Highlights

The World Bank Group’s support was well aligned with Indonesia’s financial sector priorities, effectively contributing to strengthened financial stability, expanded inclusion, and groundwork being put in place for capital market and sustainable finance development. However, alignment weakened during the FY16–20 Country Partnership Framework period, as the narrowed focus on access to finance stalled lending operations and weakened reform momentum.

Despite foundational reforms, progress on financial deepening and efficiency was constrained by the dominant role of state-owned enterprises, especially in areas such as banking competition and capital market diversification. Planned World Bank support for state-owned enterprise reform did not advance, constrained by political resistance to structural change.

The engagement of the International Finance Corporation (IFC) was primarily concentrated in a small number of private market players—reflecting the limited space available in a market dominated by state-owned enterprises—which restricted its ability to influence systemic change.

IFC helped position Indonesia as a regional leader in sustainable finance and enabled the country’s first sustainable finance road map; mandatory environmental, social, and governance disclosures; and a national green taxonomy. Progress was enabled by the effective integration of IFC’s technical work with World Bank policy operations, strategic use of trust fund resources, and regional knowledge-sharing platforms.

Collaboration between the World Bank and IFC at times relied on individual staff initiatives rather than institutional mechanisms, limiting the systematic use of each institution’s comparative advantages.

Government Priorities and Challenges

Indonesia’s financial sector priorities during the evaluation period focused on building a more stable, modern, and inclusive system under a broader reform agenda led by the Financial Services Authority (Otoritas Jasa Keuangan; OJK). This agenda was articulated through the Financial Sector Master Plan (2021–25), which outlined a comprehensive framework for financial system stability, innovation, governance, and inclusion. Complementary strategic initiatives included the National Strategy for Financial Market Deepening issued in 2018 and the updated National Strategy for Financial Inclusion that launched in December 2020. These strategies aimed to widen access to financial services, reduce reliance on traditional bank lending, expand the investor base, and strengthen the enabling environment for developing capital markets. The government also promoted digital financial services, including agent banking and fintech innovation, to reach MSMEs and underserved populations. Concurrently, the Financial Sector Omnibus Law (FSOL),1 introduced as part of the government’s COVID-19 recovery strategy, addressed long-standing legal and regulatory weaknesses by enhancing supervisory coordination, reinforcing financial sector governance, clarifying institutional mandates, and enabling more effective crisis management mechanisms.

Indonesia’s financial sector has long-standing challenges rooted in institutional, regulatory, and market-level constraints. The persistently low credit-to-GDP ratio reflects a constrained financial intermediation system, largely caused by the dominance of state-owned banks, which crowd out private sector participation and reduce competition (box 5.1). This limited competition, combined with operational inefficiencies and underdeveloped financial infrastructure (including payment systems, credit information, and risk management frameworks), discourages savings and investment, leading to high intermediation costs. Nonbank financial institutions have not expanded in line with the economy because of weak regulatory incentives, shallow investor bases, and limited product offerings, all of which restrict long-term domestic financing.

Relevance of the World Bank Group’s Support to Strengthening the Financial Sector

The World Bank’s support early in the evaluation period was relevant and responsive, aligning with government priorities and evolving sector constraints. During the FY13–15 CPS period, the World Bank focused on reinforcing financial stability—a government priority since the Asian financial crisis—through two stand-alone Financial Sector Reform and Modernization (FIRM) DPLs, from 2012 to 2015, totaling $600 million. These operations complemented the $2 billion Program for Economic Resilience, Investment, and Social Assistance in Indonesia DPL with deferred drawdown option, from 2012 to 2015, which improved Indonesia’s crisis preparedness after the global financial crisis. The program supported short-term resilience measures, whereas the FIRM DPLs supported deeper, medium-term reforms aligned with the 2010 World Bank–IMF Financial Sector Assessment Program (FSAP) recommendations for Indonesia. FIRM reforms included establishing OJK in 2012, transferring supervisory responsibilities from World Bank Indonesia and the Ministry of Finance to OJK, and creating the interagency Financial System Stability Coordination Forum (Komite Stabilitas Sistem Keuangan). These reforms laid the institutional foundation for integrated supervision and enhanced crisis preparedness. In addition, the FIRM DPLs and technical assistance contributed to developing Indonesia’s first National Strategy for Financial Inclusion (2012)—a foundational step toward expanding financial access.

