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Indonesia’s financial sector has been flourishing over the past half decade. The COVID-19 pandemic period, while being a time of austerity for most sectors, led to revolutionary innovations in Indonesia’s financial services industry, particularly in fintech. From December 2020 to December 2022, total assets of the fintech sector grew by 48.54 percent from 2020 to 2022. This growing trend continued even after the pandemic lockdowns ended, as total assets in fintech grew by 30.8 percent from December 2022 to December 2023.
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Indonesia’s financial sector has been flourishing over the past half decade. The COVID-19 pandemic period, while being a time of austerity for most sectors, led to revolutionary innovations in Indonesia’s financial services industry, particularly in fintech. From December 2020 to December 2022, total assets of the fintech sector grew by 48.54 percent from 2020 to 2022. This growing trend continued even after the pandemic lockdowns ended, as total assets in fintech grew by 30.8 percent from December 2022 to December 2023.
With fintech paving the way forward, traditional banking followed suit by revolutionizing its services. From 2022 to 2023, the banking industry’s fund distribution increased by 6.28 percent, source of funds increased by 6.33 percent, and total assets in the industry grew by 6.98 percent, reaching a total of US$8.22 trillion. Moreover, even regional banks have been benefitting from this wave of innovation. For the same period from 2022 to 2023, the regional banking sector saw a 7.67 percent in distributed funds, an 8.08 percent increase in source of funds, and a 7.52 percent increase in total assets, reaching a total of US$137.96 billion.
Innovations in Indonesia’s finance sector extend beyond financial services. On September 2023, the Indonesian monetary authority, Bank Indonesia (BI), introduced three pro-market monetary instruments that function as short-term fixed income securities with high coupon rates. The three instruments, SRBI, SUVBI, and SUVBI, were able to collect Rp 409 trillion (US$25.2 billion), US$2.31 billion, and US$387 million, respectively.
Particularly in the case of the SRBI, this instrument represented an innovative way to attract capital flow from abroad during a period of high credit costs and slow investment. Approximately 20.77 percent, or Rp 85.02 trillion (US$ 5.26 billion), of the total outstanding SRBI were owned by non-Indonesian residents, underscoring the SRBI’s success as a monetary instrument.
Even when compared to other countries in the same region, the Indonesian finance sector stands out for its stability against fluctuations. Throughout 2023, the global cost of credit was high due to hawkish Fed policies made to curb US inflation, resulting in a stagnation of capital flow on a global scale. Entering the second quarter of 2024, the composite index of many Southeast Asian countries such as Singapore and Thailand recorded price decreases compared to the same period last year, reaching -3.96 percent and -13.9 percent on the Straits Times Index (STI) and the Bangkok SET index, respectively. Meanwhile, the Jakarta Stock Exchange Composite Index (JKSE) recorded a price increase of 5.18 percent for the same one-year period.
In summary, the Indonesian financial sector stands out for its stability and consistency, maintaining growth through innovation even during periods of austerity or global uncertainty. This consistency is also reflected in its GDP, which grew by 7.4 percent from 2022 to 2023, contributing roughly 4.16 percent to the national GDP in 2023.
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Indonesia's capital market is once again under pressure following MSCI's warning of a potential downgrade from emerging market to standalone market status. The warning prompted an immediate regulatory response, including measures to address high shareholding concentration and suspected market manipulation. However, the sudden response raises a broader question: Why have longstanding market governance weaknesses and investor protection concerns only received serious attention after repeated threats of a market downgrade?
Ironically, this was not the first warning. MSCI had already raised concerns in 2025 before imposing an interim freeze on index additions and increases in Indonesian securities' weights in January 2026. The decision reflected unresolved issues surrounding free-float transparency, ownership structures and market liquidity.
After the first interim freeze, The Financial Services Authority (OJK) subsequently announced eight capital market reform measures, including higher free-float requirements, greater ultimate beneficial ownership transparency and stock exchange demutualization.
In parallel, the Indonesia Stock Exchange (IDX) began disclosing shareholders holding more than 1 percent of listed companies' shares, improving direct ownership transparency. However, this measure does not fully reveal who ultimately controls companies and benefits from their financial performance. This distinction matters in Indonesia, where complex, multilayered arrangements known as pyramidal ownership structures can allow controlling shareholders to exercise substantial voting power despite holding relatively limited economic interests, potentially influencing corporate decisions at the expense of minority shareholders.
Later on May, Indonesia successfully avoided a more serious setback in May as MSCI maintained its emerging market classification. However, the review still delivered disappointing results, removing six stocks from its Global Standard Index and 13 from its Global Small Cap Index without adding new constituents, resulting in Indonesia's index weighting decreased.
Despite the sequences of reform, questions over the reform consistency remain, particularly when politically connected businesspeople are involved. In September, the agreement for Jhonlin Baratama, controlled by Haji Isam, a businessman with ties to President Prabowo Subianto, to acquire a 30 percent stake in Bayan Resources for an 80.76 percent discounted price drew attention amid regulatory uncertainty over Bayan's coal production quotas. The government approved additional quotas shortly after the agreement was signed, raising questions about regulatory transparency and consistency, although there is no evidence linking the approval to the transaction.
Such concerns illustrate why the effort made by OJK and BEI may not convince investors that Indonesia's market governance has improved. In October, MSCI again raised concerns over coordinated trading and insufficient evidence of meaningful enforcement, warning that Indonesia could be downgraded to standalone-market status. MSCI considered the reforms insufficient to address coordinated trading behavior and a market governance. The warning immediately rattled investors, sending the Jakarta Composite Index (JCI) down 11.57 percent on the following trading day and triggering a trading halt.
As in previous instances, Indonesian regulators found themselves scrambling to address longstanding market governance concerns. OJK immediately announced sanctions totaling Rp 2.1 trillion (US$115.3 million) against parties involved in market manipulation involving Dian Swastatika Sentosa (DSSA), and irregularities in share allocations during initial public offering involving Barito Renewables Energy (BREN) and Petrindo Jaya Kreasi (CUAN). OJK also reported 835 enforcement actions against capital market participants this year. IDX also announced the exclusion of 81 highly concentrated stocks from the JCI calculation, following their earlier removal from other major indices. These measures could encourage listed companies to broaden public shareholding and improve market liquidity.
Ironically, despite the effort made by the OJK and IDX responding the recurring MSCI warning, the government has failed to respond in appropriate way. President Prabowo Subianto reportedly characterized MSCI's warning as a foreign threat, while House Deputy Speaker Sufmi Dasco Ahmad suggested that Indonesia develop its own capital market rating.
The failure of the government to understand the seriousness of MSCI's warning could undermine investor trust further since the standalone market is a serious condition. Unlike emerging and frontier markets, standalone markets fall outside MSCI's main market-classification groups, placing Indonesia alongside countries such as Argentina, Nigeria, Zimbabwe and Ukraine. A downgrade could accelerate foreign capital outflows, adding depreciation pressure on the rupiah.
The risks are particularly concerning as Indonesia's equity market is already under significant pressure. The JCI reportedly declined 41.72 percent as of Oct. 29, while cumulative net foreign equity outflows reached Rp 94.87 trillion as of Oct. 23.
Failing to address these governance weaknesses could ultimately undermine Indonesia's ability to attract investment and mobilize capital for economic growth. Consistent regulatory enforcement across businesses, regardless of their political connections, is essential to strengthening market governance and restoring investor confidence. Greater transparency and credible enforcement would also support more efficient price discovery and improve market liquidity. Without these improvements, persistent governance problems could discourage investment, increase financing costs for businesses and expose retail investors to greater losses.
