5 about domestic borrowers incumbent firms, they focus more on the transparent-large
borrowers in a more competitive market segment DellAriccia and Marquez, 2004.
Based on the aforementioned empirical research findings with regard to differences between greenfield and acquired FBs it is hypothesized that the mode of FB entry in
Indonesia has a significant relationship with the loan portfolio composition of FBs, the risk of the loan portfolios and the return on the loan portfolios.
2.2 Foreign Bank Entry into the Indonesian Banking Sector
Major reform of the Indonesian banking industry commenced with the enactment of Banking Act No 141967. This legislation enabled FBs to access the Indonesian market in
the form of branches and representative offices, after they had been expelled in the 1950s McLeod 1996 and Montgomery 2003. Ten FB
’s established branches in Indonesia; however, their operations were restricted to the Indonesian capital city and only two offices
with no deposit- taking activities McLeod, 1996. Their presence was primarily allowed to supplement the supply of capital to medium-size and large businesses Suyatno, 1999.
The permission for FB entry did not last long. In 1969, the government again banned new FB entries Montgomery, 2003 and continued the ban until 1988 Harun, 2008.
The 1988 package relaxed numerous bank establishment regulations to foster competition in the banking industry. The deregulation granted FBs permission to open sub-branches in
seven major citiesislands in Indonesia: Surabaya, Semarang, Bandung, Medan, Ujung Pandang, Denpasar, and Batam. Furthermore, the government allowed foreigners and
Indonesian citizens to establish joint-venture banks. Within one year after bank establishment, loans allocated to support export activities had to constitute at least 50 per
cent of a joint-
venture bank’s total loan portfolio. As a result, the Indonesian banking industry experienced an accelerated increase in the
number of banks. FBs became more prominent after the 1988 reforms. Their number increased from 11 in 1988 to 29 in 1991 Pangestu, 2003. These banks began to offer
retail-banking services in addition to their former focus on corporate accounts. The number increased from 30 in 1992 to 44 in 1998. Due to the Asian Financial Crisis, the number
decreased from 43 in 1999 to 34 in 2002 Bank Indonesia Annual Report. Since 2003 there has been a reversal trend as a result of banking restructuring following the crisis.
This reversal provided an opportunity to foreign investors to invest in Indonesian banking industry. As a result, the number of FBs reach 37 banks in 2011.
3 Research Methodology 3.1 Sample, Types and Sources of Data
This research use secondary data from The Indonesian Central Bank Library, Infobank magazine and the library of The Indonesian Banking Development Institute LPPI. The
central bank library provides individual bank ownership data and financial statements whereas Infobank magazine provides loan allocation data based on loan types and
economic sectors. Information from LPPI also supplements loan allocation data and loan interest income not provided by Infobank magazine. Using these sources, nine year data
2003-2011 for 106 acquired FBs and 189 greenfield FBs in Indonesia were analysed.
6
3.2 Variable Definition and Measurement
