A Synthesis of Eight IBC’s Policy Paper Series
Indonesia’s financial sector development is essential for achieving long-term and inclusive economic growth. A well functioning financial system supports efficient capital allocation, risk management, and innovation financing, factors that enhance productivity and economic resilience. However, Indonesia lags behind its regional peers in financial depth, access, and efficiency. Challenges include low credit penetration, limited financial inclusion, and high borrowing costs, particularly for MSMEs and rural populations.
The country’s current institutional structure hinders coordinated and effective financial sector development. Key regulatory bodies such as Bank Indonesia (BI), the Financial Services Authority (OJK), and the Deposit Insurance Corporation (LPS) operate independently and focus primarily on stability and prudential oversight. Meanwhile, the Ministry of Finance (MoF) has limited influence on the efficiency and innovation agenda. This fragmentation leads to a lack of clear leadership, overlapping responsibilities, and policy silos that prevent progress in key development areas.
Institutional benchmarking from countries like Australia and the UK highlights the need for regulatory realignment. These countries have implemented dual-regulator models separating prudential regulation and market conduct, while maintaining centralized coordination. In contrast, Indonesia’s multiple, loosely coordinated regulators create complexity and reduce accountability. The absence of a single agency dedicated to financial sector development is a critical gap in the current architecture.
The white paper proposes comprehensive institutional reform to realign mandates and improve governance. It recommends assigning the MoF a stronger role in leading financial sector development, supported by a national roadmap that integrates efforts across agencies. OJK should be transformed into a government agency focusing on consumer protection and market conduct, financed through the state budget. Prudential regulation should be consolidated under BI, which will oversee both micro- and macroprudential frameworks.
To enhance financial depth, access, and efficiency, targeted policy reforms are needed. These include the development of new financial instruments such as municipal bonds and REITs, expanding digital financial infrastructure for MSMEs, improving credit guarantees, and supporting banking consolidation. Financial literacy and inclusive regulatory frameworks, especially around credit scoring and consumer protection, are emphasized as critical enablers for inclusive finance.
The success of these reforms requires clear mandates, government oversight, and performance monitoring. The paper calls for a revised legal framework that streamlines roles and ensures agencies like OJK and LPS report to the government, while BI maintains independence only in monetary policy. Integrated performance evaluations, shared regulatory roadmaps, and strategic coordination from the highest levels of government are essential for long-term impact.
Ultimately, a restructured institutional framework will enable Indonesia to build a dynamic, inclusive, and competitive financial system. With stronger leadership, harmonized mandates, and a development-focused strategy, the financial sector can better serve the real economy, expand access to credit for underserved communities, and unlock private sector potential, thus driving sustainable and equitable growth.
Download Full Paper Here: Financial Development For Strong and Equitable Growth: Institutional Reform and Policy Pathways For Indonesia