While the World Bank’s relevance and alignment weakened during the FY16–20 CPF period, continued engagement with financial sector counterparts helped maintain the foundation for renewed support. During this period, the CPF narrowed its financial sector development focus to a single support area—access to finance—despite persistent and well-documented structural challenges from shallow capital markets and low intermediation efficiency, as highlighted in the 2017 FSAP. The World Bank did not approve any new financial sector lending during this period. Instead, it relied on a large trust fund portfolio, which exceeded $33 million and resulted in more than 100 advisory activities with limited strategic cohesion (figure 5.1). This fragmentation reflected both shifting priorities and the significant internal Bank Group reorganization at the time, which affected the strategic focus and coherence of financial sector engagement.

Recognizing these limitations, the World Bank recalibrated its approach in 2019. The World Bank restructured the Indonesia Financial Sector Technical Assistance (IFSTA) PASA to focus on three priority pillars—depth, efficiency, and resilience—creating a more cohesive platform to inform policy dialogue and deepen client engagement. This replaced the fragmented advisory portfolio from earlier in the evaluation period with a streamlined set of 27 thematically aligned initiatives. This shift improved internal coherence, strengthened alignment with government priorities, and enhanced policy dialogue effectiveness. Interviews and program documents confirmed that the IFSTA PASA provided the analytical and technical foundation for launching the subsequent Financial Sector Reform DPL series.

Figure 5.1. Financial Sector International Bank for Reconstruction and Development Annual Lending Commitments and Number of Advisory Services and Analytics

Image

Share Tweet Facebook WhatsApp Linkedin Email

Figure 5.1. Financial Sector International Bank for Reconstruction and Development Annual Lending Commitments and Number of Advisory Services and Analytics

Source: Independent Evaluation Group.

Note: FSOL = Financial Sector Omnibus Law; IBRD = International Bank for Reconstruction and Development; OJK = Financial Services Authority.

The FY21–25 CPF reinstated a financial sector objective with outcome-level indicators aligning with the government’s growing reform agenda. The World Bank’s IFSTA PASA informed the $2 billion Financial Sector Reform DPL series, which was launched in 2020. The DPL series closely aligned with the government’s FSOL reform agenda, demonstrating the World Bank’s capacity to rapidly scale up support when government reform momentum was strong. Each DPL in the series included prior actions mapped to FSOL provisions, whereas IFSTA supported capital market deepening, pension reform, payment systems, and insolvency frameworks—key bottlenecks identified in the 2017 FSAP and subsequent Country Economic Memorandums.

After 2019, the World Bank applied a more effective sequencing of support and a strategic mix of advisory services and lending instruments. Most Bank Group engagement during this period was channeled through DPLs, in line with strong government demand for policy reforms. The earlier focus on financial stability provided the foundation for subsequent, more complex reforms that aimed to deepen, diversify, and modernize the financial sector—an evolution that reflected a logical progression in reform ambition. A restructured and thematically aligned IFSTA PASA enhanced the coherence and traction of the World Bank’s technical assistance, allowing it to better inform the DPL series and respond to emerging policy needs. In parallel, the World Bank leveraged analytical work to shape policy dialogue on politically sensitive issues, such as banking competition and SOE dominance, while IFC mobilized investments and advisory services to reinforce efforts in financial inclusion and capital market development. The World Bank also made selective use of IPF to address specific financing gaps, including support for infrastructure financing and disaster risk finance facilities.

