Asian Development Bank Support to Indonesia’s Capital ...€¦ · 3 A. Scope, Approach, and...
Transcript of Asian Development Bank Support to Indonesia’s Capital ...€¦ · 3 A. Scope, Approach, and...
March 2018
Asian Development Bank Support to Indonesia’s
Capital Market Development, 2002–2017:
A Background Paper
NOTE
In this report, “$” refers to US dollars.
Director General M. Taylor, Independent Evaluation Department (IED)
Deputy Director General V. Salze-Lozac’h, IED
Director W. Kolkma, Independent Evaluation Thematic and Country
Division (IETC), IED
Team leaders B. Graham, Senior Evaluation Specialist, IETC (until July 2017)
L. Ocenar, Evaluation Officer, IETC
Team members G. Castillo, Associate Evaluation Analyst, IETC
V. Melo-Cabuang, Senior Evaluation Assistant, IETC
A. Martinez, International Consultant
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ASIAN DEVELOPMENT BANK SUPPORT TO INDONESIA’S CAPITAL MARKET
DEVELOPMENT, 2002–2017: A BACKGROUND PAPER
Table of Contents
A. Scope, Approach, and Overall Context………………………………………………………………………3
B. Financial System………………………………………………………………………………………………..6
C. ADB Support to Capital Market Development, 2002–2017……………………………………………...12
D. Assessment of Relevance and Results………………………………………………………………………18
E. Issues and Suggestions………………………………………………………………………………………34
Appendixes
1. Asian Development Bank Support to Finance Sector in Indonesia, 1970–2000
2. Capital Markets, Financial Development, Economic Growth, and Poverty Alleviation
List of Tables
Table 1: Finance Sector Development, 2000–2015
Table 2: Southeast Asian Capital Markets Development Index
Table 3: Banking System Soundness Indicators (%), 2002–2015
Table 4: Summary of Key Strategic Focus Areas of ADB Support to Financial Sector in Indonesia,
2002–2019
Table 5: ADB Finance Sector Loans, 2002–2017
Table 6: Ratings for Finance Sector Lending Operations, 2002–2017
Table 7: ADB Finance Sector Technical Assistance, 2002–2017
Table 8: Ratings for Finance Sector Technical Assistance Projects, 2002–2017
Table 9: Distribution of Policy Actions of ADB Policy-based Loans, 2002–2017
Table 10: Distribution of Market Infrastructure Policy Actions, 2002–2017
Table 11: Distribution of Issuer Policy Actions, 2002–2017
Table 12: Local Currency Government Securities Yield Curve, December 2017
Table 13: Government Bond Market Indicators, 2007–2016
Table 14: Capital Market Health Scorecard: Indonesia
Table 15: Comparative Data of Peer Countries
Table 16: Corporate Bond Market Indicators, 2007–2017
Table 17: Stock Market Indicators, 2007–2016
Table 18: Distribution of Investor Policy Actions, 2002–2017
List of Figures
Figure 1. Framework for the Capital Market Development Review
Figure 2. Theory of Change: ADB Support to Capital Market Development in Indonesia
Figure 3. Funding Sources to Fill the Infrastructure Investment Gap
Figure 4: Indonesia—Corporate Governance Scores, 2012–2015
Figure 5: Growth of Government Local Currency Sukuk, 2008–2017
Figure 6: Number of Articles on "Financial Deepening in Indonesia", 2005–2015
List of Boxes
Box 1: Weathering the 2008 Global Financial and Economic Crisis
Box 2: Designing Program Clusters
Box 3: Inflation Performance and Development of Bond Markets
Box 4: World Bank Group Support for Viet Nam Bond Market Development
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A. Scope, Approach, and Overall Context
1. During 2002–2017, Asian Development Bank (ADB) supported Indonesia’s capital market
development with six policy-based loans (PBLs) amounting to $1.95 billion. While the PBLs covered
several aspects of the financial sector, support to capital market development was a significant
component in all of them. The other main areas covered by the PBLs were financial sector governance,
specifically the transformation towards an integrated supervisory system, and in the latter part the of
period, financial inclusion. PBLs represented about 95% of ADB’s lending to the financial sector in
Indonesia during the past 16 years. In addition, the PBLs were supported or accompanied by technical
assistance (TA) focusing on various aspects of capital market development.
2. This paper reviews ADB’s support to capital market development in Indonesia during 2002–2017
with the objective of identifying issues which may have to be addressed in developing ADB’s future
strategy in this area. This review was undertaken in connection with the program performance evaluation
report (PPER) for the Capital Market Development Program Cluster (CMDPC)–Subprograms 1 and 2.1 The
review will serve as an input to the next Independent Evaluation Department’s (IED) country assistance
program evaluation (CAPE) for Indonesia and the sector assistance and program evaluation (SAPE) for
Indonesia’s finance sector both set to commence in 2018.
3. The review methodology was based on document and file study; data analysis; and interviews
and consultations with ADB staff, government officials, and other stakeholders. The interviews and
consultations took place in ADB headquarters and during the PPER mission to Jakarta in April 2017.
Limitations of this background paper include the lack of validations/full evaluations of many
programs/projects as well as lack of engagement with market participants and the relevant regional
department as this is mainly a desk review, with consultations through the PPER. This review is organized
into five sections: Scope, Approach, and Overall Context; Financial System; ADB Support to Capital Market
Development; Assessment of Relevance and Results; and an Issues and Suggestions section.2
1. The 1997–1998 Asian Financial Crisis and Reforms to Develop Capital Markets
4. There were several weaknesses of the financial systems in the Asian region which were
manifested during the 1997–1998 Asian financial crisis.3 There was excess dependence on the banking
system—economic growth was financed primarily by banks, and the financial system did not have a
“spare tire.”4 Many financial institutions and corporations in countries most adversely affected by the
financial crisis borrowed in foreign currency without adequate hedging. In addition, much of the debt
was short term, while assets were longer term—banks were not well suited to finance long-term
investments on a large scale.5 This double mismatch was a contributory factor to the crisis.
5. However, policies were also to blame: poor sequencing of capital account liberalization
encouraged short-term borrowing, exchange rate policies (supporting local currencies) led borrowers to
underestimate currency risk, and monetary policies allowed domestic credit to expand too quickly.6 There
1 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance
Grant to Indonesia for the Capital Market Development Program Cluster (Subprogram 1). Manila; ADB. 2009. Report and
Recommendation of the President to the Board of Directors: Proposed Loan to Indonesia for the Capital Market Development
Program Cluster (Subprogram 2). Manila. The key findings and suggestions in this background paper will be validated during the
consultations for the forthcoming CAPE for Indonesia and SAPE for Indonesia’s finance sector.
2 A documentation of ADB Support to Finance Sector in Indonesia (1970–2000) is provided in Appendix 1.
3 B. Eichengreen and P. Luengnaruemitchai. 2004. Why Doesn’t Asia Have Bigger Bond Markets? National Bureau of Economic
Research Working Paper 10576. Cambridge, Massachusetts.
4 A. Greenspan. 1999. Lessons from Global Crises. Remarks Before Program of Seminars. World Bank Group and International
Monetary Fund (IMF). Washington, D.C.
5 R. Fabella and S. Madhur. 2003. Bond Market Development in East Asia: Issues and Challenges. Economics and Research
Department Working Paper Series No. 35. ADB. Manila.
6 T. Lane. 1999. The Asian Financial Crisis: What Have We Learned? Finance and Development 36 (3). Washington, D.C.
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was an overreliance on volatile capital inflows. Because of their reliance on international capital flows to
finance investments, Asian economies became vulnerable to shifts in capital flows.7
6. Various member-countries in the Association of Southeast Asian Nations (ASEAN) pursued
reforms to develop capital markets following the Asian financial crisis. Multilateral institutions such as
ADB and the World Bank provided support. In 1999, the International Monetary Fund (IMF) and the
World Bank established the Financial Sector Assessment Program (FSAP) to conduct comprehensive and
in-depth analysis of financial systems of countries, including development of capital markets.
7. After the crisis, the Government of Indonesia made financial development and stability
development a high priority. There were sustained efforts at laying the groundwork for the recovery of
the banking system and the prevention of a recurrence of a banking crisis. The supervision capacity of
Bank Indonesia (BI) was strengthened and the frameworks for debt recovery and bankruptcy were
improved. The financial sector safety net was strengthened with the establishment of a deposit insurance
scheme and clear procedures for lender of last resort support. The banks taken over by the Indonesian
Bank Restructuring Agency (IBRA) were returned to private ownership with IBRA closing in 2004.
However, state-owned commercial banks (SOCBs) continued to account for a large share of banking
assets and lagged private banks in terms of financial performance.
8. In 2000, the Government issued the Indonesian Capital Market Blueprint 2000–2004, which
included initiatives to improve trading systems and enhance information disclosure in public offering.
This was followed up by the Capital Market Master Plan 2005–2009 which served as a strategic plan.
From 2005–2010, the Government implemented several reforms focusing on strengthening the
institutional foundation to support capital market development resulting in an increase in the share of
the nonbank financial sector in total financial system assets during 2005–2010, from 17.9% in 2005 to
23.9% in 2010. Indonesia’s financial markets quickly rebounded from the 2008 global financial and
economic crisis (Box 1).
9. While noting the reforms since the 1997–1998 crisis, the 2010 FSAP found continuing challenges
in preserving financial stability and developing the financial system. The FSAP pointed to weaknesses in
the legal and governance framework as a major constraint to further development of the financial system,
which lagged comparable countries in terms of depth and contribution to the economy. Specifically,
there were gaps in the legal mandate and powers of supervisors, poor governance of financial
institutions, and concerns about creditor rights. The FSAP included a set of recommendations in various
areas including the development of capital markets.8 In 2010, the Government issued the Capital Market
and Nonbank Financial Industry Master Plan 2010–2014, which addressed many of the concerns raised
by the 2010 FSAP. Following the establishment of a single supervision authority in 2011, the Government
issued the Indonesian Financial Services Sector Master Plan 2015–2019, which emphasized support to
7 The statements in paras. 3 and 4 were sourced from IED. 2015. Performance Evaluation Report of Technical Assistance Grants to
Support Development of Cross-Border Bond Markets in the ASEAN+3 Countries. Manila: ADB.
8 IMF and World Bank. 2010. Financial Sector Assessment: Republic of Indonesia. Washington, D.C.
Box 1: Weathering the 2008 Global Financial and Economic Crisis
The banking sector proved to be resilient to the effects of the global financial turmoil in 2008. With a strong
capital position, the banks weathered the difficult operating environment in late 2008 and early 2009. The
Government and the Bank Indonesia were able to respond with a series of mitigating measures including injecting
liquidity and expanding deposit insurance. Financial markets recovered in 2009 after an initial shock. The 2010
International Monetary Fund-World Bank Financial Sector Assessment found that a decade of sound policies and
structural reform helped Indonesia recover quickly from the 2008 global economic crisis.
Source: IMF-World Bank Financial Sector Assessment 2010.
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financing priority economic sectors such as infrastructure, financial inclusion including micro, small, and
medium enterprise (MSME) finance, and ASEAN financial market integration.
2. Framework of the Capital Market Development Program Review
10. This review follows the World Bank Independent Evaluation Group’s (IEG) framework for the
evaluation of World Bank Group’s support to capital market development (Figure 1). The elements in the
framework are presented below9:
(i) Capital markets are financial markets for the buying and selling of long-term securities
instruments. Capital markets provide an interface for allocating capital according to
market-based pricing of risk and returns. They channel savings toward long-term
productive investments, helping issuers—companies or governments—to raise long term
capital, and long-term investors, such as insurance and pension funds, to hold long-term
assets and earn returns. Key securities instruments are: (a) bonds or debt instruments
that earn investors a regular “coupon,” allowing them to become creditors to the issuer;
(b) equity instruments or stocks and shares that permit investors to acquire ownership
of companies and thereby share risk; and (c) bundles of claims, such as asset-backed
securities—mortgage-backed securities are an example.
(ii) Capital market instruments are generally deemed to have maturities of at least a year;
instruments of shorter maturity, known as money market instruments, provide the
liquidity to support secondary market development, also supported by repos and
derivatives. On primary markets, issuers of new stocks or bonds sell them to investors via
an underwriting process. In secondary markets, existing securities are sold and bought
among investors or traders, on an exchange, or on over-the-counter markets, sometimes
intermediated by brokers or primary dealers. Liquid secondary markets increase investors’
willingness to buy. Stable macroeconomic conditions (low inflation; stable interest rates)
are critical for capital market development.
(iii) Investors in securities instruments include institutions such as insurance and pension
funds. These institutions accumulate large sums of money through insurance premia
(especially life insurance) and pension deposits. Such investors hold long term assets such
as capital market instruments to match their long-term payouts. While institutional
investors have been major players in capital markets in advanced countries, their role has
been more modest in many developing countries due to several factors that include
shortage of liquid assets on the supply side and restrictive regulatory regimes such as
those mandating certain levels of holdings in government or state-owned enterprise
(SOE) securities.
(iv) Requisites for capital market development. Capital market development needs the right
infrastructure to develop, including “soft” aspects such as: a solid legal and institutional
environment; good corporate governance that protects investor rights, especially those
of minority shareholders; and “hard” aspects of sound financial infrastructure—including
the physical underpinnings of trading systems and securities clearance and settlement
arrangements.
9 IEG. 2016. The World Bank Group’s Support for Capital Market Development. Washington, D.C.
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Figure 1: Framework for the Capital Market Development Review
3. Theory of Change
11. This review is anchored on the theory of change for ADB programs and projects for capital market
development in Indonesia supported mainly by loans approved during 2002–2017, with expected
development impacts, outcomes, and outputs (Figure 2).
B. Financial System
1. Macro Context
12. Since 2002, the Indonesian economy has performed relatively well and weathered a challenging
external environment. Because of macroeconomic fundamentals that were put in place since the Asian
financial crisis, the country’s economic growth has remained strong: gross domestic product (GDP, in $)
growth averaged 5.1% in 2002–2007, 5.9% in 2007–2011, and 5.3% during 2011–2016. The increase in
global commodity prices during 2003–2011 contributed to economic growth and poverty reduction.
However, since 2012, weaker global commodity prices resulted in a slowing of the growth momentum
and exposed structural weaknesses that need to be addressed to revert to higher levels of growth. The
rate of poverty reduction also slowed since 2011.
ADB = Asian Development Bank, IED = Independent Evaluation Department.
Adapted from: Independent Evaluation Group. 2016. The World Bank Group’s Support to Capital Market Development. Washington,
D.C.
Capital Market Infrastructure
• Regulation
• Corporate governance
• Securities clearance and settlement
Other: Creditor Rights, Rating Agencies
Instruments/Issuers
• Bonds: Sovereign/Treasury (Government)
Corporate bonds (Companies)
• Equities/Stocks (Firms/Businesses)
• Asset-backed/Mortgage-backed securities
Other: Repos, Derivatives
Investors
• Insurance companies
• Pension funds
Other funds: mutual funds, sovereign
wealth funds, individuals
Interm
ed
iarie
s
Interm
ed
iarie
s
Returns
Investments
Financing the Real Sector through Capital Market Instruments
Project finance
(infrastructure)
Mortgage
finance: housing
Other real
sectors
Corporations:
• Risk capital
(equity)
• Long-term
debt
Government
budgets/public
borrowing
Soft infrastructure
Hard infrastructure
AD
B S
up
po
rt f
or D
evelo
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arkets
AD
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up
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Ca
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arket In
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ts
in
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eratio
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IE
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7
Figure 2: Theory of Change: ADB Support to Capital Market Development in Indonesia
13. A World Bank report10
identified three pathways to reducing poverty and increasing shared
prosperity: strong economic and jobs growth, improved access to key services, and better national
resource management. It also identified infrastructure bottlenecks and underdeveloped financial markets
as major impediments to economic and employment growth. To address the infrastructure gap, the
Government is embarking on a largescale infrastructure development program. The plan comprises
investments of roughly $450 billion (about 50% of GDP) during 2015–2019 with significant role of private
investment and capital markets (Figure 3). The financing of infrastructure investment, which declined
(as % of GDP) since the Asian financial crisis, has been a major motivation of various plans to develop
capital markets and the financial system.11
10 World Bank Group. 2015. Indonesia Systematic Country Diagnostic: Connecting the Bottom 40 percent to the Prosperity
Generation. Washington D.C.
11 Appendix 2 presents a review by the IEG on available literature in terms of the relation between financial sector development
and economic growth as well as poverty reduction and inequality reduction. This review also provides a summary information
on the recent evolution of capital market development of countries at different income levels.
Source: Asian Development Bank Independent Evaluation Department.
xxx
Assumptions: Macroeconomic stability, Political commitment, Effective collaboration among stakeholders
• Supporting the establishment
and strengthening of a
unified regulatory oversight
for banks and nonbank
financial institutions
• Strengthening of the
institutional foundation
supporting capital market
development
• Promoting issuance of new
instruments, and increasing
mobilization of long-term
savings by broadening the
investor base
• Promoting social security
reforms
• Infrastructure financing
• Promoting financial inclusion
(microfinance, branchless
banking initiatives, financial
literacy, consumer protection)
• Improved legislative frameworks and
enacted laws for social security governance
• Financially viable infrastructure finance
institution
• Improved long-term debt market
• Increased equity investments in
infrastructure projects
• Growth of viable institutions and financial
markets development
• Developed PPP projects
• Enhanced access to financial services
• Strengthened regulatory oversight for banks
and nonbank financial institutions
• Enhanced information disclosure and
improved price discovery
• Deeper and more liquid financial markets
• Improved market surveillance and investor
protection
• Stronger governance and human resource
capacity
• Increased mobilization of long-term savings
through a broadened investor base
• Strengthened
financial services
regulation and
supervision and
efficiency
• Strengthened
investor confidence
through improved
governance
• Improved national
social security
• Greater
contribution by the
capital market to
domestic financing
• Increased domestic
participation in the
nonbank finance
subsector
• Developed and
inclusive finance
sector
• Efficient allocation
of financing to
economically viable
infrastructure
projects
Development Impacts
Greater financial sector resilience and diversification; An expanded nonbank finance subsector; Increased annual growth rate of financial sector
supporting increased intermediation; Strengthened financial sector governance and social security system to facilitate broad -based economic
growth and reduced vulnerability to crises; Improved and equitable access to infrastructure for economic growth and poverty reduction
In
puts/A
ctivities
Ou
tp
uts/Interm
ed
iate O
utco
mes
Ou
tco
mes
8
Figure 3: Funding Sources to Fill the Existing Infrastructure Investment Gap
2. Financial System Structure and Oversight
14. Indonesia’s financial system continues to be relatively shallow and bank-centered, with a
substantial presence of the State and a narrow domestic institutional investor base. At end-2015, total
financial sector assets amounted to 72% of GDP, three quarters of which represents banking assets. The
insurance sector has been the fastest growing segment and drove the expansion of total system assets
by 8 percentage points of GDP during 2005–2015. Despite substantial progress since the 2010 FSAP, the
2017 FSAP found that the financial sector was not yet sufficiently able to fund development needs, and
that capital markets did not provide sufficient funding nor represented a competitive alternative to
banks.12
15. The financial system is composed of banks, nonbanks and financial conglomerates, with the
Government planning to establish a state holding company. Banks are the largest segment, with
commercial banks’ assets at 55% of GDP and 77% of financial system assets as of end-2015. Holdings of
state-owned commercial and regional development banks were close to 40% of the banking sector’s
assets and dominating certain credit segments such as microloans. Insurance companies and pension
funds accounted for 13% of financial system assets, with other nonbank financial institutions (NBFIs)
accounting for 10% as of end-2015 (Table 1). The 44 identified financial conglomerates accounted for
about 66% of financial sector assets, including 84% of banking sector assets and majority of insurers.
