Formulate policies to maintain a balance between attract foreign investment and protect the interests of domestic banks

Oct 13, 2025 by talynt.org 73 views

Introduction

The penetration of foreign banks in Indonesia has become a significant concern in the analysis of the competitive structure of the domestic banking sector. The increasing presence of foreign banks in the Indonesian market has raised questions about the impact on the competitive structure of the domestic banking sector. This study aims to analyze the impact of the penetration of foreign banks on the competitive structure of the domestic banking sector in Indonesia.

Background

The Indonesian banking sector has undergone significant changes in recent years, with the increasing presence of foreign banks. The Indonesian government has implemented policies to attract foreign investment in the banking sector, which has led to the entry of several foreign banks into the market. However, the impact of this penetration on the competitive structure of the domestic banking sector is still unclear.

Methodology

This study adopted a two-step approach to evaluating the impact of the penetration of foreign banks on the competitive structure of the domestic banking sector. The first stage focuses on determining the competitive structure of the domestic banking sector using the Panzar-Rosse method through data panel data regression analysis. The second stage aims to analyze the impact of the penetration of foreign banks using the common effect model and the Generalized Least Square (GLS) method.

Results

The results from the first stage show that the competitive structure of the Indonesian domestic banking sector tends to be monopolistic. That is, in this market, some banks dominate market share and have the power to determine the price and policy of service without much pressure from competitors. This can lead to concerns related to the diversity of services and innovations that usually appear in a more competitive market structure.

In the second stage, the results of the analysis show that the penetration of foreign banks has a significant negative impact on the competitive structure of the domestic banking sector. The existence of foreign banks entering this market has the potential to reduce the competitiveness of local banks, causing some of them to be difficult to survive. This penetration can also increase market concentration, where foreign banks that have greater resources will be more able to attract customers than domestic banks.

Control Variables

This study also includes control variables for more comprehensive analysis, including market concentration levels, bank characteristics, and macroeconomic environmental factors. All of these control variables show a significant effect on the level of competition in the Indonesian banking sector. For example, the characteristics of banks such as size and liquidity affect the ability of banks in competing, while macroeconomic factors such as inflation and economic growth can affect the overall performance of the banking sector.

Implications

From this analysis, it can be concluded that the penetration of foreign banks has complex implications for the competitive structure of the domestic banking sector in Indonesia. On the one hand, their presence can bring new investments and technology, but on the other hand, they can also pressure local banks that are less competitive. Therefore, it is important for financial authority to formulate policies that can maintain a balance between attract foreign investment and protect the interests of domestic banks.

Conclusion

This study provides valuable insights on the dynamics of the Indonesian banking industry, as well as the importance of understanding how these variables interact with each other in determining competition in the market. Thus, the policies implemented must be able to create a competitive climate, encourage innovation, and protect the stability of the national banking sector.

Recommendations

Based on the findings of this study, the following recommendations are made:

Formulate policies to maintain a balance between attract foreign investment and protect the interests of domestic banks: Financial authority should formulate policies that can maintain a balance between attract foreign investment and protect the interests of domestic banks.
Encourage innovation and competition: Policies implemented should be able to create a competitive climate, encourage innovation, and protect the stability of the national banking sector.
Monitor the impact of foreign bank penetration: Financial authority should monitor the impact of foreign bank penetration on the competitive structure of the domestic banking sector and adjust policies accordingly.

Limitations

This study has several limitations. Firstly, the study only focuses on the impact of foreign bank penetration on the competitive structure of the domestic banking sector in Indonesia. Secondly, the study only uses data from 2012 to 2014, which may not be representative of the current situation. Finally, the study only uses a two-step approach to evaluating the impact of foreign bank penetration, which may not capture all the complexities of the issue.

