Total Financial Inclusion: A Better Tomorrow for All Indonesians

December 31, 2010

Yoko Doi

Following articles on final inclusion and poverty reduction, financial inclusion and migrant workers, and the role of government and the private sector in nurturing financial inclusion, this final article in a series of four looks at how to achieve total financial inclusion in Indonesia. This article was published in The Jakarta Post

Imagine an Indonesia where the poor no longer struggle to set money aside and can accumulate savings as a cushion against unforeseen emergencies, and not run the risk of losing money through theft. Imagine an Indonesia where people no longer have to resort to loan sharks to borrow money at exaggerated interest rates. Imagine more than 4 million overseas migrant workers no longer repatriating their earning in cash when returning home but sending their earnings home electronically, without requiring their families to travel to a bank. Imagine millions of Indonesian children receiving education because their parents have access to the right kind of savings products; and imagine Indonesians who have never had a bank account climbing out of poverty and improving their livelihoods using a broad range of financial services.

Given that less than half the population has access to formal financial services, all of these outcomes are possible, but realizing them requires a joint effort involving the Government, financial sector regulators, the banking sector, the financial sector, and Indonesia’s development partners. Examples from other countries provide many ideas on how to enhance financial inclusion. Although these countries may have started from lower levels of financial services penetration than Indonesia they have nonetheless demonstrated that remarkable progress is possible.

The first step in realizing the goal of full financial inclusion is to establish a strong database to understand the scale and characteristics of the barriers to financial inclusion. Until recently, little data was available on the needs for financial services among the unbanked population or the demand-side constraints. In order to address this information gap, in 2009, the World Bank published survey results and analysis on the demand for formal financial services in Indonesia (www.worldbank.org/id/fsd). The results give a snapshot of financial inclusion in Indonesia. The survey found that less than half of the population has access to formal financial services and one third has no savings of any kind and can be considered “financially excluded”, precluding any access to credit from the formal financial sector. This highlights the immense potential that exists in untapped markets and demand. Regular collection of in-depth access to finance demand-side data is vital, as shown in South Africa, Nigeria, Mexico

So, what does this mean in terms of practical steps in Indonesia? Designing a financial inclusion strategy integrated with broader strategies for economic development and poverty reduction would provide clear direction for both policymakers and the private sector. The Government and Bank Indonesia play a crucial role in broadening financial inclusion. Also, the private sector can see that a huge untapped market of unbanked Indonesians exists if innovative ways can be developed to reach them. In countries like India, Pakistan, Thailand, Kenya and Mexico, governments and central banks have taken the lead, while in South Africa, industries and associations of financial services providers together with the Government and private sector are developing partnerships (www.fscharter.co.za).

Creating an enabling environment encompasses improving the existing legal and regulatory framework to ensure that barriers to financial inclusion are removed, without undermining prudential safety that protects the financial system. One area that shows great promise is in allowing service providers to maximize mobile banking via the mobile telephone network since the penetration of mobile phones is higher than bank accounts, even among the poor. Kenya, the Philippines, the Maldives, and South Africa provide examples of how to reach out to under-served populations even in remote areas. For instance, regulatory reform could allow person-to-person (P2P) e-money services, introducing certain flexibility to know-your-customer (KYC) rules, reforming regulations to allow third-party agents in remote areas to sign up new applicants for bank accounts, or permitting remote applications instead of requiring customers to visit the offices of the financial institution.

The private sector also has a crucial role in tapping into a huge new market in Indonesia. Commercial banks and non-bank financial institutions could use new technology together with simplified and less restrictive regulations to bring financial services closer to the unbanked population. For example, banks could become service providers for mobile banking services not only to existing customers but also to new customers, thereby reducing costs while extending outreach. Successful examples can be found in South Africa and the Philippines. With supportive regulations, commercial banks could also consider outsourcing mobile banking services to non-bank third parties. Another example is the micro-insurance industry — which has been expanding recently using public-private partnerships — which could serve as a model for other sub-sectors of the financial services industry. Likewise, significant opportunities exist in the remittances market from overseas migrant workers. The needs of migrants workers are not only limited to remittance channels but also extend to credit facilities, savings and investment. To convince banks of the commercial viability of this market, public-private partnerships would be worth exploring. Also, the private sector could follow the example set by the Philippines, whereby P2P transfers through mobile banking allow migrant workers to send remittances worth millions of dollars home to their families.

The importance of financial inclusion is now globally recognized and there is little doubt that it plays a crucial role in poverty reduction, narrowing income disparities and boosting economic growth. Viewed nationwide, the cumulative effect of low levels of financial inclusion carries both private and social costs, and ultimately undermines economic growth and development. The G20 recently stressed the importance of financial inclusion and Indonesia, as a member of the G20, has an opportunity to lead the world in demonstrating how financial inclusion can change millions of lives. The Government is now starting to take the initiative. With a large number of formal or semi-formal financial service providers in the country, enabling reforms and regulatory changes are necessary. However, policy-makers would benefit from working closely with the private sector, financial service-providers and development partners. The good news is that Indonesia does not need to start from scratch. All parties can work together, review relevant examples, and adapt them to the Indonesian context. As a first step, Indonesia needs to develop a broad strategy for financial inclusion that lays down time-bound short-, medium- and long-term goals. If all interested parties work together, then total financial inclusion could become a reality.

Yoko Doi is a financial specialist at the World Bank office in Jakarta.