The Government is expected to create a holding company for state-owned financial institutions before
end-2017, bringing together the state-owned banks, a financial entity specializing in small and medium
enterprise (SME) lending, and a payment switch provider.
12 IMF and World Bank. 2017. Financial Sector Assessment: Republic of Indonesia. Washington, D.C.
Source: World Bank Group. 2015. Indonesia Systematic Country Diagnostic: Connecting the Bottom 40 percent to
the Prosperity Generation. Washington D.C.
In $ billion
2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F
70
60
50
0
0
40
30
20
10
0
9
Table 1: Finance Sector Development, 2000–2015
Percent of GDP
Percent of
Total Financial System Assets
2000 2005 2010 2015 2000 2005 2010 2015
Financial System Structure
Total Assets 84.4 63.4 59.9 71.7 100.0 100.0 100.0 100.0
Deposit-taking Institutions 77.0 52.0 45.6 55.4 91.0 82.1 76.1 77.3
o/w state-owned banks … 18.7 16.3 20.0 … 29.5 27.1 28.0
NBFIs 7.6 11.3 14.3 16.3 9.0 17.9 23.9 22.7
Insurance Companies 2.2 4.4 5.9 7.2 2.6 6.9 9.9 10.0
Pension Funds 2.2 2.2 1.9 1.8 2.6 3.5 3.2 2.5
Other NBFIs 3.2 4.8 6.5 7.3 3.8 7.6 10.8 10.2
Financial System Performance
Domestic Credit to Private Sector 19.9 26.4 27.2 36.5
Credit to Government and SOEs 32.4 12.2 3.5 3.3
Stock Market Capitalization 16.2 28.5 47.7 41.0
Local Currency Bond Market 36.7 19.2 14.0 15.2
Government Bonds 35.4 17.1 12.3 13.0
Corporate Bonds 1.3 2.1 1.7 2.2
2011 2014
Financial Inclusion
Account (% age 15+) … … 19.6 36.1
Account, female (% age 15+) … … 19.2 37.5
Account, poorest 40% (% age 15+) … … 10.0 22.2
… = not available, GDP = gross domestic product, NBFI = nonbank financial institution, o/w = of which, SOE = state-owned
enterprises.
Sources: IMF-World Bank Financial Sector Assessments 2010 and 2017; World Bank Group Global Financial Database; Global
Partnership for Financial Inclusion, and Asian Development Bank AsianBondsOnline.
16. The 2017 FSAP reports that the financial sector lags peer countries in several areas although it is
not systematically out of line with countries at a similar level of economic development. Bank credit in
Indonesia is about 40% of GDP, thus, credit intermediation is low but roughly in line with other countries
with comparable GDP per capita. Equity markets are not at par with other countries, with stock market
capitalization at 41% of GDP, and underperform the median of peers by about 30 percentage points of
GDP. The fixed income market is underdeveloped relative to peer countries, with private debt securities
at about 2.5% of GDP and tradeable government securities just at 13% of GDP. Domestic institutional
investors’ assets are low relative to peer countries, with assets under pension funds at just below 2% of
GDP. Foreign investors play a significant role given the absence of domestic investor base, holding almost
40% of government securities and 54% of equities. Financial inclusion indicator is also below peer
countries, with 36% of adults holding transactional account which is far below the 69% regional average.
A McKinsey study performed a comparative review of capital market development in selected Southeast
Asian countries and found that Indonesia lagged most peer countries overall, but performed better in
certain areas (Table 2).
Table 2: Southeast Asian Capital Markets Development Index
Capital Market Development Index and Components SIN MAL THA PHI INO VIE
Capital Markets Development Index (Composite) 3.40 3.25 2.80 2.25 2.20 1.20
(i) Funding at Scale
Financial Depth of Primary Market 3 3 3 2 2 1
Availability of Long Term Debt 4 4 3 3 1 1
Availability and Stability of Foreign Investment 4 3 2 3 5 3
Competitiveness of Cost of Capital
Real Cost of Equity 4 5 3 1 4 1
Real Cost of Debt 3 3 3 3 2 1
(ii) Investment Opportunities
10
Capital Market Development Index and Components SIN MAL THA PHI INO VIE
Availability of Investment Opportunities Across Asset
Classes
4 4 3 2 1 1
Appropriate Risk-Adjusted Returns 0.76 0.60 1.13 1.38 0.88 0.72
(iii) Market Information
Quality of Pricing Information 0.170 0.191 0.185 0.185 0.131 0.224
INO = Indonesia, MAL = Malaysia, PHI = Philippines, SIN = Singapore, THA = Thailand, VIE = Viet Nam.
Scoring for each component:
Financial Depth of Primary Market: 1=very shallow; 2=shallow; 3=moderate; 4=deep; 5=very deep
Availability of Long Term Debt: 1=very shallow; 2=shallow, short term oriented; 3=shallow, long term oriented; 4=deep,
short term oriented; 5=deep, long term oriented
Availability and Stability of Foreign Investment: 1=closed; 2=local investor oriented, unpredictable; 3=local investor oriented,
predictable; 4=foreign investor oriented, unpredictable; 5=foreign investor oriented, predictable
Competitiveness of Cost of Capital: (i) Real Cost of Equity: 1=high; 5=low; and (ii) Real Cost of Debt (1=high; 5=low)
Availability of Investment Opportunities Across Asset Classes: 1=very shallow; 2=shallow; 3=moderate; 4=deep; 5=very deep;
(>0) = weak; <0.0 = very weak
Appropriate Risk-Adjusted Returns: >2 = excellent (not applicable for any markets analyzed; >1.20 = very strong; >0.80 =
strong
Quality of Pricing Information: <0.090 = highly efficient; <0.130 = efficient; (<0.170) = moderate; <0.210 = inefficient;
>0.210 = highly inefficient
Total score out of 5 (5 as the highest, meaning very deep capital market, 1 as very shallow).
Source: McKinsey & Company. 2017. Deepening Capital Markets in Emerging Economies.
17. A unified regulator for banks and nonbanks was established. In 2011, the Indonesia Financial
Services Authority Law was enacted establishing a new integrated regulator (Otoritas Jasa Keuangan or
OJK). OJK assumed responsibility for banking supervision from BI effective January 2014 and for nonbank
financial institution supervision effective January 2013. There are transitional and operational challenges
for OJK, including: need for capacity building for staff supervisory skills and experience; potential overlap
of supervisory activities between OJK, BI, and the Indonesian Deposit Insurance Corporation (LPS); and
need for change in governance structure within OJK which is sector-based resulting in operational silos.
There is a call for the amendment of OJK Law to place priority on financial stability objectives and make
legal protection in accordance with international best practice.
18. While the establishment of OJK presented transitional and operational risks, the financial system
has been stable—financial soundness indicators for the banking system continued to improve after 2010
(Table 3). The FSAP 2017 concluded that the financial system has been stable and has weathered a
simultaneous economic and credit deceleration. The framework for crisis management and resolution
and safety nets was revamped in 2016 with the enactment of the Prevention and Resolution of System
Financial Crisis Law and the establishment of the Financial System Stability Committee (Komite Stabilitas
Sistem Keuangan or KSSK)–composed of the Finance Minister and the heads of BI, OJK, and the LPS–
which is responsible for dealing with distress or failure of systematically important banks.
3. Development Challenges in the Finance Sector
19. The authorities have undertaken several measures to boost credit growth and improve
intermediation efficiency in banks. These measures included enforcing deposit rate caps for the largest
banks, using moral suasion by OJK to induce lower lending rates, and use of guarantees and credit
subsidies to boost MSME and micro lending. However, the 2017 FSAP raised concerns about the lack of
effectiveness and unintended consequences of many of the policy measures. The FSAP recommended
that the authorities focus on addressing cross-cutting financial system fundamentals such as
strengthening insolvency and credit rights regimes, improving quality of accounting and auditing for
banks, and enhancing the impact of digital financial services.
11
Table 3: Banking System Soundness Indicators (%), 2002–2015
2002 2005 2010 2015
Capital Adequacy
Regulatory Capital to risk weighted assets 20.9 19.9 16.2 21.3
Regulatory Capital Tier 1 to risk weighted assets 16.4 16.5 15.1 18.8
Capital to Assets 8.4 9.8 10.7 13.6
Asset Quality
Nonperforming Loans to Total Gross Loans 7.6 7.4 2.5 2.4
Earning and Profitability
Return on Assets 1.1 1.7 2.7 2.2
Return on Equity 16.2 21.4 25.9 17.3
Liquidity and Funding
Liquid Assets to Short Term Liabilities 30.2 31.5 32.1 35.0
Non-interbank loans to customer deposits 49.6 61.5 81.6 100.4
Sources: IMF Financial Soundness Indicator Database; IMF-World Bank Financial Sector Assessments 2010 and 2017.
20. Given Indonesia’s long-term finance and investment gap, particularly in infrastructure, capital
markets can play a larger role in mobilizing longer-term capital from foreign and domestic sources. In
addition, deeper local currency markets and a stronger domestic investor base can help reduce the impact
of currency shocks and risk of capital outflows posed by the currently large role of foreign investors.
However, to date, there is a strong concern that capital markets have not been a significant source of
financing infrastructure investments and have not been able to reduce reliance on banking and fiscal
finance. To develop the country’s shallow capital markets, the 2017 FSAP suggests the following:13
(i) Money markets should be developed. This will help spur a robust market for interest rate
derivatives and improve market infrastructure, standardization, and liquidity.
(ii) Government bond markets are relatively developed, but there is a need to enhance the
liquidity and the price referencing role of its yield curve.
(iii) Corporate bond markets are shallow. Companies still prefer bank loans and seem to be
the only funding option for many of them while investors seem to prefer SOE
instruments.
(iv) Equity markets have improved yet there are limitations on attracting new listings and
increasing the amount of initial public offerings (IPOs).
(v) Derivatives is an instrument that is not yet developed, limiting investors’ ability to
manage duration and currency mismatches—an impediment to deeper capital markets.
(vi) Investor base is yet to grow and market participation is yet to improve even if there have
been measures to mobilize savings such as social security reform and enhanced
regulations of capital market products.
21. The Government has begun to focus attention on financial inclusion with the issuance of the
National Financial Inclusion Strategy in 2012. According to the 2011 World Bank’s Global Findex survey,
only about 20% of adults held an account at a formal institution, which is a measly 16% in rural areas,
and even less for the poorest 40% of the adult population. This reflects a large number of the population
excluded from the formal financial sector and broadly reflects the widening income inequality. Access to
financial services in far-flung areas is poor. Aside from geography and lack of physical access, challenges
for improving financial inclusion include low levels of financial literacy and education, high transaction
costs, income level and socio-economic factors, and lack of identification documents (footnote 10). The
Indonesian National Kris Secretariat (Sekretariat Nasional Perkerisan Indonesia or SNKI), which enables
coordination and provides guidance to policy initiatives among different stakeholders, has an ambitious
goal of 75% of adults having a transaction account by end-2019. OJK’s National Survey on Financial
Literacy and Inclusion in 2016 showed an improvement in two indices compared to the 2013 survey: (i)
financial literacy (22% to 30%); and (ii) financial inclusion (60% to 68%).
13 IMF and World Bank. 2017. Financial Sector Assessment: Republic of Indonesia. Washington, D.C.
12
C. ADB Support to Capital Market Development, 2002–2017
1. ADB Sector Programs Strategies
22. ADB’s strategies for supporting Indonesia’s finance sector during 2002–2017 shifted focus
compared to prior years. ADB engagement from 1970–2000 mainly covered the banking sector (including
development banks) (footnote 2). Starting 2002, ADB focused on supporting reforms for transforming
governance structures of the financial sector into a single regulatory body and developing capital
markets. Towards the end of the period, ADB also begun addressing financial inclusion and access issues.
The strategies adopted were in line with the government’s strategies and priorities for the sector. Table
4 summarizes ADB’s strategies to support Indonesia’s finance sector during 2002–2017.
Table 4: Summary of Key Strategic Focus Areas of ADB Support to Financial Sector in Indonesia,
2002–2019
2002–2005 2006–2009 2010–2015 2016–2019
1. CAP, 2001–2003
continue to promote
good governance
through restructuring
and transformation
of new regulatory
institution for
financial markets,
and on reforms of
nonbank financial
sector
2. COS, 2001
encourage formation
and strengthening of
regulatory
institutions and
support broader and
deeper reforms for
the nonbank financial
sector
3. CSPU, 2002–2004
develop the nonbank
financial sector and
capital market,
including
improvement of
governance practices
4. CSP, 2003–2005
support financial and
corporate governance
and private sector
development
1. CSPU, 2004–2006
continue to support
efforts for improved
governance,
environment, and
investment climate
2. CSPU, 2005
support microfinance,
local government
financing, and financing
facility intended to
promote private sector
investments in urban
infrastructure
3. CSP 2006–2009
deepen the financial
sector by focusing on
strengthening of
nonbank financial
institutions and
development of capital
market
1. COBP 2011–2013a
contribute to deeper
and broader capital
markets to support
greater financial sector
resilience and
diversification
2. CPS 2012–2014
support the
implementation of
finance sector reforms
under the government’s
capital markets and
nonbank financial
industry master plan
3. I-CPS, 2015
support the
development and
application of the
country’s enabling
economic policies, which
was aimed to (i) deepen
and strengthen
Indonesia’s capital
markets, (ii) foster
greater financial
inclusion, and (iii) reduce
impediments to
investment and
economic growth
1. CPS 2016–2019
support capital market
and financial inclusion
reform to contribute to
better economic
governance
ADB = Asian Development Bank, CAP = country assistance plan, COBP = country operations business plan, COS = country
operational strategy, CPS = country partnership strategy, CSP = country strategy and program, CSPU = country strategy and
program update, I-CPS = interim country partnership strategy.
a The country operations business plans 2011–2013 and 2012–2014 extended the CSP to 2010 and 2011. The COBP 2011–2013
updated the CSP 2006–2009 results framework reflecting the finance sector as one of the core sectors supporting the government
sector objective of greater financial sector resilience and diversification. Supporting this objective, ADB was expected to contribute
to deeper and broader and capital markets. ADB’s planned interventions were in capital markets development, private sector
operations in microfinance, and nonsovereign operations to enhance access of companies to finance.
Sources: Asian Development Bank country planning documents for Indonesia; Country Assistance Program Evaluation, 2005.
23. ADB’s current country partnership strategy (CPS), 2016–2019 expects the finance sector to
contribute to better economic governance. One of the priority areas under this is capital market and
financial inclusion reform. The argument for the support is that a deeper, more broadly-based finance
13
sector should help to promote economic growth through productive investments, foster greater
economic stability, and support livelihoods and job creation by improving access by households and small
businesses to financial services. ADB support aims to improve market infrastructure and encourage
product diversification in the bond market. Financial inclusion will be enhanced by addressing regulatory
impediments, poor financial literacy, weak consumer protection, and by developing innovative
microcredit products to better meet the needs of the poor. TA and financial support to SMEs to enable
them to build viable value-chains and integrate into regional and global markets are also planned.
24. IED Program Review Ratings. The CAPE 200514
assessed that ADB had a comparative advantage
in providing loans in some sectors including in finance and ADB’s focus on advisory TA projects for the
finance sector improved over the years, with substantial impact on the sector. However, ADB’s
performance on the development finance loans was marginal (footnote 2).
25. The Country Partnership Strategy Final Review Validation (CPSFRV) 2011 reported that in the area
of deepening the finance sector, improved domestic resource mobilization to meet long-term financing
needs was expected to help leverage much greater private sector participation. However, targets in the
country strategy and program (CSP) results framework were missed, most notably in the failure to
stimulate private infrastructure investment and in relation to finance sector deepening.
26. The CPSFRV 2015 highlighted that project performance was better in some sectors including in
finance. ADB support for capital market reforms and capacity development has made a positive
contribution to: (i) strengthening regulatory and legal structures; (ii) developing the insurance, pension,
and Islamic financing markets; and (iii) improving the analysis and design of programs aimed at
enhancing financial inclusion.
2. Analytical Work
27. Prior to 2002, ADB had built up a body of knowledge through a series of TA projects. TA projects
supported a two-phased study on securities market development (1989 and 1991). There were several
TA projects focusing on the development of the pension fund, insurance, and venture capital industries.
There was a study on developing the secondary mortgage facility which would enable issuance of capital
market instruments.
28. Most of ADB’s analytical work during 2002–2017 were embedded in the PBLs which included
sections describing and identifying the development issues in various aspects of capital markets. In
addition, various TA projects produced several studies to further improve design of ADB interventions in
various aspects or segments of the capital market. The Financial Governance and Social Security Reform
TA, which accompanied the Financial Sector Governance and Social Security Reform Program, included a
feasibility study for social security reform and an assessment of the financial condition of the insurance
sector. The Strengthening Regulation and Governance TA, which accompanied the CMDPC, included a
diagnostic with recommendations on how to harness capital market to support SMEs. As part of ADB
Papers on Indonesia—quick-disseminating and informal publications maintained by the Resident Mission
in Jakarta—ADB issued a summary financial sector assessment15
in 2015. Several ADB regional TA
programs are supported by analytical work and provide information in Indonesia’s capital market.
