Transformation of the Financial Sector in Indonesia

Introduction : The source and deployment of finance are central issues in economic development. Since 1966, when the Soeharto Administration was inaugurated, Indonesian economic development has relied on funds in the form of aid from international organizations and foreign countries. After the 1990s, a further abundant inflow of capital sustained a rapid economic development. Foreign funding was the basis of Indonesian economic growth. This paper will describe the mechanism for allocating funds in the Indonesian economy. It will identify the problems this mechanism generated in the Indonesian experience, and it will attempt to explain why there was a collapse of the financial system in the wake of the Asian Currency Crisis of 1997. History of the Indonesian Financial system The year 1966 saw the emergence of commercial banks in Indonesia. It can be said that before 1966 a financial system hardly existed, a fact commonly attributed to economic disruptions like the consecutive runs of fiscal deficit and hyperinflation under the Soekarno Administration. After 1996, with the inauguration of Soeharto, a regulatory system of financial legislation, e.g. central banking law and banking regulation, was introduced and implemented, and the banking sector that is the basis of the current financial system in Indonesia was built up. 　　　The Indonesian financial structure was significantly altered at the first financial reform of 1983. Between 1966 and 1982, the banking sector consisted of Bank Indonesia (the Central Bank) and the state-owned banks. There was also a system for distributing the abundant public revenue derived from the soaring oil price of the 1970s. The public finance distribution function, incorporated in Indonesian financial system, changed after the successive financial reforms of 1983 and 1988, when there was a move away from the monopoly-market style dominated by state-owned banks (which was a system of public finance distribution that operated at the discretion of the government) towards a modern market mechanism. The five phases of development The Indonesian financial system developed in five phases between 1966 and the present time. The first period (1966-72) was its formative period, the second (1973-82) its policy based finance period under soaring oil prices, the third (1983-91) its financial-reform period, the fourth (1992-97) its period of expansion, and the fifth (1998-) its period of financial restructuring. The first section of this paper summarizes the financial policies operative during each of the periods identified above. In the second section changes to the financial sector in response to policies are examined, and an analysis of these changes shows that an important development of the financial sector occurred during the financial reform period. In the third section the focus of analysis shifts from the general financial sector to particular commercial banks’ performances. In the third section changes in commercial banks’ lending and fund-raising behaviour after the 1990s are analysed by comparing several banking groups in terms of their ownership and foundation time. The last section summarizes the foregoing analyses and examines the problems that remain in the Indonesian financial sector, which is still undergoing restructuring.

Is South Sulawesi a Center of Growth in Eastern Indonesia? : Japanese ODA Strategy Revisited

Japanese ODA, especially that undertaken by JICA, has targeted South Sulawesi Province as a core area of development in eastern Indonesia, with hope that the economic growth of South Sulawesi will bring about spillover effects in other regions. This paper tests the validity of the strategy using a framework of Vector Autoregressive model. The results show that South Sulawesi’s economy Granger causes other regions in eastern Indonesia, but not vice versa, implying that South Sulawesi drives the development of other regions in eastern Indonesia. Further analysis shows that the development of the agricultural sector in South Sulawesi potentially has the highest spillover effects than other sectors and that the magnitude of spillover effect from South Sulawesi on eastern Indonesia is higher than other economically important regions, such as Eastern Java and Kalimantan.

Related Lending and Bank Performance: Evidence from Indonesia

After the Asian financial crisis of 1997, it was confirmed that banks lend to their related parties in many countries. The question examined in this article is whether related lending functions to alleviate the problems of asymmetric information or transfers profits from depositors and minority shareholders to related parties. The effects of related lending on the profitability and risk of banks in Indonesia are examined using panel data from 1994 to 2007 comprising a total of 74 Indonesian banks. The effects on return on asset (ROA) varied at different periods. Before and right after the crisis, a higher credit allocation to related parties increased ROA. In middle of the crisis, it turned to negative; and this has also been the case in the most recent period as the Indonesian economy has normalized. Effects of related lending on bank risk measured by the Z-score and non-performing loan is not clear. After undergoing bank restructuring, related lending has decreased and the profit structure of banks has changed.

Critical connections : Islamic politics and political economy in Indonesia and Malaysia

This article explores Islamic politics in two Muslim-majority countries in Southeast Asia, Indonesia and Malaysia, by linking their trajectories, from late colonial emergence to recent upsurge, to broad concerns of political economy, including changing social bases, capitalist transformation, state policies, and economic crises. The Indonesian and Malaysian trajectories of Islamic politics are tracked in a comparative exercise that goes beyond the case studies to suggest that much of contemporary Islamic politics cannot be explained by reference to Islam alone, but to how Islamic identities and agendas are forged in contexts of modern and profane social contestation.

