The folly of making Bali into a financial hub

JAKARTA – Indonesia’s Bill on the Indonesia International Financial Center — first proposed in May 2024 to modernize the domestic financial sector and make Indonesia an Asia-Pacific capital hub — has become a top legislative priority.

The government and House of Representatives have agreed to fast-track the bill, known as PFII, giving lawmakers just 20 days to finish deliberations before a targeted enactment date of July 21, 2026.

The government says the rush is justified by global volatility, including the wars in Ukraine and the Middle East, which it sees as a chance for Indonesia to attract a surge of global liquidity seeking a safe haven.

Under the bill, the PFII would operate as a zone with financial and administrative autonomy and a special legal framework modeled on international standards. Its structure would include a PFII Council reporting directly to the president, supported by a management agency, a financial services supervisory agency and a specialized commercial court.

Capital would flow through the Daya Anagata Nusantara Investment Management Agency, known as BPI Danantara. A contentious clause would bar the PFII Management Agency from being declared bankrupt.

The choice of Bali as the PFII’s home has sparked sharp debate. The resort island offers non-fiscal advantages — a premium lifestyle and a global reputation as an elite tourist destination — that the government considers well-suited to a family office ecosystem.

But economists say Bali lacks the fundamentals that support financial hubs, unlike Jakarta, which has a more developed workforce, a stronger industrial base and closer ties between corporations and top universities.

Bali’s rigid building-height restrictions and other land-use rules would also limit the kind of vertical development typical of global financial hubs.

Risky legal loopholes

Critics warn the PFII bill, combined with Article 50A of Law No. 4/2026, which amends the P2SK financial sector law, could open the door to money laundering.

The article authorizes new debt instruments, the Patriot Bond and Merah Putih Bond, and grants buyers broad immunity from criminal and civil prosecution. Data on primary-market purchases can not be used for tax assessments or as court evidence, which critics say creates room for de facto pardons, despite the government’s denials.

Combined with a 100% tax exemption for family offices in Bali, that immunity could create a near-complete money-laundering pipeline: Illicit funds could be moved into state-backed financial assets without fear of prosecution, then funneled into family offices that offer trusts and special purpose vehicles without requiring disclosure of ultimate beneficial owners.

Critics say this could damage confidence in Indonesia’s financial system and jeopardize its standing in the Financial Action Task Force, the global anti-money-laundering body.

Analysts distinguish between a genuine international financial center — built on deep markets, legal certainty and strong transparency standards — and a tax haven, marked by minimal tax rates, little information-sharing and no requirement for real economic activity.

They say the PFII Bali draft currently resembles the latter more than the former.

Speculation and inequality

Building a financial center is not just a financial question, but also a matter of urban planning.

Jakarta already has the ecosystem to handle complex financial transactions; Bali does not. Forcing the resort island to become Indonesia’s sole financial hub without the necessary infrastructure risks creating an economic enclave cut off from the rest of the country’s industry.

Property speculation already underway in South Bali is an early warning sign, suggesting the development may drive asset inflation for a small group rather than broader economic growth.

That could deepen inequality, leaving local residents as bystanders to a wealthy enclave disconnected from their economic reality, while rising land prices push housing and commercial space out of reach.

Relying on a single sector with no ties to the broader real economy would also leave Bali exposed to swings in global financial markets. Without requirements for real economic activity — such as local hiring or building digital infrastructure — much of the expected economic benefit could simply move offshore, leaving Bali as a financial center on paper without lasting benefits for Indonesia’s long-term development.

Safeguards needed

Analysts say the PFII bill needs structural changes. The government could cap the corporate tax deduction at 70% to 80% to guard against moral hazard and ensure the zone contributes to state revenue.

A limited revision to Article 50A would ensure legal protections are not absolute and remain subject to due diligence and oversight by PPATK, Indonesia’s financial transaction reports and analysis unit, to screen the proceeds for crime.

Rather than concentrating all financial activity in one location, some propose a multi-hub model: Jakarta as the center for banking and capital market transactions, Batam as a cross-border fintech cluster, and Bali focused narrowly on niche areas such as green finance.

They also call for requiring PFII-registered family offices to invest at least 20% of managed funds domestically for the long term, to ensure a real multiplier effect on the economy rather than simply enriching speculators.

Financial autonomy and economic progress cannot be built on weak foundations or come at the expense of legal integrity. Substance, transparency and good governance are what separate a world-class financial center from a haven for illicit funds.

Indonesia’s future economic credibility and success depend on whether its policies can protect financial stability without sacrificing the rule of law or social justice.