29. There were several major economic and sector work produced by the World Bank and the IMF
during 2002–2017. The World Bank issued a major study of NBFIs in 1996—the study was comprehensive
and included short and medium-term recommendations for each NBFI segment. There were two joint
IMF-World Bank FSAP reports, one in 2010 and a follow-up in 2017. Both had substantive coverage of
capital markets and included specific recommended actions to be undertaken in the short to medium-
term. The 2017 FSAP also included a scorecard on implementation of recommended actions in the 2010
14 The first CAPE prepared for Indonesia, which covered ADB support during 1990 and 2004.
15 ADB. 2015. Summary of Indonesia’s Finance Sector Assessment. Jakarta.
14
FSAP. The World Bank and IMF also published in 2001 a handbook on how to develop government bond
markets.16
30. The Asian Bond Monitor (ABM)—published by ADB three times a year—provides detailed
information about the condition of local currency bond markets. The ABM covers ten ASEAN member-
countries, including Indonesia, plus the People’s Republic of China (PRC); Hong Kong, PRC; and the
Republic of Korea. In addition to monitoring development in the local currency (LCY) bond markets in
these countries, ADB examines outlook, risks, and policy options. ADB also provides an annual bond
market liquidity survey and in certain issues produces analytical pieces, such as the examination of
empirical evidence on whether LCY bond markets enhance financial stability.
3. Lending and grant operations
31. For 2002–2017, ADB approved 8 loans and a grant amounting to $2.0 billion to support
Indonesia’s finance sector. The interventions were supported mainly by PBLs ($1.95 billion) except for
two project loans and a grant (Table 5).
Table 5: ADB Finance Sector Loans, 2002–2017
Approval
Year
Loan/
Grant
No. Title
Modality Sub
sector
Approved
Amount
($ million)
2017 3541 Financial Market Development and Inclusion Program (Subprogram 2) Program FSD 400.0
2015 3274 Financial Market Development and Inclusion Program (Subprogram 1) Program FSD 400.0
2012 2895 Financial Market Development and Integration Program Program MCM 300.0
2009 2577 Capital Market Development Program Cluster (Subprogram 2) Program FSD 300.0
2007 2379 Capital Market Development Program Cluster (Subprogram 1) Program ICS 300.0
2009 2516 Indonesian Infrastructure Financing Facility Project FSD 100.0
2005 9079 Restoration of Microenterprise and Microfinance in Aceh Project MF 2.0
2004 2277(L) Microcredit Project MF 1.0
2002 1965 Financial Governance and Social Security Reform Program (Phase I) Program ICS 250.0
Total 2,053.0
ADB = Asian Development Bank, FSD = finance sector development, ICS = insurance and contractual savings, MCM = money and capital
markets, MF = microfinance.
Note: A program is supported by a policy-based loan.
Sources: Asian Development Bank Loan, Grant, TA, and Equity Approvals database; Loans and Grants Financial Information System.
32. 2002–2005: Financial Sector Regulatory Reform and Development of Contractual Savings
Institutions. The 2002 First Finance Governance and Social Security Reform (FGSSR)—designed as a
program cluster (Box 2)—was envisioned to support the establishment of OJK and promote social security
reform including governance of pension funds, an important part of the nonbank financial sector.17
The
FGSSR built on the core reforms under the 1998 Financial Governance Reforms: Sector Development
Program (FGRSDP) with additional actions in the areas of disclosure, transparency, and enforcement of
regulations to support strengthening of the financial sector while reducing vulnerability to crisis. The
FGSSR program included TA projects to strengthen the insurance industry and develop the social security
system. The second loan in the cluster did not materialize due to the adoption of a phased approach to
the establishment of a single regulatory institution.
16 World Bank and IMF. 2001. Developing Government Bond Markets: A Handbook. Washington D.C.
17 ADB. 2002. Report and Recommendation of the President to the Board of Directors on the Proposed Loans and Equity Investment
to Indonesia for the Financial Governance and Social Security Reform Program. Manila.
15
33. The project completion report (PCR) assessed the program successful. However, because
Parliament found the transition plan towards a single regulatory institution to be ambitious and required
the authorities to follow a phased approach, the PCR considered the program less than relevant and less
than effective. Nonetheless, the program resulted in the merger of Bapepam and the Directorate General
of Financial Institutions to consolidate supervision of capital markets and nonbank financial institutions.
The PCR based the overall rating of successful on improvements in the regulatory and supervision system
because of the measures supported by the program.18
While there were attribution issues, there were
improvements in several key financial system indicators: total assets of nonbank financial institutions as
percentage of GDP increased from 8% in 2000 to 11% in 2005 and stock market capitalization as
percentage of GDP increased from 16% in 2000 to 28% in 2005.
34. 2006–2009: Comprehensive Support to Capital Market. ADB approved the CMDPC Subprogram
1 in 2007 and the CMDPC Subprogram 2 in 2009 (footnote 1). The CMDPC aimed to promote
diversification and resilience of the financial sector by developing capital markets and the nonbank
financial sector through: (i) enhancing information disclosure and price discovery, (ii) promoting deeper
and more liquid financial markets, (iii) improving market surveillance and investor protection, and (iv)
strengthening governance and human resource capacity. In 2009, ADB approved the Indonesian
Infrastructure Financing Facility (IIFF) Project which had two components: (i) an ordinary capital resources
loan to the Government to be onlent to the Indonesian Infrastructure Financing Facility Company (IIFFC)
which is privately-owned; and (ii) a nonsovereign equity investment in IIFFC.19
35. The PPER for the CMDPC considered the program successful. Notwithstanding the gains in
establishing the institutional foundation for capital market development, some critical areas did not meet
expectations including corporate bond market growth. The development impact was viewed as less than
satisfactory overall because of the nonachievement of the target on increased share of nonbank financial
sector assets in total financial system assets.20
36. In 2009, ADB approved a sovereign loan to and a nonsovereign equity investment in the IIFF. The
PCR for the IIFF Project assessed the project successful based on the achievement of outcomes and
outputs in the design and monitoring framework (DMF). However, ADB performance was rated less than
satisfactory since ADB monitored only the loan agreement and not the project agreement, which was
only partially complied with. One of the lessons was the importance of coordination between the Private
Sector Operations Department (PSOD) and Southeast Asia Regional Department.21
18 ADB. 2006. Project Completion Report: Financial Governance and Social Security Reform Program. Manila.
19 ADB. 2009. Report and Recommendation of the President to the Board of Directors on the Proposed Loan and Equity Investment
to Indonesia for the Indonesian Infrastructure Financing Facility. Manila.
20 IED. 2017. Program Performance Evaluation Report: Capital Market Development Program Cluster. Manila: ADB.
21 ADB. 2017. Project Completion Report: Indonesian Infrastructure Financing Facility. Manila.
Box 2: Designing Program Clusters
One of main lessons in the program completion report (PCR) for the Finance Governance and Social Security
Reform (FGSSR) was the usefulness of the program cluster modality in supporting broad-based reforms requiring
long-term institutional development. The program cluster combines a long-term approach covering a wide range
of policy and institutional reforms with flexibility to adjust in response to changing circumstances. The long-
term approach allows for gradual introduction and appropriate sequencing of policies and reforms to result in
smooth implementation. The PCR recommended a shift from a multitranche program cluster to a medium-term
framework based on single tranche programs to focus on achievement of outcomes prior to disbursement.
Subsequent to the FGSSR were program clusters such as the Capital Market Development and Financial Market
Development and Inclusion.
Source: Program Completion Report for the Finance Governance and Social Security Reform.
16
37. 2012–2014: Support for Implementation of Financial Sector Reforms. ADB approved the 2012
Financial Market Development and Integration Program (FMDIP [Integration])22
which built on the
CMDPC and its Post Program Monitoring Framework. The FMDIP (Integration) aimed to expand the
nonfinancial sector by: strengthening regulatory oversight; deepening capital market through measures
promoting issuance of new instruments; and increasing mobilization of long term savings by broadening
the investor base. The FMDIP (Integration) was a milestone in ADB’s long standing efforts towards a
single regulator for financial institutions and supported to the Government’s Capital Market and
Nonbank Financial Industry Master Plan 2010–2014. A related TA was the 2013 Enhancing Financial
Sector Governance, Risk Management, and Depth Project.23
38. The PCR assessed the FMDIP (Integration) successful overall, but less than effective since the
program only partially met the outcome indicators in the DMF, mainly in domestic participation of the
nonbank financial sector in capital markets through ownership of tradeable government securities. The
PCR cited as one of the lessons the need for greater selectivity and reduction in the number of policy
measures by identifying the main bottlenecks to reforms. In addition, the PCR reconfirmed the
importance of TA in reform implementation.24
39. 2015–present: Financial Inclusion. The 2015 PBL for Subprogram 1 and the June 2017 PBL for
Subprogram 2 of the FMDIP (Inclusion) included a component on enhancing access to finance.25
The
program’s financial inclusion component focused on developing microfinance by enacting a legal
framework and strengthening related institutions, launching the branchless banking initiative, enhancing
financial literacy initiatives, and strengthening consumer protection. The enhancing access to financial
services component supported the 2012 National Strategy for Financial Inclusion which was updated in
2016. The program also included components on strengthening the regulatory structure and deepening
financial markets and followed up on some of the initiatives covered by previous programs. While the
CMDPC and the FMDIP (Integration) DMF impact and outcomes focused on capital market and nonbank
financial sector indicators, FMDIP (Inclusion) impact and outcome indicators covered the finance sector
as a whole.
40. Success Rate. The PCRs/program/project performance audit reports (PPARs)/PCR validation reports
(PVRs) assessed all five operations as successful (Table 6). All the PBLs were assessed as successful by the
PCR. The PPER assessed the CMDPC as successful.
Table 6: Ratings for Finance Sector Lending Operations, 2002–2017
Loan/Grant
No. Project Title
Approval
Year
Evaluation
Type
Evaluation
Year
Overall
Rating
1965 Financial Governance and Social Security
Reform Program
2002 PCR 2006 Successful
9027 Restoration of Microenterprise and
Microfinance in Aceh
2005 ICM 2010 Satisfactory
2379/
2577
Capital Market Development Program
Cluster
Subprogram 1
Subprogram 2
2007
2009
PVR
PPER
2015
2017
Successful
Successful
2516 Indonesian Infrastructure Financing Facility 2009 PCR 2017 Successful
22 ADB. 2012. Report and Recommendation of the President to the Board of Directors on the Proposed Policy-Based Loan to
Indonesia for the Financial Market Development and Integration Program. Manila.
23 ADB. 2013. Technical Assistance to Indonesia for Enhancing Financial Sector Governance, Risk Management, and Depth. Manila.
24 ADB. 2017. Project Completion Report. Financial Market Development and Integration Program. Manila; A validation report is
forthcoming.
25 ADB. 2015. Report and Recommendation of the President to the Board of Directors on Proposed Programmatic Approach and
Policy-Based Loan for Subprogram 1 Financial Market Development and Inclusion Program. Manila; ADB. 2017. Proposed Policy-
Based Loan for Subprogram 2 and Technical Assistance Grant for the Financial Market Development and Inclusion Program.
Manila.
17
Loan/Grant
No. Project Title
Approval
Year
Evaluation
Type
Evaluation
Year
Overall
Rating
2895 Financial Market Development and
Integration Program
2012 PCR 2017 Successful
ICM = implementation completion memorandum, PCR = program/project completion report, PPER = program performance
evaluation report, PVR = validation report of the PCR.
Sources: Asian Development Bank Independent Evaluation Department; Evaluation reports.
4. Technical assistance operations
41. From 2002 to 2017, 16 TA projects26
amounting to $15.6 million supported the finance sector
in Indonesia (Table 7). There has been extensive use of TA projects in ADB’s finance sector operations. TA
projects have been an important source of support for the implementation of PBL supported programs
since 2000, with many lessons from evaluations pointing to the contribution of accompanying or parallel
TA projects to program success. However, only three TA projects amounting to $2.5 million (or 16% of
total amount of TA) focused on capital market issues.
Table 7: ADB Finance Sector Technical Assistance, 2002–2017
Approval
Year
TA
No. Title
Type Sub
Sector
Approved
Amount
($ million)
2017 9333 Promoting Innovative Financial Inclusion PA FSD 0.8
2015 9054 Enhancing the Regulatory Framework of Financial Sector Development
and Oversight
PA MCM
1.5
2014 8753 Strengthening the Local Government Bond Market CD FSD 0.4
2013 8326 Enhancing Financial Sector Governance, Risk Management, and Depth CD FSD 1.0
2012 8318 Global Climate Partnership Fund - Indonesia Investment Program PP FSD 0.5
2012 8224 Improving Access to Finance in Aceh and North Sumatra CD MF 0.8
2011/2014 7793 Institutional Capacity Building of Indonesia Eximbank CD TF 1.7
2009 7466 Strengthening Indonesia's Capital Market CD MCM 1.5
2007 7000 Strengthening Regulation and Governance AD FSD 1.2
2005 4715 Secondary Mortgage Facility AD HF 0.6
2004 4550 Development of an Anti-Money Laundering Regime I AD FSD 0.5
2004 4368 Financing Integrated Settlements Development PP HF 0.8
2003 4250 Unified Registration System AD ICS 0.3
2002 4024 Financial Governance and Social Security Reform AD FSD 1.0
2002 3849 Development of an Anti-Money Laundering Regime AD FSD 1.5
2002 3850 Establishment of a Financial Services Authority AD FSD 1.5
Total 15.6
AD = advisory, ADB = Asian Development Bank, CD = capacity development, HF = housing finance, FSD = finance sector development,
ICS = insurance and contractual savings, MCM = money and capital markets, MF = microfinance, PA = policy advisory, PP = project
preparatory, TA = technical assistance, TF = trade finance.
Sources: Loan, Grant, TA, and Equity Approvals database; TA Financial Information System.
42. Technical assistance completion report (TCR) Ratings. Out of nine TA projects with ratings, six
were self-assessed as successful, one was less than successful, and two were viewed as unsuccessful
(Table 8). Of the two unsuccessful TA projects, one was not linked to financial sector projects or programs
and the other supported the development of a new institution that would contribute to the increase and
diversity of capital market instruments and issuers. An important lesson from the less than successful
project was the difficult challenge of sustainable capacity and institutional development.
26 Including project preparatory TA.
18
Table 8: Ratings for Finance Sector Technical Assistance Projects, 2002–2017
TA No. Project Title
Approval
Year
Overall
Rating Related Operation
2699 Institutional Strengthening of Regional
Development Account 2002 Unsuccessful None
3849 Development of an Anti-Money
Laundering Regime 2002 Successful
Finance Governance and Social
Security Reform
3850 Establishment of a Financial Services
Authority 2002 Successful
Finance Governance and Social
Security Reform
4024 Financial Sector Governance and Social
Security Reform 2002 Successful
Finance Governance and Social
Security Reform
4250 Unified Registration System 2003 Successful
Finance Governance and Social
Security Reform
4550 Development of an Anti-Money
Laundering Scheme II 2004 Successful
Finance Governance and Social
Security Reform
4715 Secondary Mortgage Facility 2005 Unsuccessful None
7000 Strengthening Regulation and
Governance 2007
Less than
Successful
Capital Market Development
Program Cluster
7466 Strengthening Indonesia's Capital Market 2009 Successful
Capital Market Development
Program Cluster
Sources: Asian Development Bank Independent Evaluation Department, Project documents, and TA completion reports.
D. Assessment of Relevance and Results
43. Table 9 provides the distribution of policy actions covering the PBLs during 2002–2017. Capital
market related policy actions accounted for 86%–97% of the total programs for FGSSRP, CMDPC, and
FMIDP (Integration). The FMDIP (Inclusion) capital market related policy actions were only 40% of its total
program, with support to OJK strengthening and banking system reforms accounting for 27% share each
(Table 9). Within the capital market segment for all programs, policy actions on market infrastructure
accounted for almost half, with actions on instruments/issuers and investors equally sharing the
remainder.
Table 9: Distribution of Policy Actions of ADB Policy-based Loans, 2002–2017
Policy-based loans
Capital Market Policy Actions Other Policy Actions
Total
Program
Capital
Market
Infrastructure
Capital
Market
Issuers
Capital
Market
Investors
Total
Capital
Markets Banking OJK Coordination
FGSSRP 35% 0% 51% 86% 7% 7% 0% 100%
CMDPC
Subprogram 1 39% 35% 20% 94% 4% 0% 2% 100%
CMDPC
Subprogram 2 63% 28% 9% 100% 0% 0% 0% 100%
Subtotal 51% 32% 15% 97% 2% 0% 1% 100%
FMDIP
(Integration) 39% 34% 22% 95% 2% 2% 0% 100%
FMDIP (Inclusion)
Subprogram 1 17% 13% 13% 43% 22% 26% 9% 100%
FMDIP (Inclusion)
Subprogram 2 24% 4% 8% 36% 32% 28% 4% 100%
Subtotal 21% 8% 10% 40% 27% 27% 6% 100%
Total 39% 21% 22% 82% 8% 7% 2% 100%
ADB = Asian Development Bank, CMDPC = Capital Market Development Program Cluster, FGSSRP = Financial Governance and Social Security
Reform Program, FMDIP (Inclusion) = Financial Market Development and Inclusion Program, FMDIP (Integration) = Financial Market
Development and Integration Program, OJK = Otoritas Jasa Keuangan.
Sources: Asian Development Bank Independent Evaluation Department, Policy Matrices.
19
1. Market Infrastructure
44. A sound market infrastructure is critical to the functioning of capital markets. The infrastructure
includes “soft” components, such as an appropriate legal and regulatory framework, non-distortionary
tax treatment of products and services, effective and credible institutions such as the supervision
agencies, good corporate governance and accounting standards, and protection of credit rights. The
“hard” components include trading systems, settlement and clearance mechanisms, and securities
depositories. Table 10 gives the distribution of policy actions supporting different components of market
infrastructure.
Table 10: Distribution of Market Infrastructure Policy Actions, 2002–2017
Policy-based loans
Legal,
Regulatory,
Tax Regime
(AML)
Supervision,
Rating
Agencies,
Investor
Protection/
Education
Corporate
Governance
and
Accounting
Standards
Trading
Systems
Studies/
Plans/Others
Total Market
Infrastructure
FGSSRP 20% 13% 47% 20% 0% 100%
CMDPC
Subprogram 1 26% 42% 11% 21% 0% 100%
CMDPC
Subprogram 2 28% 24% 10% 28% 10% 100%
Subtotal 27% 31% 10% 25% 6% 100%
FMDIP
(Integration) 25% 25% 31% 13% 6% 100%
FMDIP (Inclusion)
Subprogram 1 0% 25% 75% 0% 0% 100%
FMDIP (Inclusion)
Subprogram 2 17% 17% 17% 17% 33% 100%
Subtotal 10% 20% 40% 10% 20% 100%
Total 24% 26% 24% 20% 7% 100%
AML = anti-money laundering, CMDPC = Capital Market Development Program Cluster, FGSSRP = Financial Governance and Social
Security Reform Program, FMDIP (Inclusion) = Financial Market Development and Inclusion Program, FMDIP (Integration) = Financial
Market Development and Integration Program.
