Finance

Overview of Finance Sector in Indonesia: The Prospects

The financial services sector (FSS) has become one of the major determinants of economic dynamics in each country. Not only providing funds for production and consumption, this sector is also serving as a medium for the public to save. With its important role, financial services sector performance contributes to economic activities in every jurisdiction, including Indonesia, following increased innovative financial products.

The FSS has recorded a long history in the Indonesian economy. The role of the FSS started increasing during the wake of financial sector deregulation in 1980s. This deregulation has created a more competitive financial sector for supporting economic growth. In order to improve its role for supporting growth, Indonesia deregulated FSS several times.

Strong FSS fundamentals, supported by the economic potential in Indonesia have received high aspirations for economic development. The FSS in Indonesia is divided into three categories, namely the banking industry, capital market, and the nonbank financial industry (NBFI).

To date, the banking sector dominates the national FSS. Its asset share reaches 74 percent of the total. Meanwhile, respective shares of insurance companies, mutual funds industry, pension funds, and multi-finance companies are comparative.

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Six Important Aspects for FSS Development

The Financial Services Authority (OJK) believes that a number of innovative breakthrough are need to meet an optimal balance between supporting growth and more stringent regulations. The breakthroughs must cover six aspects as follows.

#1. Enhancing Counter-Cyclical Policy

Within the current climate, the development has to focus on enhancing counter cyclical policy for overcoming economic moderation. Despite current domestic economic slump, the cycle must be broken. The FSS plays its important role as a catalyst to reverse the cycle.

#2. In line with International Regulatory Reforms

The FSS development should be in line with international regulatory reforms for maintaining financial system stability. In global level, financial reforms have purposes to control excessive risk-taking behavior.

#3. Resolving the Issues of Shallow Domestic Financial Markets

Issues associated with shallow domestic financial markets must be overcome. It is especially in terms of a narrow selection of products, excessive price volatility, and limited liquidity. In these conditions, capital market serves as an alternative source of economic financing.

Fourth, financial system stability needs support from high financial products and services utilization through financial inclusion. Moreover, adequate sources of funds must back the domestic economic growth. The financial inclusion program should absorb FSS activities in the supply and demand, which will lead to broader benefits for promoting economic growth.

Fifth, FSS must exploit the available opportunities fully, as financial sector integration and globalization continue to gain their momentum. Therefore, domestic FSS is required to boost its competitiveness through enhancing human resources competence and boosting efficiency, for examples.

Sixth, following increased rapid digitalization of operating activity and digitalization of transaction in FSS, the physical presence of financial services institution can be reduced, without eliminating their products and services. On the contrary, products and services will grow and accelerate new challenges to maintain financial system stability.

 

Finance Sector in Digital Era

The rapid digitalization of transaction in FSS can be seen in the growth of financial technology (fintech). The growing volume of e-commerce transactions and the vast population of social media users in Indonesia are expected to result in US$ 130 billion market by 2020.

It attracts many platform for investing trillions of rupiah to make sure their systems meet customers’ demands to experience their marketplaces.

At the end, amid domestic economic moderation and adverse global conditions, the FSS is needed to play its important role for expediting economic growth. OJK believes the sector is able to boost economic capacity, which is important in absorbing labor force and raise living standards.

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