Interview: Muliaman Dharmansyah Hadad

How much progress has been made in terms of easing cross-border restrictions within the ASEAN banking integration framework?

MULIAMAN DHARMANSYAH HADAD: I think we’re already quite advanced in this regard. It’s a long process, and we’re still discussing the details of how we’ll proceed with this, but a lot of players would like to see a mutually beneficial integration so that, at the end of the day, there are not losers and winners. We’ve learned a lot from the eurozone experience. But I think, within ASEAN, we can agree that our integration should create additional welfare for all members.

ASEAN is really quite diverse, as there are five members within the coalition who already have highly developed banking systems: Singapore, Malaysia, Thailand, Indonesia and the Philippines.

Then there is the second generation of ASEAN: Myanmar, Laos, Cambodia and Vietnam. There is a development gap between these two groups. That is why we need to pay particular attention to how we integrate our banking systems. The issue of capacity building is paramount for all of our members, but particularly those who are still lagging in terms of financial infrastructure development. Indonesia, for example, must deepen its capital markets to stay competitive with the region.

We have to deepen our own market by increasing the number of investors and improving product development and variety. Also, the deepening has to be managed on the demand side and supply side. First, we have to increase our investor base, because the formal investors in the market are quite limited and only around 400,000 people invest regularly. Therefore, we need to grow the domestic retail investor segment. Another very important part of our job is teaching financial literacy. We must be constantly improving the financial literacy of our people, because emerging markets are still struggling with this across South-east Asia.

Creating access to finance for all people is equally important. In Indonesia, only 40% of people have formal access to financial institutions; in terms of the supply side, we would like to add to the number of listed companies in our capital market. At the moment, the timing and momentum are very good.

I expect that 2014 will be a good year for the market because we expect higher economic growth and an increase in the number of initial public offerings.

Over the long term, what level of demand for financial services do you anticipate in Indonesia?

HADAD: The room for growth in Indonesia’s financial services market is quite significant. Indonesian per capita income has increased because of a steady 6% economic growth for the last 5 years. Now, it is approaching an average of $4,000 but the middle class is also growing in very significant numbers.

We expect to have more than 100m people in Indonesia’s middle-income group within the next five years, and their income will be more than $10,000 per annum. Therefore, demand for financial services will grow quite significantly.

Previously, Indonesians were just relying on more traditional banking services; however, now they are asking for insurance services as well because they have new cars and houses. Demand for financial services is also becoming quite strong. For example, the increase of penetration of the insurance industry in Indonesia is quite significant.

Even today, Indonesia is still one of the least insured nations among the ASEAN countries, because our insurance penetration to GDP is still small and the ratio of credit to our GDP is low compared to that of our neighbours. I expect that the financial sector has great room for growth given the increasing demand and income per capita of the people, and it will be quite significant for the next 10-20 years.