INDONESIA BANKING SECTOR

Synopsis: A good overall picture of banking industry in Indonesia has encouraged existing players and new comers to exploit the available opportunities. With the increasing competition, it has become vital to maintain a high customer loyalty index. Having high savings account is not only a booster for third party funds, but also an indication of excellent customer loyalty.

Indonesian Banking Sector

According to the Indonesian Banking Law , the banking sector is structured into two categories; commercial institutions with 122 establishments, and rural banks with 2296 units. Commercial banks can be further divided into private national banks, state banks, Islamic commercial banks and Government regional banks. Since 2004, Bank Indonesia has taken numerous initiatives to create a sound, strong and efficient banking industry, by promoting industry consolidations to create a smaller number of commercial banks with greater assets and encouraging the implementation of Basel II and high standards of risk management. On the other hand, having to learn the hard way during the Asian financial crisis in 1997-1998, the banking industry has fortified themselves from the worst economic situation by implementing Bank Indonesia's advice for a higher level of CAR that is even higher than the minimum level required in Basel II, and a relatively low level of NPL. Concerted efforts by industry players and Bank Indonesia have brought about -in general- a better financial ratio or indicator of Indonesian banking industry compared to its peer industry in neighboring countries. Indonesian banking sector is booming and this is evident from the growth in the assets and third party funds in commercial banks. The sudden growth is witnessed particularly in 2008 and is expected to continue. Similarly with third party funds, many banks are now looking more into retaining the savings deposits of customers. This indicates their increased levels of activities are undertaken to retain customers. Targeting low inflation as well as maintaining stable growth are two of the many prominent aspects of the monetary policies in Indonesia. However, it is highly crucial to maintain stability in the financial sector, especially when there is a need to create a favorable investment climate. Maintaining financial stability would depend on the performance of the overall banking industry. With a high Capital Adequacy Ratio (CAR), high profitability and liquidity ratio, the Indonesian banking sector is sure to successfully sustain and be more resilient in the future.

Indonesia is the number one, in terms of the costs and net interest margins, Indonesia requires proper corporate governance. High net interest margins are a few indicators of a healthy industry, but this could be set off by high costs, which require proper and delicate attention. Therefore, in order to curb this inefficiency and increase growth, it is essential to adhere to policies that focus on stability and the increase of profitability and efficiency.

Source: Indonesian Bank Loyalty Index (IBLI) Bank of Indonesia