Sources: Asian Development Bank Independent Evaluation Department, Policy Matrices.
45. Improving legal, regulatory, and tax framework. The policy actions covering the legal and
regulatory framework included amendments to the Capital Market, Pension and Insurance Laws and Anti-
Money Laundering Law, as well as issuance of regulations that would improve transparency and upgrade
professionalism in the sector. In the area of taxes, the policy actions focused on promoting a more
conducive tax environment. This included incentives for listed companies with a minimum public float of
40% as well as elimination of distortions such as the double taxation on repurchase agreements. The tax
disincentives (distortions) in Shariah-based products were also addressed.
46. About 65% of the legal, regulatory, and tax related policy actions were in the CMDPC, with
follow-up actions in the FMDIP (Integration) which accounted for 20%. The FMDIP (Inclusion) had one
policy action in this area (tax treatment of Islamic finance instruments).
47. The legal and regulatory policy actions were consistent with the capital market master plans
(CMMP) 2004–2009 and CMMP 2010–2014 which focused on establishing a fair and transparent
framework that guarantees legal and regulatory certainty. Many of the legal, regulatory, and tax issues
addressed by the ADB programs were identified in the 2006 World Bank NBFI study which was a major
economic and sector work discussed with the government. The CMDPC included many of the
recommendations in the World Bank NBFI study. In addition, the 2010 FSAP, which included a Review of
Standards and Codes (ROSC) on International Organization of Securities Commissions (IOSCO), identified
20
deficiencies in the legal structure including a need to update the Capital Market Law. The FMDIP
(Integration) addressed some of the 2010 FSAP recommendations.
48. In terms of results, the 2010 FSAP noted improvements in improving regulatory transparency. In
addition, the 2010 FSAP found that the regulator had instituted “comprehensive operational programs
that meet the IOSCO norms.” The 2017 FSAP included a scorecard on the status of the 2010 FSAP
recommendations which showed that the legal, regulatory, and tax related recommendations for capital
markets were implemented.
49. Improving institutions: capital market supervision, investor protection, and skills of market
participants. About 20% of policy actions in the area of market infrastructure focused on improving
capacity of capital market supervision. These included strengthening internal governance, adopting code
of conduct, developing and implementing a human resource development plan, ensuring sufficient
resources for capacity building, and establishing the Capital Market Institute to upgrade skills of market
participants. About 80% of the capacity building policy actions targeted at capital market supervision
were accounted for by the CMDPC, with some follow-up actions in both the FMDIP (Integration) and
FMDIP (Inclusion).
50. Another 5% of the policy actions focused on improving capacity of rating agencies, establishing
institutional arrangements for improved investor protection, and training of market participants. Investor
protection initiatives included the establishment of the Investor Protection Fund; the amendments to the
Capital Market Law to strengthen provisions governing conflict of interest in collective investment
schemes; and regulations on advertising, disclosure, and sales of securities. A facility to enable
submission, monitoring, and addressing of investor complaints was also established. The CMDPC, FMDIP
(Integration), and FMDIP (Inclusion) had policy actions on investor protection.
51. All of the government CMMPs starting in 2000 emphasized the improvement of supervision
capacity, with emphasis on the independence of the regulator and the establishment of a risk-based
supervision. A recurring finding of the 2006 World Bank NBFI study was the poor level of enforcement
across different NBFI activities, with adverse effects on market confidence. Policy actions strengthening
supervision capacity was highly relevant. The 2010 FSAP linked weak enforcement to deficiencies in the
legal structure to augment regulators’ independence and enforcement powers, hence the focus of ADB
programs on improving the legal basis for improved supervision.
52. The 2017 FSAP identified challenges in transitioning to integrated supervision, including loss of
skills and experience. More fundamentally, the OJK Act promoted silo-based governance arrangements,
which inhibited harmonization of supervisory practices across sectors and increased the incentives for
regulatory arbitrage. In addition, recent reforms to strengthen legal protection for staff—a key
recommendation in the 2010 FSAP—were not sufficient. However, the 2017 FSAP noted the
improvement in insurance supervision since the enactment of the new Insurance Law in 2014.
53. Nonetheless, the 2017 FSAP noted the good progress in enhancing interagency cooperation
which is necessary to develop capital markets. The recently established high-level Financial Market
Coordination Forum and lower-level technical platforms provide promising vehicles to ensure an
integrated approach. Other examples of cross-agency coordination include the Bond Market
Development Team and the Capital Market Infrastructure Development Team.
54. Improving corporate governance and accounting standards. About 20% of policy actions in the
area of market infrastructure aimed to upgrade corporate governance and accounting standards. All ADB
programs had corporate governance and accounting-related policy actions. The policy actions on
corporate governance included amendments to the company law imposing liabilities of directors for false
or misleading information, issuance of regulations on information on corporate governance, and
introduction of ASEAN corporate governance standards and scorecard to listed companies. OJK has
21
developed a corporate governance roadmap for listed companies.27
The International Finance
Corporation (IFC) has also commissioned the development of the Indonesia Corporate Governance
Manual.28
55. In the area of accounting and auditing, policy actions included regulations on independence of
accountants providing audit services, requirements for publication of audited and unaudited financial
statement, development of accounting standards for sharia-based financing, and convergence of
Indonesian accounting standards with international accounting standards and international financial
reporting standards.
56. Improving corporate governance and accounting standards were identified in the 2005 and 2010
CMMPs as well as in the current financial sector master plan. The 2006 World Bank NBFI Study placed
top priority to improving corporate governance and listed several recommendations. The 2010 FSAP
identified improving accounting standards as critical to the strengthening of investor confidence and had
seven recommendations on accounting and auditing. The 2017 FSAP scorecard showed that all the
accounting and auditing related recommendations were either fully implemented or partially
implemented. In terms of corporate governance, there has been an improvement between 2012–2015
though Indonesia continues to lag peer countries in the region (Figure 4).29
57. Improving trading systems and stock market governance. About 15% of policy actions in the area
of market infrastructure covered trading systems and stock market governance. Stock trading actions
included implementation of scripless trading and remote trading, and improvements in governance of
clearing, depository, and settlement institutions. Stock market related actions included implementation
of merger of Surabaya and Jakarta Stock Exchanges (JSX and SSX) and broadening of ownership of the
merged stock exchange.
58. The Government master plans included continuous improvements in the securities trading
systems, with later plans focusing on convergence with international standards and preparation for
ASEAN financial market integration. The ADB policy actions were consistent with the Government master
plans as well as the 2006 World Bank NBFI Study which recommended the merger of JSX and SSX, move
to remote trading, and improvements in trading systems. The 2010 FSAP found numerous weaknesses
in the clearing and settlement systems.30
The 2017 FSAP scorecard show that the 2010 FSAP
recommendations on payments systems were implemented.
27 OJK. 2014. Indonesia Corporate Governance Roadmap. Jakarta.
28 IFC. 2014. The Indonesia Corporate Governance Manual. Jakarta.
29 ADB. 2015. ASEAN Corporate Governance Scorecard Country Reports and Assessments 2015. Manila.
30 The 2010 FSAP produced a Review of Standards and Codes (ROSC) on CPSS-IOSCO Core Principles for Government Bonds, Equities,
and Corporate Securities.
22
Figure 4: Indonesia—Corporate Governance Scores, 2012–2015
2. Instruments/Issuers
59. Capital markets include both public and private corporate issuers who issue a range of securities
instruments: bonds or fixed-income securities, stocks or equities which are risk-sharing with variable
returns, and bundles of claims such as asset-backed or mortgage-backed securities. About 40% of policy
actions in the issuer component of the capital market program supported the development of
government bond markets, with corporate bond and equity market development segments accounting
for about 20% each (Table 11).
Table 11: Distribution of Issuer Policy Actions, 2002–2017
Policy-based loans
Government
Bond
Corporate
Bond
Municipal
Bond Sukuk Equity
Infrastructure
Facility
Total
Issuers
FGSSRP 0% 0% 0% 0% 0% 0% 0%
CMDPC
Subprogram 1 41% 29% 6% 12% 12% 0% 100%
CMDPC
Subprogram 2 38% 23% 0% 15% 15% 8% 100%
Subtotal 36% 14% 7% 7% 36% 0% 100%
FMDIP (Integration) 36% 14% 7% 7% 36% 0% 100%
FMDIP (Inclusion)
Subprogram 1 33% 0% 33% 33% 0% 0% 100%
FMDIP (Inclusion)
Subprogram 2 0% 0% 100% 0% 0% 0% 100%
Subtotal 25% 0% 50% 25% 0% 0% 100%
Total 38% 21% 8% 13% 19% 2% 100%
CMDPC = Capital Market Development Program Cluster, FGSSRP = Financial Governance and Social Security Reform Program, FMDIP
(Inclusion) = Financial Market Development and Inclusion Program, FMDIP (Integration) = Financial Market Development and
Integration Program, sukuk = Islamic bonds.
Sources: Asian Development Bank Independent Evaluation Department, Policy Matrices.
Source: ADB. 2017. ASEAN Corporate Governance Scorecard Country Reports and Assessments 2015
(Joint Initiative of the ASEAN Capital Markets Forum and the Asian Development Bank). Manila.
23
60. Developing government bond markets. Government bonds are the backbone of fixed income
securities in Asia, and provide a benchmark yield curve.31
In addition, a government securities market
provides a source of domestic funding of budget requirements as well as strengthens the transmission
and implementation of monetary policy. Prerequisites for an efficient government securities market
include: a stable and credible macroeconomic framework (Box 3); effective legal, tax and regulatory
infrastructure; smooth and secure settlement arrangements; and a liberalized financial system with
competing intermediaries.32
61. The government securities market has its roots in the bank recapitalization program in 1999 with
the issuance of the recapitalization bonds (footnote 2). Trading in recap bonds began in 2000, the
Ministry of Finance (MOF) Debt Management Office was established in 2001, and the Government Debt
Securities Law was enacted in 2002, followed by the first issuance of debt securities for budget financing.
ADB began supporting the development the government securities market with the CMDPC.
62. ADB program policy actions on government bond markets had three focus areas. First, the actions
sought to develop the benchmark yield curve by issuing appropriate benchmark securities for
government debt securities. Second, the actions supported the establishment of a system of primary
dealership with underwriting and market making responsibilities. Third, the actions sought to improve
liquidity mainly by facilitating the development of the repurchase market. In addition, the government
bond-related actions included regulations to strengthen price information disclosure as well as
establishment of an interagency committee to improve coordination.
63. The CMDPC incorporated many of the government bond-related recommendations in the World
Bank 2006 NBFI study, including developing a primary dealer system with market marking obligations,
further development of a repo market, improving the certainty of issuance through announcing a
calendar, improving post-trade price transparency, and improving high-level and operational
coordination between BI, Bapepam-LK, and the MOF. The FMDIP (Integration) followed up the reforms
begun under the CMDPC and supported the implementation of the recommendations in the 2010 FSAP,
including actions to improve the conduct of monetary policy through the securities market based on the
31 Issuance by ADB of bonds in local currencies in selected ASEAN+3 countries also help create domestic benchmarks. ADB
established a $10 billion equivalent Asian Currency Note Program (ACNP) in 2006, but the Indonesian rupiah is not one of the
currencies included in the program. ADB also has a MYR3.8 billion Medium Term Note Program in Malaysia.
32 World Bank and IMF. 2001. Developing Government Bond Markets. Washington, D.C.
Box 3: Inflation Performance and Development of Bond Markets
Several studies have found that economies with better inflation performance had more developed local currency
(LCY) bond markets (as percentage of gross domestic product [GDP]) and relied less on foreign currency bonds
(share of LCY bonds in total bonds outstanding). Inflation performance was also a determinant of sovereign bond
yields.
After the Asian financial crisis of 1997/1998, Indonesia pursued various reforms to achieve macroeconomic
stability and control inflation. In 2005, Indonesia adopted an inflation targeting framework in its monetary
operations with price stability as the primary objective.
An International Monetary Fund study found that when comparing 2006–2014 with 1991–2005, Indonesia
performed better in terms of GDP growth, inflation, and inflation volatility than other emerging market and
developing economies with inflation targeting regimes. Indonesia 10-year bond yields have gone down in line
with the improved inflation and inflation volatility performance.
Sources: ADB. 2015. ADB Economics Working Paper Series No. 448: Bond Market Developing in Developing Asia. Manila; IMF.
2016. ASEAN-5 Cluster Report – Evolution of Monetary Policy Frameworks. Washington, D.C.; IMF. 2016. ASEAN-5 Cluster
Report – Evolution of Monetary Policy Frameworks. Washington, D.C.
24
results of the assessment of Code of Good Practices on Transparency in Monetary Policy. The FMDIP
(Inclusion) further supported improvements in the repo market and the development of the sukuk.
64. ADB interventions contributed to several results. First, the government securities market has
provided the market with a yield curve (Table 12) though the 2017 FSAP recommended consolidating
the number of instruments issued. Second, there has been an improvement in the liquidity of LCY
government securities (Table 13), though there are opportunities for further improvements in liquidity
by addressing the small size of issuance across a variety of instruments (T-bills, T-bonds, and Sukuk).
Third, the primary dealer system is in place and the 2017 FSAP noted that the government securities
market is “relatively well developed.” Fourth, yields of benchmark 10-year government bond has been
declining, reflecting progress in maintaining macroeconomic stability, controlling inflation, and
establishing credibility of monetary policy (Box 3). Finally, ADB has been supporting the development of
a municipal bond market with TA though the first issuance is still in the works.
Table 12: LCY Government Securities Yield Curve, December 2017
ID - LCY Government
Bonds
Latest Closing
(6 December 2017)
YTD
(bp)
MTD
(bp)
1 Year 5.206 ↓172.1 ↓15.4
2 Year 5.681 ↓178.6 ↓3.5
3 Year 5.946 ↓162.1 ↓4.0
4 Year 6.032 ↓166.3 ↓0.7
5 Year 6.055 ↓152.5 ↓2.5
6 Year 6.301 ↓153.5 ↓2.0
7 Year 6.506 ↓150.9 ↓2.2
8 Year 6.574 ↓153.9 ↓2.5
9 Year 6.593 ↓148.4 ↓2.1
10 Year 6.528 ↓144.5 ↑1.1
15 Year 7.063 ↓113.8 ↑0.6
20 Year 7.212 ↓98.3 ↑0.8
30 Year 7.267 ↓129.9 ↑0.1
bp = basis point, ID-LCY = Indonesia local currency, LCY = local currency, MTD =
month-to-date, YTD = year-to-date.
Source: AsianBondsOnline.
Table 13: Government Bond Market Indicators, 2007–2016
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Outstanding Government
Bond Issues (Rp trillion) 726 705 842 844 847 847 903 1307 1500 1879
Government Bond
Turnover 71.0% 46.8% 35.8% 58.3% 71.3% 63.8% 52.0% 63.3% 63.5% 55.0%
Government Bond Bid-Ask
Spread 6.4% 3.7% 4.0% 4.8% 5.0% 5.9% 7.6% 6.0% 9.2% 5.2%
Rp = Indonesian rupiah.
Source: Asian Bond Monitor.
65. The 2017 FSAP recognized that the government bond markets were relatively well developed. It
nonetheless made two recommendations. First, MOF should enhance liquidity of its benchmark securities
since a growing number of instruments and larger holdings of buy-and-hold investors may adversely
affect liquidity along the curve. Second, in the primary markets, MOF should reduce fragmentation and
increase the standardization and size of benchmarks.
66. Developing corporate bond markets. Much of the emphasis in ASEAN countries on developing
corporate bond markets stem from the consensus diagnosis of the 1997 crisis, which could be traced to
several underlying problems in the region’s financial systems (para. 4). In addition, countries were
25
perceived to be excessively dependent on volatile capital inflows despite an abundance of domestic
saving.33
67. About 20% of policy actions in the area of instruments/issuers supported the development of
corporate bond markets. There were two areas of focus. First, the programs sought to strengthen price
information disclosure and transparency through regulations and the establishment of an independent
bond pricing agency. Second, the programs supported conditions that would enable specialized
institutions to issue bonds: (i) issuance of amendments to regulations that would enable the Secondary
Mortgage Facility, which became the Sarana Multigriya Finansial (SMF) to lend for long-term tenors to
develop mortgage backed securities; and (ii) establishment of infrastructure facilities to mobilize funds
from the bond market for lending to infrastructure companies (paras. 88–93).
68. The CMDPC accounted for about 80% of the policy actions supporting the development of the
corporate bond market, with the majority of CMDPC corporate bond related actions focusing on
information disclosure and transparency. The FDMIP (Integration) accounted for other policy actions on
bond market development, focusing on improving the functioning of the Bond Pricing Agency. There
were no follow-up actions on the corporate bond market in FMDIP (Inclusion). However, ADB supported
the development of the infrastructure financing facility with a project loan and a nonsovereign operation
(NSO) investment (paras. 88–93). In addition, there was a TA for the development of the SMF.
69. The focus on price information disclosure was highly relevant, and the establishment of the Bond
Pricing Agency was a significant institutional addition to improve the information basis for pricing
securities. The CMMP 2005–2009 placed emphasis on transparency of market information as a principal
constraint to development of the bond market. However, more could have been done to strengthen
credit rating agencies—the 2006 World Bank NBFI study had several recommendations focusing on
improving qualifications and independence of rating agencies. The initiatives to increase the supply of
bonds outstanding by developing mortgage backed securities and infrastructure financing facilities were
also relevant. More could have been done in follow-up programs on the development of the corporate
bond market, given the foundation that has been put in place in early programs and the current emphasis
in the Government financial sector plan on financing the real sector (para. 68).
70. The McKinsey scorecard rated price discovery 2 out of 5 indicating more could be done in this
area (Table 14). There is mandatory trade reporting for all trades executed with information available to
market participants—an IMF paper34
rates transparency to be at par with international best practices.
Indonesia has adopted disclosure-based approaches to the registration/review process for prospectus for
public offering of corporate bonds.
