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OJK: “Growing middle class will boost the economy”

Interview - April 23, 2014
The Financial Services Authority (OJK) is the institution that oversees the Indonesian financial services industry in order to protect the interests of consumers and public and to be able to bring about the financial services industry into becoming a pillar of national economy with global competitiveness as well as capability to promote public prosperity. In an interview with United World, OJK Chairman Mr. Muliaman D. Hadad gives his insight in the Indonesian economy and discusses the vital role of the organization
Please, share your insights into Indonesia’s financial and economic accomplishments.

Allow me to start this discussion of the Indonesian financial sector by talking about Indonesian economic development. Income per capita has been growing steadily over the last 10 -15 years. Our economic growth has always been above 5%, sometimes reaching 5.5% or 6%. Indonesia is to become one of the major economies of 2020, 2030 and beyond. Our research conducted by international consultant companies has found that the growing middle-income class will boost the economy in the future. Our income per capita at the moment is around US$3,500 and expected will grow inline with the country’s strong economic growth in the next 10-15 years. Imagine, around 135 million Indonesian joining the middle class income group, the impact on the economy will be significant.

In addition, Indonesia has what is commonly referred to as the ‘demographic bonus’. Over 50% of the population is between 15-30 years of age, this section of the population is considered to be the most productive, hence we have an encouraging demographic structure.

It is worth taking into consideration our discipline in managing our macro economy by coordinating monetary and fiscal policy. We have a wide range of natural resources, and a long-term view to manage these resources. We’re heading in the right direction with our economic growth, even though the USA and Europe have been struggling. Indonesia has managed to sustain GDP growth rate at above 5% throughout the recent downturn in the global economy. In the G20, we are number 2 in terms of economic growth, only behind China. In the coming decades we are expecting to see a significant improvement in the economic wellbeing of Indonesian people.

As the middle class in Indonesia grows larger, demand for financial services will increase. For this reason I’m very positive about the development of our financial sector. We’ve witnessed two big crises in the last 20 years. In 1997-1998 the Asian financial crisis was traumatic and had a significant impact on the economy, though I think we learnt a lot from that particular experience. Of course we had 2007-2008 sub-prime mortgage crises in the USA that spread and affected most of the rest of the world economies. Considering the resilient and strong growth of our financial sector over the last 20 years, we will continue to strengthen and grow also through the positive demographics. I am very optimistic about the financial sector’s future in Indonesia. The goal now is to develop a strong and sound financial sector, which means financially viable and well managed by professionals. We want the financial sector to contribute to Indonesia’s economic development, that’s our key objective.

Within the financial sector, there is room for improvement. In the banking sector, I see the credit-GDP ratio remain low. Currently the ratio is at 35%, quite low compared with our Chinese, Malaysian and Singaporean neighbors. It is fundamental that we learn from previous financial crises and work out how to build a well-capitalized and well-managed banking sector in the future. If we have a well-capitalized and well-managed banking sector Indonesia’s financial sector will be able to amortize any unexpected and/or external shock. As for performance in banking sector; the credit growth average has been over 20% per annum, among the highest within the region. Demand for credit has remained strong. We are making sure that banks are supported by the appropriate amount of capital and keep an appropriate level of liquidity. We also want to see our banks implement good corporate governance. This is a priority in our agenda because in the last two decades we’ve witnessed the consequences of the banking sector’s failure to fulfill the minimum standards of good corporate governance.

In February you successfully implemented a roadmap for corporate governance, what do you cover in this roadmap?

In our effort to implement good corporate governance, what this roadmap is doing is fill in the gaps. We’re filling in the gap between existing and best practices. That’s the roadmap, a series of initiatives that by 2016 will focus on harmonizing national with international standards in three areas. The first gap is in regulation; the second is in supervision; and the third one surrounds education and socialization of best practice and good corporate governance. There are also a number of specific items on this roadmap, such as how we can improve protection of minority investors and how to make the financial statements of corporations more accessible. We already have implemented regulation in this regard, but compared to our neighbors we are still lacking consistency and congruency.

The roadmap on corporate governance is important because our investors always compare us with our neighbors. Good quality corporate governance is important in ensuring the sustainability of Indonesian firms. Every year we are assessed on the ASEAN Scorecard to demonstrate our progress and therefore reassure investors that Indonesian companies are committed to improvements.
Banks in Indonesia are the most liquid and profitable in the ASEAN 5. Financial achievement is a good indicator but we must be able to accompany this achievement with the implementation of good corporate governance. Hence we are committed to improve corporate governance to put in place a strong fundamental, sustainable growth and profitability.