IFC’s financial sector support aligned with the country’s priorities for financial deepening but was highly skewed toward a few large clients, given the dominance of state-owned banks and the limited pool of investable opportunities. Between FY13 and FY23, IFC committed $2.3 billion to the sector—64 percent of IFC’s Financial Institutions Group net commitments in Indonesia—demonstrating the sector’s strategic importance. Seventy-two percent of investment volume supported small and medium enterprise and microfinance lending, primarily through commercial banks (65 percent of total commitments). IFC’s emphasis on MSME finance aligned with Indonesia’s development agenda and CPS and CPF objectives, but systemic challenges caused by the dominance of state-owned financial institutions and subsidy program market distortions restricted IFC’s ability to scale and diversify its support. As a result, more than 50 percent of IFC commitments were concentrated on a single client, Bank BTPN (now SMBC), and 76 percent on the top four clients. This concentration meant that IFC engaged with institutions with the capacity to scale but had limited influence across Indonesia’s broader financial ecosystem.

IFC pivoted toward sustainable finance later in the evaluation period—a space with stronger market incentives and fewer public-sector distortions. By the second half of the evaluation period, 35 percent of IFC’s advisory projects focused on green lending; environmental, social, and governance risk management; and climate risk integration in banking operations. These efforts were reinforced by investments in green and social bonds, which align with Indonesia’s climate and inclusion goals. IFC’s work in sustainable finance also benefited from its integration with World Bank policy operations, which enhanced IFC’s influence in regulatory reforms—as noted in prior IEG evaluations (World Bank 2022b). Sustainable finance offered IFC greater traction because it lacked the SOE dominance seen in MSME and infrastructure lending and was shaped more by market forces than state direction.2

Effectiveness of the World Bank Group’s Support to Strengthening the Financial Sector

Financial Sector Resilience

The 2024 FSAP determined that Indonesia’s financial system was resilient to disruptions, supported by strong capital and liquidity buffers. Over the past decade, the country’s financial sector performance was stable, with key indicators such as the ratio of nonperforming loans showing sustained strength. The capital adequacy ratio has consistently exceeded the minimum regulatory requirement of 8 percent, averaging approximately 23 percent in recent years. Nonperforming loans have remained below 3 percent, even during global economic slowdowns, the COVID-19 pandemic, and domestic disruptions. Liquidity levels are also sound, with the ratio of liquid assets to noncore deposits at 123 percent and the ratio of liquid assets to third-party funds at 28 percent, both well above regulatory thresholds. Debt levels among households, corporations, and the public remain low, further suggesting overall financial stability (IMF 2024a).

The IMF–World Bank FSAP framed the policy dialogue and provided a clear reform road map. The 2010 FSAP identified the country’s fragmented regulatory structure as an acute vulnerability, particularly its limited crisis management capacity and the risks that OJK’s formation would cause supervisory gaps and discontinuity. These findings informed the World Bank’s support, sharpening its focus on integrated supervision, systemic risk oversight, and improved interagency coordination. The FSAP’s technical rigor and credibility enabled the World Bank to align its operations with government-acknowledged priorities, thereby increasing policy traction and stakeholder buy-in. The 2017 FSAP confirmed that Indonesia had addressed many of the identified risks, particularly those tied to the institutional transition and supervisory capacity. By 2024, the FSAP noted progress in systemic risk monitoring and institutional strengthening, validating the cumulative impact of reform efforts. Beyond diagnosis, the FSAP process helped sustain reform momentum across CPF cycles and political transitions.

