Strong fundamentals and recent performance indicate great potential for Indonesia's banks

With rising levels of public participation, a robust regulatory framework in place and high profitability at most institutions, in 2015-16 Indonesia’s banking sector performed strongly, building on nearly a decade of expansion and rapidly increasing returns. Home to 118 commercial banks and more than 1600 rural regional banks – the latter of which are allowed to operate only in a relatively small, predetermined geographical area. The industry boasted combined assets of Rp6198.15trn ($452.5bn) at the end of January 2016, according to data from the Financial Services Authority (OJK) and the Economist Intelligence Unit (EIU) – the majority of which were held in a handful of leading institutions.

Up & Up 

At the end of 2015 the four largest institutions accounted for over 47% of total assets. With this in mind, and considering the number of total lenders, the sector regulators – the OJK and Bank Indonesia (BI), the central bank – are in the midst of a push to encourage consolidation across the banking sector. At the same time, the government is working to ensure that Indonesia’s banks are ready to compete with their peers in other ASEAN member states, in preparation for the full integration of the ASEAN Economic Community (AEC) (see analysis). “The sector has posted steady expansion in recent years,” Eri Unanto, the executive director of the Indonesian Banks Association (Perbanas), told OBG. “But we think that there is still potential for strong continued expansion for years to come here.”

That said, Indonesia’s banking sector currently faces a range of hurdles to future growth. The country remains considerably underbanked, for instance, which local players consider to be both a challenge and an opportunity. According to the World Bank’s financial inclusion database, in 2014 just 36% of Indonesia’s adult population had an account at a formal financial institution. This figure is up from 20% in 2011, which indicates significant and rapid uptake of bank accounts among the general population. Nonetheless, boosting awareness about the benefits of banking remains a priority moving forward.

Banking sector activity was negatively impacted by Indonesia’s economic slowdown over the course of 2014-15, witnessing a rise in non-performing loans (NPLs) and weaker returns over the course of 2015, for instance. “Yes, there was a slight slowdown in profits across the banking sector in 2015,” Kahlil Rowter, the chief economist at the Danareksa Research Institute, the research arm of the state-owned financial conglomerate Danareksa, told OBG. “But it is important to note that in general Indonesia’s banks are making a huge profit, and this will likely be the case for the foreseeable future.”


Indonesia’s banking sector has not always performed so strongly. More than two and a half centuries ago, during the colonial period, the country’s banking sector was formally launched with the establishment of the Dutch institution De Bank van Leening in 1746. This was followed over the course of the following century by the establishment of a handful of additional Dutch institutions, including Nederlandsche Handel-Maatschappij in 1824, De Javasche Bank in 1828 and Escomptobank in 1857. Beginning in the late 19th and 20th century, meanwhile, a handful of foreign institutions moved into Indonesia, including the Hong Kong and Shanghai Banking Corporation in 1884, Yokohama Specie Bank in 1919 and the Chartered Bank of India, Australia and China in 1959, among others. Lastly, also in the 20th century, a number of local banks, founded by indigenous Indonesians, began to participate in the sector. These included Bank Vereeniging Oei Tiong Ham in 1906 and Batavia Bank in 1918, among others.

The banking sector was dramatically restructured during and after Indonesia’s independence in the middle part of the 20th century. BI was officially formed in 1953 – though the central bank can trace its history back to De Javasche Bank. In 1957 the newly independent government set out to take control of the financial sector, nationalising most Dutch banks and closing down many other institutions, including all foreign banks. Over the course of the following two decades, Indonesia’s banking sector was tightly controlled by the BI in conjunction with the federal government. During this period bank lending was directed by the state, and no new banking licences were issued, causing the sector to shrink to just three primary institutions in total.

Under President Suharto’s “New Order” government, which came to power in 1966, state oversight of the banking sector was relaxed slightly, and a handful of new institutions – both banks and non-bank financial entities – set up shop in Indonesia. Regardless, up until the early 1980s activity in the sector remained relatively stagnant.

In 1983 Suharto’s government introduced the first of a series of financial sector reforms aimed at liberalising Indonesia’s banks and other financial institutions. Over the course of the following decade – and particularly in legislation passed in 1988, 1991 and 1992 – the state ended its strict oversight of the industry, allowing banks to set their own deposit and lending rates, and compete directly in an increasingly open market. The sector grew rapidly during this period, with the total number of banks rising from 120 in 1980 to 240 by 1994, for instance, and banking sector assets jumping from Rp10.12bn ($738,000) to Rp248.06bn ($18.1m) over the same period.

