Policy Paper Series on Financial Development

The Indonesian Business Council (IBC) embarked on a comprehensive research study to identify strategic policy recommendations aimed at enhancing financial access, inclusivity, and competitiveness in Indonesia’s financial sector. The overarching goal of this research initiative was to bolster the efficiency and stability of Indonesia’s financial landscape, thereby fostering sustainable economic growth and development.​ The research encompassed seven key policy areas that were deemed essential for improving financial development in Indonesia such as financial product innovations, tax reforms, advancement of non-bank institutions, enhancement of credit information and collateral regulations, support for bank consolidations, fiscal and macroeconomic management and NPL management improvement through Asset Management Companies (AMCs).

The study underscored the importance of evidence-based policymaking, stakeholder engagement, and empirical studies to refine and implement these policy recommendations effectively. By addressing these structural challenges and implementing the proposed policy measures, Indonesia aims to enhance its financial competitiveness, attract more foreign investments, reduce borrowing costs, and promote sustainable economic growth. This holistic approach is crucial for overcoming the barriers to financial development and advancing Indonesia’s position in the global economic landscape.​

Indonesia ranks among the lowest in ASEAN in terms of broad money (M2) to GDP ratio, indicating the shallowness of its financial sector. Key challenges include over reliance on traditional funding sources, insufficient regional financial capacity for public services, unmonetized property assets, and inadequate financing for Micro, Small, Medium Entreprises (MSMEs). To address these issues, innovative financial products are critical: (i) Project Finance Bonds for long-term infrastructure projects, (ii) municipal bonds to fund regional development, (iii) Real Estate Investment Trusts (REITs) to unlock property value; and (iv) partial guarantee schemes to expand support for MSMEs.

Indonesia’s MSMEs face significant barriers to accessing credit, primarily due to the “missing middle” phenomenon, where they are too large for microfinance but too small and risky for formal financial institutions. Key issues include reliance on traditional collateral, insufficient and fragmented credit information systems, poor credit ratings due to rigid assessments, and low financial and digital literacy among MSMEs. To address these challenges, the paper recommends (i) diversifying collateral assets, such as movable property and intellectual property, (ii) enhancing credit information systems, (iii) improving the credit rating system, and (iv) increasing financial and digital literacy.