The 2011 launch of OJK reflected the government’s strong reform commitment, enabling the World Bank to effectively support this major institutional shift. The government established OJK in 2011 after over a decade of deliberation. This landmark decision—taken in the wake of the global financial crisis—reflected the government’s willingness to overhaul its financial supervisory framework despite substantial political and operational risks.3 In response, the World Bank provided targeted policy support and technical assistance to operationalize the 2011 OJK law and mitigate these risks. This support included assistance in establishing the Financial System Stability Coordination Forum, strengthening OJK’s internal governance and human resources strategy, and ensuring supervisory continuity. The World Bank’s support also enhanced the crisis management framework by expanding the mandate of the Deposit Insurance Corporation (Lembaga Penjamin Simpanan; LPS). These interventions produced tangible results and were confirmed as highly valuable in interviews with OJK, Bank Indonesia, the Ministry of Finance, and LPS officials. The 2017 FSAP confirmed that OJK had successfully navigated its foundational phase, with World Bank–supported reforms helping reduce LPS deposit payout times from 90 days in 2018 to just 7 days in 2024—fast by international standards and thereby contributing to greater public confidence in the banking system.

The World Bank strategically progressed from stabilizing the financial sector’s foundations to advancing deeper, more complex and sensitive reforms. The World Bank’s support began with the FIRM DPLs, which restructured the sector’s institutional foundation, and evolved into a programmatic series of Financial Sector Reform DPLs and complementary technical assistance. This progression was an intentional shift from financial stabilization to more sensitive and nuanced reforms, including crisis preparedness, resolution frameworks, and the supervision of financial conglomerates. For example, there was little government interest in increasing oversight of financial conglomerates in the first DPL in the later series; however, the second operation successfully included prior actions on this topic, supported by technical assistance. These reforms included enhanced oversight (such as OJK Regulation 45/POJK.03/2020) and expanded legal protections for LPS and OJK, reinforcing their independence in decision-making and aligning with international standards, including the Basel Core Principles for Effective Banking Supervision and the Key Attributes for Effective Resolution Regimes (IMF 2024a).

Financial Sector Deepening

As of today, Indonesia’s financial system remains small and highly concentrated in state-owned banks. As of December 2023, Indonesia’s private sector credit stood at 31.4 percent of the GDP, largely unchanged since 2010 and well below the East Asia and Pacific average of 124 percent. The 10 largest banks account for 66 percent of total bank assets, with four state-owned banks constituting 43 percent of those assets, while most of the other banks are small rural lenders. Nonbank financial institutions (including pension funds, investment funds, finance companies, and insurance providers) remain underdeveloped. Meanwhile, MSMEs and women continue to be underserved (IMF 2024a).4 Fintech lending has grown rapidly, yet it still represents only 2 percent of the country’s financial sector assets as of 2023 (OJK 2024; figure 5.2).

The World Bank’s foundational policy and institutional support contributed to progress in Indonesia’s digital finance and fintech sectors. The World Bank’s FIRM DPLs and the Financial Sector DPL series, complemented by targeted technical assistance, helped design Indonesia’s National Strategy for Financial Inclusion and enact the National Payment Gateway and the QR Code Indonesian Standard, which improved payment interoperability and accessibility. These reforms aligned with the government’s priorities and facilitated the expansion of digital financial services. IFC complemented this upstream engagement with strategic equity investments in fintech firms and extended finance to underserved segments such as women-led micro-retailers. These efforts, along with rising smartphone use and more prevalent digital tools in response to COVID-19, drove a sharp increase in digital payments and peer-to-peer (P2P) lending, which grew more than fourfold to Rp 60 trillion by 2024. The growth in P2P lending illustrates fintech’s contribution to expanding financial access, but 65 percent of P2P lending remains consumer focused, and only 5.2 million of Indonesia’s 64 million MSMEs have accessed P2P loans, while 40 million lack access to finance (OJK 2024).

Figure 5.2. Share of Financial Sector Assets by Institution, 2024

Image

Share Tweet Facebook WhatsApp Linkedin Email

Figure 5.2. Share of Financial Sector Assets by Institution, 2024

Source: IMF 2024a.

