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Finance
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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Finance
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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The establishment of the Indonesia International Financial Center (IFC), introduced through the revised Financial Sector Development and Strengthening (P2SK) Law, has raised concerns that it could become a channel for illicit funds. The concern stems from the law's simultaneous introduction of legal protections for buyers of special government bonds, shielding them from criminal, civil and tax investigations while prohibiting the bonds from being used for tax assessments or as evidence in court proceedings.
The IFC represents an ambitious effort to position Indonesia as an international financial hub. However, the legal protections afforded to buyers of Danantara's special bonds, including the Patriot Bonds and Red and White Bonds, risk undermining the credibility the IFC needs to attract sophisticated institutional investors, including family offices. Moreover, the government's three-month deadline to complete the IFC Law may leave insufficient time to develop the robust institutional framework such a financial center requires.
Article 248A of the P2SK Law defines the IFC as a zone primarily dedicated to financial sector activities with financial and administrative autonomy, as well as a special legal jurisdiction based on "international principles and/or standards".
The zone will be governed by an IFC Council, and more than one IFC may be established. Businesses operating within the IFC will be subject to special taxation procedures and enjoy tax incentives and other facilities. The article also mandates that the IFC Law be enacted within three months of the P2SK Law coming into force on June 17, 2026.
As for the incentives, Coordinating Economy Minister Airlangga Hartarto signaled that the IFC could become a tax haven, noting that international financial centers such as Dubai and Singapore provide tax incentives of up to zero percent to remain globally competitive. He argued that Indonesia also needs to offer an attractive fiscal regime if it wants to compete for international capital.
Policymakers see the possibility of Indonesia becoming a tax-friendly jurisdiction, similar to Singapore, Hong Kong, and the United Arab Emirates, as an acceptable trade-off for attracting significantly higher investment. For comparison, Indonesia attracts an average of Rp 2.2 quadrillion in investment annually, compared with around Rp 5 quadrillion in Singapore. Meanwhile, Dubai attracted around US$800 billion in foreign direct investment and capital inflows associated with its financial center ecosystem.
However, Finance Minister Purbaya Yudhi Sadewa rejected suggestions that the IFC would turn Indonesia into a tax haven. He explained that the IFC would be established as a new special economic zone in Bali covering around 100 hectares, with tax incentives applying only to funds held within the zone, while investments made outside the IFC would remain subject to Indonesia's normal tax regime. Purbaya also said the IFC could adopt a common law system separate from Indonesia's civil law framework, potentially giving effect to the "special legal jurisdiction according to international principles and/or standards" stipulated in the P2SK Law.
The Dubai International Financial Centre (DIFC), one of the main benchmarks for Indonesia's IFC, is one of the UAE's Financial Free Zones (FFZ). It is exempt from the UAE's federal civil and commercial laws but remains subject to federal criminal laws, including anti-money laundering legislation. Analysts argue that the DIFC's institutional autonomy is one of the key features Indonesia's IFC should emulate. However, they caution that Indonesia must first develop strong financial infrastructure, data security, and regulatory oversight to establish credible safeguards against money laundering and terrorism financing
