The FINANCIAL — The Asian Development Bank (ADB) has approved a $400 million program loan to help Indonesia develop its financial sector, including expanding access to financial services for poor households.
“A deep, liquid and efficient financial sector is critical for stability and growth, and this assistance supports reforms, including measures to help the newly integrated financial sector regulator, OJK, to become fully operational,” said Jim Nugent, Director General of ADB’s Southeast Asia Department.
Indonesia’s economy is at a crossroads, with growth declining from 6.4% in 2010 to 4.7% in the first half of 2015 on the back of a collapse in commodity prices and the government’s tightening of macro policies. In addition, household income inequality is increasing, according to ADB.
“While the linkage between financial sector development and growth is established, this needs to be coupled with reforms to increase access to financial services to narrow the growing income inequality”, said Sani Ismail, Financial Sector Economist in ADB’s Southeast Asia Department.
In terms of financial sector involvement, only about 22% of the poorest 40% of Indonesians have an account and only 13% have saved at a financial institution.
The new financial authority, OJK, has been set up to regulate all financial services in Indonesia, and the government has set out priority policy reforms, including building up capital markets and the nonbank financial sector, and promoting broader access to financial services.
ADB’s Financial Market Development and Inclusion Program supports the government’s reform agenda. This includes putting in place a stronger enabling framework for capital markets, which will encourage product diversification, including more issuances of Islamic capital market instruments.
To provide greater access to finance for the poor, the government enacted the Law on Micro Finance, while OJK has launched a new branchless banking initiative that aims to offer services to the unbanked.
ADB’s program aims to expand access to financial services for the poorest sector of the population to 25% by 2020 in line with the government’s target.
The program will see ADB partnering the government and OJK over the medium term up to June 2019.
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. In 2014, ADB assistance totaled $22.9 billion, including cofinancing of $9.2 billion.