Indonesia's Financial Industry Evolution: From Liberalization to Consolidation

Historical Context and Crises

Indonesia's financial industry has experienced significant transformations over the past four decades, marked by periods of liberalization, crises, and subsequent consolidation. The sector has weathered three major crises: the 1998 monetary crisis, the 2009 global financial crisis, and the 2020 COVID-19 pandemic.

Early Liberalization and Crisis

The financial industry's evolution began with the introduction of **Paket Kebijaksanaan 27 Oktober 1988 (Pakto 88)

The period of liberalization began with Pakto 88, which simplified the process of establishing new banks by lowering the minimum capital requirement to Rp10 billion. This led to a rapid increase in the number of banks, from 111 in 1988 to 240 by 1994/1995. However, the lack of adequate regulation resulted in many banks facing difficulties during the 1997/1998 Asian financial crisis.

Crisis and Regulatory Response

The 1997/1998 crisis led to the closure of 16 private banks on November 1, 1997, triggering bank runs on perceived weak banks. The crisis highlighted the need for stronger regulation, leading to the establishment of the Lembaga Penjamin Simpanan (LPS) to insure deposits. The Indonesian banking sector saw significant deterioration in asset quality, with Non-Performing Loans (NPLs) peaking at 42.39% in 1998.

Global Financial Crisis Impact

During the 2009 global financial crisis, Indonesia's financial sector showed resilience due to lessons learned from the previous crisis. The government responded by increasing deposit insurance from Rp100 million to Rp2 billion. The crisis also prompted banks to improve their risk management practices and governance.

COVID-19 Pandemic and Consolidation

The COVID-19 pandemic led to a significant impact on the banking sector, with lending growth slowing and NPLs increasing. In response, the Otoritas Jasa Keuangan (OJK) implemented credit restructuring policies, allowing banks to restructure loans worth Rp971 trillion by December 2020. The pandemic also accelerated the need for consolidation in the banking sector.

Current State and Future Directions

As of June 2025, Indonesia's banking assets stood at Rp12,822.68 trillion, dominated by large state-owned banks. The OJK has been promoting consolidation through regulations, including POJK No. 12/POJK.03/2020, which encourages mergers and acquisitions to strengthen banks' capital bases. The regulator plans to eliminate the KBMI 1 category, pushing smaller banks towards consolidation.

Challenges and Opportunities

The consolidation process faces challenges, including resistance from smaller banks and potential political opposition. However, it also presents opportunities for creating stronger, more efficient banks that can better compete regionally. The Indonesian financial industry continues to evolve, balancing growth with stability in an increasingly complex global environment.

Conclusion

Indonesia's financial industry has come a long way since the liberalization era of the late 1980s. The sector has faced significant challenges and crises but has also made substantial progress in strengthening its structure and resilience. As the industry moves towards further consolidation, it is poised to play an even more critical role in supporting Indonesia's economic growth and development.