Table 14: Capital Market Health Scorecard: Indonesia
Parameters
Score
(1=lowest; 5=highest)
Foundational Policies
Benchmark Assets 3
Supply of Capital 2
Demand for Capital 1
Intermediation 2
Free Markets 2
Price Discovery 2
Market Architecture and Design
Regulatory Framework 2
Cornerstone Institutions 3
33 IMF. 2011. ASEAN5 Bond Market Development: Where Does It Stand? Where Is It Going? Washington, D.C.
34 IMF. 2011. Developing ASEAN5 Bond Markets: What Still Needs to be Done? Washington, D.C.
26
Parameters
Score
(1=lowest; 5=highest)
Regulations and Standards 2
Taxation 2
Market Infrastructure and Technology 2
Overall Score 2
Source: McKinsey. 2017. Deepening Capital Markets in Emerging Economies.
71. In terms of increased issuance, the policy actions targeting specific issuers or sectors have begun
to produce results. SMF begun to issue mortgage backed securities in 2009 and is the 13th largest issuer
of LCY corporate bonds.35
Other banks such as Bank Tabungan Negara (BTN) has also begun to issue
mortgage backed securities. Two infrastructure financing facilities had been established and both had
begun to issue corporate bonds, with one facility ranked 18th largest corporate bond issuer (paras. 88–
93).
72. While overall LCY corporate bonds outstanding has been growing at a compound annual growth
rate (CAGR) of 18% during 2007–2016, Indonesia continues to lag its peer countries based on LCY
corporate bonds to GDP (Tables 15 and 16). However, in terms of LCY corporate bond liquidity, Indonesia
outperformed Malaysia and Thailand. Nonetheless, the 2017 FSAP made several recommendations to
advance the development of the corporate bond markets (para. 98).
Table 15: Comparative Data of Peer Countries
Indicator INO MAL PHI THA
Corporate LCY Bond % of GDP (end-2016) 2.5 43.4 6.2 21.2
Market Capitalization % of GDP (end 2015) 41.0 129.3 81.7 88.3
Government LCY Bond Turnover Ratio (2016) 55.0% 38.5% na 69.3%
Corporate LCY Bond Turnover Ratio (2016) 20.5% 8.0% na 10.0%
Stocks Traded, Turnover Ratio of Domestic Shares (2016) 22.4% 26.9% 14.5% 81.0%
GDP = gross domestic product, INO = Indonesia, LCY = local currency, MAL = Malaysia, na = not available, PHI = Philippines,
THA = Thailand.
Sources: Asian Development Bank. AsianBondsOnline; World Bank Global Financial Development Database; Bank Indonesia;
websites of Central Banks of Malaysia, the Philippines, and Thailand.
Table 16: Corporate Bond Market Indicators, 2007–2017
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Outstanding Corporate Bond Issues
(Rp trillion) 79 73 88 115 147 187 218 223 250 312
Outstanding Corporate Bond Issues
(% of Gross Domestic Product) 2.0% 1.5% 1.6% 1.7% 1.9% 2.2% 2.3% 2.1% 2.2% 2.5%
Corporate Bond Turnover 24% 17% 12% 22% 24% 24% 23% 19% 20% 21%
Rp = Indonesian rupiah.
Source: Asian Bond Monitor.
73. Deepening equity markets. Prior to the CMDPC, Indonesia’s stock market was at 30% of GDP in
2005, lower than the stock markets in peer countries. There was an insufficient pool of listed companies,
inadequate infrastructure, weak investor protection, and lack of transparency and disclosure. The 2006
World Bank NBFI Study found that the stock market was unable to mobilize capital due to weak corporate
governance, including lack of controls on dominant owners and inadequate oversight over the integrity
of financial disclosure.
74. To deepen equity markets, ADB programs focused on the following areas. First, the CMDPC
encouraged the increase in listed companies by enjoining SOEs to list in the context of their privatization.
Second, the CMDPC set the conditions for the development of instruments such as stock options,
35 ADB. 2017. Asia Bond Monitor. Manila.
27
exchange traded funds, real estate investment trusts, and practices such as short selling. Third, the FMDIP
(Integration) sought to improve investor protection by establishing the Securities Market Investor
Protection Fund, improving industry disclosure, and issuing a code of conduct for market intermediaries.
Fourth, the FMDIP (Integration) supported initiatives to improve the ease of transaction, including the
reduction of timeline for IPO review and approval by regulator. The FMDIP (Inclusion) did not include
specific actions on developing the equity markets.
75. Stock market capitalization has been growing at a CAGR of 18% during 2007–2016, but at 41%
of GDP in 2016 remains well below peer countries. There has been an increase in number of listed
companies, from 344 in 2006 to 537 in 2016, with SOEs currently accounting for about 25% of market
capitalization. Nonetheless, a study36
found that the number of companies electing to list—relative to
peer countries—has remained low due to perceptions of a high regulatory burden on listed companies
as well as reluctance to engage in greater disclosures, which could potentially lead to higher tax liabilities.
The turnover ratio of domestic shares has declined during the past 10 years with Indonesia’s ratio in 2016
lower than that of the Thailand and Malaysia but higher than that of the Philippines (Table 17).
Table 17: Stock Market Indicators, 2007–2016
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Market Capitalization (Rp trillion) 1988 1076 2019 3247 3537 4127 4219 5228 4873 5753
Market Capitalization (% of Gross
Domestic Product) 50% 22% 36% 47% 45% 48% 44% 49% 42% 46%
Number of Listed Companies 383 396 398 420 440 459 483 506 521 537
Trading Value of Shares
(Rp trillion) 1050 1064 975 1176 1223 1116 1522 1453 1406 1845
Trading Value of Shares to Market
Capitalization 53% 99% 48% 36% 35% 27% 36% 28% 29% 32%
Rp = Indonesian rupiah.
Source: Indonesia Stock Exchange Statistics, various issues.
76. Developing the sukuk. The ADB programs supported the development of sukuk (Islamic bonds)
which are structured to generate returns consistent with Islamic law which prohibits interest (riba). Sukuk
is defined as certificates of equal value representing undivided shares in the ownership of tangible assets,
usufructs, and services. Sukuk issuance is backed by assets and is viewed as a useful instrument for
infrastructure financing since the underlying asset is the project itself. The development of the sukuk
market has been a main component of the Government capital market and financial sector master plans
since 2005.
77. The CMDPC supported the establishment of the legal and regulatory framework to enable the
issuance of sharia-based securities, as well as the establishment of a mechanism for effective cooperation
and coordination between Bapepam-LK and the National Shariah Board. The FMDIP (Integration) and
FMDIP (Inclusion) expanded the number of eligible investments by revising the rules and improved the
enabling environment by ensuring tax neutrality and equivalence between Islamic finance and
conventional finance.
78. The sukuk market has been developed (Figure 5). Sovereign LCY sukuk outstanding increased
from Rp 5 trillion in 2008 to Rp 256 trillion in 2016 representing about 14% of total LCY Government
bonds. LCY corporate sukuk increased from Rp 1.5 trillion in 2008 to Rp 11.6 trillion in 2016, but
represented only about 4% of total LCY corporate bonds. While the LCY sukuk remains small compared
to the market in Malaysia, Indonesia has become the largest sukuk issuer in terms of US dollars.37
36 Oliver Wyman and Mandiri Institute. 2015. Financial Deepening in Indonesia. Jakarta.
37 Rachmatarwata, Isa (MOF). 2016. Sukuk for Infrastructure Development: Indonesia Experience (ppt). Jakarta.
28
Sources: Asian Bond Monitor; Sukuk for Infrastructure (2016).
3. Investors
79. ADB has a long history of engagement in the insurance and pension sectors in Indonesia
(footnote 2). Insurance and pension funds are some of the largest investors in securities instruments and
can play a major role in the development of capital markets (para. 10). Within the investor component
of the ADB’s capital market programs during 2002–2017, about 50% of the policy actions supported the
insurance sector and about 40% supported pension funds (Table 18).
Table 18: Distribution of Investor Policy Actions, 2002–2017
Policy-based loans Pension Funds
Insurance
Companies Other Funds
Total
Investors
FGSSRP 45% 55% 0% 100%
CMDPC
Subprogram 1 40% 30% 30% 100%
CMDPC
Subprogram 2 50% 50% 0% 100%
Subtotal 43% 36% 21% 100%
FMDIP (Integration) 22% 56% 22% 100%
FMDIP (Inclusion)
Subprogram 1 33% 33% 33% 100%
FMDIP (Inclusion)
Subprogram 2 0% 100% 0% 100%
Subtotal 20% 60% 20% 100%
Total 38% 50% 12% 100%
FGSSRP = Financial Governance and Social Security Reform Program, CMDPC = Capital Market Development
Program Cluster, FMDIP (Inclusion) = Financial Market Development and Inclusion Program, FMDIP (Integration)
= Financial Market Development and Integration Program.
Sources: Asian Development Bank Independent Evaluation Department, Policy Matrices.
80. Developing the insurance industry. In 2000, the Indonesian insurance industry was characterized
by a large number of companies in poor financial condition due to insufficient capital, asset-liability
mismatches, and weak governance. The MOF Insurance Directorate was also characterized by lack of
independence and weak supervision capacity leading to lax enforcement of regulations. In 2002, 25 life
insurance firms accounting for about 60% of the market in terms of gross premiums had negative
solvency margins. A well-publicized bankruptcy case against an insurance firm brought attention to the
serious deficiencies in the legal framework and judicial process which had an adverse impact on investor
confidence.
520
44
78
124
169
206
165
256
0
50
100
150
200
250
300
2008 2009 2010 2011 2012 2013 2014 2015 2016
Figure 5: Growth of Government Local Currency Sukuk,
2008–2017 (Rp trillion)
29
81. The 2002 FGSSRP supported major reforms in the legal and regulatory framework for insurance
to improve transparency, increase capital requirements, and enhance sanctions on firms not in
compliance with insurance regulations. In addition, the program included provisions for increasing
supervision capacity through training as well as issuance of guidelines for on-site examination in line with
international best practices. The 2007 CMDPC supported amendments to the Insurance Law to achieve
greater compliance with International Association of Insurance Supervisors (IAIS) Core Principles (ICP),
updated risk-based parameters and minimum capital requirements, and developed programs to
strengthen the actuarial profession. The FMDIP (Integration) and FMDIP (Inclusion) supported
enforcement of the minimum capital requirements, improvements in the regulatory regime, and
strengthening of OJK oversight, notably in the risk management area.
82. The insurance sector has been the fastest growing segment in the financial system with a CAGR
of 15% during 2007–2016. While the planned consolidation in the industry has not yet been completed,
there has been a reduction in the number of insurance companies from 157 in 2005 to 137 in 2016, a
12% reduction compared to the CMDPC target of 20%–25%. The 2017 FSAP assessed that insurance
regulation and supervision had improved since the establishment of OJK and the enactment of the new
Insurance Law in 2014. OJK had also enhanced regulations for corporate governance and risk
management. Nonetheless, the 2017 FSAP assessment of insurance supervision against ICP found
significant shortfalls in the observance of core principles, mainly in the regulation and supervision of
insurance groups.
83. Developing the pension and provident funds. The old age or retirement benefit system in
Indonesia targets formal sector workers exclusively. The system has three mandatory programs covering
formal private sector workers, civil servants, and the armed forces through state-run monopolies. These
mandatory schemes can be supplemented by voluntary pensions of two types—employer pension funds
(DPPKs) and financial institution pension funds (DPLKs). There was no unified policy, supervisory,
regulatory framework for the pension sector with multiple ministries involved in the control and
regulation of pension programs. Fiscal sustainability of the Taspen and Asabri managed programs was a
critical issue with estimated unfunded liabilities in 2001 of Rp 380 trillion (footnote 17).
84. The 2002 FGSSR had policy actions that supported significant reforms in the pension system,
including the development of a new law to unify programs and improve social security framework and
improvements in governance of mandatory pension and retirement schemes. In addition, the FGSSR set
the stage for future reforms by including as policy actions: (i) assessment and development of options
for improving the financial condition, operations, and fiscal sustainability of mandatory programs; (ii)
improvement of management of voluntary pension funds through certification requirement for fund
managers; and (iii) development of proposals for expansion of social security systems to the informal
sector.
85. The CMDPC followed up the FGSSR by supporting: (i) changes in the Pension Law and regulations
to improve fund governance and expand the range of allowable investments, and (ii) implementation of
risk-based supervision of pension funds. The FMDIP (Integration) further enhanced governance of
pension funds by requiring a separation between pension founder and administrator, and introducing
fit and proper tests for administrators. The FMDIP (Inclusion) supported enactment of regulations on
asset liability management and OJK oversight of new social security agencies.
86. The National Social Security System (SJSN) Law was enacted in 2004, supported by ADB TA.
Implementation of pension reform included the transformation of current fund administrators into Badan
Penyelenggara Jaminan Sosial (BPJS, Social Insurance Administration Organization) bringing Indonesia in
compliance with established international practice, improvement of the legal and financial structure of
the social insurance system by legally separating the assets of BPJS from the assets in the social security
funds, and supervision of BPJS by the National Social Security Council, OJK, and the State Financial Audit
30
Board. ADB also provided the Government with assistance in a special audit of Jamsostek, the social
security organization for the private sector, which undertook several initiatives to comply with the SJSN
Law.
87. Pension assets grew by a CAGR of 12% during 2007–2016, though pension assets as percentage
of GDP declined from 2.2% in 2007 to 1.9% in 2016. Nonetheless, the pension reform is expected to
increase mobilization of domestic savings through stronger enforcement of mandatory contributions and
participation, expansion of pensions to informal sector, and better governance. To improve participation
of pension funds in capital markets, the 2017 FSAP recommended improvement in the tax framework to
encourage participation in different investment products (e.g., in mutual funds), and changes in
regulations that drive pension investments into short-term products and restrict pension funds’ ability to
use derivatives to manage their portfolios.
4. Infrastructure Finance
88. Financing Indonesia’s infrastructure investments has been one of main motivations for the
Government efforts to develop capital markets. The country’s core infrastructure stock has not kept pace
with economic growth with infrastructure stock as share of GDP declining over the past decade. This has
contributed to economic and social costs through high transport costs, poor water and sanitation, and
energy shortages. The World Bank estimates that Indonesia has lost more than 1% additional GDP growth
due to under-investment in infrastructure.
89. In addition to developing the corporate bond market, ADB supported innovative financing
mechanisms to develop infrastructure finance. In particular, the CMDPC had a policy action that
eventually led to the establishment of two infrastructure financing companies and one infrastructure
guarantee facility. The infrastructure financing companies—Sarana Mulit Infrastruktur (SMI) and
Indonesia Infrastructure Finance (IIF)—were institutional responses to the lack of long-tenor financing
from commercial banks, undeveloped capital markets, and lack of skills in developing public-private
partnership (PPP) projects. Both SMI and IIF were envisioned to create new financial opportunities, such
as by introducing innovative products, tapping underutilized sources of funds such as contractual savings
institutions, and developing capacity to syndicate financing. The Indonesia Infrastructure Guarantee Fund
(IIGF) provides coverage for certain central and government performance risks under PPP schemes.
90. SMI was established in 2009 initially as a conduit for ADB and World Bank loans to the IIF.38
Since
its establishment, SMI has become an active non-bank financial institution supporting the Government’s
infrastructure development agenda, including through partnerships with the private sector in PPP
projects. SMI has three product lines—financing, advisory services, and project development with clients
from both the public (including SOEs and municipal governments) and private sector. SMI has been
expanding its range of financial products that include promoter financing, bridge loans, and
subordinated loans, in addition to the traditional loan and equity investment products offered by other
financial institutions. SMI continues to be 100% state-owned.
91. SMI has experienced tremendous growth, with outstanding commitments increasing from Rp 2
trillion in 2012 to Rp 45 trillion in 2016. Total project cost of SMI investments as of July 2017 was Rp 265
trillion. SMI has a BBB-/Stable rating from Fitch since 2013. SMI’s LCY bond outstanding as of June 2017
was Rp 6.7 trillion, making SMI the 18th largest issuer in terms of bonds outstanding (footnote 35).
92. IIF was established in 2010 and currently has as its shareholders: the Government (through SMI),
three development finance institutions (DFIs) (ADB, IFC, and Deutsche Investitions-und
Entwicklungsgesellschaft [DEG]), and SMBC (PT Bank Sumitomo Mitsui Indonesia). The longer-term plan
is for the transformation of IIF into a private sector led institution, though at this time, there is no clear
38 ADB and the World Bank provided loans to the Government which were lent by the Government to SMI for relending to IIF in
the form of subordinated debt. This was done because IIF is a private sector company.
31
strategy—other than the exit of DFIs through IPOs—for IIF’s transfer to private sector control. IIF has two
main product lines—lending primarily to the private sector and advisory services to both the public and
private sectors. IIF was envisioned to address systemic gaps and avoid duplicating roles of or competing
against existing institutions mainly by developing new instruments and clients. IIF’s outstanding
commitments have grown to Rp 10 trillion as of end-2016—about one-fourth the size of SMI. To date,
IIF has not introduced new instruments and relied on traditional product offerings. However, it has issued
LCY bonds, with about Rp 1.5 trillion outstanding as of June 2017.
93. The contribution of SMI and IIF has been through its issuance of LCY bonds whose proceeds are
lent or invested to infrastructure companies, most of which are not able to access the bond markets or
are able to but at a higher cost. However, neither SMI nor IIF have developed or issued new capital market
instruments, such as infrastructure or project bonds. There is an initiative underway in OJK—supported
by World Bank—to develop regulations that would enable issuance of infrastructure bonds. The issuance
of enabling infrastructure bond regulations would help SMI and IIF utilize this instrument.
5. Assessment
94. Market infrastructure. ADB support to the development of the capital market infrastructure has
been relevant overall. The programs have appropriately focused on “soft” infrastructure and laid the legal
and regulatory foundation for capital market development. In addition, the programs paid attention to
developing and strengthening institutions, including the establishment of new ones such as the Bond
Pricing Agency and the Investor Protection Fund. The focus on enhancing price discovery and information
disclosure was an important building block to the development of markets. There was also sufficient
follow-up by the FMDIP (Integration) and FMDIP (Inclusion), including in the areas of corporate
governance, taxation, and accounting. Nonetheless, there is continuing need to upgrade and update
capital market infrastructure, especially the “soft” components, to keep pace with market developments.
95. The capital market programs resulted in improvements in the market infrastructure overall,
though there remains scope for further improvement. One study39
found that in terms of physical or
“hard” market infrastructure, Indonesia has the building blocks in place.40
As noted above, based on the
McKinsey scorecard for market architecture and design, Indonesia scored a “2” out of 5 overall, with
cornerstone institutions having the highest score among the different dimensions. The 2017 FSAP
identified several areas for improvement focusing on “soft” infrastructure: (i) further review of the tax
framework, (ii) strengthening of creditor rights, (iii) elimination of regulatory hurdles affecting investors,
(iv) enhancements in the Company Law and corporate governance frameworks, and (v) further
improvements in financial literacy of issuers and investors.
