Implications of GATS Principles in the Liberalization of Foreign

Investment: A Case of Current Indonesian Banking Law

Acep Rohendi

Management Program, Universitas BSI, Jalan Sekolah Internasional No. 1-5, Bandung, Indonesia

Keywords: Foreign investment, Banking, Full liberalization, GATS

Abstract: The purpose of this study is to examine the implications of General Agreement on Trade and Service (GATS)

as a part of World Trade Organization (WTO) principles in the foreign investment principles in the

liberalization of current Indonesian banking law. This research is supported by the normative legal method.

The results of this study shows, first, Indonesian banking legislation originally embraced limited liberalization

(partial liberalization) becomes full liberalization. Second, the mastery of Indonesian banks by foreign

investors jeopardizes the existence of national banks in Indonesia.

1 INTRODUCTION

Banking liberalization in foreign investment in

national banking is still a pro-contra-liberalization

issue of the economy in Indonesia. A country that

runs a capitalist economic system is a country that

carries out economic liberalization. According to the

United Nation, Economic liberalization

“encompasses the processes, including government

policies, that promote free trade, deregulation,

elimination of subsidies, price controls and rationing

systems, and, often, the downsizing or privatization

of public services” (The United Nation, 2010).

Economic liberalization in Indonesia was agreed

in the Uruguay Round Ministerial Meeting on April

15, 1994 in Marrakesh, Morocco. The Government of

Indonesia has participated in the signing of the

Agreement Establishing the World Trade

Organization (WTO) and all the agreements made in

Annexes 1, 2 and 3 as a part of the Agreement (see

considerations Item e Act Number 7 of 1994 on

Ratification of Agreement Establishing WTO). The

liberalization of foreign investment in Indonesian

banks is the Government's commitment to the

liberalization of Indonesia's economy with the IMF,

which includes, among others, banking liberalization

and compliance with WTO provisions, when the

Government of Indonesia requests financial

assistance to the International Monetary Fund/IMF

(IMF, 1998). Demand for assistance to the IMF

occurred after the crisis that occurred in Asia that hit

Indonesia in 1997 (Priyatno, 2017).

Foreign investment in the banking sector is

currently a hot issue to date relating to the limitations

and percentage of foreign capital allowed in the

Indonesian banking industry and its negative impact

on the viability of local banks. It is also related to the

sovereignty of the state in economic development to

improve people's living standards by strengthening

the dominance of foreign investors in the national

banking system. It is also even linked to a sense of

economic nationalism that builds the economy that

prioritizes national interests. This is because in

Indonesia, there is still a conflict between nationalism

and globalization (Hendrastomo, 2007)

As the impact of the globalization era and the need

for foreign investment, the government of Indonesia

ratified the WTO Establishment Agreement through

Law Number 7 of 1994 on Ratification of Agreement

Establishing the World Trade Organization. This law

creates the obligation of Indonesian government to

provide wider opportunities for foreign investors to

invest in national banks.

The Indonesian government, aware of the

importance of banking support in financing national

development, through its laws and regulations in

order to support the developing world has opened up

to foreign investors in the banking business in

Indonesia. Factors limited domestic investment

capital for the establishment of the Indonesian

banking became one reason. The government hopes

to create a sound banking system, efficient and able

to compete in the era of globalization and free trade.

After the 1997 economic crisis, the Government

2974

Rohendi, A.

Implications of GATS Principles in the Liberalization of Foreign Investment: A Case of Current Indonesian Banking Law.

DOI: 10.5220/0009946929742982

In Proceedings of the 1st International Conference on Recent Innovations (ICRI 2018), pages 2974-2982

ISBN: 978-989-758-458-9

issued Government Regulation No. 28 of 1999

concerning the Merger, Consolidation and

Acquisition Bank

The process of acquisition related to the share

purchase of the commercial bank in Indonesia is

stipulated in Government Regulation No. 29 of 1999

concerning the Share Purchase of Commercial Bank.

