The Development of Indonesia’s Financial Sector

Key to the overall development of any Third World economy is the pace and pattern of financial sector development.1 This is especially true in the case of Indonesia. During the colonial days, the domestic financial system was merely an extension of the Dutch banking system and was used almost exclusively as a means of facilitating trade between Indonesia and Holland. Since that time, Indonesia’s financial system has changed markedly. The evolution of the commercial banking system and, particularly, changes in the rules governing foreign involvement in the financial system have been important elements in Indonesia’s national development policies. Today, the financial sector is a mixture of government-owned commercial banks, privately-owned commercial banks, foreign banks, foreign representative offices, a few joint venture finance companies and some state-owned development banks. Also important in Indonesia is an ‘informal’ or grey market financial system, made up of money changers dealing in cash loans and post-dated cheques which are discounted from their face value as a form of credit. While certainly more complex than many developing countries, Indonesia’s financial system remains relatively underdeveloped by comparison with those of Taiwan, Singapore, Hong Kong, and South Korea.2 Despite some recent efforts to increase the array of financial instruments, Indonesian savers and investors still have relatively few financial instruments available for investment purposes. Importantly, the government is recognizing the need to improve and to develop further the country’s financial sector.