World Bank study

Transcription

World Bank study

Public Disclosure Authorized
52032 v2
Improving Access to Financial
Services in Indonesia
THE WORLD BANK OFFICE JAKARTA
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Website : www.worldbank.org
Printed in April 2010
Improving Access to Financial Services in Indonesia was produced by staff of the World Bank with financial support
provided by the Dutch Government. The findings, interpretations and conclusions expressed in this report do not
necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments 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.
Improving Access to Financial
Foreword
In many developing countries less than half of the population has an account with a formal financial
institution. The Indonesian situation is only marginally better - just about half the population has such
access. Recent developments in theoretical and empirical literature have shown that providing access to
finance for a greater share of the population is critical for reducing income inequality, as well as enabling
more rapid economic growth. Inclusive financial systems free poor individuals and small enterprises from
the need to rely on their own limited savings and earnings to build their assets safely, mitigate risks they
face from unexpected events, invest in their education, become entrepreneurs, or take advantage of
promising growth opportunities. Failure to provide more households and small and medium enterprises
with the financial services they need acts as a brake on development. Sound financial sector policies that
encourage competition, provide the right incentives to individuals, and help overcome barriers to access
are thus central not only to stability but also to growth, poverty reduction, and more equitable distribution
of resources and capacities. Reforms to promote access to financial services should therefore be high on the
list of policy makers’ priorities.
The Government of Indonesia has long had improvement of access to credit as one of the cornerstones
of its development agenda. While an impressive amount of data and analysis exists on the state of access
to credit by small and medium enterprises (SMEs) in Indonesia, there is little hard data and analysis on
which to base policies for extending access to broader financial services (beyond credit) to a greater share
of the population. What is the demand-side view of the constraints to improved access to finance? What do
consumers and the currently un-banked population think of financial services? What access do they have
and what products and services do they need? This report is an attempt to plug this important data gap
and address such questions. It is intended to support the Government’s policy agenda in this critical area.
The key feature of this report is a nationwide household survey of access to financial services on the basis
of which it provides data, analysis, and recommendations that can assist the authorities as well as other
stakeholders such as the financial services industry in getting an insight into access to financial services in
Indonesia. The report aims to identify who does (and does not) have access to financial services in Indonesia,
the constraining factors for broader access, and measures that can lower barriers to access for un-banked
households.
The World Bank Group has long recognized that well-functioning financial systems that are stable, efficient,
and accessible are essential for economic development. As part of this, it is supporting ongoing efforts to
measure access to finance, its determinants, its impact, as well as design and implementation of policies and
programs to promote access in several countries across the globe. I hope that this report serves to begin the
process of discussions and dialog on this important issue across stakeholders in Indonesia. The World Bank
Group stands ready to support the Government of Indonesia as it works to enable those currently outside
the formal financial system to join it and reap the benefits of such access to formal financial services.
Joachim von Amsberg
Country Director
Indonesia
2
Improving Access to Financial Services in Indonesia
Acknowledgements
This report is the result of a team effort involving staff and consultants of the World Bank. The team was led
by P.S. Srinivas, Task Team Leader, Yoko Doi, Clarita Cynthia Kusharto, Bilal Husnain Zia, I Gede Putra Arsana,
Djauhari Sitorus, Neni Lestari Lloyd Kenward, Chitra Buchori and Fitria Fitrani. The team wishes acknowledge
the support provided by Achmad Budiman for his contribution to mobile phone banking section, Sumantoro
Martowijoyo on reviewing regulatory frameworks, Irfan Timothy Kortchack for editing work and Hasbi Akhir
for designing the report. The team also wishes to thank the peer reviewers: Mohammad Ikhsan, Special Staff
to the Vice President, the Vice President Office and Professor, University of Indonesia, and Anjali Kumar, Lead
Economist, IEGCG.
