The Continuing Interest Rate War

ENTERING the final quarter of this year, Muliaman Hadad is forced to do acrobatics. Fierce competition within the banking industry in recent months has caused Muliaman, who is chairman of the Financial Services Authority (FSA), great anxiety. "I have to cut the banks' business plans. Credit growth was still 20 percent, we reduced it to 16-17 percent, to slow down the race for liquidity," the former deputy governor of Bank Indonesia told Tempo two weeks ago.

For quite some time, growth in customer funds could not keep up with growth of credit. As of August this year, 92 percent of third-party funds in banks have been disbursed as loans. Not much money is left. The scramble to attract customers has become aggressive. A war of interest rates is inevitable, and in the long run, this could affect the economy. If it is allowed to go on, small banks not strong enough to compete, would collapse.

November 4, 2014