Article 3 of Government Regulation No. 29 of 1999

allows foreign investors to purchase shares of

commercial banks as maximum as 99%. Similarly,

the implementation of foreign investors and domestic

investors to buy shares of commercial banks is one of

the consequences of the liberalization of banking

ratification of the WTO (World Trade Organization)

agreements, including the GATS (General

Agreement on Trade and Service) agreement and the

agreement with the IMF (International Monetary

Fund). As the consequence, foreign investors are

allowed to acquire a bank and buy bank shares and a

maximum of 99% of shares owned banks. The bank

is a national bank known as private bank, because

Govern Banks and Rural Banks are not allowed for

foreign investment and the Government Bank is

limited to only 49% (Rohendi, 2016).

The long-term consequence of the National

Private Bank acquisition by foreign investors is that

the shares of the National Private Bank fall into the

hands of foreign investors compared to domestic

investors, as foreign investors have strong capital.

The impact is deadly national private business actors

to have banking, as the cooperative business actors

who have long been marginalized in the Indonesian

banking business. Whereas in 1978, there was still a

number of Non-Foreign Exchange Banks

Cooperatives amounted to five banks (Budianto,

2004). There are approximately 100 commercial

banks in Indonesia, and almost half of commercial

banks are either part or majority controlled by

foreigners (Madian & S, 2012).

The facts are incompatible with one of the basic

principles of national economy stated in 1945

Constitution, which is “independence” as stated in

Article 33 Paragraph 4. The main source of

development funds comes from within the country.

The main source of development funds coming from

within the country, however, does not reject the

source of economic development funds from abroad,

as a complementary source of development funds in

the country if not sufficient.

Indonesian Banking is one of the sources of

domestic financing to fund the development of the

economy. Existence of banking is a one of strategic

sources of national development. Banking in

Indonesia law does not merely provide the function

of the type of business that do business intermediation

of funds in the community, but there is more to social

function to improve the lives of people (Widiatedja

.I.G.N., 2011). The banking sector is an integral part

of the broader financial system and constitutes a key

provider of finance to business. The Indonesian

banking law of “democracy and economic

independence” is the foundation of banking laws that

apply to limited liberalization (partial liberalization).

Liberalization limited (partial liberalization) is in

accordance with the basic principles of democracy

and economic independence as stipulated in Article

33 of the 1945 Constitution.

The law of foreign investment in Indonesia's

banking sector is currently very liberal compared to

other ASEAN countries. In comparison, the

following limits of ownership of foreign banks in

some ASEAN countries, with the exception of the

Philippines, which sets foreign ownership limits 51%,

Thailand 49%, Malaysia 30% and Vietnam 30%

(Syamsul Hadi, 2012).

Mastery of the banking system is essential for the

independence of the management of economic policy

(Adityaswara, 2013). If banks are 80% controlled by

foreigners, the national credit distribution will be

determined by the head office where the banks are

located. The banking sector is a very important sector

in Indonesia, as nearly 80 total financial assets are

regulated by banks. Therefore maintaining banking

stability is a vital element for maintaining financial

sector stability in Indonesia (Santoso, 2010).

Expansion of Indonesian banks through APIs and

Services Sector Master Plan 2015-2019 Financial

Indonesia is a guideline and the banking industry to

change the relevant legal theory development has

statutory functions as a means of social change. Its

role is very important and still relevant today to be

guidelines for the drafting of foreign investment in

Indonesian banks, which at the moment the regulation

of foreign investment in the banking sector is still

disagreement as to show up today between the view

of the national interest and in terms of Indonesia's

readiness in the face of economic liberalization

The approach in this study is normative. The

analysis was based on normative analysis. Qualitative

study of normative law is supported by the historical

method of law, comparative law and futuristic legal

method. Based on this background, the problems

identified include: the application of the principles of

GATS-WTO in the liberalization of Indonesian

banking law, and the legal consequences on the

banking sector associated to the ownership of private

commercial banks in Indonesia.

Implications of GATS Principles in the Liberalization of Foreign Investment: A Case of Current Indonesian Banking Law

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2 LITERATURE REVIEW

2.1 GATS and Foreign Investment Law

in Indonesia

Investments are a source of driving economic growth

towards sustainable development in the global era.

Investments in a country can be sourced from both

domestic and foreign funds (foreign investment)

Investments are a source of driving economic growth

towards sustainable development in the global era.

Investments in a country can be sourced from both

domestic and foreign funds (foreign investment)

(Zarsky, 2015).

Foreign investment is asset flows from one nation

to other nation with the aim of gaining profit with the

supervision of the fund owner. The flow of assets in

the form of physical property is a direct investment.

