The Human Settlements Finance System Series: Housing Finance Mechanisms in Indonesia

The report examines the constraints in the housing market beginning with a brief overview of the formal financial sector and the cooperative and micro financial institutions of Indonesia. It shows how the current period of macro-economic volatility is having a negative impact on the expansion of the mortgage sector – just when this sector had made substantial improvements in the aftermath of the 1997/98 economic crisis/. Nominal interest rates have increased since the end of 2004 because of rising inflation and, as a consequence, the number of non-performing loans has increased. Moreover, long term investors have moved part of the deposits held in the banking system to short-term deposits, creating concerns about gaps in asset-liabilities. As a result, there as been a flattening out in mortgage lending in the past few years. The study concludes with a summary of the major constraints in the system and makes recommendation for the improvement of financing for the low-income sector.