Control and competition: Banking deregulation and re‐regulation in Indonesia

Abstract

Policy changes in Indonesian banking from 1983 to 1992 saw the removal of controls on interest rates, lending and expansion of branch networks, and of barriers to entry. The dismantling of loan subsidy programmes financed by the central bank ran in parallel with these changes. Private banks were enabled to erode rapidly the market share of the previously dominant, but less efficient and less customer‐oriented, state banks. Opponents of deregulation tend to blame it for Indonesia's persistent inflation in the early 1990s and for contributing to the currency crisis in 1997–98, but their arguments are found wanting. Nevertheless, despite the impressive progress resulting from reform, interventionist policy had been making a comeback prior to the crisis, and the central bank still maintained its role as a significant supplier of subsidized loans.

Keywords:

• Indonesia
• banking
• deregulation
• interest rates
• subsidies
• inflation
• current crisis