The report was prepared under the overall guidance of Tunc Uyanik, Sector Manager, Finance & Private Sector
Development, East Asia &the Pacific Region; Vikram Nehru, Sector Director, Poverty Reduction & Economic
Management, East Asia & the Pacific Region; and Joachim von Amsberg, Country Director Indonesia.
The team gratefully acknowledges government support from the Coordinating Ministry of Economic
Affairs, Ministry of Finance, and Bank Indonesia. The survey work was conducted by Regional Economic
Development Institute (REDI). The team would like to acknowledge the collaborative work with Dr. Shawn
A. Cole and Thomas Sampson from Harvard Business School on the experimental financial literacy program
for the unbanked households in East Java undertaken during the household survey implementation.
Preliminary findings of the report were presented to senior officials of Bank Indonesia, Bappenas, Ministry of
Finance, Bapepam-LK, Coordinating Ministry of Economic Affairs (CMEA) and other line ministries during a
meeting organized by the CMEA in June 2009. During December 9-10, 2009, an international workshop on
enhancing access to formal financial services in Indonesia was held with more than 250 participants of senior
policy makers, senior management of financial service providers, academics and donors to disseminate the
findings from the report and stimulate discussions among and feedback from participants on this issue. The
report has taken inputs and feedback from these events into account.
The team also acknowledges the financial support from the Government of the Netherlands (through the
Dutch Trust Fund for Improving Indonesia’s Investment Climate and the Multi-Donor Facility for Trade and
Investment Climate).
3
List of Abbreviations
4
A2F
Access to Finance
ADB
Asian Development Bank
AML
Anti-Money Laundering
APEC
Asia-Pacific Economic Cooperation
API
Arsitektur Perbankan Indonesia (Indonesian Banking Architecture)
ATM
Automated Teller Machine
Bapepam-LK
Indonesia Capital Market and Financial Institution Supervisory Agency
BEE
Black Economic Empowerment
BI
Bank Indonesia
BKD
Badan Kredit Desa (Rural Credit Bank)
BPD
Bank Pembangunan Daerah (Regional Development Bank)
BPR
Bank Perkreditan Rakyat (People’s Credit Bank)
BPS
Badan Pusat Statistik (Central Bureau of Statistics)
BRI
Bank Rakyat Indonesia
CGAP
Consultative Group to Assist the Poor
FAO
Food and Agriculture Organization
FATF
Financial Action Task Force
GDP
Gross Domestic Product
GoI
Government of Indonesia
GTZ
Gesellschaft fur Technische Zusammenarbeit
ICD
Islamic Corporation for Development of the Private Sector
IDIC
Indonesian Deposit Insurance Corporation (LPS)
IFAD
International Fund for Agricultural Development
IFC
International Finance Corporation
IFI
International Financial Institution
ILO
International Labour Organization
IPO
Initial Public Offering
Inpres
Presidential Instruction
IT
Information Technology
KSP
Kelompok Sains Petani (Farmer’s Science Group; Savings and Loan Cooperative)
KTP
Kartu Tanda Penduduk (National Identity Card)
KUK
Kredit Usaha Kecil (Small Scale Business Loan)
Kupedes
Kredit Umum Pedesan (Village Credit Program)
KUR
Kredit Usaha Rakyat (Peoples Business Credit)
KYC
Know Your Customer
LDKP
Lembaga Dana Kredit Pedesaan (Rural Credit Fund Institution)
LPS
Lembaga Penjamin Simpanan (Deposit Insurance Organization)
MASS
Microfinance Access and Services Survey
MCSME
Ministry of Cooperatives and Small and Medium Enterprises
