Enhancing access to finance for migrant workers in Indonesia : evidence from a survey of three provinces (Vol. 1 of 2) : Executive summary

52058 CONFERENCE EDITION Enhancing Access to Finance for Migrant Workers in Indonesia: Evidence from a Survey of Three Provinces EXECUTIVE SUMMARY Enhancing Access to Finance for Migrant Workers in Indonesia: Evidence from a Survey of Three Provinces EXECUTIVE SUMMARY Conference Edition 1 THE WORLD BANK OFFICE JAKARTA Indonesia Stock Exchange Building, Tower II/12-13th Fl. Jl. Jend. Sudirman Kav. 52-53 Jakarta 12910 Tel: (6221) 5299-3000 Fax: (6221) 5299-3111 THE WORLD BANK The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA Tel: (202) 458-1876 Fax: (202) 522-1557/1560 Email : feedback@worldbank.org Website : www.worldbank.org Printed in December 2009 Improving Access to Financial Services in Indonesia is a product of staff of the World Bank with the Financial Support from the Dutch Government, The findings, interpretation and conclusion expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the government they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomination and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement of acceptance of such boundaries. This executive summary is for discussion during the conference "Enhancing Access to Formal Financial Services in Indonesia", 9-10 December 2009 in Jakarta, Indonesia. Do not cite without express permission of the World Bank. 2  Executive Summary The importance of overseas migrant workers (MWs) has caught attention worldwide, from Mexicans in the United States and Turks in Germany, to citizens of former Soviet states in Russia and Indonesians in Malaysia. In 2005, migrant workers were estimated to number about 190.6 million worldwide (about 3% of the world population), the vast majority from developing countries. These are large flows of productive human resources who provide valuable low-cost services in host countries and who remit large sums of money to their countries of origin. The top four remitters (India, China, Mexico and the Philippines) each sent home tens of billions of dollars in 2007, making them an important factor for poverty alleviation in countries where higher incomes are sorely needed. On a regional basis, most migrants reside in Europe. Asia is second with some 53 million and North America is third with more than 44 million. By value of remittance (Table 1), the East Asia and Pacific region ranks first as remittance receiver and second as sender. Table 1: Remittances, by Region Remittances Received Remittances Sent (US$, bn) (% of GDP) (US$, bn) (% of GDP) East Asia & Pacific 65.2 1.6% Europe & Central Asia 25.9 0.9% Latin America & Caribbean 63.1 1.8% East Asia & Pacific 12.9 0.3% South Asia 52.1 3.7% Middle East & North Africa 5.5 1.6% Europe & Central Asia 50.4 1.8% Sub-Saharan Africa 4.4 0.6% Middle East & North Africa 31.3 4.5% Latin America & Caribbean 3.6 0.1% Sub-Saharan Africa 18.6 2.6% South Asia 2.0 0.1% Source: International Monetary Fund 2008. Data are for 2007. In the specific case of Indonesia, the number of migrant workers has increased steadily in recent years (Figure 1). Some 700,000 Indonesians, mainly women, now go abroad each year, excluding large numbers of unrecorded illegal migrant workers, especially into Malaysia. Bank Indonesia estimated a total of about 4.3 million MWs in 2007. Balance of payments statistics indicate net remittances of US$6 billion in 2008, and the gross inflows would be considerably higher. Nonetheless, among comparators in the East Asia & Pacific region (Figure 2), Indonesia is third by dollar value of remittances received, behind China and the Philippines, and comparable to Vietnam. In relation to GDP, Indonesia is way behind the Philippines, Vietnam and Cambodia. 3  Figure 1: Migrant Worker Placement, by Gender 800,000 600,000 400,000 200,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 MALE FEMALE Source: National Authority for the Placement and Protection of Indonesian Overseas Workers (BNP2TKI) Figure 2: Remittances Received, East Asia-Pacific Region (in millions of US$) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 China Philippines Indonesia Vietnam Malaysia Thailand Source: International Monetary Fund, Balance of Payments Yearbook, 2008 (data for 2007). This report pursues these issues as a follow-up to an earlier World Bank study that examined nationally representative households' access to financial services in Indonesia. That earlier study-- which was not nationally representative as regards MWs--singled out households of overseas migrant workers (MWs) for further study, owing to their unique needs for access to financial services and their pivotal role in poverty alleviation. This report's primary, higher-level Goal is to identify areas for policy intervention that will help MWs by improving their access to financial services in cost effective ways. Its more immediate, primary Purpose is to inform policy-makers as to who does (and does not) have access to financial services, including the constraining factors for broader access. The key analytical tools of this study are two surveys conducted in three provinces of Indonesia (East