Darmin Nasution: Strengthening stability towards sustainable growth - a
transformation challenge
Speech by Dr Darmin Nasution, Governor of Bank Indonesia, at the Bankers' Dinner 2011,
Jakarta, 21 January 2011.
* * *
Honorable Ministers and Members of Parliament,
Prominent Bankers,
Distinguished Guests, Ladies and Gentlemen,
Assalamu'alaikum Wr. Wb,
Good evening and may God bless us all,
1. In this beautiful evening, I would like to invite all of us to jointly extend our gratitude
to God Almighty for the opportunity to meet in such wonderful settings at the Annual
Bankers' Dinner 2011.
2. Although slightly belated, please allow me on behalf of all members of the Board of
Governors of Bank Indonesia, to wish you a Happy New Year 2011. We hope this
new year will be the year of our great achievement.
Distinguished guests, ladies, and gentlemen,
3. We have just passed the global economic crisis 2008/2009 and if I may construe our
economy in the period of 2010-2011 will be in the stage of transformation to a new
era, shifting from a recovery phase towards a sustainable growth. Our journey
during the course of transformation stage, however, would not be an easy one.
4. As the first line of defence, Bank Indonesia always puts a prudent and consistent
management of monetary and banking policies as a priority. Nevertheless, this
prudence and carefulness would not be enough. It seems that the risks and
challenges after the crash of 2008/2009 will be as tough as what we have pursued
in the midst of crisis. The risks and challenges ahead are much more diverse and
complex with global economic policy constellation tending to escalate.
5. Thus, our transformation process towards a sustainable growth inevitably needs a
new mindset and approach. To put things in the context, let me recite Einstein's
observation that "The whole of science is nothing more than a refinement of
everyday thinking." This statement seems to apply to our state of affairs. The
effectiveness of a particular policy will always diminish and render obsolete along
the way, and therefore it should be evaluated, aligned and even modified without
sacrificing its main principles.
6. In a very dynamic world and in the face of uncertainty with all of its possible risks,
our creativity and ability to explore possibilities through simulation will be tested.
Indeed, policy makers cannot rely on a single policy instrument, they have to create
a multi-front policy and formulate an accurate mix which could provide an optimum
trade-off. Decisive actions and top-down approach sometimes are required when
complexity and uncertainty are on the rise.
Distinguished guests, ladies, and gentlemen,
7. In the beginning of 2011, we should be gratitude that we have gone through all of
the challenges in 2010 with a number of noted achievements. Nevertheless, a series
of concerns which has bearing on economic and financial performance remains.
8. In the past two years Indonesia was among a few Asian countries which consistently
reached positive economic growth. In the midst of financial crisis, Indonesia was
able to grow 4.5% in 2009, and in 2010 our economy has expanded even higher by
achieving a 6.0% growth.
9. The structure of growth is now relatively more broad-based. Although the
contribution of private consumption is still dominant, the contribution of investment to
growth began to pick up by 2.0%. The performance of export was also significant,
contributing a 5.7% growth.
10. On the other hand, CPI inflation reached 6.96% in 2010, predominantly pushed by
the high pressure of food prices at year end. Such increase of food prices is a global
phenomenon, and it has generated inflation pressures in a number of countries.
Nevertheless, the pressure on core inflation was still manageable, recorded at
4.28%, due to rupiah appreciation and vigorous economic capacity to respond to
rising consumption pressure.
11. We also recognized that the upward trend of consumption and investment has
brought on high rate of import activities. The rise of import activities was still met by
adequate export revenues hence could keep a net surplus on Indonesia's current
account balance amounting to USD 6.2 billion or 0.9% of GDP.
Distinguished guests, ladies, and gentlemen,
12. We have all witnessed how many countries have undergone severe circumstances
during 2008/2009 crisis and we have all witnessed how our economy has
remarkable resilience during the crisis. Apparently, it has inspired global portfolio
managers of a new economic power in Asia aside from China and India which has a
huge market potential, solid economic fundamental, and attractive yields and capital
gains.
13. Indonesian financial market was perceived as a magnet which attracted abundant
global liquidity. We saw the surge of capital inflows into the country, mainly to
several portfolio instruments such as government debt securities (SUN), Bank
Indonesia Certificate (SBI), and equities. In total, inflow of portfolio investment to
Indonesia has reached USD 15.2 billions during 2010.
