Bank consolidation refers to the process of merging smaller, less efficient financial institutions into larger entities to achieve economies of scale, enhance operational efficiency, and improve financial resilience. It is a crucial strategy to enhance efficiency and competitiveness by strengthening the banking sector and ensuring it can withstand economic shocks and compete in a rapidly evolving financial landscape.
Despite its importance, Indonesia’s banking sector has struggled to fully embrace consolidation due to various structural and regulatory challenges. The government has taken measures to implement consolidation but still faces barriers including regulatory fragmentation, lack of leadership or designated authority to drive consolidation efforts, resistance from stakeholders due to conflicting interests, operational challenges in merging entities, and inadequate support for smaller banks to navigate the complexities of the process.
These challenges are compounded by broader issues within Indonesia’s banking sector such as elevated interest rates, rapid technological advancements, intensified competition, insufficient capital, and the burden of non-performing loans. These issues are crucial to tackle because the sector plays a pivotal role in the country’s economy. This sector’s performance and stability are closely tied to the country’s overall economic health and development trajectory. Ultimately, regulatory disharmony is urgently needed for necessary reform to enhance efficiency and competitiveness in banking sector.
All of these problems stem from the absence of specific authority to spearhead bank consolidation efforts. This lack of leadership hampers the coordination and implementation of the reform in the banking sector. Currently, neither the Financial Services Authority (OJK) nor Bank Indonesia has a clear mandate to drive this critical process. Additionally, no institution is mandated with related Key Performance Indicators (KPIs). While the Ministry of Finance houses the Centre for Financial Policy, it has yet to establish a specialized unit focused on bank consolidation. This creates a gap leaving a void in strategic oversight. As a result, consolidation efforts have been largely overlooked in recent policy frameworks and initiatives.
Other significant challenges are Indonesia’s fragmented banking regulations, limited focus on consolidation in policies like the Indonesian Banking Architecture (API) and the 2020-2025 Indonesia Banking Development Roadmap, and the lack of a centralized strategy for conventional banks. High capital requirements pressure smaller banks into mergers without sufficient planning, while shareholder disputes, culture clashes, and compliance burdens further hinder progress. Recent regulations such as Financial Services Authority Regulation (POJK) Number 12/POJK.03/2020 and POJK Number 17 of 2023 aim to strengthen governance but add complexity, highlighting the need for a streamlined framework that balances innovation, financial stability, and efficiency.
Promoting effective banking consolidation requires strategic measures. Establishing a specialized advisory body under the Ministry of Finance or integrating this function with OJK or KSSK could provide essential technical and financial guidance for mergers. Financial incentives, such as tax breaks and streamlined procedures, along with a simplified regulatory framework, would further encourage consolidation. Proactive regulatory approaches can ease the process. Addressing shareholder disputes through mediation, offering financial support, and ensuring clarity in post-merger integration are also critical. These actions are vital for fostering a competitive, efficient, and resilient banking sector to support Indonesia’s financial development.
Download Full Paper Here: Policy Paper 3_Enhancing Financial Efficiency Through Banking Consolidation