MoF
Ministry of Finance
MSME
Micro Small and Medium Enterprises
NBFI
Non-Bank Financial Institution
NGO
Non-Government Organization
NPWP
Nomor Pokok Wajib Pajak (Taxpayer Number)
OECD
Organization for Economic and Cultural Development
OJK
Otoritas Jasa Keuangan (Financial Services Authority)
PJTKI
Perusahaan Jasa Tenaga Kerja Indonesia (Indonesian Workforce Service Company)
PODES
Statistik Potensi Desa (Village Potential Statistics)
PP
Perum Pegadaian (State-owned Pawnbroker)
PPATK
Pusat Pelaporan dan Analisis Transaksi Keuangan (Financial Intelligence Unit)
ProFI
Promotion of Small Financial Institutions
Puskesmas
Pusat Kesehatan Masyarakat (Community Health Center)
RICA
Rural Investment Climate Assessment
SAF
Survey of Access to Finance
SEACEN
South East Asian Central Banks
SID
Sistem Informasi Debitur (Debtor Reporting System)
Simpedes
Simpanan Pedesaan (Village Saving Program)
SIUP
Surat Ijin Usaha Perdagangan (Business Trading License)
SKB
Surat Keputusan Bersama (Joint Ministerial Decree)
SME
Small and Medium Enterprises
SoB
State-Owned Bank
Susenas
Survey Sosial Ekonomi Nasional (National Socio-Economic Survey)
UNDP
United Nations Development Programme
5
Table of Contents
Foreword
2
Acknowledgments
3
List of Abbreviations
4
Table of Contents
6
List of Tables
8
List of Figures
8
List of Boxes
10
Chapter 1
Executive Summary
11
Chapter 2
The Current Supply of Financial Services in Indonesia
19
2.1
Overview of Indonesia’s Financial Sector
19
2.2
The Commercial Banking System
21
2.3
Regional Reach of Indonesia’s Commercial Banks
25
2.4
People’s Credit Banks (BPRs)
30
Chapter 3
2.5
Microfinance Institutions
32
2.6
Sharia Finance and Banking
36
2.7
Non-Bank Financial Institutions (NBFIs)
39
2.8
Financial Services in Support of Remittances
40
2.9
Summary of Policy Issues, by Area
44
Demand-side Aspects: What do People Want?
47
3.1
Introduction and Overview
47
3.2
Survey Results: Supply of Financial Services
50
3.3
Survey Results: Demand for Types of Financial Services
55
3.4
Survey Results: Demand for Savings Accounts
55
3.4.1
Barriers to Accessibility: Reasons for Savers Being Unbanked
57
3.4.2
Key Socio-economic Characteristics of Indonesia’s Savers
60
3.4.3
Econometric Analysis of Savings
63
3.5
3.5.1
Who Does Not Borrow?
69
3.5.2
Barriers to Accessibility: Why Do People Not Borrow?
70
3.5.3
Key Socio-Economic Characteristics of Indonesia’s Borrowers
71
3.5.4
Econometric Results for Loans
76
The ‘Truly Financially Excluded’: No Loans And No Savings Accounts
77
3.7
Survey Results on Demand for Insurance
79
3.7.1
83
3.9
6
64
3.6
3.8
Chapter 4
Survey Results on Demand for Loans
Econometric Results for Insurance
Other Survey Results: Risks to Financial Well-Being
84
3.8.1
Other Survey Results: Demand for Other Financial Instruments
84
3.8.2
Other Survey Results: Expressed Demand for Financial Products
86
Summary of Policy Issues
Regulatory Impediments to Access
88
91
4.1
4.2
4.3
Chapter 5
91
4.1.1
93
Indonesia’s Financial Regulators & Supervisors
Assessment of the Current Regulatory System, by Service Provider
95
4.2.1
Regulatory Barriers to Access: Commercial Banks
95
4.2.2
Regulatory Barriers to Access: Bank Perkreditan Rakyat (BPRs)
99
4.2.3
Regulatory Barriers to Access: Cooperatives
104
4.2.4
LPS’s Role in the Regulatory Environment
106
4.2.5
Regulatory Barriers to Access: Finance Companies
107
4.2.6
Regulatory Barriers to Access: Insurance Companies
108
