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OPINION

The Role of Government and the Private Sector in Extending Financial Inclusion

November 12, 2010


Yoko Doi



As we have noted in the previous two articles on financial inclusion in Indonesia, broadening access to financial services contributes towards both poverty reduction and economic growth. The current skewed distribution of finance hinders growth and development of both smaller firms and poorer households. Improving access to financial services to such market segments will require action on both the supply and demand sides, by both the public and private sectors. In countries such as Indonesia, where a large segment of the population has little access to financial services and has often never even opened a bank account, the question is: what are the roles of the government and the private sector in enhancing financial inclusion for a greater share of the population, and to what extent are there opportunities for innovative public-private partnerships (PPPs) to encourage greater financial inclusion among currently under-served / unbanked segments of the population in Indonesia?

The government is well placed to take the initiative to improve access to financial services in Indonesia across a wide number of areas. In addition, the private sector should see the huge untapped market potential for financial services that is currently not being met by the market. Together, there could be opportunities for innovative solutions and partnerships to exploit this new market segment.

From the public sector perspective, first a national financial inclusion strategy and policy should be put in place to provide broader and long-term guidelines to both policymakers and market players. Second, regular data collection and analysis on demand- and supply-side access to finance is required to form the basis for effective policy-making. Third, strengthening the existing legal and regulatory framework for the various formal financial institutions would be an important step in improving access to finance. For every major financial service-provider there are aspects of the regulatory framework that could be reformed for the sake of improving access to finance without compromising prudential safety. Here, Indonesia can examine examples from other developing countries for ideas that have worked elsewhere.

For example, the government could expand the regulatory framework for service-providers to use mobile banking. At present, Bank Indonesia regulations allow non-bank service-providers to issue e-money only for payment purposes. The eligibility requirements for the necessary license currently act as a major barrier to entry. Also, know-your-customer (KYC) regulations could be adjusted appropriately to allow third-party agents to sign up new customers or permit remote applications for new bank accounts below a certain relatively low threshold. As present, customers have to turn up at the offices of the financial institution involved, which can pose problems for those living in more remote rural areas.

Regarding commercial banks, one of the main issues that discourage many potential small-account customers is monthly administration fees. Making it easier for banks to close down inactive non-zero accounts could be introduced, as it appears that the lack of a policy on dormant accounts contributes to these monthly administration fees.

Regulatory reform could also help to expand the role of BPRs (People’s Credit Banks), particularly to help those that operate in more remote areas. Small BPRs would benefit from an easing in reporting requirements and reforming of KYC regulations, where Indonesia could draw on the well-documented experiences of other countries such as South Africa, Kenya and the Philippines in reviewing such regulations. Also, the waiving of taxpayer numbers as a requirement for the granting of small loans would open access to many poor households and micro-enterprises. Some useful regulatory changes could be establishing a lower tier of minimum start-up capital for small BPRs in remote locations and allowing foreign investors and NGOs to engage with larger BPRs looking for capital.
As the guardian of bank deposits, the Deposit Guarantee Agency (LPS) has performed well since its formation in 2005 in closing troubled BPRs and reimbursing insured deposits. In addition to ensuring that the LPS continues to be adequately financed, there is also a need for better communication of the limits of deposit insurance to depositors, especially in regions of low financial literacy.

Indonesia has a large number of deposit-taking cooperatives that provide financial services to low-income households. Adequate supervision of cooperatives  is required to ensure a healthy cooperative sector and reduce the risk that the insolvency of a cooperative could pose for poor households and MSME depositors.  In addition, other changes to the regulations could allow for more flexible market-based interest rates, ease in opening new branches, and apply less stringent criteria for reporting and disclosure.  

The government could also give serious consideration to a revitalized draft Microfinance Law that would allow other financial institutions (non-bank and non-cooperative microfinance institutions) to have a firm legal status to provide access to financial services, and help to extend their reach beyond their traditional areas of operation in Java and Bali. It is important that the law facilitates access to finance based on best practice from international experience and provides a solid regulatory framework and optimal supervision regarding the role that the government should play. In the meantime, a joint decree signed in December 2009 provides an interim legal framework for non-bank and non-cooperative microfinance institutions to ensure continued access to services until the Microfinance Law is promulgated.

Where the public and private sectors should work closely together is in maximizing the use of new technology to offer innovation solutions for enhancing access to finance. For example, Indonesia is already moving rapidly ahead in the development of mobile banking services. But it could go further by exploiting the potential of using telecommunications service-providers to reach the unbanked poor in rural areas. However, the current regulatory environment prevents these service-providers from meeting the needs of the poor: there are no cash-out services and no person-to-person transfer capabilities. Here, Bank Indonesia could be instrumental is reforming regulations to empower non-bank e-money service-providers and allowing both banks and non-banks to provide a wider range of services through low-cost mobile banking solutions. Given the popularity of short-messaging services (SMS) if banks and telecoms service-providers were able to offer mobile banking services using SMS as the transactions mechanism there could be a huge take-up, including from the unbanked poor segment of the market. 

In the Philippines, person-to-person transfers are allowed by mobile banking, enabling Filipino migrant workers to send remittances worth millions of US dollars home every month. Indonesia could do the same, if its regulatory framework permitted it. Therefore, there is a strong argument for piloting a program that allows such transfers, perhaps in the form of a public-private partnership.

With leadership from the public sector to provide incentives for the private sector to become more involved, Indonesia’s large unbanked segment could rapidly achieve the government’s goal of financial inclusion.

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


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