Improving access to financial services : analysis and ideas for policy-makers

Technical Note November 2010 59829 Financial Sector Development Improving Access to Financial Services: Analysis and Ideas for Policy-Makers Significance: Access to formal financial services is widely recognized as critically important to increasing economic and financial inclusion, reducing income inequality and alleviating poverty around the world. However, only about half of Indonesia's population has access to formal financial services. Commercial banks, which dominate the Indonesian financial sector, serve a relatively small proportion of Indonesian households. Less than half of Indonesia's population saves at banks, while a mere 17% of Indonesians borrow from banks. Increasing access to formal financial services not only leads to social and economic benefits; it is greatly advantageous to the Government, as well as commercial banks. In Indonesia, there are large areas of unmet demand where consumers want formal financial services but are unable to obtain them, owing to issues, such as lack of appropriate products and geographic isolation. Past policies have often been focused towards maintaining overall stability in the financial sector. However, stability and improved accessibility can be achieved simultaneously. The objective of this note is to provide data, analysis, and recommendations for policy-makers that can assist in improving access to financial services in Indonesia. What is access to finance/financial US$4,204.8 in 2009.1 Research indicates Evidence indicates that per capita inclusion? that about half the population has access income and population are the main Microfinance has gained immense to formal financial services. factors that affect the reach of Indonesia's popularity in recent years and microcredit Figure 1. Share of the population with formal commercial banking system. Although operations are flourishing worldwide. financial access commercial banks have a wide regional Small-scale loans given to entrepreneurs % reach, they do not penetrate deeply into from poor households are essential in 100 the poorer strata of Indonesian society. 80 helping them generate income and exit 60 poverty. 40 20 Savings: Almost 20% of Indonesia's From microfinance stems the broader 0 population saves using informal means concept of access to finance and Of the 68% of Indonesians who save, financial inclusion, which refer to an Sources: World Bank (2008); World Bank (2009a). only 47% do so using formal banks. These individual's or enterprise's accessibility to data point to a large potential market for financial products and services such as Indonesia has lower levels than countries commercial banks. savings, loans and insurance. Contrary to such as Malaysia, Thailand and Sri Lanka. Figure 2. Savers' financial inclusion common perceptions, access to finance However, Indonesia is better placed than is not limited to microcredit. It includes Bangladesh and the Philippines. 68% Financially Included financial asset-building in the form of 32% Financially Excluded savings products, as well as financial Demand side aspects: What products and risk mitigation of unexpected events services do people need? What is currently through insurance schemes. available to them? Results of household surveys indicate 0% 20% 40% 60% 80% 100% Banks Other Formal Only Informally Don't save To gauge the degree of access to demand for a wide range of financial Sources: World Bank (2009a). finance in Indonesia, the World Bank services. Of these, the single most In looking at the reasons for limited has conducted a study of the demand- important financial service is a bank reach, physical accessibility to bank side and supply-side aspects of access to account; more than 40% of respondents branches/ATMs is not a general problem financial services, along with the current have a bank account compared with only for bank customers. The problem lies regulatory framework. 17% who have a bank loan. The primary in the poor perception of savings reason stated for wanting/holding a products such as bank accounts offered bank account was `security'. by commercial banks. These are viewed Where does Indonesia stand? as costly to maintain and there is low Indonesia's GDP per capita was 1 The figure is the GDP per capita, PPP (current financial literacy regarding formal means international $), The World Bank (2010b); World of saving. High monthly fees and high Development Indicators.  Financial Sector Development Technical Note minimum account balance requirements Figure 4. Insurance ownership agriculture for it to better serve lower income are impediments to access. sector worker & salaried employee clients. A policy decision on the part of % management may be needed regarding 30 Loan and Credit: Nearly 33 percent of the current fee structure and lending Indonesians borrow using informal means 20 policies, which hinder Unit Desa's ability to reach potential customers with low Household surveys on the demand 10 incomes. for loans indicate that a fairly large 0 proportion (60%) of Indonesians borrow Education Asset insurance Private Health Life insurance People's credit banks (BPRs) offer great insurance insurance money. However, only 27% do so from a opportunities for wider access to finance Agriculture Sector Worker Salaried Employee formal bank or microfinance institution. Sources: World Bank (2009a). for poorer households and MSMEs. BPRs are relatively low-cost operations and are Figure 3. Borrowers' financial inclusion Inter-island comparisons: Survey close to the community, as they have shows that rural Java has almost 35% better local knowledge than regular 60% Financially Included banked population compared with only commercial banks. However, lack of 40% Financially Excluded 20% among the off Java rural population. human-resource capacity hinders the This is evidence of unmet demand extent to which BPRs can serve low- for financial services in rural, off Java income households. Also, BPRs operate 0% 20% 40% 60% 80% 100% areas. This confirms the need for policy- in limited geographic areas. Banks Semi-Formal Informally Voluntarily Excluded Can't Borrow makers to step in and narrow the gap by Sources: World Bank (2009a). enabling the provision of better services What are the regulatory impediments to Most people borrow from informal in rural areas. access to formal financial services? sources, such as friends and family. In 2001, Bank Indonesia (BI) mandated Survey results also show that formal Supply-side aspects: Who are the market Know-Your-Customer (KYC) principles for sources of finance are used for business players and what is their role in providing commercial banks and BPRs in an effort loans, whereas informal sources are access to financial services? to strengthen transparency and increase tapped for consumption purposes. Indonesia has various market players customer information. KYC regulations Interest rates: Interest rates charged on in the banking system. In summary, that demand the presentation of a full loans vary widely. Loans from commercial these include the first-tier banks, which set of documentation to access financial banks can be obtained at about 25% are the commercial banks, second-tier services reduce access to financial percent interest pa. This is followed by banks, such