96. Issuer/Instruments. The support to issuer/instrument component of the capital market program
was relevant overall. Of critical importance was the support of the programs to the development of the
government bond market, which provides the benchmark rates for financial markets. The CMDPC
government bond market initiatives, including the support to the establishment of a primary dealer
system, were followed up by the FMDIP (Integration). The FMDIP (Inclusion) focused more on the sukuk
market, a component of the government bond market.
97. The initiatives supporting the corporate bond and equity markets suffered from a lack of long-
term roadmap. The CMDPC policy actions on pricing and information disclosure, along with the
establishment of the Bond Pricing Agency, were important building blocks towards deeper corporate
bond market. The FMDIP (Integration) strengthened the information aspects of the market, including the
39 Oliver Wyman and Mandiri Institute. 2015. Financial Deepening in Indonesia. Jakarta.
40 The study cited the formation of the Indonesia Stock Exchange resulting from a merger of two exchanges (also recommended
by the 2006 World Bank NBFI Study), the Indonesian Clearing and Guarantee Corporation (KPEI) providing transaction clearing
and settlement guarantee services, and the Indonesian Central Securities Depository (KSEI) providing securities depository and
transaction settlement services.
32
functions of the Bond Pricing Agency. However, there was less attention paid to deepening the corporate
bond market after the CMDPC. In retrospect, a roadmap would have helped define the sequencing of
government actions to develop the corporate bond market, and inform the design of ADB support over
the medium-term. Box 4 gives an example of sustained World Bank Group support to bond market
development.
98. Both the 2017 FSAP and the McKinsey study rated favorably the progress in the development of
the government bond market. While there has been progress in deepening the corporate bond with a
CAGR of 18% during 2007–2016, the corporate bond market remains shallow by international
standards—McKinsey scored issuer participation the lowest (1 in a scale of 1–5 with 5 being the highest).
Most of the instruments are plain vanilla bonds. The 2017 FSAP found preference for SOE instruments
and recommended the actions to accelerate the number of private issuers and instruments:
(i) Benchmarks. In the primary market for government bonds, reduce fragmentation and
increase standardization and size of benchmark issues;
(ii) Issuance framework. Expedite the approval process of public offers and implement a new
special offering regime to qualified investors;
(iii) Captive demand for SOE instruments. Review regulation that creates captive demand such
as investment requirements in state and SOE instruments for NBFIs; and
(iv) Secondary market liquidity. Potential solutions could focus on market making requirements
and the introduction of an organized call market.
99. The 2017 FSAP recommended several actions to improve equity markets including: (i) a review of
the tax framework for investors (e.g., the merit of tax exemptions for transactions below a maximum
amount); (ii) strengthening of securities firms’ qualification; (iii) diversification of the pool of IPO
investors; and (iv) enhancements in the company law and corporate governance framework to protect
minority shareholders.
100. Investors. ADB support to the insurance and social security (pension) sectors were relevant and
part of ADB engagement that pre-dated the 2002 FGSSRP (Appendix 1). The reforms in these two sectors
supported by the FGSSRP were substantive, eventually resulting in a restructuring of the insurance sector
and the establishment of new governance arrangements in the social security area. The FGSSRP initiatives
in these sectors were followed by the successor programs.
101. The various insurance industry reforms supported by ADB as well as by the World Bank41
have
begun to pay dividends in the form of growth in insurance assets with signs that the industry is
41 World Bank. 2014. Financial Sector Reform and Modernization Development Policy Operation. Washington, D.C.
Box 4: World Bank Group Support for Viet Nam Bond Market Development
The World Bank Group (WBG) had a continuous series of interventions to support bond market development in
Viet Nam since Fiscal Year (FY) 2008. The starting point was the development of the Bond Market Development
Roadmap (FY 2008), financed by a grant, followed by the Viet Nam Capital Markets project (FY 2009). The work
began with the creation of core institutions and setting of standardized market practice. The successor Viet Nam
Bond Markets Development project (FY 2015) drew on the 2014 Financial Sector Assessment Program (the first
for Viet Nam). The projects were mainly grant funded (by the International Development Association and the
Financial Sector Reform and Strengthening [FIRST] Initiative) and had strong participation by the International
Finance Corporation in project implementation. WBG’s Independent Evaluation Group found “an increase in the
volume of mid to long-term corporate bonds that could be associated with, if not attributed to, WBG
interventions.”
Source: Independent Evaluation Group. 2016. World Bank Group’s Support for Capital Market Development. Washington, D.C.
33
consolidating. There have also been major pension reforms which have taken several years to implement.
While these reforms set the stage for growth of pension funds, pension fund assets as percentage of
GDP have been stagnant since 2010. ADB programs also had components supporting mutual funds,
which had a CAGR of 29% during 2001–2015, though the ADB focus on the investor side of capital
markets were on insurance and pension. The 2017 FSAP recognized the various measures implemented
by the authorities to mobilize savings, but found scope for improvement in several areas, including:
(i) Tax framework. The framework currently deters broader participation in different investment
products such as by pension funds in mutual funds;
(ii) Regulation. Current features drive pension investment into short term products and restrict
pension funds’ ability to use derivative to manage their portfolios;
(iii) Investor literacy. There is a need to address conservative investor culture and judiciously
increase participation in capital market products; and
(iv) Hedging instruments. These instruments would allow banks and institutional investors to
manage longer term exposures and duration mismatches.
102. Infrastructure finance. The initiatives to support the development of infrastructure finance to
enable greater private sector investment in infrastructure were relevant. The CMDPC policy action
establishing the infrastructure finance facilities supported an institutional response to the lack of
infrastructure finance while contributing to the development of bond markets. While there were no
follow up actions in the PBLs after the CMDPC, the ADB loan to and equity investment in IIF helped in
the increase in the supply of corporate bonds. However, there were missed opportunities in terms of
assisting OJK in developing the regulatory framework that would enable the issuance of project and
infrastructure bonds.
103. The contribution of SMI and IIF has been through its issuance of LCY bonds whose proceeds are
lent or invested to infrastructure companies, most of which are not able to access the bond markets or
are able to but at a higher cost. However, there have not been new capital market instruments, such as
infrastructure or project bonds. Nonetheless, there is an initiative underway in OJK—supported by World
Bank—to develop regulations that would enable issuance of infrastructure bonds. The issuance of
enabling regulations would help SMI and IIF develop the infrastructure bond instrument. In addition, as
noted in various World Bank and ADB reports, improvements in the PPP process would help increase the
pipeline of projects to be financed by SMI and PPP—these improvements had been supported by both
ADB and the World Bank through infrastructure program loans. The 2017 FSAP recommended the
following specific measures to enable project and infrastructure finance:
(i) Legal and regulatory framework. There is a need to strengthen the framework for special
purpose vehicles (SPVs) and their tax treatment; improve the regulatory framework for bond
issuance (e.g., offering regime for qualified investors); and align investment regulation of
institutional investors with the framework for offering and listing bonds.
(ii) Project financing instruments and guarantees. Several capital market structures are being
used and tested internationally in project financing. In Indonesia, SMI, IIF, and IIGF could be
instrumental in the development of such instruments.
34
E. Issues and Suggestions
1. Issues
104. The capital market continues to be described as shallow (para. 14). There were areas where the
ADB programs contributed to results, mainly in government bond markets, Islamic capital market, and
the insurance sector. However, relative growth in the corporate bond market and pension funds has
lagged those of peer countries. The 2017 FSAP has provided some recommendations on how to stimulate
growth in corporate bonds (para. 98). In the case of pension funds, the pension reforms have yet to have
a significant impact on pension fund growth. In addition, the majority of pension fund assets are in time
deposits in banks and government securities, with only about 20% invested in corporate bonds.
105. While there was significant progress in developing the market infrastructure, there are important
gaps in “soft” infrastructure. Various reports have identified weaknesses in the insolvency and creditor
rights regime, and in the protection of minority shareholders. There is scope for improving the
frameworks for taxation of financial instruments and for corporate governance. In addition, the time and
cost for public offering process in both the equity and bond markets are relatively long and costly. Finally,
the regulatory regime creates an uneven playing field that favors SOE instruments.
106. ADB support to capital market development over the past 15 years addressed a wide range of
issues but lacked clear articulation of a longer-term reform roadmap. ADB engagement covered a large
number of capital market areas, and was both demand-driven and opportunistic. The 2002 FGSSRP, for
example, focused on investors—pension funds and insurance companies—building on previous work by
ADB in these sectors and responding to client demand despite capital markets lacking many of the
preconditions for development. The 2007 CMDPC was comprehensive and provided an opportunity for
defining priorities and sequencing, but did not do so. As a result, several important initiatives were not
sustained through follow-up support.
107. The use of PBLs was consistent with ADB policy, but could have been supported more effectively
by other ADB instruments. Accompanying TA has been a common feature of the ADB programs, but as
noted in the CMDPC PPER, such TA projects did not match the scope and complexity of the programs. As
noted in para. 41, only 3 out of 16 TA projects during 2002–2017 and only 16% of total amount of TA
focused on capital markets.42
With the exception of the IIF project, ADB had not utilized the project loan
instrument more extensively to support capital market development, which is a more effective instrument
than TA in building institutions. Project loans have more ADB involvement and monitoring, as well as
greater client ownership—due to the financing aspect—than TA projects.
108. There is scope for strengthening the economic and sector work supporting capital market
development. While there is no dearth of studies on capital markets in Indonesia (Figure 6) including the
FSAPs, there are opportunities for ADB to identify specific areas or topics which would provide the
analytical basis for the design of PBLs. The World Bank operational policy on the design of development
policy operations emphasizes the importance of analytical underpinnings, and World Bank development
policy loans include a section identifying supporting analytical work.
42 Several TA projects, including those supporting financial sector governance and social security reform, contributed to capital
market development.
35
Source: World Economic Forum. 2016. Accelerating Emerging Capital Markets Development in Emerging
Economies (Country Case Studies). Switzerland.
109. There is scope for more NSOs supporting capital market development. The main NSO with links
to capital market development is the investment in IIF, which contributed to the increase in supply of
corporate bonds. A planned equity investment43
to establish a secondary mortgage facility, which was
envisioned to issue new products in the bond market, did not materialize.44
Nonetheless, the facility was
eventually established in 2005 as SMF, a 100% government-owned company, which as of September
2017 was the 13th largest issuer of corporate bonds with ADB supporting the establishment of SMF with
TA.45
The PSOD has a $300 million housing finance loan46
for eligible private commercial banks, but this
is not directly linked to the development of corporate bonds.
110. Measuring progress in market infrastructure (both hard and soft)—beyond completion of agreed
actions—has been a challenge. However, there is a growing number of indicators that enable both
tracking of progress over time as well as comparisons with selected benchmark or peer countries.
Examples of these are the ASEAN corporate governance scorecard47
produced by the ASEAN Capital
Markets Forum Working Group Secretariat and the Doing Business indicators on credit legal rights and
protection of minority shareholders. ADB could develop indicators on efficiency of the IPO and bond
approval processes to measure results from related reforms.
2. Suggestions
111. As a starting point to developing its strategy of future engagement in Indonesia’s capital market
development, ADB could perform its own (selective) analytic work. ADB would have to decide on the
focus of the analytic work, which would build on, rather than replicate, ADB’s own accumulated body of
knowledge, the 2017 FSAP findings, and other studies. It is also suggested that major PBL programs
supporting capital market reforms include a section on analytical underpinnings. The analytic work would
add another instrument supporting ADB dialogue with authorities.
112. The selected area(s) of engagement could be accompanied by a longer-term roadmap agreed on
with the Government based on appropriate sequencing of reforms and actions.48
The roadmap should
43 ADB. 1998. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Equity Investment to
Indonesia for Financial Governance Reforms: Sector Development Program. Manila. The program loan (budget support) was
accompanied by a sovereign investment loan and an equity investment.
44 The loan and equity investment were cancelled in 2001.
45 ADB. 2005. Technical Assistance Report on Republic of Indonesia: Secondary Mortgage Facility. Manila.
46 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Senior Loans to Indonesia for
Housing Finance Program. Manila.
47 The scorecard is a joint publication between ADB and the ASEAN Capital Market Forum.
48 In the ongoing Financial Market Development and Inclusion Program, ADB has supported the newly-established integrated
financial services regulator (OJK) to formulate and implement an integrated financial sector strategy and action plan covering
banking and non-bank institutions.
269 244325
830 862
697
852900
831 820
1,001
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure 6: Number of Articles on "Financial Deepening in Indonesia",
2005–2015
36
include identification of outcomes (or intermediate outcomes) with measurable indicators and targets
which could be tracked during the implementation of reforms. Both the CPSs and ADB programs could
include a description of the roadmap.
113. ADB could consider utilizing, where appropriate, more instruments beyond PBLs and TA in
supporting capital market development. In addition to analytic work discussed above, ADB could use
more of project loans and NSOs. Given the Government’s strategic focus on increasing private investment
in infrastructure, there are opportunities for further ADB support in this area that could increase the
volume and variety of capital market instruments. ADB could also explore project loans with capital
market components in the areas of housing and SOE reform.
114. ADB could also consider developing more capital market indicators by building on the work in
producing the ABM and supporting ASEAN initiatives, such as tracking the state of corporate governance.
ADB could develop indicators similar to what McKinsey produced in its capital market deepening paper
(Exhibit A.2. McKinsey Asian Capital Markets Development Index), and to track performance against these
indicators over time. This would help expand the current set of capital market indicators, and help address
gaps in measuring progress in market infrastructure and institutional effectiveness. The use of systematic
market feedback by the ABM, as in the case of liquidity surveys, could be expanded to cover other areas.
37
Appendixes
38
Appendix 1. Asian Development Bank Support to Finance Sector in
Indonesia, 1970–2000
A. Introduction
1. This is a documentation of the Asian Development Bank’s (ADB) support to the finance sector in
Indonesia covering the period 1970–2000. This was prepared in connection with the Program
Performance Evaluation Report (PPER) for the Capital Market Development Program Cluster (CMDPC)
(Subprograms 1 and 2).1 It will serve as reference to the Independent Evaluation Department’s (IED)
financial sector assistance and program evaluation (SAPE) and country assistance program evaluation
(CAPE) for Indonesia, both set to commence in 2018.
2. This paper is based on various operational documents as well as available studies, reports, and
data from various sources. It builds on findings from the program/project completion reports and relevant
IED validations or evaluations, where available, and identifies the main take-aways that will feed into the
preparation of the SAPE and CAPE. This paper is organized into five sections, Introduction, Sector Context;
ADB Sector Program Strategies; Portfolio; Performance of ADB Operations; and a concluding section
highlighting some key findings.
B. Sector Context
3. This section gives an overview of the evolution of Indonesia’s finance sector covering the period
1970–2000.
1. 1970–1982: State Control of Banking System
4. In the 1970s, the Indonesian financial system was tightly controlled by the Government. Between
1978 and 1982, the rise in oil prices and domestic oil production resulted in a quadrupling of oil revenues
which provided the Government surplus funds to finance economic growth. The Government channeled
resources through the banking system using low-interest credits to achieve its development objectives.
Bank Indonesia (BI) set deposit and lending rates of state-owned banks and guided the allocation of
credit through a liquidity credit mechanism which had two components: (i) BI direct credit to certain
borrowers mainly state-owned enterprises (SOEs), and (ii) BI credit to the banking system by discounting
bank loans to designated activities at preferential interest rates.
5. By 1982, Indonesia had 118 deposit money banks (DMBs) with the 5 state-owned commercial
banks (SOCBs) managing about 66% of total DMB assets. Among the DMBs were 28 public development
banks2—the state development bank and 27 regional development banks—which had a less than 5%
share of total DMB assets (Table A.1). While managing only 15% of total DMB assets, private sector banks
(PSBs) had a 60% share of rupiah deposits but lent mainly for working capital. The nonbank financial
sector did not play a significant role. By 1982, only 24 companies had issued shares, mainly foreign-
owned companies who are required to sell equity to Indonesians.
1 Asian Development Bank (ADB). 2007. Report and Recommendation of the President to the Board of Directors: Proposed Loan
and Technical Assistance Grant to Indonesia for the Capital Market Development Program Cluster (Subprogram 1). Manila; ADB.
2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Indonesia for the Capital Market
Development Program Cluster (Subprogram 2). Manila.
2 In addition, there was one private development bank.
39
Table A.1: Financial System Structure, 1982
Number
Asset Size
(Rp billion)
Share of Total
Financial System
Assets
(%)
Share of Total
DMB Assets
(%)
Bank Indonesia 1 13,707 42
Deposit Money Banks
State-Owned Commercial Banks 5 12,257 38 72
Private FX Banks 10 1,168 4 7
Foreign Banks 11 1,172 4 7
Private Non-FX Banks 60 720 2 4
Development Banks 29 1,336 4 8
Savings Banks 3 452 1 3
Total Deposit Money Banks 118 17,105 53 100
Other Financial Institutions
Non-Bank Financial Institutions 113 1,447 4
Rural Banks 5,808 86 0
Total Other Financial Institutions 5,921 1,533 5
Total 6,039 32,345 100
DMB = deposit money bank, FX = foreign exchange, Rp = Indonesian rupiah.
Source: World Bank. 1994. Discussion Paper: Indonesian Experience with Financial Sector Reform. Washington, D.C.
2. 1983–1997: Financial Sector Liberalization
6. With the weakening of oil prices in 1982 and the resulting deterioration of the Government’s
financial position, the Government introduced major reforms in 1983 to encourage mobilization of
private financial savings to finance domestic investment. The reforms had three main elements: (i)
elimination of credit ceilings for all banks, (ii) freedom by SOCBs to set deposit rates, and (iii) reduction
in the number of special priority programs with access to BI liquidity credits. The interest rate
deregulation resulted in an increase in the cost of funds of SOCBs.
7. In 1988, a comprehensive package of deregulation measures was introduced including the
liberalization of requirements for the establishment of new private banks and joint-venture banks. These
measures resulted in an increase in the number of banks to 240 by 1994 with large local conglomerates
establishing their own banks. While there was progress in improving the regulatory and supervisory
framework, enforcement was problematic. In addition, SOCBs experienced loan losses, especially loans
to conglomerates, and had to be recapitalized by the Government. While the liberalization reforms
resulted in financial sector growth from 1983–1997 (Table A.2), the financial system suffered
fundamental weaknesses (Box A.1).
