Introduction

This paper's focus is on Indonesia's payment system, which is essentially a legal framework for transferring funds from one party to another. Over the years, it has evolved from a simple system involving money as a means of exchange to a more sophisticated system involving various institutions and related regulations (Bank Indonesia, 2007e). At the core of the national payment system are commercial banks and non-bank financial institutions (NBFIs), which function as payment system participants. Bank Indonesia, the country's central bank, serves as regulator; its main responsibility is to ensure that the payment system runs smoothly.

After the Asian 1997–1998 financial crisis, Indonesia's government decided to reduce its external debts and rely more on domestic financing to finance its budget. This policy has affected the flow of funds in that it tends to reduce the inflow of external funds. However, the new strategy has also resulted in financial deepening in Indonesia as government securities have dominated capital market since 2001. This issue will be elaborated upon further in Section 2. In Section 3, the authors discuss recent development in Indonesia's payment system.

Section 4 explores how small- and medium-sized enterprises (SMEs) can benefit from technological advances to the payment system. In particular, it will be argued that SMEs in Indonesia have not been able to take advantage of recent improvements to the payment system to the extent they should have been. Finally, Section 5 analyzes the impact of current crisis on capital flows.

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