Corporate Governance and the Indonesian Financial System Corporate Governance and the Indonesian Financial System: A Comparative Perspective

Financial systems reform and corporate reform are deeply intertwined and thus are best addressed simultaneously and comprehensively. Indonesia is seeking to do this by developing rules, institutions, and mechanisms to achieve good corporate governance, while working to build an effectively functioning financial system that facilitates good corporate governance. This paper explores this quest in a comparative context. As does every country, Indonesia has a wide spectrum of financial institutions and financial markets. Large enterprises that engage in very large ("wholesale") financial transactions can turn to large, somewhat sophisticated financial institutions  domestic and foreign banks, insurance companies, and the capital market. Small and medium enterprises and individual depositors and borrowers use "retail" financial institutions. For the smallest, predominantly rural, producers in informal markets, there is micro finance. In the process of economic development, the formal financial sector is dominated by banks that tend to finance large firms and trade, both foreign and domestic. Formal and informal financial markets co-exist, segmented essentially by scale and the creditworthiness of borrowers. As the saving rate increases, and banks are increasingly able to attract deposits and other funds, the financial intermediation process develops and spreads. There is a trickle-down effect: the formal financial system gradually supersedes the informal system for more and more clients, both savers and borrowers. At the same time, traditional small-scale informal financial institutions evolve into more formal, "modern" financial institutions. Moneylenders start local banks and credit associations;