The flow of assets to purchase shares of a company in

other country is a portfolio investment (Sornarajah,

2010).

Foreign investments provide advantages for the

host country in the form of transfer in production

technology, skills, labors, and expansion of industrial

base and competitiveness as well as accelerated

development. Other advantage is to help overcoming

“savings–investment gap” in the development and

open access to a country’s export market (Kehal,

2004).

Foreign investment illustrated the paradox with a

country’s dependence on foreign funds to finance

domestic developments. There is a clear distinction in

interest between foreign investors and the domestic

governments. The main interest of foreign investors

is to increase profitability, competitiveness, and

access to international market. On the other hand, the

interest of the developing countries is to encourage

domestic economic growth (Kehl, 2009).

For the first time, Indonesia arranged for foreign

investment in 1967, with the enactment of Law

Number 1 Year 1967 concerning Foreign Capital

Investment. Foreign Capital Investment

acknowledged in the Law only covers direct

investments. The participation of Indonesia as a

member of WTO based on the Law Number 7 Year

1994, Law Number 25 Year 2007 on Capital

Investment reflects several principles in GATS-WTO

among others:

a. The principle of ”most-favored-nation” (MFN)

is set forth in Article 3 Paragraph (1) letter d,

which reads” equal treatment and does not

distinguish the origin of the country”.

b. The principle of National treatment is set forth

in Article 4 Paragraph (2) that the Government

“gives equal treatment for domestic investors

and foreign investors with due to regard to the

national interest”.

c. The principle of Transparency is set forth in

Article 4 Paragraph (2) letter b that the

Government “ensures legal certainty, business

certainty, and security for investors since the

process of licensing until the end of investment

activities in accordance with the provisions of

legislations.”

2.2 Liberalization Era in Banking Law

The liberalization of Indonesian banks is a

commitment of the Government of Indonesia to the

IMF, which includes, among others, banking

liberalization and compliance with the WTO

provisions, when the Government of Indonesia

requested financial assistance to the IMF (IMF, 1998).

The request for aid occurred after the crisis that

occurred in Asia which then hit Indonesia in 1997.

Indonesian banking liberalization involves

opening market access and non-discriminative

treatment to foreign parties, giving greater

opportunity to foreign parties to participate in owning

national banks so that partnerships with national

parties remain. For this purpose, adjustments were

made in the regulations of the national banking,

among others: Amendment of Law Number 7 of 1992

with Law Number 10 Year 1998 concerning

Amendment of Act Number 7 of 1992 on Banking.

The amendment of this provision gives more

opportunity for foreign citizens and foreign legal

entities other than banks to establish a mixed bank as

well as permitting foreign investors to buy shares of

commercial banks (Rohendi, 2012).

It is stated in Article 3 of the Government

Regulation that foreign investors may purchase

shares of commercial banks up to a maximum of 99%

of the total shares of the bank concerned. The same is

regulated in Bank Indonesia Regulation Number

2/27/PBI/ 2000 concerning Commercial Banks (PBI

2000) (Rohendi, 2012).

Law Number 25 Year 2007 on the Investment

Law no longer distinguishes foreign investors and

domestic investors. Presidential Regulation Number

77 Year 2007 provides that foreign investors may

acquire bank ownership up to a maximum of 99%, as

the banking sector is included in the open business

field with conditions (Rohendi, 2012). Due to the

amendments to the banking laws, currently in

Indonesia there are three types of foreign-owned

banks that have foreign capital, which are branch

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offices of foreign banks, mixed banks, and foreign-

owned national banks such banks mentioned above.

3 RESEARCH METHODS

The research method used to answer the identification

of research problems in this study using normative

legal research methods or literature law research

(secondary data only) (Soekanto & Mamudji, 2000).

Using a descriptive-analytical research specification

(Soemitro, 1994), which attempts to describe and

analyze secondary data on foreign investment law in

the national banking sector in relation to banking

liberalization and its implications for the existence of

national banks. The secondary data includes

prevailing laws and regulations, legal theories, expert

opinion and practice of the implementation of

positive law concerning the above issues.

The approach method is normative juridical. This

means that doctrinal legal research is usually used

only secondary data sources that are legislation, legal

theories and opinions of leading experts while the

analysis is done in the form of normative-qualitative

analysis (Soemitro, 1994). Secondary data used as

primary data sources consist of: primary legal

material (current law), secondary legal material

(books or research) and tertiary legal materials.

