Following the1997–1998 Asian financial crisis, Indonesia became highly aware of the need to deepen and diversify its finance sector. Under the Medium-Term Development Plan, 2004–2009 and the subsequent National Medium-term Development Plan, 2010–2014, the government thus committed to developing the country’s capital market and nonbank finance subsector.
The Financial Market Development and Integration Program, approved in September 2012 for a loan of $300 million, represented the nexus of the Asian Development Bank’s (ADB) support for government efforts on two separate but interrelated work streams: (i) implementation of nonbank subsector reforms and the blueprint developing the Integrated Financial Services Authority (OJK) as a unified, independent regulatory body; and (ii) capital market development. The program utilized a stand-alone policy-based loan in consideration of the unique transitional arrangements that arose from the government’s financial reform agenda. A technical assistance grant helped the government achieve the program objectives.
Overall, the program sought to expand the nonbank finance subsector through increased intermediation. Its intended outcome was increased domestic participation in the nonbank subsector. Its planned outputs were (i) a strengthened regulatory oversight, (ii) a deepened capital market that provides expanded access to nonbank financing, and (iii) increased mobilization of long-term savings through a broadened investor base.
To achieve output 1, the program strengthened the legal framework and enhanced the resolution and supervisory capacity of the Bapepam−LK, OJK’s predecessor, and subsequently the OJK over the financial market. It supported regional integration activities and the harmonization of Indonesia’s corporate governance standards with those of the Association of Southeast Asian Nations. It developed the self-managed Capital Markets Institute to provide enhanced capital markets education in Indonesia and helped upgrade Indonesia Stock Exchange’s trading system.
For output 2, the program supported the adoption of the Capital Markets and Nonbank Financial Industry Master Plan, 2010–2014 that guided capital market and nonbank financial industry development. It helped deepen the primary and secondary government debt markets and enhance the quality and transparency of financial information, improve ease of transactions, and strengthen investor protection.
For output 3, the program assisted in developing an enabling environment for long-term savings, encouraged Islamic finance, and helped improve the quality of market participants and risk management and strengthen governance and investor confidence.
The program thus was able to achieve all its target outputs, exceeding expectations in some. Consequently, the nonbank financial subsector performed positively during the fourth quarter of 2014, with total assets increasing 13.7% against the previous year. However, the program only partially met its outcome targets. Domestic participation in the nonbank subsector declined to 67% in 2012 from 70% in 2010, as compared to the performance target of 73%. Domestic contractual savings’ share in government bonds also declined from 26% in 2010 to 22% in 2012, as compared to the 28% target. Shortfalls in outcome targets were due to extraordinary external events rather than issues with program design or government commitment.
ADB’s Southeast Asia Department rated the program successful. The Bapepam-LK and Fiscal Policy Office were the executing agencies.