4.2.7
Barriers to Access: Pawnshops
109
Summary of Policy Issues, by Service Provider
111
Special Topics Concerning Access to Finance
115
5.1
MSMEs and Access to Finance
115
5.1.1
Key Findings of Bank Indonesia’s Survey of MSMEs
116
5.1.2
MSME Lending & Policies in Indonesia
118
5.2
5.3
5.4
Chapter 6
Introduction
Migrant Workers and Access to Finance
122
5.2.1
A2F Findings on Indonesian Migrant Workers
122
5.2.2
Migrants & Access to Financial Services
125
5.2.3
The Pre-Departure Stage
126
5.2.4
Financial Service Needs During Migration
131
5.2.5
The Post-Migration Period
137
Mobile Banking
137
5.3.1
The International Context
137
5.3.2
The State of Mobile Banking in Indonesia
140
5.3.3
Mobile Banking to Improve Access to Financial Services
142
Policy Issues
143
Policy Recommendations for Improved Access to Financial Services
147
6.1
General Strategic Matters
147
6.2
Regulatory Issues
148
6.2.1
Mobile Banking
148
6.2.2
Commercial Banks
149
6.2.3
BPRs
149
6.2.4
LPS
150
6.2.5
Cooperatives
150
6.2.6
Pawnshops
150
6.2.7
Other Financial Institutions
150
6.3
MSMEs
150
6.4
Overseas Workers and Remittances
151
6.5
Matters of More Limited Concern
151
7
Annexes
155
References
194
List of Tables
Table 1.
International Comparison of Financial Sectors: Selected Financial Indicators
20
Table 2.
International Comparison of Bank Branch Density
20
Table 3.
Indonesia, Number of Financial Institutions
22
Table 4.
Number of Kabupaten/Kotamadya With and Without Branches of Commercial Banks
29
Table 5.
Sharia Banking Offices (number of banks, etc.)
36
Table 6.
Sharia Rural Bank Performance Indicators
37
Table 7.
Official Overseas Worker Placement, 2004
40
Table 8.
Cost of Domestic Remittances, April 2009
43
Table 9.
Travel to Banks, Time & Cost
52
Table 10.
Saver’s Travel to Banks, by Urban/Rural & Java/Off Java
53
Table 11.
Non-savers’ Travel to Banks, Urban/Rural & Java/Off-Java
53
Table 12.
Summary of Indonesian Savers’ Characteristics
63
Table 13.
Household Indebtedness
72
Table 14.
Borrowers’ Characteristics, by Gender
74
Table 15.
Summary of Insurance Holders’ Characteristics
83
Table 16.
Summary of Households Use & Interest in Formal Financial Products
89
Table 17.
Financial Providers and Financial Services in Indonesia
94
Table 18.
BPR Start-up Capital Requirement
99
Table 19.
Access to Finance Indicators-Loans and Deposits
103
Table 20.
Legal Basis of the Cooperative System
104
Table 21.
Financial Services of Savings and Loan Cooperatives
105
Table 22.
Legal Basis of the Finance Companies
108
Table 23.
Sample Savings Product Offered by Banks and the Post Office
130
Table 24.
Indicative Cost of Remitting Money from a Middle-East Country
134
Table 25.
Key Policy Recommendations on Improving Access to Financing
152
Table 26.
Statistical Comparison of Village-Level Variables in the A2F Survey and PODES
162
Table 27.
Statistical Comparison of A2F vs. Non-A2F Villages Using SUSENAS Data
163
List of Figures
8
Figure 1.
Share of the Population with formal financial access
12
Figure 2.
Savers’ Financial Inclusion
13
Figure 3.
Borrowers’ Financial Inclusion
13
Figure 4.
Financial Structure (December 2008)
21
Figure 5.
Total Banks by Type of Bank
21
Figure 6.
Number of Bank Branches and ATMs, by Type of Bank
23
Figure 7.
Bank Head Offices & Branches, by Province
25
Figure 8.
Bank Branches & Density Vs. Per Capita Income, by Province
26
Figure 9.
Total ATMs & Density Vs. Per Capita Income, by Province
28
Figure 10.
