In the first eight months of 2016, credit growth in Indonesia amounted to IDR 4,146.28 trillion (approx. USD $319 billion), up 6.8 percent only from credit disbursement in the same period one year earlier. Jahja Setiaatmadja, President Director of Bank Central Asia, informed that one of the key reasons that causes slowing credit growth is slow progress of the government-led infrastructure projects.

Hadad added that the profitability of Indonesian banks will not only fall this year due to slowing credit growth but also due to the OJK's request (to the banks) to keep a higher amount of cash reserves in order to cover the rising amount of bad debt (non-performing loans). Regarding next year, Hadad would like to see banks to become more innovative in terms of credit disbursement because macroeconomic growth will not accelerate too drastically in 2017 and therefore will not be able to provide a major boost for the banking industry. Based on the latest forecasts, the Indonesian economy will expand by 5.3 percent (y/y) in 2017, from an expected 5.1 percent (y/y) in 2016.

The OJK encourages Indonesian banks to disburse credit in the priority sectors agriculture, food, energy and tourism. This government agency also encourages higher financial inclusion in Indonesia. Financial inclusion (or inclusive financing) is defined as the availability of financial services at affordable costs to sections of disadvantaged and low-income segments of society. The geographic composition of Indonesia (an archipelago that consists of thousands of islands and that is characterized by weak infrastructure) creates major challenges. However, it is important to provide banking access to the nation's small businesses, farmers and fishermen in order to combat poverty, create a just society and push for accelerated macroeconomic growth.

Meanwhile, the central bank of Indonesia (Bank Indonesia) still targets a credit growth rate in the range of 7 - 9 percent (y/y) this year. So far this year, Bank Indonesia cut its key interest rate drastically from 7.50 percent at the year-start to 4.75 percent at the October policy meeting (this also included the adoption of a new benchmark: the 7-day reverse repo rate). However, this aggressive monetary easing has had insignificant impact on banks' interest rates. It may require up to eight more months before local banks adjust their interest rates significantly in line with the national benchmark.

Local Indonesian banks are struggling with low demand and deteriorating loan quality and therefore remain reluctant to cut interest rates too much. The OJK stated that the average lending rate on house ownership offered by commercial banks stood at 10.99 percent in August, only 34 basis points lower than in August 2015, despite the much wider monetary easing that has been conducted by Bank Indonesia.

Bahas