JAKARTA: Despite the recent moderate inflation in Indonesia, cutting the benchmark interest rate is not an easy task due to banking market structure, geographical constraint and low financial inclusion, according to The World Bank.
World Bank lead economist Ndiame Diop said the net interest margin in Indonesia was currently sitting at five percent, above the nation’s regional peers which average below four percent.
“Overhead costs in Indonesia are higher than that of peer countries. This may reflect the particular geographical challenges of Indonesia and perhaps the low level of financial inclusion,” he said on Monday in Jakarta.
The small number of non-bank financial institutions amid the underdeveloped debt and equity markets mean less option to raise funds, offering increased bargaining power for banks to keep the high interest rate regime.
The Indonesian banking market is now dominated by 13 big banks which take 89 percent of the market share. Most prefer to deal with mid-high and corporate customers in a long-term relationship rather than with low and micro customers.
“The banking sector in Indonesia is not excessively oligopolistic. The market concentration is lower than that of the European Union. But there are signs of weak competition,” Ndiame added.