Could you give as an overview of the capital markets?

The capital market is something relatively new to most Indonesians. The number of investors is small: 0.02% of Indonesians are using the capital markets. A priority issue for us is deepening and developing our capital market.

How do you plan to deepen your capital market?

We have a number of demand-side and supply-side initiatives. Supply-side initiatives include increasing the number of companies publicly listed so that more shares and bonds can be traded in the market. On the demand side, we can increase the number of domestic investors by encouraging the use of capital market as a vehicle for investment and financing activities. We recognize the importance of the capital market in securing long-term financing. We have to rely on the capital markets because relying on banking for financing long-term projects is not easy. The capital market is particularly important for financing infrastructure development. That’s why deepening our capital market is a priority. We want to introduce the importance of the capital market to the mid-size Indonesian firms.

Is the Financial Services Authority (OJK) planning to ease regulations for Initial Public Offerings?

Yes. I would like to ease regulations, develop the infrastructure surrounding it and create some protection for the investor’s asset. I would like to increase the number of retail investors as well. Retail involves a large pool of investors and creates an even larger number of stocks.

What is the prospect of the Non-Banking institutions sector?

The major player of Non-Banking Financial Institutions is insurance. The demand for insurance services, like GDP per capita, is growing steadily. People are starting to look for insurance services to protect their increasing wealth. However, demand capacity of the Indonesians for this type of financial service is still small compared to other economies in the region. We would like to boost micro-insurance because access to insurance is still limited in Indonesia. It is quite a project though, creating access to finance for millions of people. We also plan to introduce more services including insurance protecting against natural disaster, bad crops harvest and health micro-insurance.

In general, access to finance is still low. Only around 22% of Indonesians are connected to formal financial institutions. Our financial system has room for growth partly because access is low. The inclusiveness of our financial sector needs to be improved. It is difficult for some people to get access to formal financial products. This is an important target for us; creating a sound and strong financial sector that is easily accessible. Accessible for people in remote areas and on small islands, not just people in the cities. This is why micro-finance, like micro-banking and micro-insurance, is becoming so important; so we can create access. To support this, we also increase competition in the sector, which will lower average prices.

What is the Financial Services Authority (OJK) striving to achieve within the financial industry?

We started fully operating in 2013, supervising all financial sectos, after the handover of banking supervision from the central bank. The Financial Services Authority wants to ensure the implementation of prudential principles in the financial sector, supervise the conduct of business and protect the interest of consumers.

What is the main benefit of detaching the Financial Services Authority from government control?

We will avoid arbitrary regulations and loopholes. Before the establishment of the Financial Services Authority, the industry was supervised by separate agencies that did not interact well. Now, we can conduct an integrated and consolidated supervision. We can increase interconnectivity across the financial sector. We are able to supervise integrated, interconnected and subsidiary companies in the sector and overseas.

This integrated approach is supposed to strengthen the financial system. In the past year Indonesia has been confronted with instability in the financial sector due to tapering of the US stimulus package. Now pressure on the Rupiah is easing and the financial sector is stabilizing, how did you increase investor confidence in the financial sector?

We didn’t change our fundamental approach and waited for everything to return to normal. We were confident in our well-capitalized, well-managed financial institutions. We have the strong economic fundamentals. Now that we have implemented the corporate governance regulations, confidence in country’s prospect will increase further.
Investors are reevaluating Indonesia as a good place for investing opportunities. Foreign direct investment flowing into Indonesia’s financial sector is beneficial for the entire economy because it increases confidence and because it deepens our capital markets, in particular if foreign investor reinvest the wealth generated, in Indonesia.

What are your top three priorities for the Financial Services Authority (OJK)?

The first is to accelerate the internal consolidation of the Financial Services Authority. We are all from different backgrounds and have to develop a new culture, a new belief and a new confidence. Secondly, I would like to increase our capacity to supervise in a more integrated way. Thirdly, we would like to develop a financial sector that is strong, sound and easily accessed.

What advice would you like to give to the coming president? What do you think he should pay attention to?

I would ask that he looked into progressively improving access to the financial sector. Access is good for poverty alleviation, participative economic development and more quality growth for people’s welfare.