CIMB- Entry into Indonesia
WRITTEN BY ANUAR, A.Z, HARBAN, A.A., KOH, E., ROBBEN, G., & EDITED BY SEOW KIAN TAN

Background

CIMB Group is Malaysia’s second largest financial services provider. It is listed on Bursa Malaysia through Bumiputra-Commerce Holdings Berhad (BCHB). In 2004, the CIMB Group began the process of creating a strong and competitive universal bank anchored by Commerce International Merchant Bankers (CIMB), Malaysia’s largest investment bank. In line with CIMB's forward thinking philosophy, CIMB has acquired stakes in international banks and these subsidiaries have been integrated into the CIMB Group making the CIMB Group the leader in investment banking in Southeast Asia.

The majority stakeholder (28.39%) of the CIMB Group is Khazanah Nasional, which is the investment holding arm of the Malaysian Government. Khazanah Nasional also owns a stake in CIMB-Niaga (Khazanah Nasional Berhad, 2010). In just 2 years, CIMB transformed itself from Malaysia’s no. 1 investment bank into a regional universal banking group. CIMB has grown from staff strength of 1,000 in Malaysia to 20,000 in 12 countries while market capitalization has increased from RM6.3 billion to RM19.5 billion. The Group’s total assets grew from RM14.7 billion to RM155 billion with a further RM18 billion being third party funds under management (CIMB, 2010).

Objectives and Philosophy CIMB’s objective is to create value by serving the needs of its clients, and doing this with integrity (Anonymous, Personal communication, September 15th 2010), CIMB's primary focus is its customers. CIMB strives to attain world-class standards in terms of service levels, cost and productivity. CIMB’s focus is on improving quality and efficiency of its products and services.

CIMB has served its customers under one primary philosophy: serving customers by thinking forward. Looking and planning ahead, innovating new methods and solutions, anticipating and seeing future needs and hidden opportunities before others are aware of them. The CIMB Group calls this Forward Banking (Anonymous, Personal communication, September 15th 2010). Besides that, honesty and transparency are the core values practiced by the CIMB Group. Their always put first the interests of their clients.

Strengths of CIMB

CIMB offers a wide array of products and services that cater towards all segments of the South East Asian market. This diversification is a strength which would propel CIMB forward as CIMB can now offer its customers a larger selection of options in investing, which in turn would increase CIMB’s profits (Anonymous, personal communication, September 15th 2010). Additionally, CIMB possesses core competency in offering Islamic banking services, and CIMB Islamic Bank has been recognized as the “Best Provider of Islamic Financial Services in Asia” by Euromoney, in the Islamic Financial Awards, 2004 (CIMB Islamic, 2010). This award propelled CIMB Islamic Bank to the international forefront. CIMB Islamic Bank also leads the market in terms of size and experience as it employs over 100 Islamic Investment bankers and specialists (CIMB Islamic, 2010). CIMB’s policy of Forward Banking, has also proven to be one of the best means to serve customers and create value (CIMB, 2010). CIMB has further strengthened its position in the market through the acquisition of SBB Asset Management Sdn. Bhd. and SBB Mutual Sdn. Bhd, which provide CIMB with additional investment management skills (CIMB Wealth Advisors, 2010). The mergers and acquisitions of international companies like Bank Niaga and Bank Thai, increase foreign recognition of the CIMB brand and potentially revenue. This was demonstrated by the increase in CIMB’s revenue after the integration of CIMB-Niaga into the CIMB Group in 2002 (CIMB Niaga, 2009b). Finally, by virtue of being owned by Khazanah Nasional (a Government linked company), CIMB is ensured stability and support from the Malaysian Government in times of crisis.

CIMB the global player

As CIMB grown to dominate the Malaysia market, it began to incorporate a future development strategy to expand into the South East Asian market (Leah & Chris, 2005). This strategy is said to be founded due to CIMB’s forward thinking policy (Anonymous, Personal communicaiton, September 15th 2010). Over the years CIMB has collected various awards, which include “best debt house”, “best M&A house”, “best local investment bank” and “best domestic debt house” among others (Asiamoney, 2003). This has given CIMB international recognition for the development of the capital market in Malaysia. Based on this success CIMB is looking to become a prominent global player in the finance sector.

As part of its strategy to become a dominant global player in the finance sector, CIMB entered the Indonesia market in 2002 (Anonymous, Personal communication, September 15th 2010). This decision was made after CIMB carefully considered the Indonesia banking environment.