Future Research Directions

This study provides a foundation for future research on the impact of foreign bank penetration on the competitive structure of the domestic banking sector in Indonesia. Future research should aim to:

Examine the impact of foreign bank penetration on other aspects of the banking sector: Future research should examine the impact of foreign bank penetration on other aspects of the banking sector, such as the stability of the banking sector and the availability of credit to small and medium-sized enterprises.
Use more advanced methodologies: Future research should use more advanced methodologies, such as the use of machine learning algorithms, to analyze the impact of foreign bank penetration on the competitive structure of the domestic banking sector.
Examine the impact of foreign bank penetration in other countries: Future research should examine the impact of foreign bank penetration in other countries, such as in Southeast Asia and Latin America.
Frequently Asked Questions (FAQs) on the Impact of Penetration of Foreign Banks on the Competitive Structure of the Domestic Banking Sector in Indonesia ===========================================================

Q1: What is the impact of foreign bank penetration on the competitive structure of the domestic banking sector in Indonesia?

A1: The penetration of foreign banks in Indonesia has a significant negative impact on the competitive structure of the domestic banking sector. The existence of foreign banks entering this market has the potential to reduce the competitiveness of local banks, causing some of them to be difficult to survive.

Q2: What are the implications of foreign bank penetration on the domestic banking sector in Indonesia?

A2: The implications of foreign bank penetration on the domestic banking sector in Indonesia are complex. On the one hand, their presence can bring new investments and technology, but on the other hand, they can also pressure local banks that are less competitive.

Q3: What are the control variables that affect the level of competition in the Indonesian banking sector?

A3: The control variables that affect the level of competition in the Indonesian banking sector include market concentration levels, bank characteristics, and macroeconomic environmental factors. These variables show a significant effect on the level of competition in the Indonesian banking sector.

Q4: What are the characteristics of banks that affect their ability to compete?

A4: The characteristics of banks that affect their ability to compete include size and liquidity. Banks with larger size and higher liquidity are more able to compete in the market.

Q5: What are the macroeconomic factors that affect the overall performance of the banking sector?

A5: The macroeconomic factors that affect the overall performance of the banking sector include inflation and economic growth. These factors can affect the overall performance of the banking sector and the level of competition in the market.

Q6: What are the policies that can maintain a balance between attract foreign investment and protect the interests of domestic banks?

A6: The policies that can maintain a balance between attract foreign investment and protect the interests of domestic banks include formulating policies that can attract foreign investment while protecting the interests of domestic banks.

Q7: What are the recommendations for financial authority to formulate policies that can maintain a balance between attract foreign investment and protect the interests of domestic banks?

A7: The recommendations for financial authority to formulate policies that can maintain a balance between attract foreign investment and protect the interests of domestic banks include:

Encourage innovation and competition: Policies implemented should be able to create a competitive climate, encourage innovation, and protect the stability of the national banking sector.
Monitor the impact of foreign bank penetration: Financial authority should monitor the impact of foreign bank penetration on the competitive structure of the domestic banking sector and adjust policies accordingly.

Q8: What are the limitations of this study?

A8: The limitations of this study include:

The study only focuses on the impact of foreign bank penetration on the competitive structure of the domestic banking sector in Indonesia: The study only focuses on the impact of foreign bank penetration on the competitive structure of the domestic banking sector in Indonesia, and does not examine the impact on other aspects of the banking sector.
The study only uses data from 2012 to 2014: The study only uses data from 2012 to 2014, which may not be representative of the current situation.
The study only uses a two-step approach to evaluating the impact of foreign bank penetration: The study only uses a two-step approach to evaluating the impact of foreign bank penetration, which may not capture all the complexities of the issue.

Q9: What are the future research directions?

A9: The future research directions include:

Examine the impact of foreign bank penetration on other aspects of the banking sector: Future research should examine the impact of foreign bank penetration on other aspects of the banking sector, such as the stability of the banking sector and the availability of credit to small and medium-sized enterprises.
Use more advanced methodologies: Future research should use more advanced methodologies, such as the use of machine learning algorithms, to analyze the impact of foreign bank penetration on the competitive structure of the domestic banking sector.
Examine the impact of foreign bank penetration in other countries: Future research should examine the impact of foreign bank penetration in other countries, such as in Southeast Asia and Latin America.