Strengthening Indonesia’s Financial Sector through Deepening and Inclusion Initiatives

Indonesia’s financial sector faces a critical juncture as it seeks to overcome structural challenges and enhance its contribution to economic development. Despite the banking sector’s significant wealth, the financial sector only contributes approximately 4% to the country’s GDP. There is immense untapped potential, particularly in financial deepening, which refers to increasing the size, reach, and efficiency of financial services. However, achieving this requires a holistic approach, involving policy reform, institutional strengthening, stability, and greater inclusion across the population.

One of the central issues in Indonesia’s financial sector is the lack of effective governance, financial stability, and enforcement mechanisms. Although existing regulations mandate saving for pensions and other financial securities, these policies are not adequately enforced. The Ministry of Finance has a critical role to play, yet its current focus on fiscal matters limits its capacity to impose mandatory saving mechanisms on a broader scale. A dedicated unit or Directorate-General specifically tasked with overseeing the financial sector would help address these gaps and improve the sector’s stability.

Benchmarking against countries such as the UK and Australia reveals a trend toward stronger financial oversight bodies. For instance, the UK’s shift towards financial conduct authority has empowered its Treasury while Australia’s oversight extends to both tax and prudential regulations, enhancing the stability of their financial system. Such models demonstrate the importance of having robust institutions capable of enforcing savings mandates, overseeing financial services, and ensuring long-term financial stability. In Indonesia, there is an ongoing discussion about establishing a new Ministry of Financial Services or Superannuation, which could serve as the orchestrator for deepening the financial sector and ensuring stronger regulatory oversight to safeguard stability.

Financial inclusion is another pressing issue that requires immediate attention. Many Indonesians are not compelled to save, despite the fact that saving for retirement or emergencies is crucial. The informal economy thrives, with individuals spending on non-essential items while neglecting long-term financial planning. This underscores the need for more stringent policies that ensure every employee with a taxpayer number (NPWP) contributes to financial security schemes such as BPJS Ketenagakerjaan (employment insurance). The current system lacks the enforcement mechanisms to make this a reality. Therefore, collaboration between the Ministry of Finance, OJK (Financial Services Authority), and other institutions is vital.

Moreover, the potential for growth in Indonesia’s financial sector is substantial. Currently, pensions and insurance account for only 12% of GDP, yet there is room to increase this tenfold over the next 20 years. This would not only enhance the financial security of individuals but also generate significant economic growth. The success of fintech in Indonesia, driven by the country’s high internet penetration rate, illustrates the demand for accessible financial services. However, illegal practices such as predatory lending through unregulated peer-to-peer platforms pose significant risks, highlighting the need for improved governance.

In conclusion, Indonesia’s financial sector stands at a pivotal point. A comprehensive approach involving stronger governance, enforcement of mandatory saving, stability measures, and expansion of financial services to underserved populations is necessary. Achieving financial deepening and ensuring system stability requires coordinated efforts between government bodies, regulators, and the private sector. By building alliances and fostering collaboration, institutions like the Indonesian Business Council (IBC) can help drive these reforms, ensuring that Indonesia’s financial sector reaches its full potential in supporting sustainable economic growth.