Regulatory fragmentation initially slowed the expansion of agent banking, but the World Bank’s support unlocked scale. Indonesia’s archipelagic geography makes traditional branch banking difficult, particularly in expanded access to remote and rural areas. Agent banking, by contrast, is when banks authorize local businesses, or agents, to act as service points, offering a viable alternative to branch banking in Indonesia. However, the government’s initial rollout of separate but parallel agent banking programs—OJK’s branchless banking (Laku Pandai) and Bank Indonesia’s digital finance service (Layanan Keuangan Digital)—was marred by inconsistent regulations and conflicting mandates, leading to operational inefficiencies and limited reach of these networks. The World Bank Financial Sector DPL and associated technical assistance addressed this challenge by harmonizing the Bank Indonesia and OJK agent programs, which, together with the complementary National Payment Gateway and QR Code Indonesian Standard reforms, catalyzed a dramatic increase in agent numbers—from fewer than 50,000 in 2014 to more than 1.5 million by 2023. Stakeholder interviews credited the World Bank for fostering institutional coordination and addressing policy bottlenecks, which enabled agent networks to expand access to underserved communities.

Despite significant progress in access, the persistently low use of financial services revealed limitations in the World Bank’s approach to inclusion. Bank account ownership in Indonesia rose from 20 percent in 2011 to 51 percent in 2021 (Demirgüç-Kunt et al. 2022). However, nearly 40 percent of account holders made no digital transactions, and formal savings and borrowing remained low. Much of the new account uptake was driven by digital finance reforms and social assistance transfers rather than genuine financial engagement. Furthermore, strict registration requirements (such as burdensome registration and compliance for digital lenders), the inefficiency and fragmentation of microfinance institutions, limited outreach to remote areas, and the crowding out of private providers by state-backed microfinance institutions further limited financial inclusion (World Bank 2023a). Bank Group staff and market stakeholders noted in interviews that a greater emphasis from the World Bank on increasing financial literacy and a more competitive financial ecosystem that enables the development of financial products that meet the demands of underserved market segments could have amplified use and financial participation.

IFC helped expand credit access in Indonesia, but market distortions and supply- and demand-side constraints limited its systemic impact. Over the past decade, IFC committed more than $500 million in loans, social bonds, and equity investments, including a $150 million investment in Bank BTPN in 2018 that launched Indonesia’s first private sector social bond. Technical assistance complemented these efforts. However, these initiatives remained small and did not catalyze broader market shifts. An IEG review of five major IFC-supported private banks found only marginal MSME portfolio growth, while the national MSME lending share held steady at approximately 19 percent despite a sharp increase in the number of accounts. A key supply-side constraint was the government’s subsidized People’s Business Credit (Kredit Usaha Rakyat; KUR) program, which channeled loans through large state-owned banks, crowding out private lenders and limiting innovation. IFC’s 2019 Completion Report on its $2 million Microfinance Advisory Project (2013−19), which aimed to build institutional capacity and expand microfinance outreach, rated it mostly unsuccessful, citing the KUR’s rapid expansion as a major constraint—particularly in the microfinance segment, where subsidized lending reduced private sector participation or the downscaling of operations. At the same time, demand-side issues, including a limited pipeline of bankable projects—exacerbated by large domestic liquidity that reduced the competitiveness of IFC’s local currency financing products—and low financial literacy, constrained the effectiveness of IFC’s market-based financing solutions.

The World Bank contributed meaningfully to capital market development and regulatory modernization. Since 2015, the World Bank has provided a combination of technical assistance and policy lending to Bank Indonesia, the Ministry of Finance, and OJK to lay the groundwork for market infrastructure reforms, such as enhanced frameworks for currency and interest rate swaps, the launch of the domestic nondeliverable forward market to manage exchange rate risks, and regulatory changes that deepened the government’s securities repurchase agreement market. These efforts bolstered market confidence and improved access to hedging tools. By 2022, daily domestic nondeliverable forward transactions exceeded $1 billion. The Financial Sector DPL series and advisory support under the IFSTA PASA helped shape the capital markets law and the pension and insurance law, both enacted under the 2023 FSOL. These new laws strengthened the legal foundation for capital markets, insurance, and pension sector modernization.