Secondary data were obtained by legal research in the

Library Research and Internet Research (Stim, 2003).

Secondary data were obtained by legal research in the

Library Research and Internet Research (Stim, 2003).

Technique of collecting data is done by searching

library materials. Data analysis was done to data that

have been obtained by analytical descriptive with

normative juridical approach, using power

abstraction and interpretation/ construction.

4 RESULT AND DISCUSSION

4.1 Result

4.1.1 Application of the Principles of GATS

WTO in the Liberalization of

Indonesian Banking Law

The liberalization of the banking application of the

principles of the GATS -WTO in the legislation

include: Principles of market Access, Principles Most

Favored-Nation, National Treatment principles in the

banking law.

Principles of Market Access set out in Article XVI

(1) GATS relates to the opening of market access

services according to mode of supply of services

(supply of service) to any countries other members

equally, without any conditions except to the terms

agreed upon in the "schedules of specific

Commitments "as stipulated in Article XX.

Market Access in banking legislation, namely:

A market-access commitment

Foreign banks are allowed to open branches in

Indonesia, set forth in Article 20 of Law No. 7

of 1992 as amended by Act No. 10 of 1998 and

Government Regulation No. 24 of 1999, and

Article 6 Paragraph 1 of Law No. 21 Year 2008

on Bank Sharia.

a market-access limitation

1) Foreign investors to partner in the

commercial banks and the mixture are

allowed to have a maximum stake limit

with the composition of 99% and 1% in

the hands of domestic investors. Article

22 Paragraph 1 (b) of Law No. 7 of 1992

as amended by Act No. 10 of 1998 and

Article 9 Paragraph (1) of Law Number

21 Year 2008 on Bank Sharia, Bank

Indonesia Regulation Number

11/1/PBI/2009 concerning Commercial

Bank; Bank Indonesia Regulation

Number 15/13/PBI/2013 on Amendment

to Bank Indonesia Regulation Number

11/3/PBI/2009 on Islamic Banks.

2) Foreign investors may purchase shares of

commercial banks in Indonesia in the

majority, stipulated in Article 26

paragraph 2 of Law No. 7 of 1992 as

amended by Act No. 10 of 1998 and

Article 14 of Law Number 21 Year 2008

on Islamic Bank. Limitation of the

maximum number of shares that can be

purchased is 99%, the rest is still owned

by domestic investors (Government

Regulation No. 29 of 1999 on the

Purchase of Shares of Commercial Bank

and Bank Indonesia Regulation Number

14/8/PBI/2012 on Shareholding

Commercial Banks.

an exception to the national treatment principle

1) The foreign investor can have only

commercial banks and rural banks are not

allowed under Article 22 and Article 23

of Law No. 7 of 1992 as amended by Act

No. 10 of 1998

2) Foreign investors are only allowed to

have Islamic Bank, and not Rural Bank,

set forth in Article 9 of Law No. 21 of

2008.

Implications of GATS Principles in the Liberalization of Foreign Investment: A Case of Current Indonesian Banking Law

2977

4.1.2 Principles of the Most-Favored-Nation

This principle is outward looking, without

discrimination that the Government's policy is not to

discriminate between foreign investors from one

country to another. Several principles of Most-

favored-nation (MFN) that played a role in the

liberalization of the Indonesian banking in foreign

investment include:

a. Article 20 of Law Number 7 of 1992 is amended

by Law Number 10 of 1998 that foreign

investors in the form of foreign banks domiciled

abroad may open Branch Offices, Branch

Offices and Representative Offices with the

permission of Bank Indonesia

b. Article 22 Paragraph (1b) of Law Number 7 of

1992 is amended by Law Number 10 Year 1998

that domestic and foreign investors may

establish Commercial Banks in partnership.