Table A.2. Finance Sector Growth, 1983–1997
1983 1988 1993 1997
Bank Deposits (% of Gross Domestic Product [GDP]) 12.7 21.5 36.5 46.0
Domestic Credit to Private Sector (% of GDP) 14.8 28.4 49.0 60.8
Domestic Credit to Government and State-Owned
Enterprises (% of GDP) 4.0 4.9 3.3 3.2
Deposit Money Bank Assets (% of GDP) 16.5 28.0 48.0 56.3
Stock Market Capitalization (% of GDP) 1.2a 14.1 24.1
a as of 1989.
Source: World Bank Global Financial Development Database.
40
3. 1997–1999: Dealing with the Financial Crisis
8. Much of the work during and in the immediate aftermath of the crisis focused on stabilizing and
restructuring the banking system. The restructuring program had four pillars: (i) blanket guarantee for
all depositors and creditors of banks, (ii) creation of the Indonesian Bank Restructuring Agency (IBRA),
(iii) a recapitalization program for private and state-owned banks, and (iv) an out-of-court debt
restructuring mechanism. IBRA was established in 1999 and as part of the bank restructuring program
received assets with a face value equivalent to 43% of gross domestic product (GDP) in 2000. The
Government issued domestic bonds equivalent to 55% of GDP in 2000 to recapitalize the banks.
9. The crisis resulted in the consolidation of the banking system. Before the crisis, there were 238
banks with total assets representing 93% of GDP. By end-1999, there were 165 banks representing 61%
of GDP. However, the number of state-owned banks increased from 34 to 44, increasing their share of
total banking assets from 42% to 59%. The domestic private banks lost sizeable market share as a result
of closures and mergers (Table A.3). Between June 1997 and December 1999, a total of 66 banks
managing 13% of total banking assets were closed and 13 banks managing 21% of banking assets were
taken over by IBRA.3 Domestic credit to private sector as percentage of GDP fell from 60.8% in 1997 to
20.6% in 1999 while credit to government and SOEs as percentage of GDP increased from 3.2% in 1997
to 26.1% in 1999.4
Table A.3. Banking System Restructuring, 1997 and 1999
June 1997 September 1999
Publicly
Owned
Private
Domestic
Foreign
Controlled Total
Publicly
Owned
Private
Domestic
Foreign
Controlled Total
Number of Banks 34 160 44 238 44 81 40 165
Assets (% of GDP) 39.2 45.8 7.7 92.7 35.9 15.3 10.0 61.2
Market Share (%) 42.3 49.4 8.3 100.0 58.6 25.0 16.4 100.0
Source: IMF. 2001. Indonesia: Anatomy of a Banking Crisis: Two Years of Living Dangerously, 1997–1999. Washington, D.C.
3 International Monetary Fund (IMF). 2001. Indonesia: Anatomy of a Banking Crisis: Two Years of Living Dangerously, 1997–1999.
Washington D.C.
4 World Bank. Global Financial Development Database. Washington D.C.
Box A.1: State of Banking System, 1997
While the liberalization reforms resulted in financial sector growth, the financial system suffered
fundamental weaknesses which would play a role in the 1997–1998 financial crisis. Some notable
weaknesses were: poor credit assessment with approvals based on relationships, weak legal framework for
contract enforcement, and currency and maturity mismatches. There was an unsustainable level of problem
loans with numerous banks seriously undercapitalized. State-owned commercial banks, which accounted for
38% of banking assets in 1997, had high levels of problem loans due to directed lending. The rapid expansion
of private banks masked governance and credit problems. As the rupiah began to depreciate in July 1997,
loan portfolios deteriorated further as borrowers with unhedged foreign currency positions were unable to
make loan payments. Public confidence evaporated and depositors withdrew large amounts adversely
affecting banking system liquidity.
Sources: IMF. Working Paper: Indonesia Anatomy of a Banking Crisis Two Years of Living Dangerously 1997–1999.
Washington D.C.; Anwar Nasution. 1998. The Meltdown of the Indonesian Economy in 1997–1998. Jakarta; Bank
Indonesia. 2000. Indonesia's Financial and Corporate Sector Reform. Jakarta.
41
C. ADB Sector Program Strategies
10. ADB operations in Indonesia began in 1967. For the finance sector, ADB’s first technical
assistance (TA) project was in 1968 and first loan in 1971. Table A.4 summarizes ADB’s strategies to
support Indonesia’s finance sector over the years. The table shows that ADB’s strategy for supporting
Indonesia’s finance sector shifted from lending to the real sector through specific banks (initially state-
owned banks and later including PCBs) utilizing credit lines to improving financial intermediation by
supporting banking sector reforms.
Table A.4: Summary of Key Strategic Focus Areas, 1980–2000
1980s–early 1990s 1994–1997 1998–2000
improve industrial base and
develop a more efficient and
responsive financial system
(i) liberalize entry of new financial
institutions and reduce
restrictions on financial services
(ii) streamline legal framework for
money and capital markets
(iii) promote securities market
(iv) restructure public enterprises
mobilize domestic resources,
increase private sector
participation, and improve
efficiency of investments
Country Operational Strategy, 1994
create appropriate enabling
environment and encourage
efficient private provision of
financial services and productive
investment activities
Interim Operational Strategy, 1998–2000
support reforms for governance
structures of corporate and banking
sector and capital market
Sources: Asian Development Bank country planning documents for Indonesia; Country Assistance Program Evaluation, 2005.
D. Portfolio
1. Lending operations
11. ADB approved 12 loans amounting to $2.5 billion to support Indonesia’s finance sector during
1970–2000. Almost 80% ($1.9 billion) was accounted for by the finance sector development subsector.
Other subsectors such as banking systems ($0.5 billion) and microfinance ($26 million) had a combined
share of 21%. No grant was approved during the period (Figure A.1).
Figure A.1. Subsector Share: Loans, 1970–2000
Source: Asian Development Bank Independent Evaluation Department.
12. The year 1998, which coincided with the Asian financial crisis, saw finance sector approvals rise
to $1.5 billion, with one program (supported by two policy-based loans [PBLs]) and one project
(supported by one loan) (Figure A.2).
20.0%
79.0%
1.0%
Banking systems Finance sector development Microfinance
42
Figure A.2. Loan Approvals Supporting the Finance Sector, 1970–2000 ($ million)
Source: Asian Development Bank Independent Evaluation Department.
13. Prior to 1988, ADB utilized project loans mainly to provide subloans to targeted sectors such as
agriculture and industry. When ADB began focusing on supporting financial sector reforms starting 1988,
PBLs were utilized as the main instrument, though ADB continued to provide financial intermediation
loans (credit lines) in 1989 and 1993 (Table A.5).
Table A.5: ADB Finance Sector Loans, 1970–2000
Approval
Year
Loan/
Grant Title
Modality Sector Approved
Amount
($ million)
1998 1618 Financial Governance Reforms: Sector Development - Program Loan Program FSD 1,400.0
1998 1619 Financial Governance Reforms: Sector Development - Financial
Governance Reforms Support
Program FSD 47.0a
1998 1620 Financial Governance Reforms: Sector Development - Capacity Building
for Financial Governance
Project FSD 50.0
1994 1327 Microcredit Project MF 25.7
1993 1223 Second Development Finance Project BS 200.0b
1992 1160 Second Financial Sector Program Program FSD 250.0
1989 981 Development Finance Loan Project BS 200.0
1988 938 Financial Sector Program Program FSD 150.0
1988 939 Financial Sector Program Program FSD 50.0
1987 834 Second Bank Pembangunan Indonesia Project BS 60.0
1977 319 Bank Pembangunan Indonesia (BAPINDO) Project BS 30.0
1971 66 Bank Rakjat Indonesia Modernization Project BS 3.4
Total 2,466.1
BS = banking systems, FSD = finance sector development, MF = microfinance.
Note: A program is supported by a policy-based loan.
a Cancelled.
b $124.6 million was cancelled.
Sources: Loan, Grant, TA, and Equity Approvals database; Loans and Grants Financial Information System.
2. Technical assistance operations
14. From 1968–2000, 26 TA projects5 amounting to $6.4 million supported insurance and contractual
savings (31.1%), banking systems (26.5%), money and capital markets (19.7%), microfinance (12.8%),
finance sector development (7.0%), housing finance (1.5%), and small and medium-sized enterprise
(SME) finance and leasing (1.4%) (Figure A.3).
5 Including project preparatory technical assistance.
3.4 30 60
200 200250
200
25.7
1497
0
0
200
400
600
800
1000
1200
1400
1600
1971
1977
1987
1988
1989
1992
1993
1994
1998
2000
43
Figure A.3. Subsector Share: Technical Assistance, 1968–2000
Source: Asian Development Bank Independent Evaluation Department.
15. Advisory TA accounted for 80.0% ($5.1 million) and project preparatory TA for 20.0% ($1.3
million) (Table A.6). About 61% of TA projects (by number) were linked to PBLs either as
background/preparatory work or program implementation support.
Table A.6: ADB Finance Sector Technical Assistance,1968–2000
Approval
Year
TA
No. Title
Type Sector Approved
Amount
($ million)
1999 3228 Development of a Deposit Insurance Scheme AD ICS 0.2
1998 3119 Regulatory Reforms in the Insurance Industry AD ICS 0.8
1998 3116 Reform of Pension and Provident Funds AD ICS 0.9
1996 2699 Institutional Strengthening of Regional Development Account AD BS 0.6
1996 2586 Secondary Mortgage Facility AD HF 0.1a
1993 1849 Microcredit PP MF 0.5
1992 1753 Review of the Banking System PP BS 0.1
1991 1531 Securities Market Development - Phase II AD MCM 0.6
1991 1514 Financial Sector Review PP FSD 0.3
1990 1347 Review of the Pension Fund Industry PP ICS 0.1a
1990 1348 Review of the Insurance Industry PP ICS 0.1a
1990 1320 Development of the Leasing Industry AD SMEFL 0.1a
1990 1319 Development of the Venture Capital Industry AD MCM 0.1a
1990 1313 Strengthening of Term Lending Capabilities of Participating Private
Commercial Banks under Bank's Development Finance Loan
AD BS 0.1
1989 1161 Institutional Strengthening of Bank Umum Koperasi Indonesia AD MF 0.4
1989 1090 Study Relating to Securities Market Development AD MCM 0.5
1989 1089 Study of Regional Development Banks AD BS 0.2
1988 1063 Strengthening Bank Indonesia's Supervisory Capabilities AD BS 0.1a
1988 1008 Financial Sector Program PP FSD 0.1a
1988 977 Study on Establishment of Indonesian Venture Capital Company and a
Detailed Evaluation of P.T. Bahana
PP MCM 0.1a
1988 945 Indonesian Banking Development Institute AD BS 0.4
1987 856 Financial Sector Review AD BS 0.1a
1982 474 Second Agricultural Credit AD BS –b
1979 278 Second Agricultural Credit PP BS 0.1a
1970 24 Bank Rakjat Indonesia AD BS 0.1a
1968 006B Rural Credit Survey AD BS 0.1a
Total 6.4
ADB = Asian Development Bank, AD = advisory, BS = banking systems, HF = housing finance, FSD = finance sector development, ICS =
insurance and contractual savings, MCM = money and capital markets, MF = microfinance, PP = project preparatory, SMEFL = small and
medium enterprise finance and leasing, TA = technical assistance.
a Approved amount is less than $100,000, but due to rounding off, the amount is reflected as $100,000;
b Cancelled.
Sources: Loan, Grant, TA, and Equity Approvals database; TA Financial Information System.
26.5%
7.0%
1.5%
31.1%
12.8%
19.7%
1.4%
Banking systems
Finance sector development
Housing finance
Insurance and contractual savings
44
E. Performance of ADB Operations
1. Supporting Targeted Sectors through Credit Lines
16. Lending to State-Owned Financial Institutions. During 1970–1987, ADB financial sector
operations were mainly designed as credit lines to state-owned financial institutions to be onlent to
priority sectors such as agriculture and industry. While the projects were relevant, the loan designs often
failed to include critical capacity building components, which resulted in poor performance of
subprojects. Consequently, ADB activities in the finance sector during this period resulted in minimal
contribution to financial and industrial development. Of the three projects6 during the period, one was
assessed achieved, one partly achieved, and one had no project completion report (PCR)/project
performance audit report (PPAR). The PCRs for two finance sector loans emphasized the importance of
capacity building in project design and monitoring.7
17. Participation of Private Banks in ADB Credit Lines Projects. The First (1989) and Second (1993)
Development Finance Loan (DFL) Projects began to include PCBs in ADB’s finance sector lending
operations.8 The PCR for DFL-1 judged the project satisfactory based on loan utilization and the
generation of new jobs and incremental exports. It noted the positive impact of Bank of Indonesia (BI) in
enabling PCBs to comply with ADB loan covenants, compared to the failure of state owned financial
institutions to meet performance targets.9 The PPAR for DFL-2 assessed the project less than successful
due to underutilization of the loan and deterioration of participating financial institutions’ portfolios.
The PPAR noted poor design and weak diagnostic assessment despite two preparatory TA projects (Box
A.2).10
2. Strategic Shift in Focus Towards Financial Sector Development and Poverty Alleviation
18. Support for Finance Sector Reforms. Starting 1988, ADB began to focus on finance sector
development with PBL as the main instrument. Two Financial Sector Program Loans (FSPLs) supported
the Government’s program of financial reforms (PAKTO) announced in 1988.11
The reforms included
removal of entry barriers to the establishment of new private banks, abolition of monopoly of state-
owned banks over deposits of SOEs, and allowing more private banks to engage in foreign exchange
operations. The reforms would promote expansion of and competition within the banking system. ADB,
the World Bank, and the United States Agency for International Development (USAID) assisted the
government in developing PAKTO. Both the 1988 FSPL-1 and the 1992 FSPL-2 had two tranches with an
immediate release of the first tranche based on policy actions completed prior to Board presentation and
a second tranche release after completion of agreed policy actions. Parallel TA covered the role of regional
development banks and development of the securities market.12
6 ADB. 1971. Report and Recommendation of the President to the Board of Directors on the Proposed Loan to Indonesia for Bank
Rakjat Indonesia Modernization. Manila; ADB. 1977. Report and Recommendation of the President to the Board of Directors on
the Proposed Loan to Indonesia for Bank Pembangunan Indonesia (BAPINDO). Manila; ADB. 1987. Report and Recommendation
of the President to the Board of Directors on the Proposed Loan and Technical Assistance Grant to Indonesia for Second Bank
Pembangunan Indonesia. Manila.
7 ADB. 1980. Project Completion Report: Bank Rakjat Indonesia Modernization. Manila; ADB. 1986. Bank Pembangunan Indonesia
(BAPINDO). Manila.
8 ADB. 1989. Report and Recommendation of the President to the Board of Directors on the Proposed Development Finance Loan
to Indonesia. Manila; ADB. 1993. Report and Recommendation of the President to the Board of Directors on the Proposed Loan
to Indonesia for the Second Development Finance. Manila.
9 ADB. 1996. Project Completion Report: Development Finance Loan. Manila.
10 IED. 2004. Project Performance Audit Report: Second Development Finance Loan. Manila: ADB.
11 ADB. 1988. Report and Recommendation of the President to the Board of Directors on the Proposed Loans and Technical
Assistance to Indonesia for the Financial Sector Program. Manila; ADB. 1992. Report and Recommendation of the President to
the Board of Directors on the Proposed Loan to Indonesia for the Second Financial Sector Program. Manila.
12 See para. 28 of the Program Performance Audit Report for Financial Sector Program.
45
19. The PPAR for FSPL-I noted the improved outcomes in the finance sector: during 1988–1990,
banking assets grew by 70%; the number of deposit money banks increased from 79 to 134 with growth
coming from private banks; and deposits and outstanding credits more than doubled. However, the PPAR
found inadequacies in the legal framework and supervision capacity. One of the important lessons cited
in the PPAR was that institutional capacity needed to keep up with financial sector growth. The PPAR
concluded that it was too early to rate the performance of FSPL-1 due to concerns about financial sector
stability and several outstanding issues on prudential safeguards, legal, regulatory, and supervisory
framework to be addressed in FSPL-2.13
20. The PCR for FSPL-2 assessed the program successful based on implementation of the policy
actions and improved outcomes including increased deposits, higher share of private sector banks in
overall lending portfolio, and growth of stock market capitalization. The policy actions included
enactment of legal framework for the financial sector and the adoption of prudential regulation for banks
and regulatory framework for securities market. In terms of outcomes, the PCR reported that the share
of PCBs in outstanding credits had surpassed that of state-owned financial institutions and that there
has been a decline in the share of liquidity credits (from BI) in total banking credits. However, the PCR
raised concern about the deteriorating loan portfolio quality of banks.14
As noted in Box A.1, several
fundamental weaknesses in the banking system were not adequately addressed. In retrospect, the FSPLs
were less than successful.
21. Addressing Poverty Alleviation and Inclusion. In 1994, the Government launched a program to
accelerate the development of microenterprises in the rural areas. In support of the program, ADB
approved the 1994 Microcredit Project—a loan to the Government to be onlent to provincial
development banks and rural banks—which aimed to increase incomes and employment in rural areas
to reduce poverty and to improve the status of women.15
There was a preparatory project TA and an
13 IED. 1993. Project Performance Audit Report: Financial Sector Program. Manila: ADB.
14 ADB. 1980. Project Completion Report: Second Financial Sector Program. Manila.
15 ADB. 1994. Report and Recommendation of the President to the Board of Directors on the Proposed Loan to Indonesia for the
Microcredit Project. Manila.
Box A.2: Main Findings from Evaluations for the Development Finance Loan Series
The Asian Development Bank (ADB) continued using the credit line lending instrument after the 1983 and 1988
financial sector liberalization reforms, but expanded the participating institutions to include private banks. The
following are some of the main findings from the project completion report for the first (1989) Development
Finance Loan (DFL-1) and the project performance audit report (PPAR) for the second (1993) Development
Finance Loan (DFL-2).
First, there was a contrast in performance between state-owned development finance institutions (DFI) and
private commercial banks (PCBs) participating in the loan programs—in DFL-1, only 35% of DFI-financed
subprojects performed satisfactorily compared to 90% for PCB-financed subprojects.
Second, the DFLs had marginal contribution to improved financial intermediation at the national level, which
was one of the objectives of the projects. The project design did not sufficiently consider how the financial
intermediation process would be improved.
Third, there was a concern about bank governance issues in both state-owned and private banks and their
adverse impact on ADB’s reputational risk. The PPAR for DFL-2 recommended for more stringent measures in
assessing governance of participating institutions.
Sources: Project Completion Report for DFL-1 and Project Performance Audit Report for DFL-2.
