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If The Banks Are Doing So Well, Why Can’t I Get A Loan? Regulatory Constraints to Financial Inclusion in Indonesia

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  • Prasetyantoko, A.
  • Rosengard, Jay K.

Abstract

Indonesia’s financial sector has two paradoxes: 1) Indonesia has been a global leader in microfinance for the past 25 years, but access to microfinance services is declining; and 2) 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 non-competitive and non-inclusive business practices.

Suggested Citation

  • Prasetyantoko, A. & Rosengard, Jay K., 2011. "If The Banks Are Doing So Well, Why Can’t I Get A Loan? Regulatory Constraints to Financial Inclusion in Indonesia," Scholarly Articles 8705903, Harvard Kennedy School of Government.
    • Handle: RePEc:hrv:hksfac:8705903
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    References listed on IDEAS

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    1. Don Johnston & Jonathan Morduch, 2008. "The Unbanked: Evidence from Indonesia," The World Bank Economic Review, World Bank, vol. 22(3), pages 517-537, October.
    2. Jay Rosengard & Richard Patten & Don Johnston & Widjojo Koesoemo, 2007. "The Promise And The Peril Of Microfinance Institutions In Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 43(1), pages 87-112.
    3. Ross McLeod, 1999. "Control and competition: Banking deregulation and re‐regulation in Indonesia," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 4(2), pages 258-297.
    4. Thee Kian Wie & Siwage Dharma Negara, 2010. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 46(3), pages 279-308.
    5. Ross McLeod, 2011. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 47(1), pages 7-34.
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    Cited by:

    1. Heriyaldi & Arief Anshory Yusuf, 2013. "Does Micro Finance Institution Improve Welfare? A Double Difference Analysis of Indonesian Community-level Data," Working Papers in Economics and Development Studies (WoPEDS) 201307, Department of Economics, Padjadjaran University, revised Mar 2013.
    2. Chatib Basri & Hal Hill, 2020. "Making Economic Policy in a Democratic Indonesia: The First Two Decades," Asian Economic Policy Review, Japan Center for Economic Research, vol. 15(2), pages 214-234, July.
    3. Bao Zhu & Shiting Zhai & Jing He, 2018. "Is the Development of China’s Financial Inclusion Sustainable? Evidence from a Perspective of Balance," Sustainability, MDPI, vol. 10(4), pages 1-16, April.
    4. Ilmiawan Auwalin, 2021. "The effect of a credit policy change on microenterprise upward transition and growth: evidence from Indonesia," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 11(4), pages 611-636, December.
    5. Irwan Trinugroho & Agusman Agusman & Mochammad Doddy Ariefianto & Darsono Darsono & Amine Tarazi, 2015. "Determinants of cross regional disparity in financial deepening: Evidence from Indonesian provinces," Economics Bulletin, AccessEcon, vol. 35(2), pages 896-910.
    6. Fanny Salignac & Julien Hanoteau & Ioana Ramia, 2022. "Financial Resilience: A Way Forward Towards Economic Development in Developing Countries," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 160(1), pages 1-33, February.
    7. Tri Mulyaningsih & Anne Daly & Riyana Miranti, 2016. "Creating contestable banking market: the effect of changes in the regulatory structure in Indonesia," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(2), pages 149-163.
    8. Trinugroho, Irwan & Agusman, Agusman & Tarazi, Amine, 2014. "Why have bank interest margins been so high in Indonesia since the 1997/1998 financial crisis?," Research in International Business and Finance, Elsevier, vol. 32(C), pages 139-158.
    9. Hal Hill, 2012. "The Best of Times and the Worst of Times: Indonesia and Economic Crises," Departmental Working Papers 2012-03, The Australian National University, Arndt-Corden Department of Economics.
    10. Mulyaningsih, Tri & Daly, Anne & Miranti, Riyana, 2015. "Foreign participation and banking competition: Evidence from the Indonesian banking industry," Journal of Financial Stability, Elsevier, vol. 19(C), pages 70-82.

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