as BPRs (Bank Perkreditan services for lower-income households. loans from MFIs and community welfare Rakyat: People's Credit Bank (BPRs) and Identification requirements such as schemes at over 40%. It is noteworthy BKDs (Badan Kredit Desa: Rural Credit identity cards (KTP), drivers' licenses that banks and some MFIs charge Banks). The market players also include and taxpayer numbers are difficult to markedly lower interest if the borrower cooperatives, LDKPs (Lembaga Dana obtain, especially for those with minimal has a bank account. Thus, a simple Kredit Pedesaan: Rural Credit Fund resources. More flexible approaches in way to reduce costs is for borrowers to Institutions), and other non-banking complying with KYC and Anti-Money open bank accounts, as this serves as an financial institutions (NBFIs). Laundering (AML) issues have been indicator of creditworthiness. implemented in other countries, such Commercial banks can take two as South Africa and may be useful for Insurance: There is a dramatic important steps in extending wider Indonesia. difference in insurance take-up between access to financial services. agricultural workers and salaried 1. As innovators, banks are the most employees. The latter are more than 10 Focus on MSMEs likely institutions to introduce new times as likely to buy insurance than the technologies to deliver otherwise MSMEs are widely recognized as former. In Indonesia, insurance sales are relatively high-cost services to low- crucial for economic development, heavily tilted towards urban, upper- income clients in costly, remote as international evidence indicates income groups. The bulk of insurance areas. that they account for about 98% of all is accounted for by the compulsory enterprises and employ about 60% of the coverage of government workers 2. Banks will be helpful in extending private sector workforce. However, there and travel insurance. Thus, voluntary access because they will put are numerous barriers to their access to insurance, where customers are willing to competitive pressures on other finance. pay the premium, is low. Results suggest service providers, thereby holding demand for micro-insurance products down prices and improving the BI survey results show that the main for poor households that are geared quality of services obstacle for micro businesses is towards low-cost protection from illness collateral, while for SMEs it is high interest BRI's Unit Desa is Indonesia's premier and poor business performance such as rates. Their greatest needs from the micro-finance provider and has a large harvest failures. Government are for credit, training and client base. There is great potential market information. Financial Sector Development Technical Note Loans to MSMEs in Indonesia comprise Mobile-phone banking and these limitations include no cash-out a significant proportion of banks' total international best practice: Recent and no person-to-person fund transfer loans portfolios. The proportion of such years have seen a boom in mobile phone capabilities. In countries such as the loans has been climbing in recent years, banking operations to improve financial Philippines, remittances from one person and is currently at around 50%. outreach in developing countries. to another can be made easily using There is a transformation from cash to mobile phones. However, in Indonesia Figure 5. MSME loans as a % of total loans % electronic value, stored and conveyed by the current regulatory framework does 54 mobile phones. In those countries that not permit this. Currently, fund transfers 52 52 50 51 50 have experienced successful financial are only permitted from one bank 48 47 49 49 inclusion through mobile phones, account to another. 46 cash-out and cash-in services point 44 42 43 towards person-to-person transactions Main Policy Recommendations 40 being available outside bank branches/ 38 cash offices. This requires regulators to Regulations - Changes in the policy 2002 2003 2004 2005 2006 2007 2008 issue necessary regulations. In Kenya, framework for commercial banks will Source: Bank Indonesia. the mobile wallet service offered by help in improving access to finance for People's Business Credit (Kredit Usaha Safaricom attracted 13 million subscribed poor households. Know-Your-Customer Rakyat, or KUR) is a newly established users by September 20103 (in a country could be simplified for small accounts. program to help farmers and MSMEs where fewer than 4 million people have Similarly, the requirements for taxpayer with credit accessibility. KUR provides bank accounts). In the Philippines, the numbers could be waived for small loans risk mitigation for commercial banks country's two leading mobile network below a pre-specified threshold. and thus accelerates primary sector operators offer small-scale transactional Savings and TabunganKu - The development and empowers small-scale banking to an estimated 5.5 million Government has placed high importance businesses. Through KUR, commercial customers.4 on the issue of improved access. The banks can lend to MSMEs with a 70% authorities are initiating policies aimed credit guarantee. As of December 2009, at overcoming constraints to formal Mobile phone banking in Indonesia: KUR disbursement was Rp 17.2 trillion financial services. The launch of a new With Indonesia's wide geographic through six executing banks. There saving product called TabunganKu (My spread, the main issue is how to reach is great potential for this program to Saving) in early 2010, is a step in the the unbanked poor in remote areas using expand and improve credit accessibility right direction as this provides access cost-efficient means. Because of its wide for poorer households although the to banking services for the millions of reach, mobile-phone banking offers program does face challenges that need Indonesians who have the financial much promise in providing financial to be addressed. capacity to save money, even if only small services to the poor in rural regions. Mobile-phone penetration in Indonesia amounts.5 However, these efforts should The role of ICT in improving access to is at 37% of the population, whereas be continued on a larger scale to provide finance only 8.4% of Indonesians have fixed-line rural populations with the incentive to telephones. save using formal sources such as the The role of information and commercial banks. The economic impact communication technology (ICT) is Indonesia is moving ahead with mobile of TabunganKu should be assessed. essential in improving access to financial phone banking services and as of end- TabunganKu is currently limited to being services without increasing costs for 2007, 23 banks offered different kinds a good entry point for the unbanked service providers. Banks have numerous of mobile banking services to their population. However, incentives should ICT options to replace transactions customers. However, these services are be provided for customers to "graduate" using bank branches. Of these the most limited to existing customers and do not from TabunganKu and begin normal common are ATM machines that can reach out sufficiently to the unbanked banking with commercial banks. accept, store and dispense cash and population. Indonesia is also among the point of source (POS) devices such as few countries with regulations allowing Insurance