Article 22 Paragraph (1b) of Law Number 7 of

1992 as amended by Law Number 10 Year 1998

does not distinguish the origin of foreign

investors. This means that foreign investors,

both foreign citizens and/or foreign legal entities

originating from any country can partner with

Indonesian citizens and/or Indonesian legal

entities can partner in establishing a commercial

bank.

c. Article 26 Paragraph (1b) states that domestic

and foreign investors may purchase shares of

commercial banks in partnership. Article 26

Paragraph (2) shall not distinguish the origin of

a foreign investor country. This means that

foreign investors, both foreign citizens and/or

foreign legal entities originating from any

country are permitted to purchase the Bank's

shares. This provision allows foreign investors

to own shares of Commercial Banks established

under Article 22 Paragraph (1) to be able to

partner with Indonesian citizens and/or

Indonesian legal entities can partner in

establishing a Commercial Bank.

d. Law Number 21 Year 2009 concerning Sharia

Banking:

(1) Article 9 (1b): "Sharia (Islamic) Commercial

Bank may only be established and/or owned

by: a. Indonesian citizens and / or legal

entities of Indonesia with foreign nationals

and/or foreign legal entities in partnership;" or

(2) Article 14 Paragraph (1): "Indonesian

citizens, foreign citizens, Indonesian legal

entities, or foreign legal entities may own or

purchase shares of Sharia Commercial Bank

directly or through the stock exchange.

e. The words used in to show foreign investors in

the banking sector using the terms "foreign

nationals" and "foreign laws", do not indicate a

country. No rules that treat discrimination

against fellow member countries of WTO

members relating to their banking sector

policies.

4.1.3 The Principle of National Treatment

This principle is inward looking without

discrimination, meaning the state of Indonesia as a

WTO member states treats equally to domestic

investors and foreign investors in the banking

business.

Some of the principles of National Treatment

arranged in Article 17 GATS that play a role in the

Indonesian banking liberalization in foreign

investment include:

a. Article 6 Bank Indonesia Regulation Number:

11/1/PBI/2009 concerning Commercial Bank

(regulatory implementation of Article 22

paragraph 1b of Law No. 7 of 1992 amended by

Act No. 10 of 1998). Foreign investors similarly

to domestic investors can set up a commercial

bank in partnership. Foreign investors can even

have a Commercial bank in partnership with the

ownership of bank shares amounting to 99% of

paid up capital.

b. Article 6 Bank Indonesia Regulation Number

11/3/PBI/2009 on Islamic Banks as amended by

Bank Indonesia Regulation Number

15/13/PBI/2013 on Amendment to Bank

Indonesia Regulation Number 11/3/PBI/2009 on

Islamic Banks, states that Foreign investors

similarly to domestic investors can establish

Sharia Commercial Bank partnerships. Foreign

investors can even have Islamic Banks in

partnership with the ownership of bank shares

amounting to 99% of paid up capital.

c. Indonesian Government Regulation No. 29 Year

1999 on Purchase of Shares of Commercial Bank.

Government Regulation is an implementing

regulation of Article 26 of Law No. 7 of 1992 as

amended by Act No. 10 of 1998.

d. Government regulations do not distinguish

between foreign investors and domestic investors

in the purchase of shares of Commercial Bank.

e. Article 3 of the Indonesian Government

Regulation No. 29 of 1999 the number of

shareholding commercial banks by foreign

citizens or foreign legal entity which is acquired

through purchase directly or through the Stock

Exchange was as much as 99%. Article 10 of

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Government Regulation No. 28 Year 1999 on

Merger, Consolidation and Acquisition Bank (The

implementing regulation of Article 28 of Law No.

7 of 1992 amended by Act No. 10 of 1998). This

provision does not distinguish between foreign

investors and domestic investors to acquire

commercial banks provided it meets certain

requirements of Article 10 of Government

Regulation No. 28 of 1999.

Harmonization of banking law with the provisions

GATS embraces full liberalization and applies one

form of economic liberalization through the GATS,

which has been ratified by the Government of

Indonesia. Actually, Law No. 7 of 1992 before it was

changed in 1998, embraced liberalization but not in

full (partial liberalization) as foreign investors

allowed to buy shares of commercial banks but

should not have a majority.

GATS commitment is to implement the

provisions of the banking law of Indonesia to

implement economic liberalization, which in this

case, intangible banking liberalization means

"opening up" to the rest of the world related to

banking activities. Economic liberalization of

banking services makes it easier to invest and conduct

banking business (Nguyen, 2018) as in the country of

Indonesia. Indonesia's economic system should

embrace a mixed economic system in accordance

with Article 33 1945 Constitution, but in fact

implement liberal economic system, as has been

adoption in banking legislation relating to foreign

investment.

