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 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.


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.

Project Information
Project Name: 
INDONESIA: Financial Market Development and Integration Program
Report Date: 
June, 2017
Main Sector: 
Report Rating: 

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