The expansion of the industry during the 1980s and early 1990s can be attributed in large part to an enormous increase in lending, as the private commercial banking sector’s annual lending ratio jumped from 6.5% in 1979 to 51.2% by 1996.

Crisis & Rebuilding 

Financial sector deregulation during the early 1990s, in particular, led to rapid and expansive sector growth, but also exacerbated risks in the banking sector and across the financial services industry as a whole. These pressures eventually contributed to the upheaval of the 1997-98 Asian financial crisis, during which Indonesia suffered large currency swings and, in 1998, the loss of 13.4% of GDP in a single year. When the dust had settled, both the country’s president and central bank governor had been replaced, and the banking system was in a state of disarray. The state set to work developing and implementing a series of comprehensive reform measures aimed at repairing the economy and returning the country to a positive growth trend.

In 1999 the government passed the Bank Indonesia Act, which gave the central bank regulatory independence from the federal government and set the financial sector on a course towards a better oversight environment. One of the primary challenges facing BI during this period had to do with the number of banks operating in the country. In the run-up to the 1997-98 crisis, a substantial number of new banks were set up in or entered the country. As mentioned previously, by 1994 and through 1995 some 240 lenders were operating in Indonesia, double the figure less than a decade earlier.

From 1999 onward BI focused on implementing international standards for minimum capital requirements, mandatory deposit insurance, improved risk management standards, new corporate governance requirements and a wide range of additional features aimed at ensuring the long-term stability and profitability of the domestic banking market. These new rules served to facilitate consolidation in the market, as smaller institutions either shuttered their operations due to an inability to meet the new requirements, or else were acquired by larger banks.

One particularly significant change instituted in the wake of the crisis was Presidential Regulation No. 29 of 1999, which raised maximum foreign ownership levels to 99% in the banking sector, or 100% if the lender’s shares were bought directly on the Indonesian Stock Exchange (IDX). This ruling replaced a 1992 banking sector law that had allowed for foreign ownership of just 49% of local banks. The ruling resulted in rapidly rising levels of foreign ownership in the country’s banking sector during recovery efforts in the early 2000s and a high degree of foreign ownership today.

Indeed, Indonesia’s 99% foreign ownership limit is currently the most liberal in the ASEAN region, which has implications for the institution of a single banking market under the AEC in 2020 (see analysis).

Strong Performer 

Over the course of the past decade, the rebuilding of Indonesia’s banking sector has been regularly held up as a success story. By the time the 2007-08 international economic downturn swept through South-east Asia, the nation’s banking sector was stable enough that it barely registered the global financial turmoil, unlike many other countries in the region and elsewhere around the world. As noted by the IMF in 2010, the banking sector “did not experience major deposit withdrawals during the second half of 2008 when the global crisis severely affected the financial markets in Indonesia”. Indeed, the industry as a whole posted continuous growth throughout the downturn and in the years that followed, with total banking sector assets rising from Rp2311trn ($168.7bn) at the end of 2008 to Rp2530trn ($184.7bn) at the end of 2009, Rp3089trn ($225.5bn) at the end of 2010 and Rp3652trn ($266.6bn) at end-2011. Both loans and deposits in the banking system expanded during this period, as did the industry’s overall capital adequacy ratio (CAR), the latter of which actually improved from 16.8% at the end of 2008 to 18.5% by early 2012.

In 2011 the government formally established the OJK, which has been the primary financial sector regulator – in conjunction with BI – since it became operational in 2014. The OJK has issued a substantial number of new laws and regulations in an effort to ensure that Indonesia’s banks and other financial institutions operate according to global best practices. These rulings have impacted how institutions deal with risk management, corporate governance for conglomerates, rural development banks, Islamic banking rules and the use of consumer-facing technology such as smartphone banking apps, for example, in the industry.

According to a mid-2016 report by the international law firm White & Case, the rules introduced by the OJK since it took power in 2014 have “introduced stricter protocols on banks in several respects”. Broadly speaking, bank oversight on the part of the OJK is understood to be considerably tighter than previously, when the industry fell solely under BI.