The current economic system with the agreement

of both cross country in regional and multilateral

liberalization economic contains changing economic

legal system that is based on Article 33 of the 1945

Constitution, into a legal system based on liberalism

and capitalism are contrary to Article 33 of the 1945

Constitution. The development of the Indonesian

economy under Article 33 UUD 1945 is the mandate

of the proclamation that aims to prosperity.

Indonesian economic liberalization is ultimately

gradually integrated into the global market economy

system based on capitalism (Baswir, 2006).

4.2 Discussion: Impact of Banking

Liberalization on the Ownership of

National Commercial Banks

4.2.1 Domination of Acquisition Process of

National Private Banks by Foreign

Investors

One of the consequences of the liberalization of

banking in Indonesia is that foreign investors are

more interested in buying shares of National Private

Bank, which at the same time can also do acquisitions

and proceeds through a previous merger and ending

with the acquisition process. The procedure is simple

and low cost. Foreign investors prefer to purchase/do

acquisition of the commercial banks than set up new

ones.

If foreign investors want to own/establish

commercial banks, it is enough to buy bank shares

25% of the paid up capital of the bank, then the

investor has the ability to control, and also to

maximize profit. Foreign investors can buy shares of

commercial banks up to a maximum of 99% of the

bank's shares. There is no need to research the market,

because banks are already known publicly, already

know the advantages and disadvantages of their

products, knowing the performance of management,

including personnel in it.

The dominance of the acquisition of commercial

banks is in contrary to Pillar I of the Indonesian

Banking Architecture that is "healthy banking

structure" with a vision: "Creating a healthy domestic

banking structure that is able to meet the needs of the

community and encourage sustainable economic

development". How to achieve this vision is done

either by bank merger (see Merger provisions set

forth in Government Regulation Number 28 Year

1999 Concerning Merger, Consolidation and

Acquisition of Banks)

4.2.2 Denationalization Share of the

National Private Bank

The acquisition process of the National Private Bank

does not occur prior to the liberalization of banking

sourced to Law No. 7 of 1992 as amended by Act No.

10 of 1998 on Banking and Law No. 21 of 2008

concerning Islamic Banking, and its regulation

implementation is set purchase of shares of

commercial banks and Mergers and Acquisitions.

The provisions concerning the purchase of shares

of commercial banks is originated from Article 26 of

Law No. 7 of 1992 as amended by Act No. 10 of 1998

on Banking and its implementation regulation, that is

Implications of GATS Principles in the Liberalization of Foreign Investment: A Case of Current Indonesian Banking Law

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Government Regulation No. 29 Year 1999 on

Purchase of Shares of Commercial Bank which allow

foreign investors to buy Shares of Commercial Bank

99%, the rest is still owned by 1% by domestic

investors.

The legal consequences of these provisions could

happen to all bank institutions, where initially both

the National Private Commercial Banks of

Conventional and Islamic Banks can be purchased

and acquisitions at the same time take over by foreign

investors from different countries.

Denationalization of National Private

Commercial Bank shares, to replace the role of the

national private sector with foreign role is in contrary

to the principle of independence as set forth in Article

33 Paragraph (4) of the 1945 Constitution and Article

2 Paragraph (1) of Law No. 25 of 2004. Foreign

capital in the principle of self-reliance is still needed

for the development of Indonesian banks, for foreign

capital in the banking industry as the private sector

should remain a complement, and not become owners

of major capital in the development of the private

banking business

Denationalization of National Private

Commercial Bank shares contrary to the People's

Consultative Assembly Decree of the Republic of

Indonesia Number XVI/MPR/1998 on Political

Economy in the Context of Economic Democracy as

a legal source material and focuses on people's

economy in economic development

4.2.3 The Control of National Banks by

Foreign Investors

Economic sovereignty in the long term will evolve

eroded by the private sector in the banking control,

where control is taken over by foreign investors. The

holding in the Indonesian banking is almost 50% in

Foreign Exchange Commercial Bank (Otoritas Jasa

Keuangan, 2015).

Foreign investors correlated with gains from the

banking business in Indonesia will be transferred to

the foreign investor's home country (capital flight).

Supposedly if the commercial bank shares are held by

domestic investors, it can at least be used to develop

banking business in Indonesia, especially to improve

banking intermediation function.