14. A better prospect and resilience of our economy also attracted foreign direct
investors, though still limited to resource-based sectors such as mining. This was
evident from the foreign direct investment which reached USD 12.6 billions,
increasing threefold from 2009 which was recorded at USD 4.9 billions.
15. Indonesia's balance of payments reached a surplus of around USD 30 billions in
2010. International reserves also posted an increase as it reached USD 96.2 billions
or grew 45.5% higher than 2009, equivalent to 7.1 months of import and the
repayment of short-term government debts due.
16. A solid balance of payments and increased international reserves has put
Indonesia's external liquidity position on a stronger footing. Furthermore, a
decreasing ratio of government debt to GDP (29.5% of GDP as of October 2010)
provides further contribution to the robustness of Indonesia's external sector.
17. We believe that stronger performance and resilience of the external sector was
among the reason behind the recent improvement of our sovereign ratings. I am
optimistic that now we are on the way to investment grade. The primary obstacles to
achieve investment grade mainly relates to infrastructure development, which I
believe is a task that must be resolved together. Issues on infrastructure
development have been discussed numerously and policy recommendations have
been formulated as well. It is time now to consistently implement them.
18. A surplus balance of payments was also reflected by a relatively stable rupiah. In
2010, rupiah strengthened 4.2%, in a range that we view is quite ideal and
consistent with the macroeconomic and business environment.
19. Increased economic activity during the course of 2010 was also supported by the
performance of banking sector which was reflected in improving intermediation
function and stability of the sector. This was evident from several aspects such as
credit expansion which reached 22.8% in 2010, a relatively high capital adequacy
ratio (CAR), and a steady low gross non-performing loan (NPL) which was kept
under 5%. Overall, resilience of domestic financial market was improving. The
escalated debt crisis in Europe which peaked in May and November 2010 only put
temporary pressure on the domestic market.
Distinguished guests, ladies, and gentlemen,
20. All of the achievements which I have mentioned are the fruits of our hard work,
including the banking community. Those achievements are much more appreciated
and cherished since they were achieved in the midst of global uncertainty and
calamity.
21. In this opportunity, allow me to address Bank Indonesia's policy responses in 2010
in preserving macroeconomic and financial system stability. In accordance with
tonight's theme, I believe that strengthened stability will support the transformation
process of our economy in the aftermath of the global financial crisis from a recovery
stage to a more sustainable growth.
22. The way Bank Indonesia formulates policy responses is indeed a meticulous
process involving deep internal discussion. This was undeniable since the threats
and challenges in 2010 was so diverse and unpredictable creating complexity in the
policy making process.
23. In general, there are three challenges in 2010 which will persist in the future. First,
the challenge of global economic imbalance. Two years after the crisis, the global
economy underwent two speeds of recovery in which the recovery in emerging
markets is more rapid than that in advanced economies. To ensure durability of
recovery, policy makers in developed countries rely on accommodative policies. On
the other hand, policy makers in emerging markets have to deal with economic
overheating. We may say that almost all emerging markets have undergone policy
normalization in 2010, some countries even have shifted to tightening mode.
24. Second, challenges associated with global capital mobility and currency war. The
differences of economic cycles and policy stances between developed countries and
emerging markets unfortunately have led to unfavorable consequences for emerging
market. This is evident in the context of tidal wave of capital inflows into emerging
markets including Indonesia. The surge of capital inflows bring about complexities of
macroeconomic policy management to emerging market, including Indonesia, since
it has bearing on currency appreciation pressure, asset bubble risks, and financial
fragility following capital reversal.
25. Policy responses by way of foreign exchange intervention and managing capital
flows in several emerging market have generated different appreciation pressures
among countries. In the mean time, since keeping large stock of international
reserves is deemed too costly, emerging markets tend to put their reserves in other
emerging markets. This situation indeed entails a significant negative externality in
the emerging markets region. Hence, a policy coordination in the multilateral level is
necessary to avoid negative externality of individual country policy response.
26. Third, challenges related to domestic demand and inflationary pressure. Global
financial crisis 2008/2009 has deteriorated inter and intra-regional trade which
prompted many countries to focus on promoting domestic demand. However, in the
context of Indonesia, relying solely on domestic demand has two significant
implications.
27. Firstly, a high domestic demand may generate inflation since supply side is quite
less flexible to respond to accelerated demand. Secondly, a high domestic demand
may accelerate import even faster since import content in our industry is still
perceived high. This situation will bring about decreasing current account surplus or
even a deficit. Since the ratio of short-term capital to total capital inflows is quite
high, the risk of current account deficit should be monitored closely.
