ventura for VC investments in SME’s
– 1995 - creation of private VC firms
• Structure
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Very small, Rp. 2.7 trillion in assets (0.1% of financial sector)
Number of VC companies has stayed at 60 since 2001
Ownership dominated by state and business groups
Indonesian VC companies are generally in the business of
lending, not in the business of taking on equity risk
• Funding and investments
– Raising funds from the public and issuance of debt securities is
prohibited for VC firms
– Return on investment has been low, less than 3% between
2000-2005
• Tax exemptions in certain sectors
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Equity Market Structure
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Relatively small: 30% of GDP (Thailand 70%)
Highly concentrated: Top 10 companies have 50%+ of market cap
Relatively illiquid:
– Out of more than 330 stocks, no more than 30 stocks, mostly blue chips,
are actively traded
– Turnover velocity is about 50%, low compared to Korea (200%),
Thailand (90%) and India (75%)
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Small float:
– Top 20 public companies have 39.4% owned by public
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Performance:
– Strong recent secondary market performance. Market cap increased
from Rp 680 tr to Rp. 801 tr from December 2004 to December 2005
– Weak IPO market. New capital raised as % of market cap has been
between 1-3% since 2001
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Participation
– Foreign institutions are the largest investors (over 70% of market cap)
– Estimated 100,000 domestic retail investors in Indonesia (Korea 3.9 mln)
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Equity Market Key Issues
• Underlying corporate health
– Profitability: 10% return on invested capital in 2004 compared
with 10% in Korea, 7% in Malaysia. Accounting for inflation,
Indonesia can do better
– Leverage: 11.6% of companies are over 200% leveraged in
2004, down from 45% in 1998, but still room for improvement
– Corporate governance: Indonesia scored 37 in 2005, compared
to 50 in Thailand and 56 in Malaysia
• Insufficient number of listed companies
– Tax issues: Many companies are hesitant to enlist because they
are concerned about historical tax investigation
• Need for diversifying investor base, especially domestic retail
• Inadequate infrastructure –
– JSX is vulnerable to a stoppage of trading should a catastrophe,
such as a fire, flood, or terrorist attack, inflict damage to the floor
– Remote trading not yet implemented
– Two stock exchanges introduce redundancies and inefficiencies
in the capital markets
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