ADB Support to the Indonesia Finance Sector (2005–2018)

Evaluation Document | 23 October 2019
ADB Support to the Indonesia Finance Sector (2005–2018)

Indonesia is the largest economy in Southeast Asia. The growth of its real gross domestic product has remained stable at over 5% in the past 5 years, underpinned by robust domestic demand. In a context where digital finance and financial technology are surging, the financial sector has the potential to become the engine supporting this economic growth. It is therefore important that banks, nonbank financial institutions and the private sector deepen their role in financial intermediation, supported by proper regulatory and prudential standards to assure the continued stability of the financial system. Moreover, the finance sector in Indonesia could contribute to several operational priorities of Strategy 2030, including addressing remaining poverty and reducing inequality, tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability, strengthening governance and institutional capacity and private sector development. In particular, finance and private sector development are a cross cutting agenda, as a vibrant financial and private sector eco-system is important for mobilizing additional capital for development needs. These priorities need to be carefully considered in the design of the next Country Program Strategy for Indonesia.

It is in the above context that this sector assistance program evaluation assessed the performance and results of the Asian Development Bank (ADB) support to the Indonesia finance sector in the period 2005–2018 which was provided mainly through policy-based loans to the sector and totaled about $2 billion. The focus was on improving Indonesia’s financial stability and on deepening the sector and making it more inclusive. 

The evaluation found that ADB’s support helped improve the stability of the sector and, to a lesser extent, to deepen it. Results for financial inclusion and access to finance are still limited and will require a more strategic and coordinated approach in future to support the mobilization of finance from the insurance and pension industry to further deepen financial markets and foster financial inclusion moving forward. Moreover, ADB’s finance program in Indonesia is affected by the unsystematic analytical diagnostics underpinning the design of the portfolio of sovereign and nonsovereign operations, the Bank’s difficulties in providing funding in local currency, and the weak coordination and sequencing of ADB sovereign and nonsovereign operations. The results of ADB support for infrastructure finance were below expectations and the projects to support financial intermediation did not reach underserved segments of the population.

The evaluation offers a set of recommendations to help ADB make a more meaningful contribution to the finance sector in Indonesia and to achieve better results from its investments. The evaluation recommends systematically organizing its analytical diagnostics. It also points to the need for better coordination both externally with other international financial institutions, and internally to sequence sovereign and nonsovereign operations more effectively. The availability of local currency funding has proven to be a key determinant of the success of ADB’s financial sector operations, so ADB should ensure it can continue to mobilize local currency funding from domestic capital markets and derivatives sources, while working to develop a pipeline of viable sovereign and nonsovereign transactions to deploy the local currency within a reasonable time frame to react to market opportunities. Considering the immense infrastructure financing gap that constrains the development of Indonesia, ADB should promote financing from institutional investors for large infrastructure assets by helping reduce the risks of investments in the sector. Finally, the private sector is a major driver for deepening financial markets and making them more inclusive, which means that improving financial inclusion will not only require better access to finance and greater financial literacy, but also more effective financial intermediation and private sector development. Digital finance, digital economy, and fintech will play a crucial role in promoting financial inclusion. ADB should increase its investments in financial inclusion over the longer term and broaden the scope of its operations by complementing its work to improve regulation and financial literacy with a more strategic and comprehensive approach to financial inclusion. 

Final consultations with the government of Indonesia have enable IED to confirm the findings, issues, and recommendations offered by the report and key stakeholders have expressed their appreciation for ADB’s support and continued interest in engaging with ADB to address the issues affecting the development of the finance sector in Indonesia.