The Government And Indonesian Central Bank

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In the past decades, the Indonesian banking system has experienced significant changes. The economic crisis that hit Indonesia in 1997-1998 has resulted in a deteriorate bank performance and the banking system nearly collapsed. The economy declined by 13% in 1998 and the country had to take a 43 billion USD bailout fund by the International Monetary Fund (IMF) as its currency weakened, companies could not pay their loans and at least 80 banks failed or were nationalized (Setiaji and Chen, 2012). The government and Indonesian Central Bank (Bank Indonesia) implemented various policy changes in order to save the banking system from collapsing, including the provision of Bank Indonesia Liquidity Assistance (Syafri, 2012). These policies have…show more content…
While the global economic condition is still recovering from crisis, many argue that the process is uneven and susceptible to shock (Bank Indonesia, 2015). The recovery process tends to slow down as there is weakened commodity prices and foreign investment, and these factors are inevitably affecting the growth rate of Indonesia. GDP growth is falling from 6.3% in 2007 to a forecasted growth rate of 5.5% in 2015 (Asian Development Bank, 2015). In this case, as a financial intermediary, banks have a strategic role in supporting the national economic growth. It is believed that efficient banking system is essential for the country development. Therefore, a study looking at the efficiency and profitability of Indonesian banks is substantial as it will signal the growth of the Indonesian economy in the future. According to Bloomberg, the lenders in Indonesia have the most profits among the top 20 economies in the world (Vallikappen and Moestafa, 2013). The data shows that Indonesian banks have higher profitability than other Southeast Asian (ASEAN) countries due to high demand for credit. It can be seen that banks in Indonesia tend to have high net interest margin (NIM), which demonstrates the ability of traditional bank activities to generate interest-based income. From 2000 to 2009, average banks in Indonesia had the highest NIM of 5.29% compare to other ASEAN countries, including the Philippines at
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