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Improving Access to Financial Services in Indonesia Read the report Enhancing Access to Finance for Migrant Workers in Indonesia Read the report The Challenge and Opportunity of the Indonesian Debt Market Full Report Strengthening Pensions and Insurance Markets in Indonesia Full Report Financial Literacy for Indonesian Overseas Migrant Workers (Newsletters) 1st Edition 3rd Edition 2nd Edition 4th Edition (final) More Reports Micro-insurance: Helping Indonesia’s Poor Cope with the Unexpected Micro insurance provides coverage to low-income households and is offered in multiple forms: for example, to cover children’s schooling in the event of the death of a bread-winner; to cover children’s hospitalization; or to cover small farmers’ against crop failure due to drought or other extreme climatic events Read more The Thinker: Money on the Line. Read more

A well-functioning financial system would help to accelerate economic growth, make that growth more equitable by spreading the benefits to all sections of society, reduce poverty, and would strengthen Indonesia’s status as an emerging middle-income country. To this end, the Government's focus on maintaining and strengthening the stability of its financial system over the past decade has been highly successful and needs to be continued. The time is now right to address two major remaining financial sector challenges, namely improving efficiency and enhancing access.

Key policy issues in maintaining the stability of the banking sector are: (i) putting in place an appropriate regulatory and supervisory structure (ii) implementing a financial sector safety net; (iii) strengthening the Deposit Insurance Agency (LPS) by providing the human and financial resources that it needs; and (iv) strengthening the framework for rules-based corrective actions for weak financial institutions.

Important issues to address in improving the efficiency of Indonesia's financial sector are: (i) diversifying and strengthening non-bank financial institutions (NBFIs); (ii) restructuring insolvent insurance and pension companies; (iii) restructuring civil service pension plans and social security schemes to make them fiscally sustainable; (iv) increasing the breadth and depth of equity and bond capital markets through improved enforcement of corporate governance regulations; and (v) strengthening the coordination among financial sector agencies.

In addition to financial sector stability, the Government has also made enhancing access to financial services for low-income households and micro, small, and medium enterprises a priority going forward. Currently, about half of all Indonesian households have no access to formal financial services. Enhancing financial access can be achieved by: (i) broadening the policy focus from the provision of credit to the provision of financial services; (ii) empowering formal micro credit institutions through improved access to funding and targeted capacity-building; (iii) enacting the legal framework for non-bank/non-cooperative microfinance institutions; (iv) encouraging venture capital, leasing, and syariah-based financial products; and (v) providing a clear legal and regulatory framework for innovative/technology-led financial services/products that are key to low-cost financial service provision.

Meanwhile, Indonesia has made good progress in improving its investment climate. Formal sector employment is once again expanding, poverty has been falling, and a broader middle-class is emerging. Less affected than its neighbors by the global financial crisis, Indonesia has a unique opportunity during the recovery and post-recovery to increase both its global market share and domestic consumption. The key is to push ahead with reforms designed to improve competitiveness, increase flexibility in the labor market, and avoid protectionism that stifles efficiency and innovation. There remains a requirement to create the institutional structures needed to deliver consistent policy. Global evidence indicates that strong institutions drive regulatory reforms and improve coordination. Indonesia also has an opportunity to take advantage of high global commodity prices to drive investment in mining, and oil and gas by completing key mining regulations and clarifying uncertainties relating to oil and gas. Indonesia can also promote exports of new products via public-private R&D partnerships, and align fiscal incentives to develop downstream industries.

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In the area of financial sector reform, several policy priorities need to be addressed in a coordinated way to improve efficiency, diversify away from an over-reliance on commercial banks and establish stronger NBFIs.

• The insurance sector needs to be overhauled through new regulations to consolidate the sector and make it more efficient.
• There is a need to restructure the Government’s civil service pension plan to avoid large implicit liabilities, especially as proposed civil service reforms improve compensation levels of civil servants.
• Creation of a single citizen identification number would provide the basis for a sound social security and credit history system.
• Support for a growing bond market to be able to provide long-term corporate financing through a strong legal and corporate governance framework.
• Continue with efforts to list minority stakes in state-owned enterprises on the stock exchange to deepen the current equity market dominated by a handful of firms.