Distinguished guests, ladies, and gentlemen,
28. On that note, a number of policy mix of monetary and macroprudential instruments
have been implemented during 2010 to mitigate the global and domestic risks. In the
midst of surging capital inflows and abundant excess liquidity, efforts to combat
inflationary pressure cannot solely rely on conventional policy instruments such as
the interest rate. Increasing interest rate may attract even more capital inflows. It is
for this reason, a mix of policy instruments is needed.
29. The policy mix implemented is intended to address the challenge of maintaining
external and internal economic stability. Achieving external stability means,
maintaining strong and sustainable balance of payment, meanwhile internal stability
implies attaining low and stable inflation to support sustainable economic growth.
30. To maintain external stability, a policy mix is aimed at exchange rate stabilization
and capital flows management through macro prudential policies. In the midst of
surging capital inflows and appreciation pressures, exchange rate stabilization policy
through intervention is maintained to minimize the exchange rate volatility, taking
into consideration the direction and movement of exchange rates in the region.
Given the complexity of relying only on intervention, macroprudential policies are
also pursued. Since June 2010, Bank Indonesia has started to implement
macroprudential policies with the imposing of the one-month-holding-period (OMHP)
for SBI buyers. This regulation requires SBI buyers to hold their holdings for one
month before selling them to other parties. I view this policy very useful in preventing
large and sudden capital outflows originating from SBI transactions such that it can
manage to reduce exchange rate volatility. The scope, timing and sequencing of the
policy mix are based on the consistency of the exchange rate to macroeconomic
target and the impact of excess liquidity resulting from exchange rate stabilization on
monetary operation.
31. Meanwhile, to sustain internal stability a policy mix is introduced to maintain price
stability and appropriately manage domestic demand. Measures taken include
among others imposing a level of interest rate in combination with macroprudential
measure to manage excess liquidity. This is done through increasing Minimum
Reserve Requirement. The scope, sequencing and timing of the policy mix took into
consideration inflation and macroeconomic projections, the current excess liquidity
(including the impact of foreign exchange intervention and fiscal expansion), and the
cost of monetary operation.
32. We continue to calibrate the mix of policy measures taken to strike an optimal trade
off between various macroeconomic targets. Bank Indonesia also maintains on
going coordination with the government especially to minimize the impact of volatile
foods and administered prices inflation on the economy.
Distinguished guests, ladies, and gentlemen,
33. In the short run, I believe the opportunity for higher economic growth is still very
much wide open. Bank Indonesia projects economic growth in 2011 to reach the
range of 6.0%-6.5%, and increasing to 6,1%-6,6% in 2012. Investment which
began to improve since 2010 is expected to continue its growth hence creating a
more balanced economic growth structure.
34. Higher growth in 2011 is also supported by solid performance of the external sector.
Exports is expected to be more diversified and grow stronger while the fast growing
imports is in line with robust investment and consumption.
35. The portion of foreign direct investment as a composition of capital inflows is
estimated to expand. Overall, the 2011 balance of payment is projected to reach a
surplus of USD16.4 billion, and the foreign reserves to reach USD112.6 billion by
the end of the year. This is equivalent to 7.5 months of imports and short-term
government debt repayment. The sizable foreign reserves will strengthen
sustainability of the Indonesian economy in mitigating various external shocks (a self
insurance mechanism).
Distinguished guests, ladies, and gentlemen,
36. We observe stronger economic growth in 2011 is expected to be accompanied with
rising inflationary pressure. We are well aware of the number of sources of
inflationary pressure, especially those coming from increase food prices as well as
possible adjustment of administered prices. The rise in inflation expectation due to
the impact of food price increase on the perception and dynamics of the domestic
financial market recently, is also a special concern to us.
37. In this context, Bank Indonesia together with the government will continuously
coordinate to fine tune various programs to increase supply and improve distribution
of staple goods. Bank Indonesia has high hopes and is certain that the Government
will thoughtfully address this issue. The synergy between an appropriate policy mix
and a well-built coordination will undoubtedly bring inflation to its target of 5%±1% in
2011 and 4,5%±1% in 2012.
38. In my capacity as a monetary authority, I would like to reemphasize that Bank
Indonesia is still very much committed to direct the BI rate to reach the medium term
inflation target which is in the range of 3.5%. The setting of the BI rate is formulated
with excise measurement so that inflation and expected inflation will move towards
the corresponding target without sacrificing economic growth.