FSOL reform momentum stalled as key regulations lagged, and the World Bank exited before implementation took hold. FSOL expanded OJK’s mandate and laid the groundwork for innovative collective investment products and derivative markets, but delays in issuing critical regulations stymied implementation. These delays stemmed from the Ministry of Law and Human Rights’ extensive prioritization process and the timing of the legislative changes, which occurred in 2024 after the World Bank’s Financial Sector DPL series concluded.5 The DPL series was intentionally designed to end before the 2024 government transition, but this timing limited the World Bank’s engagement during the implementation phase. The DPL was approved on the basis that other development partners would provide follow-on support, but this arrangement proved ineffective, as the regulations needed for implementation remain pending. The 2024 FSAP highlighted that there were structural weaknesses after FSOL’s enactment, emphasizing the need for continued reforms and the timely issuance of well-designed regulations to fully implement the law.

IFC helped catalyze sustainable finance in Indonesia, effectively complementing the World Bank’s policy engagement under the Financial Sector DPL series. IFC launched an environmental and social risk management advisory services program in 2013 in response to the growing environmental and social risks facing Indonesia’s banks—particularly in high-impact sectors such as palm oil, forestry, and extractives. The program helped establish a regulatory foundation by supporting OJK in developing Indonesia’s first sustainable finance road map, a national green taxonomy, and mandatory sustainability reporting regulations. It also built the capacity of financial institutions and elevated OJK’s international standing through leadership in the Sustainable Banking and Finance Network. These efforts contributed to a measurable increase in sustainable finance activity: by 2020, green and sustainable financing grew to Rp 913.15 trillion, sustainability reporting between 2019 and 2021 reached full compliance, and 83 percent of financial institutions met full reporting standards (IFC and OJK 2021). These reforms were included as prior actions in the DPL series, along with an evidence-based design, strong regional partnerships, and the strategic use of global platforms. However, high perceived risks, weak financing models, insufficient performance data, and a limited pipeline of bankable green projects continued to constrain private sector participation and the development of a deeper sustainable finance market.

The Bank Group helped establish infrastructure financing institutions in Indonesia, but their limited scale has constrained their ability to significantly address the country’s growing infrastructure needs. The World Bank helped establish the Indonesia Infrastructure Finance (IIF) and the Indonesia Infrastructure Guarantee Fund (IIGF) to attract private investment and improve infrastructure project bankability.6 It also brought in strategic partners, including IFC and the Asian Development Bank, as shareholders in IIF and the government of Singapore as a technical assistance provider for IIGF. From 2009 to 2024, the World Bank supported IIF through a $300 million IPF operation, while IFC provided $105 million in equity investments. However, IIF became profitable only in 2017. IIF’s limited capital base and competition from large state-owned banks constrained its ability to scale up, while its modest profitability and below-expectation returns on equity have created challenges to attracting additional private capital and respond to Indonesia’s expanding infrastructure financing needs (box 5.2). Similarly, the World Bank’s $30 million IPF project for IIGF (2012–18) contributed to IIGF exceeding its project appraisal targets (World Bank 2019b). Still, despite revenue growth, IIGF’s net profits and return on equity remain below 5.5 percent, and its capital base is still small relative to Indonesia’s growing public-private partnership financing needs. Government officials indicated that further public capital injections may be necessary to sustain IIGF’s operations.

The World Bank’s progress in enhancing financial sector efficiency was constrained by political resistance to SOE reforms (box 5.3). While the World Bank contributed to foundational improvements such as strengthening insolvency and creditor rights, bolstering consumer data protection, and modernizing payment systems, these efforts were insufficient to drive systemic efficiency gains because they failed to address distortions caused by the dominant role of SOEs in the banking sector. The World Bank dropped key reform initiatives—including a planned SOE reform DPL and a banking competition measure under the Financial Sector DPL series—because of limited government interest. Successive FSAPs and Country Economic Memorandums advocated for SOE reform. World Bank staff acknowledged in interviews that political resistance to SOE reforms was greater than anticipated. At the time of DPL negotiations, the World Bank’s engagement with the Ministry of State-Owned Enterprises and other key stakeholders was nascent and unable to move reforms forward, underscoring the importance of having sustained engagement with broader coalitions to advance reforms that challenge a state-dominated financial system.

