Seizing opportunity in global economic challenges - Indonesia

GDP was worth US$888.54 billion in 2014. Indonesia’s GDP value represents 1.43 per cent of the world economy and about 40 per cent of the Asean economy. Indonesia’s participation in the Asean Economic Community (AEC) this year will have a significant impact on domestic growth. 

However, Indonesia has problems related to social economic inclusion. Based on a World Bank report, the Gini ratio - a measurement of inequality - has increased sharply over the last 15 years, climbing from 30 in 2000 to 41 in 2014. Currently, the richest 1 per cent own 50.3 per cent of all the country’s wealth and the richest 10 per cent of Indonesians own an estimated 77 per cent of all the country’s wealth. In 1920, the richest 10 per cent of Indonesians held only 15 per cent of total income. 

The implementation of financial inclusion and financial expansion is the key to ensuring the achievement of high economic growth as well as the distribution of economic welfare. The level of financial inclusion in Indonesia is in a critical state. Presently, 53 per cent of Indonesians are excluded from banking deposit products and 83 per cent of Indonesians are excluded from financial services given that only 17 per cent borrow from banks. 

The level of financial inclusion varies between regions, but generally speaking, universal financial inclusion means bringing people currently excluded into the formal financial system, and filling the financing gap for SMEs in emerging and developing areas. 

We should promote financial literacy campaigns on saving and cashless transactions and reinforce subsidised credit facilities, especially in fisheries and agriculture, for unbanked and poor people. We should also finance the creative industry and the start-ups industry and harmonise the regulatory framework. 

Financial expansion increases efficiency and depth in credit intermediation and market turnover, and increases the breadth of markets, instruments and accessibility. 

Financial market depth in Indonesia is low compared to regional emerging markets. The relative depth of financial markets is measured by the ratio of stock market capitalisation to GDP, the volume of outstanding corporate and government bonds to GDP and interbank loans to GDP. 

We need to put in place a strategy to accelerate the implementation of financial expansion through the strengthening of Indonesia’s financial infrastructure. We must create a productive regulatory environment and improve law enforcement.

The global financial crisis revealed significant weaknesses in the financial system and some of the vulnerabilities that can result from having such an interconnected global market. The global economic crisis provided an opportunity for a fundamental restructuring of the approach to risk and regulation in the financial sector. 

The Basel Committee on Banking Supervision has collectively reached an agreement on reforms to “strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector”. This agreement is being referred to as Basel III. The implementation of Basel III will force the Indonesian banking industry to be more efficient. 

The weaker banks are likely to have difficulty raising the required capital and funding. This will have consequences. First, there will be reductions in different business models and in competition. Second, there will be significant pressure on profitability and a shift in demand from short-term to long-term funding and this in turn will impact pricing and margins.

Several domestic regulations such as the one that requires foreign banks to become limited liabilities will support expansion and stability in the local banking sector, protect the domestic banking industry from global contagion and underpin long-term economic development in the country. 

The Indonesian banking sector needs to be more efficient as the government has set the loan interest rate for the next few years at a single digit. A good pricing strategy will therefore be inevitable.

There are steps to compare this price to the cost that must be incurred to achieve a favorable pricing rate. The effect of costs in a pricing strategy is very important. The pricing of banking products will address the costs that the issuer faces, which can be broken down to the cost of funds, regulatory costs, overheads in the form of administration, marketing and distribution costs and risk premiums.

The digital lifestyle has become an amazing phenomenon of the modern era. Virtually everything has become more efficient and effective, which has impacted positively on people’s lives. 

There are 3.2 billion internet users worldwide, or 44 per cent of world population. There are 6.8 billion mobile phones in the world. In Indonesia, there is 99 percent mobile penetration, a large portion of them being smartphones. 

The success of digital strategies depends on improving operational agility, flexibility and relevance to customers. This requires an organisation to expand and transform. It needs a review of business and operating models. 

The business model should integrate physical and digital banking distribution capabilities to provide more channel banking options. The bank should also incentivise positive channel behaviors. 

Banking in branches will stay, but the transition from transactional to value-added services should be encouraged more. The right sizing of branches is important. A comprehensive strategy should be put in place considering the fact that a segment of customers still needs traditional banking. 

(The writer is vice president of sharia and micro, small and middle-scale enterprise academy head at CIMB Niaga. The views expressed are his own.)