The efforts of the OJK have been met with mixed reactions from local players. Many institutions are generally happy to abide by new regulations that will ensure long-term sector stability, so long as they do not interfere detrimentally with daily operations. “When OJK came on the scene, many banks expected that it would become harder to operate in Indonesia,” said Unanto. “But this was not the case at all. It is not more difficult to operate now, despite technically having two bosses, the OJK and BI.” Indeed, the OJK has worked to ensure that all changes it enacts are discussed widely across the banking sector before being formally rolled out, which is an improvement on the decree-based system in place before. That said, the new regulator has attracted some criticism for the speed at which it has worked to improve the sector. “Sometimes when OJK introduces new regulations, they simply move too fast,” Isbandiono Subadi, a member of the research and development department at Perbanas, told OBG. “Also, occasionally their rulings contradict previous laws, which can be confusing. Nonetheless, in general their efforts have noticeably improved the business environment and streamlined operations across the sector.”

Headline Figures 

As of the end of 2015, Indonesia’s banking sector comprised 118 commercial banks and 1637 rural banks, which together accounted for the largest component in terms of assets held of Indonesia’s financial services industry as a whole.

The banking sector is fairly concentrated both on the commercial side and with regard to the largest lenders. Indeed, commercial lenders had total assets of Rp6095.9trn ($445bn) as of the end of January 2016, which was equal to more than 98% of total banking sector assets. Rural banks, by comparison, had just Rp102.2trn ($7.5bn) in assets at that time. Similarly, the country’s largest 10 banking institutions account for around 80% of total business, while the top five control almost 60%.

The industry has seen rapid growth over the past decade. The banking sector’s compound annual growth rate from 2010 through the first four months of 2015 was 16.9%, according to a late 2015 report published by EY. Overall assets held by Indonesian commercial banks more than doubled from 2010 through to the end of 2015. At the end of 2013, total assets were at Rp4954.5trn ($361.7bn), up from Rp4262.6trn ($311.1bn) at end-2012 and Rp3652.8trn ($266.7bn) at end-2011, according to statistics published by the OJK. Commercial banks’ asset grew by 9.2% in 2015, increasing from Rp5615.2trn ($409.9bn) in 2014 to Rp6132.6trn ($447.7bn) at the end of 2015.

In the same period Indonesia’s banks reported strong annual return on assets, in excess of 2.5% between 2010 and 2015. In line with this data, bank profitability has been quite high in Indonesia for many years. Indeed, as of mid-2015, Indonesian commercial banks’ net interest margin (NIM) was at 5.3%, compared to 2-3% in Malaysia and Singapore, for example. NIM reached 5.6% in January 2016, according to the OJK. From 2010 to 2015 the industry’s NIM averaged 5.26%, and the OJK recently announced that it expected local lenders to maintain a NIM in the 4-5% range for the foreseeable future.

Multi-Finance Companies 

Non-bank lending companies, known as multi-finance companies, serve as alternative lenders in the country, offering consumers primarily vehicle and heavy equipment financing and leasing. The total assets of the industry reached Rp425.7trn ($31.1bn) in 2015, up 1.25% year-on-year, OJK data showed.

According to Francis Lay, president director of BFI Finance, the industry is very fragmented. “Companies typically only focus on financing a specific activity, such as cars, motorcycles or equipment. This has meant that while some finance firms have survived, others haven’t, and this depends very much on having a good balance sheet, capitalisation, execution capabilities and a well-organised risk management assessment,” Lay told OBG.

In 2015 the OJK permitted multi-finance companies to start expanding into sectors beyond automotive and heavy equipment. According to the OJK, potential new sectors include agriculture, horticulture, plantations, tourism, infrastructure and electricity.

Market Participation 

Despite this rapid growth in recent years, Indonesia remains underbanked as measured by most metrics. The country’s outstanding loan-to-GDP ratio, which is deployed here as a measure of banking penetration, stood at 37% at the end of 2014. This was the lowest ratio among all Asian-Pacific countries, according to EY. Indeed, many other nations in the region have loan-to-GDP ratios that are more than that of Indonesia. In Singapore, for instance, the ratio was 126%, while in Malaysia it was 145%, in Thailand it was 183%, and in Japan it was at 374%, reported EY. The sector’s relatively low penetration rate is often cited as a key indicator of the growth potential for banking in Indonesia.

