Taking a long-term view to finance sector development ensures continuity in support and engagement. Making changes to legal, regulatory, and supervisory frameworks and developing institutional capacity and human resources take time. External volatility in financial markets can affect domestic quantitative targets. The Asian Development Bank (ADB) has successfully taken a long-term view to finance sector development in Indonesia, providing continuity in support and engagement. The loan modality chosen for the Financial Market
Development and Integration Program was appropriate at the time. Supported by technical assistance (TA), the program ensured continuity of engagement with the government and provided a bridge to dialogue with the newly established regulator. Without the program, it would have been difficult to re-engage and maintain a continuity of reforms after several years of inactivity.
Adapting to the needs of government may require developing and providing unconventional loan modalities.
Despite the unconventional modality of providing a single-tranche, policy-based loan, ADB responded to the government’s request for support and developed a program that considered the unique nature of the executing agencies and the important transition happening during the period. This transition comprised the move to a unified regulator with financial and operational autonomy.
The capital market is complex.
It is important to look not just at the quantity but also the quality of growth in the capital market. Nevertheless, that the number of companies participating in the market and the number of initial public offerings had grown slowly but steadily over the program period indicates a dimension of success.
Selective support for key policy measures promotes stronger impact.
While the program had only 11 policy triggers, the policy matrix also included 41 policy measures. Subsequent interventions had reduced the number of measures, helping ADB and the government to better identify the biggest bottlenecks and be more selective in choosing the key policy reforms expected. This selective focus would help ensure a stronger impact and outcome. Just as important, outcome indicators should be those that are less likely to be affected by cyclical factors.
Technical assistance is key to achieving reforms.
The complementary TA provided by ADB for this program was critical in building the capacity of the Integrated Financial Services Authority (OJK) as a unified, independent regulatory body. The information and communication technology support provided under the Enhancing Financial Sector Governance, Risk Management and Depth TA helped smooth the transition and reduce its potential negative impact on the finance sector. Additionally, close engagement between ADB and the executing and implementing agencies help keep policy makers focused on their targets. TA helps maintain that engagement and makes the milestones, policy measures, and targets more achievable.
Inclusive finance sector development deserves greater attention.
ADB has supported finance sector development for many years with a focus on strengthening the fundamentals of sector development, particularly in the capital market and nonbank subsectors. Greater effort should also be done to expand financial market participation by increasing the access to finance of all Indonesians and enhancing usage through financial education and consumer protection initiatives.