Regular data collection key for effective policy : making towards enhancing financial inclusion in Indonesia

59830 Technical Note October 2010 Financial Sector Development Regular Data Collection Key for Effective Policy-Making towards Enhancing Financial Inclusion in Indonesia Significance: Broadening access to financial services for a greater proportion of the Indonesian population will help to contribute to poverty alleviation, reduce income disparities and accelerate economic development. A first step in achieving this is through updating the data and information available on people's needs and the constraints on accessing broader financial services. Without identifying the problems and priorities, the formulation of effective policy response and the development of a regulatory framework are almost impossible. Regular collection of demand-side data can also measure the effectiveness and progress of policies over time. Such data could also provide valuable information for market players to identify the demand for financial services/products. This technical note addresses the following questions: What is the role of demand-side information in building inclusive financial systems? How much information does Indonesia have at present? What is the experience of other countries with the same objective? Which indicators are important to measure? A holistic approach is used to address these issues. Reaching inclusive financial system Usaha Rakyat, or KUR, a partial credit About half of the total household requires better data and analysis guarantee scheme for loans to micro, population did not have access to formal small and medium enterprises, and financial institutions Financial inclusion is based on the idea TabunganKu, a zero-cost basic savings About 48 percent of the total of providing the same opportunities account offered voluntarily by most of households in Indonesia did not have to receive financial services for all, the major banks in Indonesia. One of access to a formal financial institution. and inviting every citizen in a nation the key constraints to concrete policy Although informal financial service to engage in economic activities with action in improving access to financial providers were able to provide solutions the help of financial service providers. services and enhancing financial for 31 percent, another 17 percent was The practice has been conducted with inclusion is the lack of comprehensive living without any financial services success in several countries such as data and analysis on what exactly (either formal or informal). Households Bangladesh, Kenya, the Philippines and the demand-side view of the needs with low education levels living in off- South Africa, while efforts are ongoing and challenges is. It is not clear what in India, Mexico, Pakistan, and several consumers and the currently un-banked Figure 1. Access to Financial Services in Indonesia African countries. Regrettably, as in population think of financial services, Access to Financial Services in Indonesia other developing countries, banking what access they have and what (All sample) and financial systems in Indonesia products and services they need. The Financially Served - 83 % often cater only to large- or medium- first step in addressing such demand, sized firms and/or higher-income Using Formal - 52 % the needs and effective policy-making, Underserved individuals. As a result, growth and is to measure the demand. development of smaller firms and 49 3 31 17 poorer households often have to rely on Where Indonesia stands in terms of limited savings and modest earnings. 1 financial access 0% 20% 40% 60% 80% 100% Acknowledging the significance A recent World Bank study on access to Bank Formal Other Informal & Semi-formal Underserved of access to financial services as finance in Indonesia gathered relevant Access to Financial Services in Indonesia a constraint to development, the information on financial inclusion (Poor Households) authorities are initiating policies issues. This information was collected Financially Served - 61 % aimed at increasing access (e.g.: Kredit through a survey methodology in 2007 Using Formal - 21 % using multi-stage random sampling Underserved to ensure national representativeness. 1 Access to financial services is much broader than simply access to credit. Savings, credit, in- Some of the key points are presented 19 2 40 39 surance, and remittance services all play an im- in Figure 1. portant role in supporting the financial activities of households. 0% 20% 40% 60% 80% 100% Bank Formal Other Informal & Semi-formal Underserved  Financial Sector Development Technical Note Java rural areas were most likely to finance information such as number of The second is a repeated cross-section fall into this financially underserved savers, number of borrowers, number survey. Periodic surveys (annual, every category. of insured households, and reasons for 2 years, or every 3 years) conducted not using the specific financial services on a randomly selected cross-section Less formal access for the poor to more general information such of the population that is statistically Focusing on the poor2 households' as the socio-economic condition of representative of the whole country sample, formal financial institutions households. using the same or a similar instrument only serve about one fifth of total as a one-time survey. As performed by Central Bureau of Statistics (BPS) FinScope and the Survey of Consumer poor households in Indonesia. When Surveys engaging in financial activities, Finances, the information gathered informal financial service providers Survey Khusus Tabungan dan Investasi enables governments to monitor the were most likely to be the first choice Rumah Tangga, or SKTIR (Special progress of financial accessibility over for this group. Unfortunately, about Household Savings and Investment time. 4 out of 10 poor households did not Survey), is an annual survey in selected The third is a panel or multiple-survey use (or receive) any form of financial provinces at the household level. interviews on the same households/ services (either formal or informal). The main information comprises individuals at regular periodic intervals. household income and expenditure For example, the results from Financial Dire economic condition and lack of patterns; household savings ratios, Diaries or Family Life Surveys are used financial knowledge: main barriers to levels, and patterns; household capital by governments to gauge the impact access formation structures; and household of changing policy on the progress of financial transactions. Related to the financial accessibility within a country. Shortcomings in financial condition access to finance issue, SKTIR can and a lack of financial knowledge provide information on household were the major reasons for many Data collection on access to finance in levels of savings, credit, and household other countries underserved households to forego insurance ownership within a year. savings, credit, or insurance in their Unfortunately, its structure does not In several other countries a daily lives. Most non-saving households provide further information regarding steady supply of data related to stated that they did not have sufficient barriers to access. access to financial services are money (lack of income or all money generated by either private or spent on consumption) as the main Survei Sosial Ekonomi Nasional, or government institutions. Regularly reason for not saving, regardless of Susenas, (National Socio-Economic collected information enables these income level. Lack of creditworthiness Household Survey) is another yearly governments to monitor the impact was the main reason for not applying survey comprising 200,000 households covering socio-economic information, of their policy responses on accessing for credit, although no collateral was healthcare and nutrition, household financial services. the next reason given. As for insurance, lack of income and a poor knowledge income and expenditure, and work In the African region, FinScope, a of insurance products were the main experience. Information on business FinMark Trust initiative, conducts a reasons for not being insured. The credit and its sources are the only data comprehensive national household physical accessibility of financial related to access to finance in the core survey focused on the financial service providers was one of the issues raised module. The Susenas housing module needs and usage of South Africa by the rural population off-Java. has information on household nearest and southern African populations. distances to banks, which can serve as Some surveys have been conducted Where Indonesia stands in terms of a physical barrier indicator. as public and private partnerships demand-side data collection (PPP). This information has helped the World Bank Indonesia Survey Types of data collection and their relevant respective governments in monitoring objectives the development of access to financial A nationally representative survey based on randomly selected There are at least three types of services across financial product populations focusing on access to demand-side survey that are available categories, namely transaction banking, financial services was conducted in to achieve certain objectives. The first savings, credit and insurance. The 2007. The survey covered a wide array is a one-time cross-section survey study covered a broad range of issues of information from specific access-to- where a randomly selected statistically of financial interest from livelihood representative cross-section of the conditions and poverty, to financial population is interviewed just once. behavior and financial literacy. 2 The poverty line used in the data analysis was As performed by FinScope and the based on the poverty line in 2008 set by Biro Pu- World Bank Group in several countries, The survey of Consumer Finances sat Statistik (BPS, the Central Bureau of Statistics). this can provide snapshots of current in the United States is conducted The poverty line (2008) was Rp 204,896 for urban every three years, providing detailed dwellers and Rp 161,831 for rural villagers. levels of financial accessibility within a country. Financial Sector Development Technical Note Table 1. Access to finance survey in other countries identifying the financially underserved South Namibia Botswana Zambia Uganda Tanzania population. Africa Started 2002 2003 2003 2005 2006 2006