Number of Kabupaten without Bank Branches, by Province
30
Figure 11.
Financial Performance of BPRs
32
Figure 12.
Top 20 Developing-country Recipients of Remittances, 2005
41
Figure 13.
Bank Account Distribution, by Type of Bank
51
Figure 14.
Bank Branch Locations
51
Figure 15.
Travel Time to Nearest Bank Branch
52
Figure 16.
Average Time to Reach Select Institutions
54
Figure 17.
Waiting Time to be Served in a Bank
54
Figure 18.
Financial Products Used by Households
55
Figure 19.
Summary of Survey Results for Savers
56
Figure 20.
Overlap Among Savings Providers
56
Figure 21.
Reasons for Having a Bank Account, by Type of Bank
57
Figure 22.
Main Reasons for Not Having a Bank Account
58
Figure 23.
Main Reasons for Not Opening a Bank Account, by Income Deciles
59
Figure 24.
Yearly Total Household Expenditure
60
Figure 25.
Savers’ Socio-economic Characteristics
61
Figure 26.
More Savers’ Socio-economic Characteristics
62
Figure 27.
Savings by Per Capita Expenditure
62
Figure 28.
Summary of Survey Results for Borrowers
64
Figure 29.
Purpose of Loan, by Service Provider
66
Figure 30.
Loan Sizes, by Institution
67
Figure 31.
Indicative Loan Interest Rates
68
Figure 32.
Non-Borrowers by Per Capita Expenditure
69
Figure 33.
Non-Borrowers’ Characteristics
70
Figure 34.
Characteristics of Borrowers
73
Figure 35.
Borrowers’ Characteristics, Urban/Rural
73
Figure 36.
Borrowers’ Characteristics, by Age
74
Figure 37.
Borrowers’ Characteristics, by Employment Status
74
Figure 38.
Borrowers’ Characteristics, by Type of Job
75
Figure 39.
Borrowers’ Characteristics, by Enterprise Ownership
75
Figure 40.
Borrowers, by Region, by per Capita Expenditure
76
Figure 41.
Bank Loan, by Region, by per Capita Expenditure
76
Figure 42.
Characteristics of ‘Truly Financially Excluded’, by per Capita Expenditure
77
Figure 43.
Characteristics of the ‘Truly Financially Excluded’
78
Figure 44.
Characteristics of the ‘Truly Financially Excluded’, continued
79
Figure 45.
Insurance Holders, by per capita Expenditure
80
Figure 46.
Types of Insurance Ownership
81
Figure 47.
Characteristics of Holders of Insurance
82
Figure 48.
Characteristics of Insurance Holders, continued
83
Figure 49.
MSME Lending
119
Figure 50.
MSME Characteristics
121
9
Figure 51.
Characteristics of Migrant Workers
124
Figure 52.
Migrant Workers, by Type of Work and Legal Status (in per cent)
125
Figure 53.
Indonesian Migrant Workers and Access to Finance
126
Figure 54.
Migrant Workers in the Formal Sector, Financed by Employers
127
Figure 55.
How Migrant Workers Finance Pre-departure Expenses
128
Figure 56.
Method of Receiving Remittances, by Host Country (in percent)
135
Figure 57.
Access to Financial Services Versus Access to Credit
156
Figure 58.
Difference Between Access to and Usage of Services
157
Figure 59.
Samples in PODES 2005 vs. Access to Finance 2007, at Village Level
160
Figure 60.
A2F Sample Characteristics
164
Figure 61.
Urban/Rural Split
164
Figure 62.
Respondents, by Province
165
Figure 63.
Sample Characteristics, Age by Gender
165
Figure 64.
Respondents, by Employment & Education
166
Figure 65.
Respondent Wage Composition
166
List of Boxes
Box 1.
10
The Role of State Vs. Private Banks in Indonesia
24
Box 2.
BRI’s MASS Survey: Insights to Banks’ Capacity to Reach the Poor
31
Box 3.