Indonesia -Pest Analysis

Political Factors

Indonesia has generally been faced with much political unrest due to corruption and regular changes in the ruling parties. When CIMB first entered Indonesia in 2002, the political system was experiencing a constitutional reform that started in 1999. In late 2001, then President Abdurrahman Wahid, was forced out of office and Megawati Sukarnoputri was appointed as the first Indonesian female president. Abdurrahman Wahid was the leader of the Islamist National Awakening Party while Megawati Sukarnoputri was the leader of the Indonesian Awakening Party. This transition to a more democratic governing system provided more freedom to foreign investors to penetrate the Indonesian market. Furthermore, this democratic ruling significantly reduced the power the military held in politics, eliminating the threat of coups that could impede foreign investment and trade (Rabasa & Haseman, 2003). The high rate of corruption that exists within the government and the running of businesses in Indonesia pose a further threat to the development of the country. According to the International Corruption Perceptions Index of 2008, Indonesia ranked 126th out of 180 countries, suggesting that significant legal reforms are needed to cleanse the system (Business Monitor International, 2010).

Since Megawati’s reign ended in 2004, the democratic ruling continued under current president Susilo Bambang Yudhoyono (President SBY) (Liddle, 2005). President SBY has since implemented policies to increase economic success, which included a free trade agreement with Japan (Dee, 2007). Having won his second term as president in the 2009 parliamentary elections, there is much expectation that policies will be strengthened to encourage regional trading. The large Muslim populous of Indonesia also provides the government with an adequate platform to address Islamic issues which can reinforce ties between Muslim nations such as Malaysia (Business Monitor International, 2010).

Economic Factors

The Rupiah was adversely affected by the 1997 Asian Financial Crisis. This resulted in the weakening of the currency from ~Rp3,000/1USD to ~Rp11,000/1USD (Onada, 2010). Indonesia proceeded to receive aid from the International Monetary Fund (IMF) with little avail under the 1997-2000 government. However, during the 2001-2004 democratic rule of Megawati, the Indonesian economy experienced increased macro-economic stability. Inflation rates declined from 12.6% to 10% and eventually to 5.1% in years 2001, 2002 and 2003 respectively. Foreign debt also decreased as a percentage of GDP from 93% in 2001 to 75.9% in 2002 and 70% in 2001. Economic growth overall however has been relatively low with 3.4%, 3.7% and 4.1% increases during the 2001-2003 period (Shiraishi, 2005). Growth rates peaked in 2007 at 6.3% which has helped to address relatively high unemployment rates. As it stands, Indonesia has the largest South-East Asian economy with a nominal GDP of US$600 billion.

Geographically, Indonesia has the benefit of being on major international trade routes between the East and West as well as Oceania. One geographical disadvantage however stems from the archipelagic nature of the country which makes the cost of establishing an efficient commerce infrastructure more costly (Business Monitor International, 2010). Indonesia has unfortunately been hit by natural disasters including the 2004 Indian Ocean tsunami. This had led to large amounts of damage on infrastructure which has impeded the development of the country.

In terms of Foreign Direct Investment (FDI), Indonesia as a developing country has experienced an increased inflow of interest. From 2007 to 2008, FDI stocks rose from US$58.96 billion to US$67.2billion. The rise of Islamic banking in the Middle East as well as in countries such as Malaysia has further provided Indonesia with increased FDI (Wright, 2008).

The banking sector was adversely affected by the Asian Financial Crisis. In 1996 there were 239 banks in Indonesia while in 2003, there were only 138 banks left in operation. This decrease was mainly attributed to domestic private banks closing down. The Indonesian Bank Restructuring Agency (IBRA) was formed in 1998 by the government to monitor and aid distressed banks. The governments’ restructuring program of the banking sector during the crisis required 75% of the country’s GDP. Since 2003, the banking sector has stabilized with the help of increased foreign investment (Australian Department of Foreign Affairs and Trade, 2000). International banks such as HSBC, Citibank and DBS bank have set up subsidiaries in Indonesia. It is also forecasted that due to the market size and potential, the Indonesian banking sector will be as strong as a major European market in 2050. (Price Waterhouse Cooper, 2010).

Social Factors

Indonesia has the world’s 4th largest population with over 240 million people, with a growth rate of 1.1%. With 86.1% of this population being Muslim, Indonesia is the most populous Muslim country (World Fact Book, 2010).