Java, Nusa Tenggara Barat (NTB) and Nusa Tenggara Timur (NTT)) that are sources of large numbers of migrant workers. The first Survey is an extensive (50-page) survey of MWs' households (HHs), including: demographics and socio-economic indicators; use of various 4 financial services; MW remittances; financial literacy; and household expenditures. The respondents of this survey were representative of MWs' households in the three provinces surveyed. The second Survey, of village heads, is much shorter (8 pages) and covers characteristics of financial services available in the villages. This report will present the findings from these surveys, recognizing that the features on access to finance in the surveyed MW HHs may not be nationally representative of all migrant workers in Indonesia. Nonetheless, the findings are worthy of close attention because of the ample evidence of the challenges that MWs and their HHs face in accessing various financial services, particularly from formal service providers. The broad issues facing the MW HHs in these three provinces are likely to be a good indicator of the kinds of issues that face MW HHs throughout Indonesia. The choice of surveyed provinces in this study was made based upon practical considerations, including the special interests of one of the financing partners. Another especially notable point is that this study takes a broad perspective on MWs' needs for financial services (including savings, remittances, credit and insurance). As conclusions, the report suggests policy reforms to improve services in each of these specific areas, as well as in certain broader policy areas that are important for improving MWs' interests. Profile of Indonesia's Migrant Workers and Their Households in Three Surveyed Provinces Most Indonesian MWs from the three surveyed provinces are females from rural regions with lower educational backgrounds; the majority are middle-aged, the average being around 30 (Figure 3). The most popular destinations are in the Asia-Pacific region, especially Malaysia, followed by the Middle East, mainly Saudi Arabia. For the most part, females work with legal status in the informal sector as domestic helpers, with roughly half on their first contract. Male MWs of surveyed HHs tend to have a job in the formal sector (such as factories, plantations and construction) and many are working abroad without legal status. Repeat work terms abroad are more common among men and in the Middle East for surveyed households. A more appropriate strategy would be to increase the reach of financial service providers that offer relatively low-cost credit (e.g., banks versus MFIs and MFIs versus private money lenders). It is also notable that just over half of Survey respondents are Muslims (Figure 3). This is well below representative national levels, owing to the choice of NTT and NTB for the Survey. 5  Figure 3: Key Characteristics of Surveyed Households of Migrant Workers (in %) by Province by Regional Area by Age 100 20.9 17.0 80 >55 32.7 40<55 18.4 32.5 49.1 60 25<40 83.0 40 17<25 36.9 <17 0 25 50 75 100 20 8.8 East Java West Nusa Tenggara East Nusa Tenggara Urban Rural 0 0.7 by Education Level by Gender by Religion 1.7 100 University 100 14.8 80 Senior high 15.6 school/eq. 42.3 75 54.4 Moslem 60 Junior high 57.7 school/eq. Catholic 35.3 50 Primary school/eq. Protestant 40 21.5 Marapu Did not complete 25 20 20.8 primary school 21.3 11.7 Never go to school Male Female 0 0 2.8 6 MWs' N nancial Serv Needs for Fin vices As n he A stylized in Figure 4, th financial n needs of Ind Ws donesian MW going abr ly road generall fall e into three broad categ , parture needs, most notabl financing for their up- gories. First, their pre-dep ly, -front costs. Se n their econd, their needs during t time abro mainly to send mone home. An third, their post- oad, o ey nd r needs (saving credit and investment which are not covered separately in this report. The migration n gs, d t), n is material i rolled into MWs' house s, he so eholds' needs because th issues are s similar. igure 4: Mig Fi ers' for al grant Worke Needs f Financia Services Cred dits Remittance Pre e During Channel P Post Savings ture Depart ings Savi Migration Savings gration Mig Credits rance Insur Insurance Pre-Departur Needs for Credit. Su P re r at le urveyed HHs indicate tha their MWs have sizabl up- % is g. rce front costs, about 80% of which i financed by borrowing The most popular sour of financ iscing personal savings, esp ng MWs, which i encouragin because i implies sa pecially amon repeat M is ng it avings he during th first contraact. The sec cond most co ommon sour of financ rce lly cing, especial among femmales -time MWs, is borrowing from the re and first- i g ecruiting agen (the PPT ncy TKIS; see im elow). mmediately be e he Banks are at the very bottom of th list. Financing fr F rom the PPT TKIS. This source of f s pically in the form of a salary financing (typ e f Hs advance) for MWs of surveyed HH is controv use ve versial, becau some researchers hav found very high y erest (10-20% per month Analysis here indicat that effec effective rates of inte % h). tes ctive interest rates ed re re ted s are indee high, but the costs