There is now a wealth of evidence from worldwide research that suggests financial inclusion plays a critically important role in poverty reduction, reducing income disparities and increasing economic growth. While many readers of The Jakarta Post are likely to be well connected to financial services, this is not the case for more than 50 percent of Indonesians, largely for those who are poorer, with lower levels of education and who are living in more remote regions of the country. This is because most banking and financial systems in Indonesia — similar to other developing countries — cater to higher-income individuals or larger companies in major urban areas. For example, a pembantu (maid) who works in Jakarta, is paid monthly in cash and who does not have a bank account, will struggle to set money aside, will miss out on the opportunity to earn interest, will run the risk of losing her money or having it stolen and, when the unexpected happens, will have no reserves to fall back on.
The cumulative effect of a large swathe of the population being effectively excluded from access to formal financial services carries both private and social costs, and ultimately undermines economic growth and development. Obviously, this can be of no help in the efforts to reduce poverty, which explains why the Government of Indonesia has been taking an increasing interest in promoting financial inclusion.
Until recently, little data was available in Indonesia on the kinds of financial services needed by potential consumers in the un-banked population and, as a result, there was little understanding of the constraints on the demand side. This was in contrast to the multitude of information and analysis available on the issue of access to credit by micro, small and medium enterprises (MSMEs).
This dearth of data was remedied towards the end of 2009, when the World Bank published the results of a household survey into the demand of formal financial services in Indonesia (www.worldbank.org/id/fpd). The survey found that only about half of the population has access to formal financial services which, while better than levels of access found in China, Pakistan, Bangladesh and the Philippines, still trails behind countries such as Sri Lanka, Thailand and Malaysia. More worrying still, the survey found that one third of Indonesians has no savings and can be considered “financially excluded”. Meanwhile, less than half of all Indonesians save money with banks and informal institutions actually cater for more savers in Indonesia than the banks do. Only about 17 percent of Indonesians borrow from banks, with about one third borrowing from the informal sector, while about 40 percent of the population is “financially excluded” from credit. The most important reason for being excluded appears to be either having incomplete documentation or lacking any collateral.
The survey also found that the most important financial service that households want is a bank account. People described the main reason for wanting a bank account as “security” and also stated that the main reason for not having a bank account was “lack of sufficient income”. But the data also highlighted those who expressed this view were by no means all from the poorest households. It is interesting to note that the survey found that bank credit was not such an important issue for most households compared with having a bank account. Households off Java are more than twice as likely not to have a bank account as households on-Java. One important finding was that physical access to formal financial services is generally not a major issue. Travel times to banks compare favorably with key public services such as hospitals and schools. The exceptions to this are rural off-Java regions, especially those where more costly water transport is involved.
So, what are the options for enhancing access to formal financial services/financial inclusion in Indonesia going forward? One option that has been tried with some success in several other countries is for banks to offer basic banking services, or “no frills” accounts. This is already being piloted by a number of banks in Indonesia with support from Bank Indonesia, namely “TabunganKu”. Such small savers’ accounts could be an entry point for educating people about other financial services and products. Encouraging people to use such small savings accounts fully and gradually help them move towards normal savings accounts and fully utilize the range of financial services that meet their needs is key to enhancing financial inclusion.
Another option is to make use of the latest information and communications technology (ICT) to extend access in the most cost effective way. Banks could make more services available through “mobile banking” using mobile telephones, not only offering services to existing customers but also outreaching to potentially new customers, while substantially reducing the costs of outreaching to the most remote areas. Making cash-in and cash-out points available to make financial services convenient for potential customers, especially in rural areas, should also be an important area of consideration for policy-makers. Creating such a regulatory environment and framework is crucial. New products such as contractual savings products could be offered to urban residents to encourage them to save, while mobile savings services could be offered in rural areas.
People’s Credit Banks (BPRs) have an important role to play as, despite their smaller size and regional nature, they can potentially make a much more important contribution towards the financing of poorer households than they currently do. They are often at the frontline of the delivery of financial services to MSMEs and poorer families, including those in very remote parts of Indonesia. However, BPRs are not fully utilizing their potential to contribute to financial inclusion for various reasons, including limited area of operations, restrictions on investors for BPRs, and access to sufficient/low cost capital.
While commercial banks are required to meet international standards on Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF), global experience exists on simplifying Know-Your-Customer (KYC) regulations for small accounts and taxpayer number requirements for small loans below a certain threshold.
When taken together, all of these changes would help extend the reach of formal financial services down towards some of the most disadvantaged households in Indonesia and, in so doing, contribute towards poverty reduction and increased financial security across Indonesia.
Yoko Doi is a Financial Specialist at the World Bank office in Jakarta.