The Shadowy Faces of Indonesia’s Lintah Darat
34
Box 4.
BRI’s Unit Desa System
35
Box 5.
Wider Access to Financial Services through Sharia Mobile Banking
38
Box 6.
What Do Household Surveys in Other Countries Tell Us?
48
Box 7.
What Do Other Surveys for Indonesia Tell Us?
49
Box 8.
Sampling Methodology of the Indonesian Survey
49
Box 9.
Some Details on Insurance in the Survey
80
Box 10.
Survey Results on Mobile Banking
85
Box 11.
Survey Results on Financial Literacy
86
Box 12.
Evidence on Easing Constraints to Opening Bank Accounts
88
Box 13.
South Africa’s Approach to Improving Access to Financial Services
92
Box 14.
Some History on the Regulation of Other Microfinance Institutions
101
Box 15.
Legal Framework for Microfinance Institutions in Indonesia
111
Box 16.
Case Study: Migrant Workers Bound for Taiwan
129
Box 17.
Perum Pegadaian (The State-owned Pawnshop) & Access to Credit
129
Box 18.
Remittance Method and Frequency from a Middle East Country
132
Box 19.
The Methods of Remittance: Formal vs. Informal
133
Box 20.
Voices of Hard Experience
136
Box 21.
Promising Technologial Advances – South Africa’s WIZZIT
138
Box 22.
International Experience in Reducing the Cost of Mobile Banking
139
Box 23.
Mobile Banking Product Development in Indonesia
141
Box 24.
Weaknesses in the Regulatory Environment for Branchless Banking in Indonesia
142
Chapter 1
Executive Summary
There is an impressive amount of evidence to support the proposition that access to formal financial services
is a critically important factor for the achievement of poverty alleviation1. There is a growing recognition
that increasing access to formal financial services has both private and social benefits. Extending access to
financial services encourages economic growth and can improve income distribution.
In light of the evidence for the benefits of expanded access to financial services, financial inclusion is high
on the policy agenda of a number of developing countries worldwide. This is often particularly necessary
in such countries, where banking and financial systems are often underdeveloped and often cater only
to large firms in the formal sector and/or high-income individuals. Improving access requires actions on
both the supply and demand side, by both the public and private sectors. It also requires changes in the
institutional environment. Recent experiences in several countries show that with the right information on
who lacks access and for what reasons, policies can be adjusted and products can be designed to scale up
access, especially with new technology.
The Government of Indonesia has also placed high importance on the issue of improved access. The
Indonesian government acknowledges that limited access to financial services is a constraint to development,
and the authorities are initiating policies aimed at overcoming this constraint. One of the key constraints to
concrete policy action in improving access to financial services, in particular at the household level, is the
lack of concrete data and sound analysis on what exactly the demand-side view of the constraints. Before
attempting to address the issue of extending access, it is necessary to answer the following questions: What
1
See, for example, the work of Beck, Demirguc-Kunt and Martinez Peria (2004), (2005) and (2006). Banking the Poor (2009c),
Access to Finance Study: Brazil (2004), India (2006c), Nepal (2007b), and Pakistan (2009b)
11
Chapter 1
Executive Summary
do consumers and the currently un-banked population think of financial services? What products and services do
they need? Are these products and services are available to them? If not, why not?
Evidence-based answers to these questions can provide a solid basis to inform policy and product
development. While there is a significant amount of data and analysis on the issue of access to credit,
particularly by Small and Medium Enterprises (SMEs) 2, there is very little data or analysis on matters related
to broader access to financial services.
The basis for this report is a nationwide household survey related to issues of access to financial services.
On the basis of this survey, data, analysis, and recommendations are presented as inputs for regulatory
authorities and other stakeholders, including those in the financial services industry.
The report begins with a review of the supply side of financial services from an access perspective, followed
by an examination of the demand side of access to those services. It then looks at the regulatory barriers to
financial inclusion and discusses the means by which these barriers may be addressed. Finally, it addresses
a number of topics that are of particular relevance to issues of access, including MSMEs, overseas migrant
workers and mobile banking.