ar much mor complicat than simply usurious rates of int terest. Still, if tthese variou costs cou be redu us uld uld y uced, it wou markedly benefit M MWs (see P Policy ons, Suggestio below). ile : es. Services Whi Abroad: Remittance While M oad, MWs are abro a very im mportant finaancial s f service is a channel for sending m ge, money back to the villag survey re espondents in at ndicating tha the ce on remittanc is usually sent home o special o occasions, in small amou 0 unts (US$200 or so). Am mong y tics 5), other key characterist (Figure 5 the MW m makes the ch mittance chan hoice of rem based nnel, usually b upon con w nvenience, with convenie eceiver more important t ence of the re e than that of the sender. Bank he ular nce and e. transfers are by far th most popu remittan channel a the least troublesome Carrying m money by hand ( e hird (either by the MW or a th party) is the most pro oblematic. 7  Figure 5: Characteristics of Remittances (in %, unless indicated) Ever remitt money? Freq. of Remittance Who decides remittance channel? Only on special occasions The migrant him/herself 77.4 Once every 34 months 31.6 Only once Employer 17.7 Every month Every 2 months Family in Indonesia 4.3 Every 6 months Sponsor 0.3 68.4 Other Once in one year Others 0.3 Carried on return trips Not applied Hiring company (PJTKI) 0.1 No Yes 0 15 30 45 60 0 20 40 60 80 Avg. Remittance Value Avg. Remittance Value Avg. Remittance Value by Gender by Regional Destination by Legal Status 4,000,000 4,000,000 4,000,000 4,000,000 3,000,000 2,700,000 3,000,000 3,000,000 3,000,000 2,000,000 1,500,000 2,000,000 1,500,000 2,000,000 1,000,000 1,000,000 1,000,000 1,000,000 0 0 0 Male Female Asia Pacific Middle east Illegal Legal Method of Money Transfer Criteria for Choosing Method Problems in Remitting of Transfer by Type of Transfer Method Bank wire transfer Through relatives or friends Through relatives/friends Recipient convenience Carry own on return trips Speed Carry own on return trips Security Other Western Union Sender convenience Informal MTA Bank cheque through air mail Western Union Cost Post office Reliability Bank wire transfer Informal money transfer agent Flexibility Post office Other other Mailed bank cheque 0 15 30 45 60 75 0 15 30 45 60 0 14 28 42 56 70 8  Bank services for remittances are relatively expensive, but they are very popular and appear to work reasonably well, subject to two important qualifications. First, it may not be easy for the MWs to visit banks, for example in some Middle Eastern countries. And second, the recipient needs to live reasonably close to a bank branch. Absent these conditions, the MWs rely upon the employer to remit the money, or they use money transfer agencies or a trusted third party to deliver the money by hand. The cost of remittances to Indonesia looks about middle of the road relative to available comparators, and there is a range of services available to meet different needs (speed, convenience, security, low cost, etc.). Evidence indicates that MWs can save 5% of more on the value of a remittance just by shopping around, if they are aware of the options offered by the various service providers. In this situation, there may not be much room for policies to reduce costs other than explicit subsidies (see Policy Suggestions, below) Use of Remittances. Once back in the village (Figure 6), the head of household usually makes decisions regarding use of the money. According to the surveyed households, the main use of the remittance is to meet daily needs, reflecting the high incidence of poverty in these villages. Other notable uses are loan repayment and various forms of real asset accumulation, like housing. Emergencies, like a health care expense, don't rank high on this list, and business investment is very low. These uses of remittances together with their other characteristics, noted above, suggest some tentative insights into the choice of transmission mechanisms. Namely, the occasional nature of most remittances, combined with their use for daily consumption back in the village, causes MWs to value the security and convenience of bank transfers more than the relatively high cost of those transfers. Still, it's surprising that there isn't more use of low-cost Post Office transfers for routine uses and money transfer agents for emergencies. This suggests a role for financial literacy training to ensure that MWs are aware of their options for remitting. MWs' Households Needs for Financial Services; Evidence from the Surveyed HHs. Savings Accounts. The single, most important financial service for MWs households is a savings account, which provides a safe, convenient means of remitting money as well as a repository for personal savings. Ownership of a savings account is low relative to national comparators. However, the use of a savings account is much more common, because households of MWs often receive their remittances via a trusted third party. This difference is indicative of the potential for greater use of financial services if MWs' concerns can be overcome, again suggesting a role for financial literacy training. Use of savings accounts--and exclusions from savings--are summarized in Figure 6. Some 27% of surveyed MW households are excluded, substantially higher than representative national averages, even for rural areas. Of those who are included, banks are by far the most important service provider, because of their access to the clearing system for remittances. Other sources are relatively unimportant and there is limited overlap among multiple service providers. 