Strengthening the resilience of the Indonesian financial system

Like other countries, Indonesia was affected by the health crisis in 2020, which accentuated structural weaknesses in its financial sector. As a result, the country has difficulties in mobilising long-term financial instruments that can help finance resilient infrastructure, social welfare services struggle to reach the poorest populations, and the regulatory and supervisory environment is complex and not very resilient to payment defaults.

In this context, a multi-year reform was proposed by the World Bank in 2020, to which AFD has been associated since the first loan. AFD's support to the reform program takes the form of public policy budget financing, and it is envisaged to associate a technical assistance program dedicated to supporting Indonesian public institutions and banks in the implementation of the planned climate actions.

The objective of the program, which is in line with AFD's financial systems support strategy, is to support Indonesia in reducing the infrastructure financing gap, increasing access to the financial sector for individuals and businesses, and improving the sector's efficiency and regulatory framework.

The programme is structured around the following three areas:

1. Increasing the depth of the financial sector by making it more inclusive, improving the range of products available and mobilising long-term savings.
2. Improving the efficiency of the financial sector by strengthening the legal framework for the protection of consumers and creditors, thus promoting the interoperability of payment systems and the protection of personal data.
3. Strengthen the resilience of the financial sector through the implementation of sustainable financial practices and disaster risk coverage mechanisms.

As the programme is currently underway, the full impact of the reforms is not yet known. However, key developments in the reforms initiated during the first loan are already in place. For example, the Indonesian central bank (BI) and the financial regulator (OJK) have adopted joint measures to support the implementation of their financial inclusion programmes. The first phase of the programme also allowed the creation of instruments dedicated to pension funds and insurance companies through the introduction of new regulations that offer more alternatives for long-term investments.