Focus is on reinforcing stability, deepening the financial sector, and expanding financial inclusion
WASHINGTON, D.C., July 1, 2014—The World Bank’s Board of Executive Directors approved today a US$500 million Financial Sector Reform and Modernization Development Policy Loan for the Government of Indonesia. The loan supports Indonesia’s policies aimed at reinforcing the stability of the financial system, diversifying the financial sector, and expanding financial inclusion to reach the poor and other underserved groups.
“Global experience has shown that deepening and diversifying the financial system contributes to creating more jobs and reducing poverty,” said World Bank Country Director for Indonesia, Rodrigo A. Chaves. “Access to savings instruments increases investment, while insurance services—for example, for health and natural disasters—reduce vulnerabilities of families and communities and helps them manage financial risk,” he added.
Indonesia’s financial system is currently dominated by banks and is highly concentrated in a few of them, while the non-bank financial sector – including insurance, mutual funds and pension funds – is underdeveloped.
The loan supports the government’s efforts to maintain stability of the financial system by improving crisis prevention, management and resolution, including the work of the Financial System Stability Coordination Forum (FKSSK), which is the new body responsible for coordinating and maintaining financial stability. Other goals include developing non-bank financial institutions, promoting microfinance development, and enhancing the micro-insurance regulatory framework.
The micro-insurance sector – very underdeveloped in Indonesia – can potentially protect millions of families, including Indonesia’s growing middle class, protect themselves against unexpected hardships, such as death of a primary breadwinner, sickness, or natural disasters.
The DPL also addresses a very important goal for Indonesia: financial inclusion, greater financial literacy, and consumer protection. According to the World Bank’s Global Findex, in 2011 only 20 percent of Indonesian adults held an account at a formal institution; in rural areas, this ratio is only 16 percent. In 2012, the government launched a National Financial Inclusion Strategy aimed at promoting greater access to finance facilities for all, including the low-income poor, the working poor, the near-poor, as well as migrant workers, women, and remote communities.
“The cost of financial exclusion is income inequality,” said Country Director Chaves. “The ‘unbanked’ pay higher costs for financial services and they are not able to make optimal investment and consumption decisions or protect themselves against unexpected events.”
The DPL also supports the Government’s reforms to improve consumer protection by establishing uniform obligations and enforceable regulations for financial service providers, through provision of clear and accurate information disclosure. Setting up dispute resolution mechanisms to handle consumer complaints is also key.
Other financial reforms on the agenda include: developing and implementing nationwide financial education programs; socializing a ‘savings’ culture, by expanding basic savings accounts with no fees and low minimum balance requirements; and promoting branchless banking.
This DPL builds on the 2012 Financial Sector and Investment Climate Reform and Modernization Development Policy Loan (‘FIRM DPL’), which also focused on business environment reforms.