Study on the

Chapter I. Introduction

1. Purpose of the Thesis

Notwithstanding much controversy, many people have praised the East Asian economic miracle just until a year and a half ago. The East Asian countries collapsed suddenly with no due notice. What makes it more notable for Indonesia is that it had retained a very sound economic situation. But there were many hidden reasons that caused the Indonesian economy to go bankrupt. It was the financial sector, or more specifically, the banking sector. The collapse of the Korean economy was very similar to the Indonesian case. The people of Indonesia and Korea have suffered greatly. The Indonesian people have undergone hardship, such as, unemployment, poverty, ethnic conflicts, political instability, etc. What were the reasons behind the suffering of such a large number of people?

The weakness in the financial sector of Indonesia began to grow as a result of the reform of its banking system in June 1983, by liberalizing interest rates and by the complicated & selective credit policy with subsidized interest rates. In addition, the elements of the financial repression disappeared with the introduction of market liberalization in October 1988. Such reforms gave a severe impact on the Indonesian economy.

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  The banking reforms have caused excessive credit expansion by the banking system because many financial institutions emerged with the removal of entry barriers.
  

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  There was rapid increase in bank liabilities following the serious maturity and currency mismatches.
  

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  The banks had poorly capitalized financial structure.
  
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  The Indonesian government was heavily involved in a selection of credit customer. It distorted the economic principle and resulted in political corruption.
  

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  There was a lack of prudent and credible administrative institutions or regulations. Indonesia lacked a sufficient financial infrastructure required to absorb the highly open and self-regulated banking system.
  

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  The central bank, i.e., the Bank Indonesia, was not able to function as a competent lender to which companies could turned to as the last resort. Korea liberalized its financial sectors and opened the capital market without enough preparation required. However, the Korean economy basically did not have the strong financial basis, similar to the case of Indonesia
  

The purpose of my thesis is to study the factors that caused the Indonesian financial crisis, especially those related to the banking sector, and reforms which were adopted and are expected to direct the financial sector in playing a proper role in the national economy.

In particular, I would like to study the following issues:

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  What is the current situation of the Indonesian banks?
  

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  How did the Indonesian banks play a role in the preceding Indonesian foreign exchange and economic crisis.
  

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  What roles played by the financial sectors are expected to help overcome the current economic difficulties and prevent the next economic crisis?
  

In conclusion, my ultimate goal is to find the direction for Korean banking sector, by examining the problems of the Indonesian banking sector and the expected reforms

2.