In the late 1990s, during the Asian Financial Crisis, the Indonesian banking sector essentially collapsed. The crash of the rupiah pulled back the curtain and revealed that the balance sheets of many banks were stuffed with bad loans. Many of them went under, or had to be rescued and recapitalized by the government. Four such failing state-owned banks were merged into a new entity in 1998, which was re-named Bank Mandiri. Today, Bank Mandiri is the largest bank in Indonesia with $138 billion in assets and net income in 2023 of around $3.9 billion.
Indonesia’s banking sector is dominated by state-owned banks and has rebounded pretty well from the doldrums of the Asian Financial Crisis. The three largest state-owned banks in the country are Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia. The government owns between 57 and 60 percent of each, with the rest held by the public.
In 2023, the combined assets of these three banks were $335 billion and they had a cumulative net income of $9.2 billion. As a point of reference, the largest privately owned commercial bank in Indonesia is Bank Central Asia, which had $3 billion in profits and $90 billion in assets in 2023.
So what is behind the rise of Indonesia’s banks? One obvious answer is that the pandemic drove up the national savings rate consierably. According to the World Bank, in 2019 gross national savings in Indonesia was 31 percent of GDP. By 2022, it had shot up to 37 percent. This means people have been saving more of their income, often in the form of bank deposits.
When banks collect more deposits they can issue more loans, and this generally leads to higher profits, assuming the loans are properly underwritten. Growth in deposits has slowed now that the pandemic is over, but the savings rate is still moving upwards. Bank Mandiri, for instance, saw its deposit base grow by 4 percent in 2023.
Increased savings are only part of the picture, however. Another important factor is that these savings are being recycled into productive investments. Not only are Indonesian banks making more loans in recent years, a lot of these loans are being used to finance things like infrastructure or to provide working capital for business development.
In Indonesia, the big banks don’t typically do a lot of consumer lending or home loans. One of the smallest of Indonesia’s state-owned banks is called BTN, and it is specifically focused on mortgages. In 2023, BTN booked a net profit of $245 million on $29 billion in assets. That’s not bad, but it’s eclipsed by a bank like Mandiri, which is heavily involved in industrial development and infrastructure and often lends to other state-owned companies that are developing large-scale national projects.
Indonesian banks aren’t just making loans though. Since the pandemic, they have also been busy buying government bonds. Looking at Bank Mandiri again, the value of government bonds on their balance sheet rose from $9.3 billion in 2019 to $21 billion in 2022, an increase of 126 percent.
During the pandemic, the state increased spending to offset the drop in economic activity, and this was financed by issuing billions of dollars in government bonds. Indonesian banks, with their rising deposit bases, were well-positioned to absorb a lot of that new debt. This is, incidentally, what banks in a moderately well-functioning financial system are supposed to do.
They are intermediaries, taking accumulated savings and channeling it into productive economic activity. Indonesian banks are pretty conservative in this regard, especially state-owned banks. They are not highly leveraged, and generally like to fill the asset side of the ledger with good old-fashioned loans and bonds. Lately, they have been financing a lot of infrastructure, industrial development and other government spending.
Another thing worth mentioning is that regulatory oversight and management of Indonesia’s banking sector is much improved from where it was in the 1990s. Are there still cases of financial malfeasance and chicanery? Sure, but it’s much less systemic, there is a lot more transparency, and it is highly unlikely that the banking system is stuffed full of the same kind of bad loans as it was during the Suharto era.
This means the solid performance of Indonesian banks is probably not a fluke, and the incoming administration of Prabowo Subianto is in all likelihood going to manage the banking sector in much the same way as the previous administration did. Indonesian banks are on a pretty good run right now and no one, least of all Prabowo, whose grandfather was involved in founding Bank Negara Indonesia and who is intimately familiar with what happens to Indonesian presidents when banks collapse, wants to see a repeat of the 1990s.
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