Consensus and democracy in Indonesia : Musyawarah-Mufakat revisited

This paper analyzes customary practices of consensus decision making, called musyawarah-mufakat, as a basis of democratic stability in Indonesia. Musyawarah and mufakat (deliberation and consensus) are a traditional decision-making rule in Indonesia which has often been observed in village meetings. This paper argues that this traditional decision-making rule is still employed even in a modernized and democratized Indonesia, not only at rural assemblies but in the national parliament as well. Furthermore, this consensus way of decision making provides an institutional basis for democratic stability by giving every parliamentary player, whether big or small, an equal opportunity to express his/her interests. On the other hand, this system of musyawarah‐mufakat decreases political efficiency in the sense that it takes a long time to deliberate drafted laws in the parliament.

Inflation targeting in Korea, Indonesia, Thailand, and the Philippines : the impact on business cycle synchronization between each country and the world

This paper empirically analyzes whether and to what extent the adoption of inflation targeting (IT) in Korea, Indonesia, Thailand and the Philippines has affected their business cycle synchronization with the rest of the world. By employing the dynamic conditional correlation (DCC) model developed by Engle (2002), we find that IT in Asia has little effect on international business cycle synchronization and the effect is positive in some of the countries, if any. These findings basically seem to be consistent with the evidence from relevant literature.

The inverted Chinese / China problem in Indonesia : a preliminary analysis on the 2011 Surabaya incident

A clash between the police and journalists covering a Falun Gong gathering in Surabaya 2011 have shown a significant change in understanding the triangular relationship between Indonesia, China and the Ethnic Chinese in Indonesia. During the Suharto period, ethnic Chinese in Indonesia and China as a foreign state were the problems for the Indonesian government. After the political reforms in Indonesia together with the Rise of China in 2000s, in some situation, it is the Indonesian government together with the Chinese government which is the problem for some ethnic Chinese in Indonesia. Ethnic Chinese people were seen to be close with China and their loyalty to the nation was doubted. But now it is the Indonesian government which is viewed as being too close to China and thus harming national integrity, and suspected of being unnationalistic.

Presidentialism and political parties in Indonesia : why are all parties not presidentialized?

This paper analyzes whether the "presidentialization of political parties" is occurring in newly democratizing Indonesia, as argued by Samuels and Shugart (2010). In Indonesia not all parties are becoming presidentialized. Parties are presidentialized when they have a solid organizational structure and have the potential to win presidential elections. Parties established by a presidential candidate need not face an incentive incompatibility between their executive and legislative branches, since the party leader is not the "agent" but the "principal". On the other hand, small and medium-sized parties, which have few prospects of winning presidential elections, are not actively involved in the election process, therefore party organization is not presidentialized. As the local level, where the head of government has been directly elected by the people since 2005 in Indonesia, the presidentialization of political parties has begun to take place.

Voting behavior in Indonesia from 1999 to 2014 : religious cleavage or economic performance?

In this study, we examine the voting behavior in Indonesian parliamentary elections from 1999 to 2014. After summarizing the changes in Indonesian parties' share of the vote from a historical standpoint, we investigate the voting behavior with simple regression models to analyze the effect of regional characteristics on Islamic/secular parties' vote share, using aggregated panel data at the district level. Then, we also test the hypothesis of retrospective economic voting. The results show that districts which formerly stood strongly behind Islamic parties continued to select those parties, or gave preference to abstention over the parties in some elections. From the point of view of retrospective economic voting, we found that districts which experienced higher per capita economic growth gave more support to the ruling parties, although our results remain tentative because information on 2014 is not yet available.

Excess capital and bank behavior : evidence from Indonesia

The Indonesian banking sector has been restructured since Asian financial crisis and restored to soundness. The capital adequacy ratio (CAR) returned to a sound level; however, the average excess capital has become too high, while credit disbursement has remained low. This paper investigates the determinants of excess capital among Indonesian banks and its effects on credit growth during the 2000s. The results indicate that the determinants of excess capital vary widely depending on bank type. Return on equity (ROE) affects excess capital negatively among domestic banks, and the effect of non-performing loans is mixed, differing for various bank types. Excess capital affects credit growth positively, except among foreign banks.