Indonesia Stock Exchange is located in Jakarta, with locations still not settled for establishing international financial centres in Indonesia (Dimas Ardian/Bloomberg via Getty Images)

Indonesia’s financial centre must grow from its domestic economy

A legal framework has been created – but with no clear source of commercial demand.

Ramkishen S. Rajan

4 August 20264 min read

Indonesia’s parliament approved legislation (Opens in new window) last month establishing international financial centres under the Pusat Finansial Internasional Indonesia (PFII) framework. The aim is to permit foreign-currency transactions and offer tax concessions to attract firms to conduct business. Bali has been discussed as a possible site – although none had been formally selected when parliament voted.

Under President Joko Widodo, Indonesia had already offered tax incentives for a planned financial centre in the intended new Indonesian capital Nusantara (Opens in new window), while the Nusantara Capital Authority signed an agreement (Opens in new window) with the Dubai International Financial Centre (DIFC) to cooperate on its development. The public account of PFII does not explain how this earlier initiative relates to the new framework.

A decision on location should follow a clearer account of the business PFII is meant to host. Details released after the vote describe a dedicated supervisory board and specialised dispute-resolution arrangements. These features may improve PFII’s appeal, but they do not explain its commercial role or what firms would gain.

Before borrowing the features of foreign centres, Indonesia needs to define PFII’s role. A separate regime can reduce uncertainty if contracts are enforceable and regulation predictable. Firms also need confidence that disputes will be handled fairly.

Even so, these arrangements cannot produce sustained activity unless firms see a commercial advantage in using the jurisdiction. Tax concessions may help at the outset, though market depth develops through repeated business and the relationships built around it.

An aerial view in August 2025 shows the presidential palace and government ministry buildings under development in Nusantara, the planned new capital of Indonesia, in East Kalimantan (AFP via Getty Images)

Hong Kong and Singapore followed different paths, but both built on existing commercial functions. Hong Kong’s entrepôt economy and business networks preceded its rise as the leading offshore renminbi centre, a role sustained by the free movement of capital. Singapore relied more heavily on public intervention. The government established the Asian Dollar Market in 1968 and kept offshore foreign-currency business separate from domestic banking, before liberalising as supervisory capacity improved and local banks strengthened. Policy set the pace, while demand came from Singapore’s place in regional trade and finance.

DIFC shows that state-led development need not take generations. Established in 2004, it operates under a common-law framework with its own regulator and courts. The legal structure mattered, although it operated in a city serving regional commerce and well connected to international markets, with sustained government backing and professionals willing to move there. By 2025, DIFC hosted just over 1,000 regulated firms and its workforce exceeded 50,000 (Opens in new window). Its growth owed as much to Dubai’s established commercial role as to the legal design.

PFII is being created as the rules governing offshore finance tighten. Automatic exchange of financial information has made secrecy less viable, while beneficial-ownership rules have become more demanding. International action against harmful tax practices has narrowed the scope for activity based mainly on tax treatment, and the global minimum tax (Opens in new window) has reduced it further for large multinational groups. While Fiscal incentives may still influence early location decisions, they are unlikely to sustain a centre unless firms have other reasons to keep using it.

The law can establish the jurisdiction, but the commercial case must come from Indonesia’s own economy.

Geopolitical fragmentation also changes what credible regulation entails. Sanctions and investment screening now affect which transactions banks can process, and exposure can arise through payment networks or operations abroad. Foreign banks will use PFII only if they trust its controls, because weak screening or a reputation for facilitating evasion could jeopardise access to the networks it would need. Meeting that standard requires expertise beyond conventional financial supervision. Regulators must understand how sanctions exposure is transmitted through payment networks and how foreign economic-security rules apply to firms.

PFII’s best commercial case lies in activities already generated by Indonesia. Commodity production creates demand for trade finance and hedging, while infrastructure and energy-transition projects need long-term capital, often in foreign currency. Islamic finance offers another possible specialisation, although sharia banking accounts for less than 8% (Opens in new window) of national banking assets. A separate jurisdiction could make this business easier to conduct in foreign currencies and draw in firms with relevant expertise, whose presence would rest on Indonesian demand rather than tax treatment alone.

Any PFII site outside Jakarta would remain dependent on the capital. Jakarta accounted for about one-sixth (Opens in new window) of national GDP in 2025 (Opens in new window), and leading banks and corporate headquarters remain there, supported by dense professional networks. Bali may attract professionals, but banks have stronger reasons to keep treasury and credit functions close to clients and regulators. A site elsewhere would need close operational links with Jakarta and a role that justifies the added cost.

India’s Gujarat International Finance Tec-City (GIFT City (Opens in new window)) is useful because it was created to bring India-related financial services conducted offshore into a separate foreign-currency jurisdiction. Mumbai remains India’s main domestic financial centre, and although the two compete for some mandates, their core roles differ. A comparable arrangement would leave Jakarta as Indonesia’s core while PFII handles selected international business.

PFII will matter if it brings Indonesia-related financial activity onshore and supports new business linked to the country’s trade and investment. Announced investments may indicate interest, though lasting relevance will depend on the business actually conducted there. The law can establish the jurisdiction, but the commercial case must come from Indonesia’s own economy.

About the author

Ramkishen S. Rajan

Ramkishen S. Rajan is Yong Pung How Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

Topics

Indonesia Economy Trade & investment Southeast Asia Singapore Hong Kong