Reforms in Indonesia’s Financial Sector Open New Economic Opportunities

The World Bank’s Board of Executive Directors on Friday approved a loan of US$300 million to assist the government of Indonesia in implementing financial sector reforms that will help sustain economic growth and achieve the country’s shared prosperity goals.

About half of the adult Indonesian population do not have access to bank accounts, leaving them with limited opportunities to invest in their future and protect themselves from financial and non-financial shocks. In addition, the limited availability of financial services and lack of incentives for long-term savings creates further risks for individuals and restricts investment opportunities in critical sectors, such as infrastructure.

“In recent years, the Government has taken important steps to strengthen the financial sector, particularly the financial oversight and crisis management. A further acceleration of reforms that promote efficiency and inclusion while not compromising stability is now needed to finance the infrastructure gap and broaden economic opportunities for individuals and firms in Indonesia” said Luky Alfirman, Director General of Budget Financing and Risk Management at the Ministry of Finance of the Republic of Indonesia.

The development policy loan will provide budget support for Indonesia’s reform agenda in three key policy areas. First, increase the size of the Indonesia’s financial sector by expanding its outreach, broadening financial markets products and mobilizing long-term savings. This will increase the availability of funds and access to financial opportunities for both individuals and firms.

Second, improve the efficiency of the financial sector by making financial practices more transparent, reliable and technology-oriented. This will benefit both individual and enterprises by helping to channel savings into the most productive investment opportunities in a less costly, faster and safer way.

Third, strengthen the resilience of the financial sector to withstand shocks, by strengthening the resolution framework, promoting sustainable finance practices and establishing disaster risk finance mechanisms. This will help Indonesia protect its people and assets in case of shocks.

“Indonesia’s macroeconomic fundamentals continue to be strong. The country’s poverty rate has reached single digits, the lowest level ever. However, with the pace of poverty reduction slowing, it is essential to protect those who are still struggling to achieve the financial security of the middle class. A sound and well-functioning financial sector is critical to sustain Indonesia’s growth and to achieve the Government’s economic growth and poverty reduction goals, particularly amidst the continued challenging global conditions,” saidSatu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste

The World Bank’s support to financial sector reforms in Indonesia is an important component of the World Bank Group’s Country Partnership Framework for Indonesia, which focuses on government priorities.