46
accompanying TA for institution building to strengthen lending institutions, nongovernment
organizations, and women self-help groups.16
22. The PCR assessed the Microcredit Project successful based on substantial outreach to the poor
and good prospects for sustainability of microcredit institutions. Social impact surveys indicated
improved incomes of borrowers. One of the lessons and recommendations in the PCR was that ADB
should promote private sector participation in microfinance and reduce the scope of public sector activity
in future ADB microfinance projects.17
The 2001 IED impact evaluation of ADB’s rural credit assistance
included the following lessons: (i) projects should improve targeting of the poor, (ii) project design should
be commensurate with capacity of microcredit institutions, (iii) TA projects are useful mechanisms for
capacity building, and (iv) projects should focus on the development of a sound and sustainable rural
financial system. 18
23. Overall, ADB operations during 1988–1997 supported financial sector reforms that resulted in
increases in bank deposits (as share of GDP) from 21% to 46%, domestic credit to private sector (as share
of GDP) from 28% to 61%, DMB assets (as share of GDP) from 28% to 56%, and stock market
capitalization (as share of GDP) from 1.2% to 24%. However, the completion and evaluation reports
raised concerns about the inability of the regulatory framework and supervision capacity to keep up with
financial sector growth. The rapid expansion of PCBs masked their governance and credit problems, while
SOCBs had high levels of problem loans due to directed lending through liquidity credits. As cited in Box
A.1, there were several notable weaknesses in the banking system which were not sufficiently addressed
and which played a role in the 1997–1998 financial crisis. With respect to support to microfinance, while
the ADB project was successful, the development impact on the microfinance was unclear. There was no
follow-up to the support to microfinance until 2015 with the approval of the Financial Market
Development and Inclusion Program (Subprogram 1) which included components on developing
microfinance. ADB could have continued its support to microfinance between 1997–2015.
3. ADB Support During and After the 1997–1998 Financial Crisis
24. 1997–1999: Lending Support During the Crisis. The 1998 Financial Governance Reforms: Sector
Development Program (FGRSDP) was part of a multi-donor program (Box A.3) and had three components:
(i) a PBL, (ii) an equity investment in a secondary mortgage facility (SMF), and (iii) a TA loan.19
The FGRSDP
focused on restructuring the banking system, improving financial and public sector allocation of
resources by strengthening governance, increasing disclosure and transparency of financial information,
and reinforcing the financial sector’s legal and regulatory framework. The program was intended to
respond to crisis as well as initiate longer-term reforms to address the root causes and reduce
vulnerability to future crises. The equity investment component was eventually cancelled because the
adoption of a new Central Bank Law in 1999 precluded BI from taking a stake in the SMF.
25. The PCR for the FGRSDP assessed the program highly relevant and successful overall. In the
lessons section, the PCR highlighted the importance of a credible commitment to long term structural
reforms during a crisis.20
It also stressed the importance of country and sector knowledge, as well as
diagnostic work, in designing a PBL. Different instruments may be needed for different policy conditions.
Given the number and complexity of reforms and need for sustained policy dialogue, field presence was
critical. In addition, implementation may require adjustments as circumstances change, as in the case of
the cancellation of the SMF component.
16 See para. 3 of the Report and Recommendation of the President and para. 25 of PCR of Second Financial Sector Program.
17 ADB. 2005. Project Completion Report: Microcredit. Manila.
18 IED. 2001. Impact Evaluation Study on ADB’s Rural Credit Assistance in Bangladesh, People’s Republic of China, Indonesia, Nepal,
Philippines, Sri Lanka, and Thailand. Manila: ADB. The study did not cover the two rural/microcredit loans in Indonesia but
included two TA projects.
19 ADB. 1998. Report and Recommendation of the President to the Board of Directors: Financial Governance Reforms: Sector
Development Program and Technical Assistance Loan. Manila.
20 ADB. 2004. Project Completion Report: Financial Governance Reforms: Sector Development Program. Manila.
47
26. A separate PCR assessed the TA loan component of the FGRSDP successful but found ADB
performance to be less than satisfactory due to lack of guidance and assistance provided to the
implementing agencies.21
In addition, the program had an unwieldy design with multiple agencies
involved. In retrospect, the TA project could have been unbundled into smaller packages and targeted at
specific issues.
4. Summary Ratings and Findings from Evaluations
27. Financial Sector Lending Operations Assessments. Out of the nine operations with ratings, the
PCRs/PPARs/project completion validation report (PVR) assessed six as successful and two as less than
successful (including one considered partly achieved). One project with PPAR had no rating (Table 7).
There had been mixed success in the overall performance of credit line operations. In part, this was due
to loan designs that did not emphasize capacity building and governance improvements in participating
financial institutions. On the other hand, all the PBLs were assessed as successful by the PCRs. The PBLs
linked policy actions with disbursements, while TA provided inputs to program design and support for
program implementation.
Table A.7. Finance Sector Lending Operations with Ratings 1970–2000
Loan/Grant Project Title
Approval
Year
Evaluation
Type
Evaluation
Year
Overall
Rating
66 Bank Rakjat Indonesia Modernization 1971 PPAR 1980 Achieved
319 Bank Pembangunan Indonesia (BAPINDO)
Project
1977 PPAR 1986 Partly
Achieved
938/939 Financial Sector Program 1988 PPAR 1993 No rating
981 Development Finance Loan 1989 PCR 1996 Satisfactory
1160 Second Financial Sector Program 1992 PCR 1996 Successful
1223 Second Development Finance Loan 1993 PPAR 2004 Less than
successful
1327/
2277(L)
Microcredit 1994 PCR 2005 Successful
1618/1619 Financial Governance Reforms: Sector
Development Program
1998 PCR 2004 Successful
1620 Capacity Building for Financial Governance 1998 PCR 2006 Successful
PCR = program/project completion report, PPAR = program/project performance audit report.
Sources: Asian Development Bank Independent Evaluation Department; Evaluation reports.
21 ADB. 2006. Project Completion Report: Capacity Building for Financial Governance. Manila.
Box A.3: Relationship with the International Monetary Fund, 1997–1998 Financial Crisis
According to the International Monetary Fund’s (IMF) Independent Evaluation Office (IEO) 2003 Evaluation
Report, the Asian Development Bank’s (ADB) participation in the design of a multi-donor program focused on
analysis of regional development banks and nonbank financial institutions. However, the IMF staff did not keep
the ADB team informed of discussions with Indonesian authorities. In addition, ADB disagreed with the IMF on
the creation of the Indonesian Bank Restructuring Agency (IBRA). This led to a deterioration in the relationship
between the two institutions and a delay in the approval of the Financial Governance Reforms: Sector
Development Program. Subsequently, working relationships were reestablished with ADB taking the lead on
analysis of “non-IBRA banks”.
Source: Independent Evaluation Office. 2003. Evaluation Report: The IMF and Recent Capital Account Crises, Indonesia, Korea,
and Brazil. International Monetary Fund. Washington, D.C.
48
28. Technical Assistance Project Completion Reports (TCRs). The two TCRs with ratings were assessed
successful, with one TCR having no rating (Table A.8).
Table A.8. Finance Sector Technical Assistance Projects with Ratings
Technical
Assistance Project Title
Approval
Year
Overall
Rating Related Operation
945 Indonesian Banking Development Institute 1988 No rating Agro-Industries Credit
3116 Reform of Pension and Provident Funds 1998 Successful
Financial Governance Reforms:
Sector Development Project
3620 Development of a Financial Services
Supervisory Institution 2000 Successful
Finance Governance and Social
Security Reform
Sources: Asian Development Bank Independent Evaluation Department, Project documents, and TA completion reports.
29. Country Program Review. The CAPE 200522
assessed that ADB had a comparative advantage in
providing loans in some sectors including in finance sector and ADB’s focus on advisory TA projects for
the finance sector improved over the years, with substantial impact on the sector. However, ADB’s
performance on the development finance loans was marginal.
F. Key Findings
30. The strategic shift of ADB’s financial sector operations to program loans to support sector
reforms was appropriate. Initially, ADB finance sector operations in Indonesia focused on providing credit
mainly to the agriculture and industrial sectors through financial institutions using credit lines. These
projects had mixed success and did little to improve financial intermediation. The ADB country strategies
began to shift focus from financing enterprises to improving the financial system, and supported
government reforms to transform the financial system from state-controlled to market-based. The use of
PBLs as the main instrument supporting the financial sector reforms was appropriate.
31. The PBLs supporting reforms were based on analytic work and accompanied by TA for
implementation. A financial sector review in 1987 was an important input to the 1988 Financial Sector
Program, with another financial sector review in 1991 feeding into the 1992 Second Financial Sector
Program. TA projects covering areas that included strengthening of BI’s supervisory capabilities and the
Indonesian Banking Development Institute accompanied the program loans. The 1998 PBLs were based
on multi-partner analytical work during the financial crisis.
32. The PBLs that supported PAKTO did not address the inability of supervision capacity to keep up
with the growth in lending unleashed by the reforms, as well as the weaknesses in bank governance and
lending practices. The PPAR for 1988 Financial Sector Program issued in 1993 had raised concerns about
inadequacies in the banking regulatory framework, inability of the supervisory authorities to cope with
the high growth in the financial system, and emergence of signs of potential instability in the banking
system. The Second Financial Sector Program was not able to adequately address these concerns, which
eventually manifested themselves during the 1997–1998 financial crisis.
33. There may have been missed opportunities in developing micro and small and medium-sized
enterprise (MSME) finance. ADB could have followed up on its successful microcredit project in support
of the Government’s program to accelerate the development of microenterprises in rural areas. In
addition, the SME sector was and continues to be an underserved segment in terms of financing.23
In
2007, MSMEs accounted for 97% of employment and 56% of GDP, while MSME loans to total loans in
the banking system was about 21% in 2011, of which 77% was for working capital.24
22 The first country assistance program evaluation prepared for Indonesia, which covered ADB support during 1990 and 2004.
23 IFC. 2016. Women-owned SMEs in Indonesia: A Golden Opportunity for Local Financial Institutions. Washington, D.C.
24 ADB. 2014. Asia SME Finance Monitor 2014. Manila.
49
Appendix 2. Capital Markets, Financial Development, Economic Growth
and Poverty Alleviation
1. The following note taken from the Independent Evaluation Group’s evaluation of World Bank
support to capital market development reviews available literature in terms of the relation between
financial sector development and economic growth as well as poverty reduction and inequality
reduction.1 It also provides summary information on the recent evolution of capital market development
of countries at different income levels. To the extent that information is separately available on the capital
market segment of the financial system, it is provided. The relative scarcity of information on capital
markets’ effects, as a distinct segment of the financial system, is not surprising as available evidence
points towards the complementarity of bank driven and market driven financial systems, with an increase
in the relative share of the latter as countries grow and develop.
1. Finance
2. Financial systems help to allocate capital, mobilize and pool savings, monitor investments,
facilitate risk diversification and management, and ease the exchange of goods and services (Levine
2005). Evidence of a causal link between financial depth and economic growth was traced by King and
Levine (1993), in a multi-country study that showed that financial development predicts long-run
economic growth. Gerschenkron (1962), Allen and Gale (2000) and Demirguc-Kunt and Levine (2001),
provided theoretical and empirical reasons to look at the financial sector beyond banks as a driver of
growth. Beck and Levine (2005) expanded the analysis to include stock markets and found that the size
of the banking sector and stock market development were both positively related to economic growth.
Extending this further, Fink, Haiss and Hristoforove (2003) found that in addition to banks and stock
markets, bond market development also influences economic activity.
3. Levine (2002, 2005) based on an empirical examination, shows that classifying countries as
having bank-based versus market-based financial systems is not very fruitful. Although overall financial
development is robustly linked with economic growth, there is no specific support for either the bank-
based or the market-based view. As pointed out by IEG (2006a) ‘Research on the best mix of financial
institutions, in terms of bank-based systems versus market-based (capital markets), shows a striking lack
of results. Rather, it is the overall level of financial sector development, regardless of which structure
dominates, that matters for growth. Thus, whether to promote the establishment or expansion of capital
markets in a country will depend on the circumstances, including the ability of the country to reduce
informational asymmetries.’
4. Studies also showed that financial depth influences not just the level of economic activity, but
also the nature of real sector activity, and the industrial structure of an economy. Capital market
development encourages industries that need external finance (Rajan and Zingales1998), Demirguc Kunt
and Maksimovic (2000) also show that stock market development is more related to the availability of
long term financing, whereas banking sector development is more related to short term finance. While
Beck, Demirguc-Kunt, Laeven and Levine (2004) suggest that financial development, overall,
disproportionately helps small firms, Didier and Schmukler (2013) point out that larger firms, especially,
benefit from stock and bond market access in some prominent emerging economies.
2. Finance Sector Development and Capital Markets
5. The extent to which financial structure (bank-based versus market-based) affects economic
growth has also been explored, and the implications of financial structure on growth. Cross-country
empirical research (reported by Levine 2005) finds fairly consistently that there is no single preferred
system, even for financially-dependent industries, or firms with external financing needs. Overall, the
1 Independent Evaluation Group. 2016. The World Bank Group’s Support to Capital Market Development. Washington, D.C.
50
conclusion from the literature to date is that while financial sector development is good for growth, the
financial structure adopted by a country is less important. However, Demirguc-Kunt, Feyen and Levine
(2011) find that as countries develop they increase their demand for the services provided by securities
markets relative to those provided by banks. Bank-based structures tend to dominate in the early stages
of growth, but the relative importance of banks decreases as economies develop.
3. Finance and Macroeconomic Volatility
6. The financial sector has played a contributing role in many, if not most, of the economic crises
that have taken place in recent years. The implications of such events on both growth and poverty are
significant. Even before the 2008 crisis, Easterly, Islam and Stiglitz (2000) found that the development of
the financial sector as measured by both bank credit to the private sector and stock market traded value
are negatively related to macroeconomic volatility. But they also pointed out that while bank credit is
negatively related to macroeconomic volatility, the relationship is not linear; above a certain level of
credit, financial sector development adds to macroeconomic volatility. This is similar to the finding of
Arcand, Berkes and Panizza (2012), who find that financial sector development, defined in this case as
private credit to gross domestic product (GDP), is positively related to economic growth, until it reaches
100% of GDP, beyond which it has a negative impact.
7. The development and expansion of capital markets, and indeed financial markets as a whole, is
not without risk. Instability may limit the impact of financial development on poverty alleviation. Banking,
a central part of most financial systems, is highly leveraged and has been prone to exaggerated credit
cycles that sometimes end in crisis, and there are some signs of increasing global levels of leverage and
possibly nascent bubbles in the real economy. The greater role of capital markets in more developed
financial systems can diversify some risk away from banks, dampening overall economic effects of shocks
to the banking system. Yet, in a changing world, technological shifts have introduced new forms and
delivery mechanisms of financial services that bear their own risks.2 And dynamic changes in global
financial structure, in a post-crisis environment, including regulatory shifts in the banking system, could
shift risks towards 'shadow banks’ and capital markets, and towards emerging as opposed to developed
markets.
8. Caprio and Klingebiel (2003) showed that fiscal costs of financial crises often exceeded 20% of
GDP. Bordo et al. (2001), determined that twin (banking and currency) crises have led to cumulative GDP
losses on the order of 18%, and Halac and Schmukler (2004) discuss the significance of regressive wealth
transfers unleashed by financial crises. During the course of the 2008–2009 financial and economic crisis,
it was estimated by the World Bank that an additional 53 million persons were plunged into poverty in
the developing world. Banking, a central part of most developed and developing financial systems, is
highly leveraged and has been prone to exaggerated credit cycles that sometimes end in crisis. But
historical evidence informs us that, in fact, financial crises are more frequent in developing than in
developed countries, likely due to better macroeconomic policy, regulation, and supervision (Reinhart
and Rogoff [2009]). And the greater role of capital markets in more developed financial systems
diversifies some risk away from banks, dampening overall economic effects of shocks to the banking
system.
2 Certain complex institutional and legal structures are deliberately designed to fall outside the traditional purview of regulators.
‘Shadow banking’ structures provide an example, and they are not new, nor are they illegal, untaxed, or unmonitored. While
these complex structures may use capital markets as financial intermediaries for transactions that would likely have previously
involved banks, this is primarily a challenge for regulators in the most developed financial markets. Credit derivatives are another
recent example. And certain market processes, such as high frequency trading, now increasingly present in the larger middle-
income countries, also carry own risks of exacerbating volatility.
51
4. Finance, Poverty, and Inequality
9. Does financial development help the poor through better resource allocation and more
information? Or does financial development inordinately help the rich, because the poor rely mostly on
informal networks and family? Beck, Demirguc-Kunt and Levine (2007) and Clarke, Xu and Zhou, (2006)
find that that financial development, measured by growth in private credit, disproportionately boosts
incomes of the poorest quintile of the population and reduces income inequality. Akhter and Liu (2010),
using a broader measure of financial development that includes non-bank financial institutions, find that
financial development helps the poor in countries with stable financial systems. However, instability may
limit the impact of financial development on poverty alleviation, a caution echoed by Jeanneney and
Kpodhar (2008). Perez-Moreno (2010) also points out that it is the moderately poor that clearly benefit.
Kim and Lin (2011), using measures of both bank and stock market development, also find that the
relation between financial development and inequality depends on the development level the country
has reached. Studies on individual countries also exist, though most use bank-based measures of financial
development. Ayyagari, Beck and Hoseini (2013) also find that financial development is strongly
associated with poverty reduction, a result echoed for Kenya by Odihambo (2010) and for Pakistan by
Imran and Khalil (2012), using bank-based data. Jalil and Feridun (2001), in a study on People’s Republic
of China (PRC), which uses a wider spectrum of financial development variables, also finds that increased
financial development will reduce income inequality in the PRC. Studies that isolate the effects of capital
markets as a component of the financial system, and poverty, are rare, as are those that use stock market
development alone as a proxy for wider financial development.
10. It should be added that some recent arguments suggesting a link between capitalism, inequality,
and instability, e.g., Piketty (2014), are not linked to capital markets. His argument is against the tendency
of capitalism, in general, to concentrate wealth in the hands of capitalists. There is not a single variety of
capitalism and some countries, for example, Sweden and Japan, operate capitalists systems with well-
developed capital markets and low inequality. Rajan and Zingales (2009) also recognize the inherent
problems with capitalism, but argue that financial markets offer a way out of poverty when they are well
managed and developed. Galbraith (2014) offers four factors impeding a return to normal growth after
the 2008 crisis, among which is the breakdown of law and ethics of the financial sector, but he does not
differentiate between the financial sector and capital markets.