An earlier version of this paper was presented at the Twelfth Asian Economic Policy Review Conference on the theme of “Developments in Asian Finance” on May 20, 2011 in Osaka. The authors are grateful to the participants for their useful comments, particularly the editors and our two discussants, Hal Hill and Seiro Ito.
If the Banks are Doing So Well, Why Can't I Get a Loan? Regulatory Constraints to Financial Inclusion in Indonesia
Article first published online: 6 DEC 2011
© 2011 The Authors. Asian Economic Policy Review © 2011 Japan Center for Economic Research
Asian Economic Policy Review
Volume 6, Issue 2, pages 273–296, December 2011
How to Cite
ROSENGARD, J. K. and PRASETYANTOKO, A. (2011), If the Banks are Doing So Well, Why Can't I Get a Loan? Regulatory Constraints to Financial Inclusion in Indonesia. Asian Economic Policy Review, 6: 273–296. doi: 10.1111/j.1748-3131.2011.01205.x
- Issue published online: 6 DEC 2011
- Article first published online: 6 DEC 2011
- bank regulation;
- financial sector reform;
- SME finance
Indonesia's financial sector has two paradoxes: (i) Indonesia has been a global leader in microfinance for the past 25 years, but access to microfinance services is declining; and (ii) Indonesia's commercial banks are liquid, solvent, and profitable, and the Indonesian economy has been doing well over the past decade, but small and medium enterprises are facing a credit crunch. Although Indonesia is underbanked, most commercial banks have been unresponsive to unmet effective demand. The behavior of banks has been in their own short-term best interests, primarily because of the unintended consequences of Indonesia's financial sector reregulation after the East Asian crisis and contradictory monetary policies, which have produced a prudentially sound but inefficient, narrow, and homogenized banking oligopoly. Indonesia should not respond to financial exclusion by artificially pumping out and administratively allocating more credit. Instead, it should promulgate smart regulation so that banks maintain their sound risk management without pursuing noncompetitive and noninclusive business practices.