39. I have strong believe that by the official establishment of the ASEAN Economic
Community by 2015, we can achieve the medium term inflation target hence bring
our inflation rate to the level of neighbouring countries in the region. A low and
stable inflation accompanied with improvements to various structural impediments
will support the Indonesian economy which is estimated to grow by 7.5% by 2015.
Distinguished guests, ladies, and gentlemen,
40. The picture of our state of economy which I have just portrayed is still prone to a
number of global and domestic risks. The global economy will continue to move
dynamically in its search for equilibrium. However, this process may well be
described as an indefinite search within a dark and never ending tunnel.
41. An imbalanced global economic recovery, a persistent debt crisis in the peripheral
European area, signs of economic overheating in emerging markets, and extreme
climate change and its impact on food prices are still considered as risks that may
affect the stability of the global financial market in years to come. The dynamics of
the global financial market can have an immediate impact to Indonesia as we
currently have a relatively open financial market. Our first challenge is how, on the
one hand, we can strengthen our domestic financial system while, on the other
hand, reap the benefits of this relatively open market, including efforts to deepen our
market.
42. Based on my observation, efforts to deepen our financial market are moving on a
relatively slow track. In this context, the strengthening of the domestic investor base
must be a priority so that the dynamics of our financial market is not solely
dependent on changing global investor risk appetite. Furthermore, we may no longer
have to fear the risk of capital reversal. In this opportunity, I welcome efforts made
by the Ministry of Finance and the Ministry of State Owned Enterprises on their
cooperation to maintain the stability of the government debt securities.
Distinguished guests, ladies, and gentlemen,
43. A number of domestic issues in 2010 are still pending and must be resolved. In this
context, our second challenge is how to transform the Indonesian economy into a
more sustained economy supported by sustainable growth. Despite its relatively
more stable growth compared to most other countries in the region, the structure of
the domestic demand of the Indonesian economy must be further boosted to be an
investment-driven demand. For example, the high economic growth of China and
India are supported by a share of investment to GDP of 45% and 33%, respectively.
This is compared to Indonesia with a 24% investment to GDP ratio.
44. Indonesia still lags in attracting FDI compared to the two countries. Despite its
increasing trend in 2010, according to the United Nation's World Investment report,
the ratio of the stock of incoming investments to GDP for Indonesia is only 13.5%,
far below Thailand (37.5%) or Malaysia (39%).
45. The dynamics of our economic growth structure in terms of sector must also be put
to our attention. Labour intensive sectors which facilitate transfer of technology,
especially the manufacturing industry, are contributing less and less to the economy.
On the other hand, an accelerating growth is depicted in small value added,
resource-based industry and non-tradable sectors such as telecommunication. If left
unattended, this problem may lead to deindustrialization that may cause reduction in
the value added of the national industry.
46. Our domestic manufacturing industry is also heavily dependent on imports. As a
consequence, economic growth is followed by rising imports which causes the
current account surplus to decline. Such a trend is actually already happening. In
2009, our current account recorded a surplus of USD 10.7 billion (2.0% of GDP),
and in 2010 in line with strengthening consumption and investment, it fell to
USD 6.2 billion (0.87% of GDP).
Distinguished guests, ladies, and gentlemen,
47. is how to direct inflation to a low and stable level in line with
The third challenge
the set target. Recently, market perception on inflation is based more on short term
phenomena or cyclical factors.
48. In the last ten years, Indonesian inflation on average reached 8.2% and is on a
declining trend. This rate is well above regional average during the same time
period. However, there has been significant progress as the inflation gap during this
period is declining. In fact, compared to the BRIC countries, all having an investment
grade rating, the inflation rate in Indonesia is relatively close to the level of the rate
in Russia and Brazil, and even lower than in India. Regardless its improving inflation
profile, Indonesia needs structural reforms in order to further lower inflation to be in
line with neighbouring countries.
49. The fourth challenge is reaping the benefits of incoming capital flows. Foreign
investors' appetite for domestic financial market should ideally be directed to
facilitate domestic financial market deepening and corporate financing. In this
context, we need to find breakthroughs on how to provide incentives to boost
initial/secondary public offering or even bond issuance. Also, imperative measure
needed to provide assurance to foreign investors is the strengthening of
infrastructure, which includes institutional aspects, regulation, and market efficiency.
