Korean Banks Face Regulatory Hurdles in Indonesia’s Financial Market

Indonesian financial authorities are tightening the reins on foreign banks, with new regulations mandating that Korean lenders such as KB Kookmin Bank and Shinhan Bank establish local holding companies. This development, part of a broader regulatory push by Otoritas Jasa Keuangan (OJK), Indonesia’s independent financial watchdog, poses fresh challenges for Korean financial institutions already grappling with a complex and restrictive market environment in South East Asia’s largest economy.

New Rules Reshape Foreign Banking Operations

The regulation, announced by OJK at the end of December last year, targets financial institutions with significant operations in Indonesia. Companies managing two or more financial affiliates with total assets surpassing 100 trillion Indonesian Rupiah (US$5.95 billion) or those with three or more affiliates holding assets over 20 trillion Rupiah are required to establish a local holding company or designate an existing affiliate to serve in that capacity. For Korean banks, which have expanded aggressively in Indonesia through acquisitions over the past decade, this rule adds a layer of complexity to their operations.

Among the six Korean lenders currently active in the Indonesian market—KB Kookmin Bank, Shinhan Bank, KEB Hana Bank, Woori Bank, and OK Savings Bank—two stand out as meeting the thresholds for compliance. Shinhan Bank, which entered the market in 2017 with the establishment of PT Bank Shinhan Indonesia, now operates two additional affiliates: PT Shinhan Indo Finance and PT Shinhan Asset Management Indonesia. Similarly, KB Kookmin Bank, under its parent KB Financial Group, oversees seven affiliates, including PT KB Bank Indonesia Tbk and PT KB Insurance Indonesia. Both banks have confirmed they are engaging with Indonesian regulators to address the new requirements.

A Shinhan Bank official noted the bank’s proactive approach to compliance. “In Indonesia, this regulation was announced at the end of December last year. It applies to all financial institutions operating in the country, and among Korean firms, Shinhan and KB fall under its scope” the official said. The bank aims to submit a detailed compliance plan by the June deadline set by the Indonesian government, following an in-depth review of financial, accounting, and tax implications.

KB Kookmin Bank, meanwhile, is in the preliminary stages of discussions with regulators. “We are in the early stages of talks, and the details are still being developed” a bank spokesperson said. The lender’s extensive network of affiliates in Indonesia underscores the scale of the challenge it faces in restructuring its operations to meet the new mandate.

Struggles Amid a Harsh Regulatory Landscape

For KB Kookmin Bank, the pressure to comply with the holding company requirement comes at a particularly difficult time. Since acquiring a controlling stake in the troubled Bank Bukopin (now PT KB Bank Indonesia Tbk) in 2018, the lender has struggled to turn around its Indonesian subsidiary. Last year, the subsidiary reported a net loss of approximately 240 billion South Korean Won (US$174 million), a figure that reflects not only operational challenges but also intensified regulatory scrutiny. Indonesian authorities imposed 18 sanctions on PT KB Bank Indonesia Tbk in the past year alone, a marked increase from the one or two annual penalties recorded in the years following the acquisition.

The financial strain raises questions about KB Kookmin Bank’s capacity to establish a holding company, a move that typically requires a stable and profitable foundation. “It’s a harsh regulatory environment for KB. To establish a holding company, a bank needs to be profitable enough to support it, but that’s not the case for KB” an official from a financial firm said, speaking on condition of anonymity. This sentiment highlights the broader difficulties Korean banks face in navigating Indonesia’s regulatory framework, which some industry insiders perceive as increasingly unwelcoming to foreign capital.

Broader Implications for Foreign Investment

Indonesia’s financial market, while offering significant growth potential as the fourth-largest economy by population globally, remains limited in both size and accessibility for foreign players. The country’s banking sector is dominated by domestic giants such as Bank Mandiri and Bank Rakyat Indonesia, leaving foreign institutions to contend with stringent regulations and cultural barriers. The latest OJK mandate is seen by some as part of a broader trend to prioritize local control over the financial sector, potentially at the expense of international investment.

“It’s becoming clear that foreign financial capital is not being welcomed, and the risk of indirect sanctions is increasing, deterring Korean financial institutions” the anonymous financial official added. This perspective aligns with concerns raised by industry analysts who argue that Indonesia’s regulatory environment may discourage further expansion by foreign banks, particularly those from South Korea, which have been among the most active in acquiring local financial firms over the past decade.

The challenges are not unique to Korean lenders. Other foreign banks operating in Indonesia, including those from Japan, Singapore, and Europe, may also face similar pressures as OJK seeks to consolidate oversight of sprawling financial conglomerates. However, the specific focus on holding companies appears to disproportionately impact institutions like KB Kookmin Bank and Shinhan Bank, whose multi-affiliate structures have been built through successive acquisitions rather than organic growth.

Strategic Dilemmas and Future Outlook

For Shinhan Bank and KB Kookmin Bank, the path to compliance involves not only logistical and financial restructuring but also strategic recalibration. Establishing a holding company could streamline oversight and potentially improve operational efficiency by centralizing governance across affiliates. However, it also entails significant costs and regulatory burdens, particularly for KB Kookmin Bank, which is already operating at a loss in Indonesia. Analysts suggest that the bank may need to consider divesting underperforming assets or seeking partnerships with local firms to bolster its financial standing.

Shinhan Bank, by contrast, appears better positioned to adapt, given its relatively stronger financial performance in the region. Its proactive engagement with OJK and commitment to meeting the June deadline signal a willingness to integrate more deeply into Indonesia’s regulatory framework. Nevertheless, the broader trend of tightening oversight could prompt both banks to reassess the long-term viability of their Indonesian ventures.

The regulatory shift also raises broader questions about Indonesia’s approach to foreign direct investment in the financial sector. While the government has publicly emphasized the importance of attracting international capital to support economic growth, policies such as the holding company mandate may send mixed signals to potential investors. If foreign banks perceive the risks of operating in Indonesia as outweighing the rewards, they may scale back their ambitions, potentially slowing the pace of innovation and competition in the country’s financial market.

A Balancing Act for Indonesia

Indonesia stands at a crossroads as it seeks to balance the imperatives of economic openness with the need to safeguard national interests. The OJK’s regulations are ostensibly designed to enhance transparency and stability in the financial sector by ensuring that large conglomerates are subject to unified oversight. Yet, the practical effect of such policies may be to limit the flexibility of foreign institutions, particularly those from countries like South Korea that have played a significant role in modernizing local banking through acquisitions and technology transfer.

For Korean banks, the coming months will be critical as they navigate compliance deadlines and weigh their strategic options. The outcome of their discussions with OJK could set a precedent for how other foreign financial institutions approach the Indonesian market, shaping the landscape for international investment in the years ahead. Industry observers will be watching closely to see whether Indonesia can strike a balance between regulatory rigor and economic inclusivity, or whether the barriers to entry will continue to grow.

As these developments unfold, the experiences of KB Kookmin Bank and Shinhan Bank may serve as a litmus test for Indonesia’s commitment to fostering a competitive financial sector. For now, the road ahead remains uncertain, with both banks facing a delicate balancing act between regulatory compliance and commercial sustainability.