The immediate purpose of the report is to inform policy-makers and the industry on where and in which
sectors of the population constraints to access to financial services exist. The objective is to identify—as
specifically as possible—measures that can lower barriers to access for poorer households, especially
measures that work in cost-effective ways.
Survey Results on the Demand for Financial Services
Just about half of Indonesia’s population has access to formal financial services. This is better than countries
such as China, Pakistan, Bangladesh, and the Philippines. It is, however, worse than countries such as Sri
Lanka, Thailand, and Malaysia. In short, there is much room for improvement.
Figure 1.
Share of the Population with formal financial
access
%
100
80
60
40
20
0
Sources: World Bank (2008d); World Bank (2009b)
2
12
Commercial banks, which dominate
the Indonesian financial sector, serve a
relatively
small
proportion
of
Indonesian households. One-third of
Indonesians don’t save at all, and can
be considered truly ‘financially
excluded’ (see Figure 2 below). Similarly,
less than half of Indonesians save at
banks, and of those who do save at
banks, two-thirds also save at some
other type of service providers.
Considering the overlap between
banks and the informal sector, informal
institutions actually service more savers
than do banks.
World Bank (2006e),“Making the New Indonesia Work for the Poor,”; World Bank (2006):“Revitalizing the Rural Economy: An
assessment of the investment climate faced by non-farm enterprises at the District level” ; Significant work done by GTZ on
rural banks: See http://www.profi.or.id/; FAO and IFAD on rural finance: http://www.ruralfinance.org/ and http://www1.deptan.
go.id/kln/FAO%20in%20%20Indonesia.htm. ILO on migrant workers: See http://www.ilobkk-migration.org/, IFC/GTZ, and CGAP
(2009d), ADB (2007): “Low Income Households’ Access to Financial Services” (2007)
Chapter 1
Executive Summary
Figure 2.
Savers’ Financial Inclusion
A mere 17% of Indonesians borrow
from banks, with about one third more
borrowing from the informal sector. On
this basis, roughly 40% of the
population is ‘financially excluded’ from
credit (see the Figure 3: below). The
most important reason for exclusion
appears to be difficulties satisfying
documentation requirements. The
evidence suggests that lack of collateral
is a secondary reason.
The single most important financial
service identified by households in the
survey is a bank savings account. The most important stated reason for having a bank account is ‘security’.
By far, the most common stated reason for not having a bank account is ‘lack of income’ or not having a
job. While the survey’s respondents claimed that access to credit from banks was also important, it was
considerably further down the list of priorities than access to a savings account. Credit is still concentrated
in the informal sector, with sources of credit being widely diversified among service providers.
Taken together, the above findings
underscore the importance of
expanding
financial
services
institutions abilities to offer both
savings and credit services, while
raising depositors’ incomes through
broader
policies
of
economic
development. These findings also
underscore the challenge to Indonesia’s
formal financial system, especially the
banks, of significantly expanding its
client base, to reach a much larger
portion of the population. The ‘truly
financially excluded’, or those who have
neither a savings account nor a loan, are predominantly poor, poorly educated, live off-Java in rural areas,
and do not own non-farm enterprises. Off Java residents are more than twice as likely to have neither a bank
account nor a loan, than are on Java residents.
Figure 3.
Borrowers’ Financial Inclusion
Physical access to formal financial services is not generally regarded as a significant constraint. The vast
majority (some 95%) of Indonesians rated the physical and geographical accessibility of banking facilities as
‘convenient’ or ‘very convenient’. The exception is in rural, off-Java regions, especially where water transport
is involved. Nonetheless, it is notable that average travel times to reach bank branches compare favorably
to the average travel times taken to reach key public services such as hospitals, schools and other health
facilities.
