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Why banking sector's role remains small
Access to financing was deemed one of the top three challenges for doing business in Indonesia, influencing about 9.2 percent of the competitiveness index
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The tradable sectors — agriculture, mining, and manufacturing industry — contributed about 40 percent of gross domestic product. This sector also employs about 45 percent of Indonesian labor, mostly of low educational background. (Shutterstock/-)
T
he World Economic Forum’s 2017-2018 Global Competitiveness report places Indonesia in 36th place, up from 41st last year. However, Indonesia’s position is still lower than its peers, particularly when compared to Thailand (32), Malaysia (23) and Singapore (3).
The report methodology considers basic requirements, efficiency enhancers and innovation and sophistication factors. The report also named the 16 most problematic factors in doing business in each country.
Surprisingly, access to financing was deemed one of the top three challenges for doing business in Indonesia. This factor influences about 9.2 percent of the competitiveness index, which is very questionable as the market size in Indonesia serves an advantage. If access to finance remains difficult, it will be difficult to maximize the large consumer base and middle-income population.
Last year, the share of problems relating to financial access was 8.6 percent. In the competitiveness index for 2017-2018, inadequate supply of infrastructure is in fourth place. Corruption (13.8 percent) is the first factor, while the second is inefficient government bureaucracy (11.1 percent).
The government is faced with challenges as accessibility in the financial sector remains difficult. Policymakers hope the financial sector can contribute more, particularly in infrastructure projects. Therefore, the government has introduced several reform packages to support private sector participation, including in the banking sector.
According to the National Medium-Term Development Plan for 2015-2019, Indonesia needs more than Rp 26 quadrillion of investment to reach 7 percent economic growth annually. On account of the limited state budget, the government will be only able to provide about Rp 4 quadrillion of the funds needed. Therefore, the private sector will have to fill the gap.
There are two main sources of funding from the private sector: Private investment (domestic and foreign) and financial institutions. More effort is needed to increase investment realization in Indonesia due to the poor investment climate. Even though Indonesia has made significant improvements in the competitiveness index over the last five years, the improvements have not been enough to boost investment. The government is still working to create a more friendly investment climate.