Figure 5.3. Average Returns on Bank Assets

Image

Share Tweet Facebook WhatsApp Linkedin Email

Figure 5.3. Average Returns on Bank Assets

Source: Independent Evaluation Group, based on World Bank DataBank.

The Bank Group used analytics and policy dialogue to improve the government’s MSME credit program, but late and complex reforms blunted the impact of these efforts. The World Bank’s analytical work on KUR helped catalyze long-overdue reforms to enhance market competitiveness. KUR successfully expanded access to credit, but its design—characterized by subsidized interest rates and a strong reliance on state-owned banks—constrained competition and stifled innovation in MSME finance. In 2022, the World Bank drew on a nationally representative survey under the IFSTA PASA to advance policy dialogue and inform important regulatory changes in 2023. These changes included the phased reduction of subsidies for repeat borrowers and measures to encourage graduation to commercial lending. However, the timing of these reforms—15 years after KUR’s inception—has limited their overall impact. Moreover, interviews with private sector stakeholders indicated that recent program changes, including new lending windows and borrower graduation requirements, have added operational complexity, slowed loan approvals, and risked introducing new barriers to MSME financing.

Coordination and Collaboration

Overall, Bank Group support to Indonesia’s financial sector demonstrated close collaboration with development partners. The World Bank maintained a strategic partnership with IMF, using joint diagnostics such as the FSAPs and regular Article IV Consultations to ensure consistent messaging on macrofinancial stability and structural reform priorities. The Bank Group also collaborated with the Asian Development Bank to deepen financial markets and promote infrastructure financing, with the Asian Development Bank and IFC co-investing in IIF and other institutions. The IFSTA PASA, primarily funded by the Swiss and Australian governments, served as a platform for policy dialogue, analytics, and targeted capacity building. Alignment among development partners and Bank Group activities improved significantly after the analytical services were brought under the PASA umbrella. Interviews with development partners noted that this restructuring enabled more coherent and productive technical discussions with Indonesian counterparts.

The World Bank and IFC collaborated effectively in some areas but in others depended more on individuals than on institutional mechanisms. There were strong examples of joint IFC–World Bank work in capital markets, sustainable finance, and infrastructure financing achieving meaningful results. However, this collaboration was not systematically structured to capitalize on each institution’s comparative advantages. Bank Group staff interviews indicated that high-level cooperation takes place during CPF and DPL preparation. For example, in sustainable finance, the World Bank assigned IFC a designated role in the Sustainable Finance DPL series reform area. However, operational-level coordination remained limited and was challenged both by internal governance gaps and client-facing sensitivities, including government preference for a single Bank Group voice, creating ambiguity about each institution’s contributions. While the collaboration to develop Indonesia’s capital markets was close, more interaction at the design stage—particularly in relation to identifying policy reforms to facilitate private sector participation—with clear roles and responsibilities could have better maximized institutional complementarities and strengthened the Bank Group’s potential impact (IFC 2021).7

Internal reorganizations within IFC disrupted its advisory services, weakened institutional memory, and affected internal alignment. The departure of most advisory services project leads during the evaluation period due to IFC’s reorganizations reduced continuity and consistency in delivery. Interviews and project documents suggested that frequent restructurings have limited the expansion of advisory services despite IFC investment clients’ growing demand, especially for MSME-related advisory services. Moreover, recent shifts in IFC’s business model, which now require linking advisory services to investment operations, have constrained its ability to provide stand-alone advisory support. Such an approach may enhance financial sustainability, but it also reduces IFC’s flexibility and narrows opportunities for broader market development impact, especially for nascent or high-risk investments.