One key reason for the current penetration rate is the banking sector’s geographic concentration. Indonesia comprises more than 13,000 islands spread out over a total area of 1.9m sq km. Many of the nation’s islands are hard to reach and, consequently, lack not only financial services – such as bank branches – but much more basic services as well. According to EY, some 52% of the country’s financial services outlets are located on the island of Java – the most populous island in the world, with around 57% of Indonesia’s total population – while the rest were located in Sumatra (22%), Kalimantan (9%), Sulawesi (8%) and the relatively more remote south-eastern islands of the Indonesian archipelago (9%).

Improving access to banking services and boosting awareness of the benefits of participating in the formal banking system has been a key area of focus at both the regulatory level and among Indonesian banks themselves in recent years.

Indeed, in December 2010 BI introduced its National Strategy of Financial Inclusion, which aimed to alleviate poverty by improving access to financial services and boosting financial literacy. More recently, the OJK has also hosted various financial inclusion conferences and workshops, with an eye towards encouraging banks to develop services to cater the nation’s large unbanked population.

Market Resilience 

In 2014-15 Indonesia saw some downward economic pressure, due partly to tightening in China and partly to cyclical developments. The nation’s GDP growth slowed to 4.7% in the first quarter of 2015, following on from a steady slowdown on a quarterly basis since 2010-11, when quarterly GDP growth neared 7%.

As of mid-2016, the nation’s economy had already begun to bounce back to pre-2014-15 levels (see Economy chapter). Nonetheless, rising levels of economic volatility have had an impact on the banking sector, with mixed results.

Broadly speaking, Indonesia’s banking sector is well capitalised, stable and highly profitable. According to OJK data, as of early August 2016, the sector’s CAR was at 20.64%, which puts Indonesia well above most other countries in the region. Indeed, according to IMF data from 2014 – when Indonesia’s CAR was at 18.7%– the CAR among Hong Kong-based lenders was 16.8%, while in Thailand it was 16.5%, in the Philippines it was 16.1%, and in Malaysia it was 15.4%.

That said, according to the IMF, rising NPLs and tightening liquidity conditions in 2014 and 2015 were reason enough to keep a close watch on the sector’s stability. While the NPL ratio – NPLs as a percentage of the sector’s total outstanding loan book – declined from 2.6% to 1.87% between 2010 and 2012, since then it has slowly but steadily increased on an annual basis, reaching 1.91% at the end of 2013, 2.2% at the end of 2014 and 2.5% at the end of April 2015, according to EY. While this figure was not particularly high compared to global levels, which were at 4-5% as of the end of 2015, according to the World Bank, they increased over a short enough period of time to cause concern. More specifically, the rising NPL ratio put Indonesia closer to the lower end of the ASEAN country spectrum.

Loan & Deposit Growth 

The steady expansion of the banking sector over the past decade has been driven in large part by retail loan and deposit growth. Indeed, in the years since the 2007-08 global financial crisis, household borrowing has outpaced loans to businesses by a considerable margin, with the exception of 2012-13, when the latter grew faster than the former. The loan book was at $198.3bn at the end of 2011, increasing to $211.1bn at the end of 2012 but falling to $193.2bn at the end of 2013. The sector’s total loans were worth $214.9bn in 2014 and they increased by 3% to $221.4bn at the end of 2015, according to data compiled by the EIU. This represents growth of 3% on the previous year, when.

The majority of the end-2015 figure was made up of long-term loans, which were worth $134.7bn, or nearly 61% of the total loan book. Short-term loans made up the remainder.

According to sector analyst forecasts, the industry’s credit portfolio is expected to post rapid growth through to 2020. In mid-2016 the research house estimated that Indonesia’s outstanding loan book could expand to $417.3bn by the end of the decade.

Deposits are a major source of funding for most Indonesian banks. Bank deposits were worth $322.5bn at end-2011, rising to $341.4bn at the end of the following year. As with the loan book, 2013 was a slow year for bank deposits, with deposits shrinking to $311.2bn at the end of the year. The sector’s deposits rose again in 2014, totalling $344.6bn at the end of the year. In 2015 deposits rose to $353.8bn, and the loan-to-deposit ratio increased to 92.1% from 89.4% at the end of 2014.

Major Players 

The majority state-owned Bank Mandiri was the largest lender in Indonesia at the end of 2015, accounting for 14.8% of total banking sector assets. The institution, which was formed in 1998 as a result of the state merging together four failed government-held banks, posted a net profit of Rp20.3trn ($1.5bn) in 2015, up around 2% from the previous year. The bank’s loan book increased by 12.4% over the course of the year to reach Rp595.5trn ($43.5bn).

