Financial Inclusion: Making Life Easier for Indonesia's Overseas Migrant Workers

November 10, 2010

Yoko Doi

Faced with limited job prospects at home, an ever increasing number of Indonesians are venturing abroad in search of work. More than 800,000 legally registered Indonesians go abroad to work each year, and tens of thousands more leave in search of work with no legal status, particularly those who find their way to Malaysia. In 2008, the Government estimated that there are around 6 million Indonesians working abroad, bringing in net remittances of up to US$6.8 billion in 2009.  Despite this impressive figure, in terms of the dollar value of remittances, Indonesia still lags behind China and the Philippines, and is comparable to Vietnam.
Most Indonesians working abroad are women, unskilled, and come from lower-income households in rural areas where job opportunities are scarce. Popular female migrant worker jobs in destination countries include those in the informal sector, like housemaids or babysitters. The regular income migrant workers receive during the migration period, the relatively higher wages they earn abroad – coupled with local economic developments and poverty reduction in Indonesia – all provide positive impacts to the livelihoods of their families. Meanwhile however, there are many reported cases of mistreatment of migrant workers both in Indonesia and destination countries. Consequently, the Government has made improving the well-being of migrant workers one of its priorities. To this end, improving access to financial services plays an important role in both improving migrant workers’ livelihoods and in protecting them from mistreatment and exploitation.

To assist the Government in identifying the binding constraints and the needs of Indonesia’s migrant workers, the World Bank undertook an Access to Finance Household Survey of Migrant Workers in 2009 (www.worldbank.org/id/fpd). The survey’s findings confirm that in each stage of the migration process – pre-migration, migration, and post-migration – migrant workers and their households have unique needs for access to formal financial services. These include savings products, transaction tools for international remittance, credits and micro-insurance, all of which have yet to be provided. The findings also point towards possible policy changes that could potentially improve the material well-being of migrant workers and their families.

First, it is vitally important that migrant workers and their families have access to low-cost bank savings accounts that they can jointly use. Currently, because it is a government requirement, all legally registered migrant workers must open a bank account before they can leave Indonesia. (This is partially because by showing proof of a bank account, migrant workers can obtain a waiver for paying the ‘fiskal’ exit tax at the airport.) The majority of these accounts are then left unused, as an account under a migrant worker’s name cannot be accessed by the family who receives the remittance. The survey’s findings show that only 29 percent of respondents have their own accounts, while another 36 percent use accounts under someone else’s name. These dormant accounts also have implications for the cost of bank operations. The regulations requiring the opening of compulsory bank accounts should be reviewed such that more suitable joint bank accounts can be opened in their place.  

The survey’s findings show that the most popular choice of migrant workers in choosing a remittance channel is “convenience for the receivers” and “senders” rather than the cost of remittance.  Bank services are relatively expensive but are nonetheless highly popular and seem to work reasonably well. But even then, banks do not necessarily offer convenience to migrant workers or their families.  For instance, for many migrant workers it may be impossible to visit a bank during normal working hours, especially if cultural norms discourage female migrant workers from leaving the homes where they are employed, as in many Middle-Eastern countries. In these cases, migrant workers have to rely on the employer to remit money, or alternatively make use of informal money transfer agencies or trusted third parties to deliver money. This increases the risk of money going astray. In order to increase the level of convenience, the role of information and communication technology (ICT) could be considered, such as making more use of mobile phones.

In terms of needs and demand for credit, all legally registered migrant workers are required to pay so-called ‘placement fees’ during the pre-migration period to the placement agency (PPTKI).  Placement cost varies depending on the destination country and the PPTKI, ranging from Rp 8 million to Rp 18 million.  Most migrant workers, especially those going abroad for the first time, usually need to borrow money to finance the costs. The trouble is that many tend to borrow from very expensive sources, such as illegal money lenders or their recruiting agencies. Banks rarely offer credit to migrant workers looking to cover up-front costs, since banks — even those specialized in small-scale lending — see migrant workers as excessively risky unless they are supported by a local guarantor. Meanwhile, very few non-bank financial institutions like state-controlled pawnshops (Perum Pegadaian) offer loans to cover placement fees. By increasing access to affordable credit, migrant workers would be able to better utilize their earnings to improve their families’ livelihoods and contribute to the local economy. In some cases the Government has signed agreements with destination country governments, encouraging commercial banks to offer credit schemes to migrant workers, albeit still with high interest. More innovative credit products therefore need to be explored.

Another potential area worth exploring is in building financial literacy for migrant workers and their families, which the survey findings confirm are very limited. Training in financial management and planning skills would give migrant workers and their families a better understanding of the available financial services and products in the market, as well as other issues such as sending remittances and finding affordable sources of credit and insurance schemes. The World Bank is currently piloting a scheme along these lines in partnership with the Ministry of Manpower and Transmigration Regional Offices, the National Authority for the Placement and Protection of Indonesian Overseas Workers (BNP2TKI), and several migrant workers’ placement agencies (PPTKIS) in East Java.

Overall, much can still be done to maximize the impact that Indonesia’s migrant workers can have on poverty reduction at home. The valuable contribution migrant workers are making in supporting their families and helping to drive the broader Indonesian economy are being undermined by the difficulties and costs encountered at each stage of the migration process. It would be well worth policymakers’ time and attention to address these difficulties and attempt to reduce costs.

Yoko Doi is a Financial Specialist at the World Bank office in Jakarta.