Banking system in Indonesia
As of 2023, Indonesia has 106 commercial banks and over 27.92 thousand bank offices. Bank Rakyat Indonesia, Bank Mandiri, and Bank Negara Indonesia are Indonesia's largest banks based on assets. However, payment systems and foreign exchange supervision are regulated and managed by Bank Indonesia, the central bank of Indonesia. Meanwhile, the Financial Services Authority, Otoritas Jasa Keuangan, oversees important aspects of the banking and financial system, including bank regulation and supervision.Despite being the country with the highest share of Muslims worldwide, Indonesia is still an emerging market for Shariah banking. Compared to its neighboring countries, the penetration of Islamic banking products in Indonesia is still relatively low, about seven percent in December 2021. Meanwhile, the share of Islamic banking in Malaysia and Brunei was around 30 and 50 percent, respectively. In early 2021, however, PT Bank Syariah Indonesia Tbk became one of the largest banks in Indonesia by assets due to the merger of several Islamic banks.
Indonesia is one of the most adaptable countries to digital banking services globally. Most of the population, which is relatively young, is receptive to digital payment options as well as digital consumption in general. By 2025, the number of mobile wallet users was projected to reach 202 million in the country.
Challenges facing the Indonesian banking sector
Micro-, small, and medium-sized enterprises (MSMEs) are Indonesia's key economic drivers, accounting for around 61 percent of Indonesia's GDP and absorbing 97 percent of the workforce, with women running nearly half of these MSMEs. However, a lack of access to formal banking services has hindered their ability to access capital, limiting their growth potential. Many lack bank accounts, are in debt, and transact predominantly in cash, making it difficult to build a legitimate credit history that would give them access to formal funding when needed.The Indonesian government introduced the National Medium-Term Development Plan 2020-2024 to address these issues, and it places a strong emphasis on MSMEs' financial inclusion. Its main objective is to make bank accounts more accessible to MSMEs. This access makes it possible to use additional financial services like loans and credit cards, which expands the range of available economic opportunities. Additionally, this plan would emphasize regulatory change and financial literacy, enhancing product features and reducing MSMEs' cost of goods.
Expanding financial inclusion will enhance the banking industry's efficiency and reduce income inequality and the gender pay gap in Indonesia. Despite the country's financial services being more digitalized, Indonesia does not yet have specific laws and regulations for the personal data protection to protect its financial stability from cyberattacks and significant data leaks. Regulation needs to rise to ensure Indonesia’s banking sector can become more efficient and feature greater financial inclusion.