Bank Mandiri’s profit growth was the slowest the bank has recorded in more than a decade. The institution attributed this in large part to increased provisioning against rising NPLs. Non-performing credit increased to 2.6% of the lender’s total loan book by the end of 2015, due primarily to the institution’s exposure to the mining sector. The recent slowdown in Chinese demand for raw materials has had a detrimental impact on Indonesia’s mining industry and, as evidenced by Bank Mandiri’s decision to avoid additional exposure to mining-related firms, on the banking sector as well.

Bank Mandiri, which is currently 70% state-owned after two share sales on the IDX reduced the government’s stake, was recently the focus of a state-led plan to ramp up sector consolidation. In 2014 the bank made a bid to acquire Bank Tabungan Negara (BTN), the smallest of Indonesia’s state-owned lenders. After demonstrations by BTN employees and media scrutiny, however, the state abandoned the merger of the two banks.

Indonesia’s second-largest bank at the end of 2015 was Bank Rakyat Indonesia (BRI), which controlled 14.3% of all sector assets. The institution reported profits of Rp25.2trn ($1.8bn) in 2015, which represented an increase of 4.25% on the previous year. BRI performed better than Bank Mandiri in terms of profits, primarily due to the fact that BRI’s focus is microfinance and lending to small and medium-sized enterprises (SMEs), which meant that the bank was cushioned against slowing demand in China.

Nonetheless, after posting 14.4% year-on-year profit growth in 2014, the 2015 results were a marked slowdown, which the bank attributed to the tightening domestic economy and interest rate rises. At the same time, like Bank Mandiri, BRI ramped up its provisioning efforts in 2015. “We predict that our loan loss provision will still rise this year, as there is remaining risk in the economy,” Haru Koesmahargyo, the bank’s finance director, told local media in February 2016. “However, the provision growth will be lower compared to last year.”

Rounding out the top-five largest banks by assets at the end of 2015 were Bank Central Asia, which is the country’s largest private lender; the state-owned Bank Negara Indonesia, which is the oldest lender in the country; and Bank CIMB Niaga, which is part of Malaysia’s CIMB financial conglomerate.


As indicated by the top-two banks’ performance in 2015, a number of lenders remain somewhat concerned about the future. Rising NPL levels across the industry suggest that the country’s hard-earned reputation a stable, highly profitable banking sector could be weakened in the coming years by economic volatility. The sector’s regulatory apparatus is well aware of these risks.

Indeed, the formation of the OJK and that authority’s recent regulatory actions – namely, steadily increasing oversight and the implementation of strict operating requirements – may be seen as part of a far-reaching effort to protect the nation’s banking system against these very dangers. With this foresight in mind, and considering the banking sector’s strong position with regard to capital adequacy, transparency and corporate governance, most local players are broadly optimistic about the future.

By most accounts Indonesia’s banking sector has only just begun to tap into what will likely be decades of continuous and robust growth, as the country’s enormous population is slowly but surely brought into the formal banking system. This transformation of Indonesian society will not take place overnight, nor will it proceed without bumps. “Although, at the beginning, fintech companies could seem like a threat to the banking sector, we now see that they are actually opening several opportunities for us and that we have to find the right synergy, ” Jahja Setiaatmadja, CEO of Bank BCA, told OBG.

The government’s ongoing consolidation drive, under which the OJK aims to reduce the number of banks operating in the country by nearly half over the coming decade, will not be a simple or straightforward process, as evidenced by the failed merger between Bank Mandiri and BTN in 2014. Nonetheless, the industry is developing numerous opportunities for continuous, long-term growth. The Islamic banking segment, for instance, at present only controls approximately 5% of industry assets, despite Indonesia housing the largest Muslim population in the world (see analysis).

Similarly, while the regional banking integration plan put forward as part of ASEAN’s plan to form a single market by 2020 will no doubt present various hurdles for Indonesian lenders, many local banks are also expected to benefit from easier access to neighbouring markets (see analysis). Additionally, implementation of the government’s Tax Amnesty programme, which commenced in July 2016 and seeks to increase tax revenues by encouraging the repatriation of funds housed abroad, is likely to benefit the country’s banks, with billions of dollars worth of inflows expected (see Economy chapter). Given the array of potential opportunities ahead, many local lenders remain bullish about the future.

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The Report: Indonesia 2017

Banking chapter from The Report: Indonesia 2017

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