In addition, improving financial access to a larger share of the population is key to sustainable growth. Policy priorities in this area include the following:

• Microfinance institutions need a formal legal framework to build institutional capacity and clarify issues around savings mobilization. Stalled for almost a decade, the Microfinance Law should be a priority.
• Develop other non-bank financial services such as venture capital, leasing, syariah-based financing, which all help to meet the needs of the low-income segment.
• Encourage strong public-private partnerships to develop and pilot new affordable financial products and services for a broader section of the population.
• Identify financially underserved regions outside Java for targeted interventions, such as migrant workers with special needs.
• Reach under-served regions by encouraging innovative technology-led financial services, including mobile-phone-based and branchless banking.
• Develop micro-insurance as a risk-management instrument for low-income households by creating incentives and a regulatory framework for the insurance industry.

In terms of improving the investment climate, present reform efforts should be continued and enhanced in the following areas:

• A cohesive regulatory reform program is needed to streamline and simplify investment procedures. Although local government one-stop shops are helping to reduce waiting time, they will not succeed in cutting through the complex web of business regulations issued by central government agencies in the absence of comprehensive regulatory reform.
• Indonesia needs to move towards converting its large domestic market into a single market. This will allow greater competition among domestic producers and better use of labor and resources, making Indonesia more dynamic and help to improve technological sophistication. This implies the need for greater connectivity: intra-island, inter-island, and international.
• Further revisions, rationalization, and clarification of the Investment Negative List (DNI) could boost investment levels in critical services.
• Issue implementing regulations for the 2008 Mining Law
• Finalize and implement the blueprint for logistics reform and issue regulations to allow competition to reduce high transportation costs and delays.

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The World Bank’s effort to strengthen key trade and investment institutions to improve Indonesia’s trade competitiveness and investment climate is supported by funding from the Multi-Donor Facility for Trade and Investment Climate (MDFTIC). Established in November 2008 and lasting until 2013, MDFTIC was created in response to a request from the Ministry of Trade (MoT) and the Coordinating Ministry for Economic Affairs (CMEA). The World Bank, as a partner of the Government of Indonesia (GoI), manages MDFTIC, which has received financial contributions from the Government of the Netherlands and the Government of Switzerland. In its efforts to enhance a stable, efficient and accessible financial sector, the World Bank is supporting both a medium-term program of policy reforms and responding to requests from the Government for assistance in the event of unexpected shocks and fluctuations to the financial system. In terms of policy reforms, the World Bank is supporting the Government’s medium-term financial sector policy reforms and will address the following over the next few years: Advisory services and technical assistance will be the key instrument is supporting reform efforts. The recently completed Financial Sector Assessment Program (FSAP) provides important inputs on next steps regarding stability and efficiency issues. Other advisory work by the Bank, such as the report on non-bank financial institutions and the Enhancing Access to Financial Services report, has provided inputs to the Government on issues relating to efficiency and access. Work on strengthening institutional capacity will also form part of this support. The World Bank will work closely with all concerned authorities including Bank Indonesia, Bappepam-LK, , the Coordinating Ministry for Economic Affairs, the Ministry of Finance, civil society and development partners, in these efforts. The World Bank can also help to provide innovative engagements, structuring and lending-support in areas such as infrastructure financing, capital markets, MSMEs, sub-national and Islamic financing. The World Bank Group (World Bank and IFC) is working closely with the Coordinating Ministry for Economic Affairs (CMEA), the Ministry of Finance, the Ministry of Trade, the Ministry of Home Affairs and the State Ministry of Public Administration (MenPan) to improve the investment climate in Indonesia. The World Bank Group is supporting the National Team to Enhance Exports and Investment (Timnas PEPI) to improve the policy formulation process and assisting the CMEA with its regulatory reform initiatives, including the streamlining of business licensing at the national level. It is also assisting in the process of developing a blueprint for the reform of the national logistics system to improve connectivity. The World Bank Group’s investment climate team can provide wide-ranging support to the Government in the form of capacity-building and public-private dialogue. The advisory work on the investment climate could include issues such as: Advising on best practice institutional set-up and processes to implement regulatory reform. Monitoring the implementation of policy reforms by supporting Indonesian institutions to conduct investment climate surveys. Providing advice on attracting greater private investment into various sectors of the economy.

Related Links Access_to_Finance on IFC Webs World Bank East Asian and Pacific Region, Finance and Financial Sector Development