Distinguished guests, ladies, and gentlemen,
50. I am certain that through commitment, active participation, and strings of
coordination among affiliated parties, we are able to face the various risks and
challenges mentioned. To direct inflation towards its target, policy taken by Bank
Indonesia during 2011 will take the form of stronger monetary and macro prudential
policy mix that have been implemented in 2010. This effort is done by taking into
consideration all available instruments to be optimally calibrated. These instruments
include:
a) BI rate is directed to be consistent with announced inflation targets, 5%±1%
and 4,5%±1% for 2011 and 2012, respectively, while keeping in mind the
increasing inflationary pressure.
b) Foreign exchange policy is aimed at achieving inflation target while keeping
consistence with other macroeconomic targets and providing certainty to the
business world. The possible trinity solution Bank Indonesia has opted for will
be the optimal configuration of foreign exchange stability, management of
capital flows, and interest rate response. In other words, taking into
consideration the various complexities, Bank Indonesia's strategy to go
around the impossible trinity is by choosing middle ground solution instead of
corner solution.
c) Monetary operation and macroprudential policy to manage domestic liquidity
are directed to be consistent and supportive of the interest rate policy in
achieving the inflation target and managing domestic demand.
d) Macroprudential policy on capital flows is aimed at supporting foreign
exchange policy and preventing excessive impact on domestic liquidity. Two
policy packages announced in December 2010, an increase in reserve
requirement in foreign currency and reinstatement of the limit of daily short
term foreign debt position, fall into the category of macroprudential
instruments directed to manage capital flow. In the midst of capital inflows,
such increase in reserve requirement in foreign currency will strengthen
banking liquidity management. Meanwhile, the limit of daily short term foreign
debt position will increase prudence in managing banking short term foreign
debt.
51. In the formulation and implementation of the policy mix, it is important to keep in
mind linkages between monetary and financial stability. Bank Indonesia will continue
to calibrate various measures so that the policy mix taken will bring optimal trade off
between monetary stability, financial system stability, and sustainable economic
growth.
Distinguished guests, ladies, and gentlemen,
52. In line with the macroeconomic development, allow me to give explanation on
Indonesia's banking condition, much of which certainly needs to be encouraged and
dealt with. To this end, I will underscore principal aspects that I believe require
closer attention.
53. I would like to begin with financial system stability and the positive banking
performance in 2010. In general, financial system stability is reasonably maintained
as indicated by the Financial Stability Index of 1.75, much lower than the 2.43 figure
recorded during the 2007/2008 crisis. The performance of the banking industry, as I
mentioned before is also quite satisfying. The intermediation function is enhanced
although still leaving room for growth, the credit risk is maintained, and the capital is
adequate with the support from ample liquidity which I believe is more than enough.
54. The indication of excess liquidity in the banking sector is reflected by the size of the
liquid instruments as of 15 December 2010 including SBI amounting to
Rp 494.5 trillion and Government Debt Securities amounting to Rp 229.9 trillion. The
banking undisbursed loan amounting to Rp 556.8 trillion also indicated the presence
of excess liquidity. This highlights that our economy is not short of liquidity. The
challenge is in how to channel that liquidity to finance productive business sector
and economic development as a whole.
55. I see a serious issue here, where in a condition of excess liquidity, the role of banks
in promoting economic growth is still small. The ratio of credit to GDP in 2010 is only
26.1%, just a slight increase from 25.7% in 2009. This low figure is caused by the
impact of the 1997/1998 crisis which has pushed Indonesia into a low leverage
economy. In this condition, deleveraging process in the corporate sector occurred
for quite a long period. Not surprisingly, during that period, credit to the corporate
sector grew at a low pace. I indeed hope that banks have the courage to take bigger
role in reviving the corporate sector, off course with high quality service and efficient
cost.
56. In my opinion, banks need to take a closer look at non-bank sources of financing
which have developed to be more competitive. To illustrate, in 2010 financing
through equity and bond market reached Rp 280.6 trillion or 4.4% of GDP,
compared to 3.7% of GDP in 2009. The number of issuers increased from 57 (2009)
to 74 (2010). This condition should be able to encourage banks to increase their
efficiency so as to maintain sound competitiveness.
57. Apart form the above matter, I see a potential opportunity for SMEs to become an
engine for the economy. Data as of end 2010 showed that the share of SME credit
have reached 53.32%, growing 25.17%. These figures indicated the dominance of
SME to the total credit. Furthermore, the 2.65% non-performing SME loan is lower
than that of the non-SME (3.51%).
