Indonesia’s banking and finance sector has undergone a rapid transformation in recent years in line with technology advancements and growth in demand for services throughout the country. Digital technology has dramatically changed the way banks and financial institutions operate. In the field of human resources, these changes have resulted in a shift in the employment landscape. It is, therefore, predicted that going forward, the demand for traditional banking jobs such as tellers and analysts will gradually decline while those engaged in the field of IT will increase substantially. Banking and finance higher education institutions in Indonesia are being forced to quickly adapt to these current trends to avoid a wider skills gap between their graduates and the industry’s needs.
Indonesia is considered behind the curve in developing its banking and finance higher education sector. Until the end of the 1960s, the number of universities offering economics and business education in Indonesia was still limited. This was mainly due to the government’s over-regulatory policy which made it difficult for the banking and finance sectors to grow. As a result, the country only had a few banks until the late 1970s. The tide turned in 1983 when the Indonesian government began deregulating the banking sector by removing the debt ceiling and allowing banks to unilaterally set loan, saving and time deposit interest rates.
Five years later, in 1988, the government and the Indonesian Central Bank (BI) pushed the deregulation policy even further by issuing the 1988 Banking Deregulation Policy Package (Pakto 88). The policy relaxed capital requirements for establishing new banks. As a result, the number of banks mushroomed from 111 in October 1988 to 240 in 1995, while the people’s credit banks (BPR) soared from 8,041 in 1988 to 9,310 in 1996 (See Indonesia’s Banking Sector; Under Pressure But Staying Strong).
A massive opening of new banks and rapid economic development had created a huge demand for skilled workers in the banking and finance sectors. Since the number of graduates from Indonesia’s state universities was unable to keep pace with the increased demand, the government allowed private individuals and institutions to establish private colleges and universities (See Indonesia’s Tertiary Education Sector: Aiming Higher).
As a result, the number of universities offering economics and business education in the country soared to hundreds and even thousands in the following decades. Some, including Universitas Prasetiya Mulya, IPMI, and PPM Graduate School of Management, began offering a master’s degree in business education in the early 1980s to meet the growing need for middle managers and top executives (See Opportunities for Business Education in Indonesia).
One of the first universities offering specialised banking, finance, and information technology higher education was Perbanas Institute. The college was established in 1969 by the Indonesian Banks Association (Perbanas) in the form of Perbanas Banking Academy (AIP) to cater to the demand for operational staff at banking institutions. Since that time, the institution has evolved rapidly to now offering diploma degrees in tax accounting, finance and banking, bachelor’s degrees in accounting, management, Islamic banking, information technology, and information system, as well as master’s degrees in management and accounting.
Islamic banking and finance higher education
The establishment of shariah banking in Indonesia (See Indonesia’s Islamic Banking Industry: Bright Prospects Ahead Despite Constraints) traces its roots back to 1983 when the government allowed banks to adopt a profit-sharing system. Later, following the implementation of the Banking Deregulation Policy in 1988, a number of local shariah people’s financing banks began to emerge.
In 1990, Indonesia’s Islamic Scholars Council established a working group to form Islamic banks throughout the country. A year later, the first Islamic bank in Indonesia, Bank Muamalat Indonesia, was founded and commenced operations in 1992. In 1998, the government officially acknowledged the existence of shariah banks in Law No. 10/1998 which stated that there are two banking systems in Indonesia, namely conventional and shariah. From this point forward, the number of Islamic banks in Indonesia mushroomed. Currently, there are 197 Islamic banks operating in the country, comprising 12 general shariah banks, 22 shariah business units, and 163 shariah people’s financing banks (BPRS).
To further regulate the sector, in 2008 the government issued Law No. 21/2008 on shariah Banks and Law No. 19/2008 on Islamic Bonds (See The Rise of the Sukuk in Indonesia’s Islamic Finance Industry). The opening of Islamic banks naturally demanded bankers that specialised in Islamic finance.
Many business schools and universities seized this opportunity by offering diplomas, bachelor’s, master’s and even doctoral degrees in shariah economics, banking and finance as well as executive training programmes for professionals. They include the State Islamic Universities, the University of Indonesia, Perbanas Institute, and STIE Tazkia. In addition, the Indonesian Banking Development Institute (LPPI) also established the International Centre for Development in Islamic Finance which offers training sessions for professionals (See Islamic Finance Education in Indonesia).
Quality remains a key challenge
One major shortcoming of Indonesia’s banking and finance higher education sector is the mismatch between what businesses in Indonesia need and what the education provides. The country’s education system still heavily emphasizes theory and knowledge over practical teaching (See Second Class: Indonesia’s Higher Education Sector In Need of Reform).
A further challenge is that the accreditation level of the majority of Indonesian universities, including banking and finance higher education institutions, are falling into the B and C categories. That is why many of its graduates are unable to compete in the job market due to the lack of practical business skills which results in the widening gap between the demand for middle managers and its supply (See Labour Pains in Indonesia).
Furthermore, the rapid advancement of technology in the banking and financial sectors, marked by the emergence of financial technology (fintech) startups offering technology-based, payment services, crowdfunding, and peer to peer lending, are forcing banks to adopt digital technology which has dramatically changed the way banks and financial institutions operate in Indonesia. These changes are highlighted by the introduction of branchless banks, cashless payment, and other internet-based services.
Banking and finance higher education institutions in Indonesia must also quickly adapt to the current trends to make sure that their graduates remain competitive in Indonesia’s job market. According to a study, only 20% of finance and economics graduates meet the requirements to fill jobs in the Islamic banking and finance industry due to the lack of soft skills and standardised curriculum. In fact, many universities in Indonesia, including state ones, are lacking human resources, especially qualified faculty members, and facilities to provide the required standards of education for their students.
Some universities in Indonesia have tried to address this problem by requiring their students to obtain various additional certifications such as TOEFL, general banking, risk management, investment broking certifications etc. when approaching their graduation. Others prefer to partner with foreign universities through joint programmes and research to improve the competency and competitiveness of their graduates (See Opportunities for Research Collaboration in Indonesia).
Prospects remain bright
The demand for economics and business education to fill jobs in Indonesia’s banking and finance sector remains high throughout the country. Based on data from the Committee of Joint Selection for State Universities Admission (SBMPTN), management and accounting majors attracted the highest number of applicants in 2017 with 139,109 and 96,423 applicants respectively.
Similarly, shariah banking, economics, and financial management majors attracted the highest number of applicants at Islamic state universities. Moreover, the OJK has laid out plans to strengthen Indonesia’s Islamic banking industry and increase the total of shariah-compliant banking assets from the current share of 5% to 15% in 2023. To achieve this, the country needs 11,000 new bankers specialized in Islamic finance. Currently, Indonesia is only able to produce 3,750 graduates annually in shariah economics and finance related subjects which are inadequate to support the OJK’s growth plans (See Indonesia’s Brain Drain Pains).
A study by the Faculty of Economics of Airlangga University revealed that within the next 20 years, Indonesia’s higher education must be able to produce 184,800 professionals in Islamic banking and finance to keep pace with the 30% growth recorded by the industry. This comprises of 8,400 bankers with doctoral degrees in shariah economics, 25,200 master’s degree holders, 50,400 bachelor’s degree holders and 100,800 diploma degree holders. This presents tremendous opportunities for both local and international higher education organizations as well as executive training providers to meet this demand.
Originally published in Global Business Guide Indonesia