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Financial Evolution and Regulatory Reform in Indonesia: Insights from Hendri Saparini, PhD

This presentation by Dr. Hendri Saparini explores the financial evolution and regulatory reforms in Indonesia. It covers the dominant role of the banking sector, regulatory changes from the New Order to the Reformation Era, and the impact of foreign ownership post-liberalization. The session also highlights the limited roles of both the banking sector and capital markets in promoting economic development, focusing on challenges like high loan interest rates and the attractiveness of public listings. The findings aim to provide a comprehensive understanding of Indonesia's financial landscape as of 2013.

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Financial Evolution and Regulatory Reform in Indonesia: Insights from Hendri Saparini, PhD

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  1. Financial Evolution and Regulatory Reform in Indonesia Hendri Saparini, PhD CORE Institute ECONIT Advisory Group Independent tink tank in Economic Development Jakarta - Indonesia saparini@econit.co.id and saparini@core-institute.co.id Financial Evolution, Regulatery Reforn and Cooperation in Asia Seoul National University – 17-18 May 2013

  2. Outline • Indonesian Financial Structure • Regulation in Financial Sectors • Roles of banking sector in economy • Roles of capital market in economy

  3. 1. Indonesian Financial Structure • Dominated by banking sector • Banking regulation has changed over the New Order to Reformation Era • Increasing foreign ownership in banking sector after the liberalisation of banking regulation

  4. Asset Composition of Finance CompaniesBanking industry dominates Indonesian financial system * March 2012 Source: Bank Indonesia

  5. Total Number of Financial Institutions‘Out-spread’ banks * December 2011 Source: Bank Indonesia

  6. Regulating and Supervising Body The establishment of OJK (Financial Service Authority) - 2012 *NBFI includes Pension, Insurance, Finance Companies, Venture Capital, Guarantee Companies

  7. Phases of Indonesia financial developmentStill consolidating? Source: Hamada (2003) dengan tambahan

  8. Time-line of Number of banks in Indonesia From over-regulated to consolidation after liberalization • Policy-based • finance period Financial reform (deregulation) restructurisation consolidation • formative period • expansion Source: Bank Indonesia

  9. Ownership of BanksRestriction in Asia vs. liberalisation in Indonesia http://in.reuters.com/article/2011/08/02/idINIndia-58571120110802

  10. Big Banks Domination in IndonesiaTen banks hold 65% of national banking assets *Data Desember 2012 kecuali Bank Panin Sept. 2012 **Bank BUMN (38%) & 6 bank swasta (27% ) Source: Laporan Keuangan Perusahaan2

  11. Further Banking Regulation Indonesia ready for Basel III Regulation in 2019 * Risk Weighted Assets Indonesia Banks Performance

  12. 2. Limited Role of Banking Sector in Economic Development • Poor policy of monetary authority in managing interest rates • High interest rate of loan has restricted public access to banks • Indonesia national banking tends to take the capitalists side than the whole economic development

  13. Monetary Policy Transmission MechanismAimed at inflation rate management? Source: Bank Indonesia

  14. BI rate & loan rateUnable to induce loan rate to lower level Source: Bank Indonesia

  15. Headline Inflation Rate (yoy, %)Still high, but went lower Source: World Bank

  16. Lending interest rate, 2010Indonesia, the highest among some Asian countries Source: World Bank

  17. Net Interest MarginIndonesia also the highest among ASEAN countries Source: Maybank Kim Eng, 2013

  18. Fee Based Income, 2011Poor creativity, relying on interest based income Source: Maybank Kim Eng, 2013

  19. Limiting factors of investmentHigh interest rate, main obstacle for investment Source: Bussiness Survey, Bank Indonesia, QIV-2012

  20. Prime Lending RateWide gap of interest rates (microfinance vs. other loan) *per 31 March 2013 Source: website perusahaan

  21. Share of Loans to SMEs: Very Small The Number of SMEs is very huge Bank Financing for SMEs Number of SMEs & Large Enterprises *Feb. 2013 *2010 Source: Bank Indonesia, BPS

  22. Domestic Financing ProfileSources of business financing: mainly from internal source Indonesia East Asia & Pasific Source: Enterprise survey, World Bank, 2009

  23. Percentage of firms with a bank loanOne of the Lowest in ASEAN Source: World bank

  24. External Debt Outstanding Source: Bank Indonesia

  25. Capital & Financial AccountGrew highly after 2008 crises Source: Bank Indonesia

  26. Domestic credit provided by banks*Banking roles in financing is the lowest *% of GDP Source: World Bank

  27. Rate of Return on Commercial Bank EquityIndonesian banking: the highest Source: ADB

  28. Component of Lending RateBase Withheld by interests

  29. Charactersitics of Indonesian BankingDominated by big depositors over Rp. 5 billion Source: Bank Indonesia

  30. Banking Loans Distribution Mining grew highly, manufacture sector slower Source: Bank Indonesia

  31. Loan Distribution by SectorDecreasing loans to manufacture, increasing to trade sectors Source: Bank Indonesia

  32. 3. Limited role of capital market in financing • Low attrectiveness of going-public from government and private enterprises • Despite te fact of low attractiveness to go public, Indonesian capital market has highly performed, particularly in sectors with strong fundamental performance • Foreign investment flow was still high as a result of high rate of return.

  33. Market Capitalisation vs GDPLimited role of capital market to economy in Indonesia *data tahun 2011 Source: World Bank

  34. Number of listed companiesLess than 500 Indonesian companies go public Data per 2012 Source: World Federation of Exchanges

  35. Asia Growth IndexIHSG, the most expansive after 2008 crises Source: Yahoofinance

  36. Indonesian Indices by sectorConsumer good , the most attractive Source: Yahoofinance

  37. IDX Financial Data & Ratios, 2011Consumer goods went higher then the others Sumber: IDX Statistics 2012

  38. Issuance Volume of Bond Market, 2012Bonds as financing resources in Indonesia: Very Low Source: ADB

  39. Asian LCY Bond Returns IndexIndonesian bonds’ return: the Highest in Asia Source: ADB

  40. Foreign Holdings in LCY Government BondsHigh returnattracted foreign investors Source: ADB

  41. Foreign Ownership on Portfolio InvestmentForeign investors’ domination Source: Bank Indonesia, MOF, KSEI

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