58. On top of that, there is room for improvement for the SME sector. The lending rate
for this sector is still higher than for the other corporate sector. This is a challenge
for us together, because if the interest rate for SME can be lowered further, the
benefit will be high for the economic activity.
59. Regional wide, our banking competitiveness in terms of efficiency, capital and asset
is still lower compared to other countries in the region. Based on data from Bank
Indonesia and Bank Scope as of end 2009, our ratio of operational expenses to
operational income (OEOI) and net interest margin (NIM) are 81.6% and 5.8%,
respectively. Meanwhile, Singapore, Malaysia, Thailand and the Philippines charted
OEOI of 32.7%-73.1% and NIM 2.3%-4.5%. This fact indicates how Indonesian
banking efficiency is the lowest among ASEAN-5. This is ironic to the other fact that
the average increase in bank equity price in Indonesia is very fantastic. To this end,
I request banks to catch up in terms of efficiency.
60. Moreover, the challenge ahead that we should confront together is how to reach an
equal footing for our banking competitiveness as we are heading toward the ASEAN
Economic Community (AEC). The banking sector liberalization under the AEC will
be effective in 2020. Like the saying: "9 years a short period of time, the future will
be here before we know it," we all have to be ready for the challenge. Therefore,
banks are demanded to have the capability to compete while enhancing their
resilience individually, among others through capital accumulation for sound
expansion of assets.
61. At the global level, as a highly regulated industry, banks cannot disregard
international standards, all the more with Indonesia being a member of the Group
of 20 (G-20), Financial Stability Board (FSB), Bank for International Settlements
(BIS) and Islamic Financial Services Board (IFSB). By implementing various agreed
commitments, it is expected that Indonesian banking sector keeps growing healthy
in the corridor of international prudential standard.
62. Considering the various global concessions in maintaining the financial system
stability, I notice that the capital and liquidity aspects need to be reviewed.
Meanwhile, crisis resolutions for the possible systemic impact of failing financial
institutions also need to be strengthened. All these challenges pose serious
concerns and adopted by Bank Indonesia as the basis for strengthening the
program of the Indonesian Banking Architecture (API).
63. By the end of 2010, Indonesia has completed the Financial Sector Assessment
Program (FSAP) as part of its commitment as the member in G-20 global
community. FSAP assesses the extent of resistance, and compliance with
international standards of financial sector. The results of FSAP are encouraging.
The level of Indonesian banking sector resilience is deemed robust and sound. The
stress tests indicate that the resilience of our domestic banking industry is sufficient
in time of a crisis. Furthermore, the level of Indonesian compliance with the main
principles of effective bank supervision is considered to be sound. Therefore, let me
extend our appreciation to distinguished ladies and gentlemen for this achievement.
Distinguished guests, ladies, and gentlemen,
64. Albeit those various issues to be addressed, I have faith the macro economic
outlook for 2011 still provide hope for banking industries to grow. The industry
should see credit growth in the range of 20%-23% in 2011. However, this growth is
vulnerable to the potential risk of commodity price increases and inflationary
pressures, as well as the increased role of non-bank financing. In return, those
factors might potentially surpress credit growth in the range of 19%-21%.
65. To encourage the growth of micro-, small- and medium-scale business credit
(UMKM), Bank Indonesia requires banks to include micro-, small- and medium-
scale business financing scheme in their business plan. Let me take this opportunity
to thank all stakeholders who have supported the initiative of synergy through the
commercial banks - rural banks linkage program, and the initiative of using
guarantee schemes as one of risk mitigation efforts.
66. To increase the role of rural banks in micro-, small- and medium-scale business
credit sector and the communities in their vicinities, particularly lower and middle
class society, adjustments in the asset quality rules are applied to obtain a more
encouraging atmosphere, hitherto creating an agile rural bank sectors without
neglecting the prudential credit principles. Likewise, redesigning the rural banks
efficiency, specifically on how to substantially reduce lending rates, is profoundly
necessary.
67. To strengthen the regional economic development, BPD Regional Champion
program is launched to help boosting up the role of Regional Development Banks
(BPDs). The program is aimed to improve the viability and competitiveness of
regional development banks; hence they can effectively perform their function as
agents of development in the regions.
68. Related efforts in improving the quality of national Islamic banking industry, I view
that there are 3 respective aspects to take into consideration: (i) improving the
professionalism and the quantity of manpower in the industry, (ii) providing robust
and sound incentives, especially in the form of conducive regulatory environment,
and (iii) strengthening product innovation and infrastructure in Islamic banki