Mastery of ownership National Private Banks

equals to hand over the banking intermediation

Indonesia to foreign investors, the fact that foreign

investors doing business in Indonesia purely business

motives. Internal bank policy makers are certainly the

majority or under the influence of foreign investors.

The practice of MSME credit channeling at lower

rates than commercial banks is controlled by

domestic investors

National banks which acquired the top foreign

investors are banks that already have offices/

branches throughout the archipelago. This means that

banks controlled by foreign investors can reach the

entire archipelago and compete with banks not only

Govern banks, but also by the Rural Banks. The banks

controlled by foreign investors, who have a tendency

to be oriented more to consumer credit, compared

with productive credit to support economic

development, would adversely affect the

development of Indonesia's economy.

4.2.4 Difficulties of SMEs in the Ownership

of National Banks

Mastery of national banks by foreign investors, the

presence of Indonesian banks to improve people's

living standard will certainly be disrupted. Welfare of

the people through the implementation of economic

democracy will not be realized because the banks

owned by foreigners do not automatically improve

the welfare of the people.

The welfare state is a country that has a huge role

to regulate all aspects of life of its citizens in order to

achieve the greatest prosperity of the people. The

concept of the welfare state concept was originally an

attempt to overcome the negative effects of the

capitalist economic system. The welfare state is often

cited as one of the variants of capitalism, capitalism

in a kinder and more humane face (compassionate

capitalism).

Indonesia's economic development as a means or

process running the country's economy today, and

forever shall refer to Article 33 and Article 34 of the

Constitution 1945, as the foundation of economic

development and social welfare development.

Economic development is one of the efforts to

achieve the welfare of all the people of Indonesia,

which is a manifestation of preamble of paragraph IV

of 1945 Constitution. Foreign investment

liberalization of the banking sector to the

development of the Indonesian economy in the goals

of the welfare state results in Indonesian banking law

to be liberal and is contrary to the essence and spirit

of the State of Indonesia in Destination Welfare State,

as contained in the essence of the welfare state in

paragraph I to IV of the 1945 Constitution.

Liberal laws on banking liberalization are

contrary to ideal law of Pancasila (the Indonesian

state philosophy) and Justice Theory of Pancasila.

The liberal law can hardly be expected to support the

essence and spirit of the State of Indonesia in

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Destination Welfare State, as contained in the essence

of the welfare state in paragraph I to IV of the 1945

Constitution. The concept of foreign investment in

banking law on the development of the Indonesian

economy in the era of economic liberalization is

limited and needs to be returned to the national

banking principle of economic democracy that

reflects the Justice of Pancasila. Indonesian economic

actors together take part in supporting the national

banking promoting the independence of the national

banking system, especially empower Small and

medium enterprises (SMEs) to take part in the

ownership of private national banks, in addition to

other domestic investors and foreign investors.

5 CONCLUSION

Implications of the application of GATS-WTO

principles of economic liberalization in the economic

development of Indonesia against the Indonesian

banking system changed the law of Indonesian banks

that originally embraced limited liberalization (partial

liberalization) became full liberalization (full

liberalization). It changed the foreign investment in

the private national banks of only a minority into a

majority shareholding in commercial banks.

The legal consequences on the banking sector

associated to economic liberalization of the purpose

of the welfare state, among others mastery of

Indonesian banks by foreign investors, jeopardize the

development of the national economy.

Liberalization on the Ownership of National

Commercial Banks results in impact in various fields.

First, foreign investors dominate the acquisition

process of National Private Banks. Second is

Denationalization of National Private Commercial

Bank shares where foreign capitals are no longer act

as a complement, but the major capital owners in

private banking business. Third, the ownership of

major capital of private banks by foreign investors

results in the control of the private bank. This can

affect the development of economy in Indonesia. The

last is that the mastery of national banks by foreign

investors makes it difficult for SMEs to take part in

the ownership of private national banks, which also

affect the welfare of the people of Indonesia.

This study is useful for the executive

(Government), legislative body (The House of

Representatives/DPR), and central bank (Bank

Indonesia). The results of this study can provide

benefits in the framework of drafting legislation in the

field of economy, especially in the preparation and

policy making involving foreign investment in the

development of Indonesian banking in the era of

economic liberalization.

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