9  Figure 6: U of Remi F Use ittance (%) ho decides on Wh mittance? n use of rem e of Remitta Main Use ance Daily needs 57.7 60 n Repayment Loan novate house Built/buy/ren 45 3 37.0 Payment o of school fee Buying asset B 30 Covering he alth expense Spec ial occasions 15 Businesss investment 5.2 2 0.1 ng motorbike Buyin 0 Other Head of the S Sender amily Other fa Nonfamily household memb ber member 0 15 30 0 45 60 D Do you save the o you save th Where do he you save the Why don't y remittance e? mittance? rem remittance? 100 78.9 ent on consumption All spe 98.4 80 .2 25. t know how to save Don't 5.9 60 Don't know how to use 74.8 2.7 fin. Inst. 40 Don't want others to 1.2 15.6 borrow 20 3.4 2.2 Other 0.5 0 Yes o No Bank t home Other At Coop. C 0 25 50 75 100 10  As a special matter in this area, Government regulations currently require all legal MWs to open a bank account before they leave the country. This account looks like it ought to overcome the limited ownership of bank accounts, noted above. However, the great majority of these accounts are inactive, indicating that MWs do not find them useful. There looks to be a great deal of room to make this financial service more appropriate to the needs of MWs and their families (see Policy Suggestions, below). Credit. Credit is also important to the surveyed households, but it tends to be spread among a wide variety of service providers, banks being the least popular choice. Many MWs of surveyed HHs-- especially females on their first work contract--often borrow from high cost sources (see Financing from the PPTKIS, above). As for the banks, discussions with bank officials indicate that banks--even those that specialize in small scale lending--believe that MWs are high risk, unless there is a local guarantor. Overall credit services are summarized in Figure 8. Two features are striking. First, banks are a very small source of credit to the surveyed households, servicing less than 4% of the total. This is striking evidence that MWs' needs are not being net by the formal the credit market. Second, almost 60% of surveyed households are financially excluded from credit, which is very high. Figure 8: Overlap Among Credit Providers Semi-Formal Bank 1.8% 0.6% 6% 0.8% 0.2% 3.5% 28.6% Informal Financially Excluded 58.6% Insurance. Take-up rates for insurance are generally low in Indonesia, and it is mainly a financial product for the higher-income urban households. By contrast, legal MWs (who are required to have MWs' insurance before going abroad) come from poor, rural areas. Not surprisingly, the 11 current, compulsory system is not providing much by way of benefits to the MWs. Requirements under the current claim process look too complicated, time-consuming and costly for the MWs and their HHs, owing in large part to their lower education background. There is room to improve the current insurance system to the benefit of MWs as well as improve the financial literacy of MW and their HHs as regards insurance.(see Policy Suggestions, below). Who Are `Financially Excluded'? And Why? As just mentioned, financial exclusion is high among the surveyed MW's households (27% for savings and 59% for credit) and it is considerably higher in rural areas. Survey evidence from the three provinces indicates striking similarities among the `financially excluded', independent of the type of financial service (savings, credit, both savings and credit, or insurance). The excluded tend to be at the lower end of the income distribution, at the extremes of the age distribution and living in rural areas. The `truly excluded' (that is, those with no savings and no credit; see Figure 9) represent a bit more than 18% of the total surveyed, which is only slightly above the national average of 17%. This probably reflects MWs' origins in predominantly poor regions of the country, which roughly offsets their need for a remittance channel. Physical accessibility is not perceived as a significant problem by Survey respondents, although the implicit costs (of travel and waiting) do look substantial. Gender differences in accessibility tend to be relatively small or even non-existent among surveyed respondents. This said, there is some indirect evidence from the Survey that supports the view that women's saving rates from MW earnings are higher than men's. The data suggest a strong element of voluntary exclusion with economic reasons dominating that choice among surveyed respondents. For example, more than 3/4 of `excluded savers' believe that they lack sufficient money or a job to justify opening a bank account. Other reasons (like physical accessibility or high fees) are relatively unimportant. As for `excluded borrowers', roughly 75% see no perceived need to borrow. Voluntary exclusion is clearly at the prevailing price of the financial services