Interview: Wimboh Santoso
How is the need for infrastructure project funding being addressed by the financial services sector?
WIMBOH SANTOSO: The administration of President Joko Widodo has reallocated a portion of the budget that was previously for energy subsidies to infrastructure development. The budget also focuses on social services, education and universal health care. Long-term investment in infrastructure provides many economic and social benefits, yet only becomes commercially feasible in the long run. Therefore, financing is the main challenge, which the National Medium-Term Development Plan 2015-19 aims to address.
It is necessary to look beyond the government budget for other sources of financial support. Banks have legal restrictions on the amount they can lend, due to the sheer size of some projects, which may lead to duration mismatches as well as concentration risks. Companies are encouraged to seek out non-banking sources to obtain their funding, as this could help with the misallocation of infrastructure financing. To this end, the OJK has created medium- to long-term financing instruments in capital markets, such as limited participation mutual funds, municipal bonds, green bonds and a range of other investment products, including real estate investment trusts, infrastructure investment funds, asset-backed security and blended finance.
What progress has been made to consolidate Indonesia’s banks, and how can the ASEAN Banking Integration Framework (ABIF) assist this process?
SANTOSO: In 2000 approximately 240 commercial banks were operating in Indonesia, and since 2011 the number of banks has shrunk by more than 50%. However, critics still argue that Indonesian banks are too numerous, inefficient and uncompetitive. By 2006 we had revised various risk management and transparency regulations for mergers and acquisitions. From then onwards, the consolidation process was market driven rather than regulatory driven. Although the pace remains somewhat slow, new technologies will inevitably lead to tougher competition, increasingly driving small-scale banks out of the market. We also encourage mergers and consolidation through single presence policy enforcement to strengthen banks’ capital and enable them to operate more competitively.
In line with the ABIF, Indonesia is already well integrated with the Singaporean and Malaysian markets. From a regulatory perspective, there should be a process to mitigate risks in the financial sector prior to consolidation under the ABIF. This could include ensuring high-quality regulation standards, auditing the quality of bank management and ensuring there is sufficient financial infrastructure in place.
How important will regulations on financial sector innovation be in enabling growth of the financial technology (fintech) segment?
SANTOSO: Our policy guidelines indicate that banks can expand anywhere in Indonesia by using technology platforms without the need to open physical branches. Banks could use local agents, such as loyal customers, to provide customer service and support to other customers in that particular region or area. The fintech segment has recently experienced rapid growth in Indonesia. Compared to 2017, peer-to-peer (P2P) lending using fintech has grown by approximately 620%, from Rp700bn ($49.6m) to Rp5trn ($357m). In response to this, OJK has issued regulations regarding the operation of fintech companies, as well as guidelines on specific products such as P2P lending and equity crowdfunding.
The aim of this new regulatory framework is to ensure fintech platforms operate based on good corporate governance principles and protect consumer interests. Fintech providers should be transparent with the public, held accountable, and able to prove that they have the resources and finance needed. To increase transparency, fintech P2P lending providers are also required to transfer a sum within two days to the borrower.
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