Bahasa Indonesia is the official language with it being the prime language used in the media and is the medium of instruction in schools (World Fact Book, 2010). Bahasa Indonesia is very similar to Bahasa Malaysia or Malay which is widely spoken in Malaysia, Brunei and Singapore. This allows for more convenient interaction between these countries. English however is not widely spoken which can be disadvantageous for potential foreign investment.

Another social issue that has attributed to mediocre FDI is the threat of terrorist attacks. The infamous Bali bombings of 2002, and the more recent Marriot and Ritz Carlton bombings of 2009 were primarily targeted at Western foreigners. This has caused many foreign companies to fear for their safety if they were to establish a business in Indonesia. Jemaah Islamiah, the chief terrorist organization in Indonesia, has been spearheading these attacks in order to institute a completely Islamic state. Many leaders have since either been captured or killed, providing foreigners in Indonesia a safer environment (Economist.com, 2010).

Technological Factors

Telecommunications in Indonesia has improved dramatically in the last 15 years. Cellular phone users alone had increased from 1.1 million in 1998 to more than 140 million in 2008. Similarly Internet users had increased drastically from 4.4 million in 2002 to 30 million in 2008. Internet providers generally provide dial-up and ADSL connections. In the bigger cities of Jakarta and Surabaya, broadband services are available which effectively complements business infrastructure (Anonymous, 2009).

Entry into Indonesia

After analyzing the Indonesian banking environment CIMB decided that it could profit from investing in the Indonesians banking sector (Anonymous, Personal communication, September 15th 2010), CIMB entered the Indonesia market in 2002 with the purchase of a majority share (roughly 51%) in Bank Niaga from the Indonesian Bank Restructuring Agency and renamed the bank CIMB Niaga. CIMB gradually increased this share to 63.4% in April 2008 (CIMB Group, 2007). One of the reasons for choosing Bank Niaga was due to its innovative competence as evidenced by it being the first bank to introduce ATM services in 1987 and online banking services in 1991 (CIMB Group, n.d.a).

In order to better regulate these banks the central bank of Indonesia, Bank Indonesia (BI), introduced the concept of Single Presence Policy (SPP). Under the SPP, investors who own shares in excess of 25% in more than one bank will be forced to either, divest their holding, merge their various banking assets or set up a holding unit (Oxford Business Group, 2007). This policy required these actions to be carried out before 2010 and plans to do so had to be submitted by 31th December 2007 (CIMB Group, 2007).

This policy applies to Khazanah as it owns a 93% stake in Bank Lippo and a 64% stake in Bank Niaga via CIMB Group (CIMB Group, 2007). Consequently Bank Niaga and Bank Lippo decided to merge, as this would be the most profitable step for their shareholders while complying with Indonesia’s regulations. Bank Lippo was earlier acquired by Santubong Investment B.V, a Khazanah’s wholly owned subsidiary, from Swissasia Global Consortium. This 52% stake was subsequently increased to approximately 88% (CIMB Group, n.d.b). Bank Lippo is also accredited with pioneering E-Banking services in Indonesia through its LippoNetBank service (CIMB Niaga, 2008).

Besides complying with the Indonesian regulatory environment due to the SPP, the merger between Bank Niaga and Bank Lippo was driven by commercial ambition. Both Bank Niaga and Bank Lippo added their own unique strengths to the undertaking. Niaga contributed its strong corporate presence (2nd in Indonesia), mortgage niche (Roughly 10% market share) and its established position in car finance while Lippo Bank contributed its leadership and payment processing system (CIMB Niaga, 2009a). The merger would combine the strengths of the two banks resulting in a bank well positioned to compete and grow in the Indonesian banking environment (Anonymous, Personal communication, September 15th 2010). The merger between Bank Niaga and Bank Lippo created the 5th largest bank in Indonesia in terms of assets with a network over 650 branches nationwide (CIMB Islamic, 2008). To facilitate this merger process, CIMB Niaga has set up an integration governance structure (Figure 1) to ensure a smooth transition between the two banks.

Figure 1: CIMB Niaga’s Integration Governance Structure
(CIMB Niaga, 2009b)

Questions 1. What macro and micro environment factors should a financial institution like CIMB consider before entering into a new market? How did CIMB enter the Indonesian banking sector? What are the risks of this strategy? 2. Was Khazanah (CIMB’s main shareholder) in a stronger position controlling bank CIMB Niaga and Bank Lippo in Indonesia? Why does this matter? 3. Discuss some likely challenges faced by CIMB Niaga in the integration process between Bank Lippo and Bank Niaga.

References

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