One simple, low-cost solution for borrowers who want to access bank credit at a lower interest rate is for
them to open a bank account. Banks and MFIs both charge nominal interest rates of about 30% per annum,
with both institutions offering lower rates to borrowers who hold a savings account. Nominal interest rates
from other formal and informal sources of credit, except for loans from employers, friends and neighbors,
tend to be higher.
13
Chapter 1
Executive Summary
Consumers do respond to more attractive pricing of financial services, particularly lower charges on savings
accounts. However, the demand looks somewhat price inelastic, which implies that banks need to carefully
consider whether it is in their financial interest to reduce fees. This is consistent with identified bank policies
that set deposit rates and administration fees in a way that discourages small savers. One policy option in
this regard is to encourage banks to offer basic banking services or ‘no frills’ accounts, an initiative that has
already begun and appears set to grow in 2010. It should be noted that banks in a number of countries
around the world are implementing such ‘no frills’ schemes, although in different ways. Another option
would be to encourage regulatory and technological advances to foster the development of services such as
mobile banking, which allows service providers to reach more customers at lower cost. Another innovation,
especially given Indonesia’s geography, would be to permit and encourage banks to form partnerships with
non-bank in institutions and outlets as a means of increasing access to their services.
Some new products that would be of interest to consumers are contractual savings products for urban
residents or mobile savings services for rural residents. As for extending the reach of formal bank services so
that it better served lower income earners, the most promising avenue looks like mobile banking – even if
at first, it is likely that mobile banking is largely likely to be focused on payments services. Even the poorest
people in remote villages often have access to mobile phones, and the survey uncovers considerable interest
in mobile banking among those with a mobile phone, but with no bank account at present.
Key Aspects of the Current Supply of Financial Services
Although the number of banks has declined substantially since the 1997/98 crisis, banks have significantly
expanded the reach of their financial services by expanding their network of branches and through the
use of ATMs. Other formal sector providers such as cooperatives and the state owned pawnshop have
also expanded their physical outreach. Per capita income and population density go a long way towards
explaining the reach of Indonesia’s commercial banking system and the differences between the provinces
in terms of its reach. The only notable exceptions relative to the average are Jakarta (which is ‘over-serviced’)
and East Kalimantan (which is large, resource rich, sparsely populated and ‘under-serviced’).
In considering banks, it is important to distinguish between the commercial banks and People’s Credit
Banks (BPRs), which are regional in nature and much smaller in size. Among the former, only a relatively
small number currently provide financial services to a significant number of lower income households. And
even among these, their focus tends to be on better-off clients. However, the commercial banks do make
important contributions in other ways. For instance, a number of large commercial banks are involved in
so-called ‘linkage program’ with BPRs. In addition, their numbers include one of the largest micro finance
institutions in the world (BRI’s Unit Desa system). Also, commercial banks are aggressive, opportunistic
competitors who are quick to move into promising new markets. Such characteristics imply that the
commercial banks are the institutions most likely to introduce new cost-cutting technologies and to put
competitive pressure on other financial institutions. Still, they are only a part of the short-term answer to
improving access to financial services, because they do not currently have the facilities and infrastructure
to serve the lower strata of Indonesian society, particularly for members of the community living in remote,
rural areas.
By contrast, in terms of improving access to financial services, the BPRs and other small financial institutions
offer much more promise in the near- to medium-term. Despite a great deal of diversity, they are often on
the frontline of the delivery of financial services to MSMEs and poorer households, including those in very
remote parts of Indonesia. As detailed below, much can be done on the regulatory front to extend their
reach.
Sharia banking (and more generally, sharia financing) currently commands a small market share, although
this market share has been expanding rapidly for about a decade. These institutions are particularly
14
Chapter 1
Executive Summary
important because they cater almost exclusively to the lower end of the market, including in rural regions.
Also, Indonesia’s first sharia bank (established in 1992) is a leading innovator in terms of extending financial
services to poor remote areas through mobile banking.
Among other financial institutions that provide access to financial services for the poor, three are especially
notable: the state-owned pawnshop; cooperatives; and other micro finance institutions. Each faces its own
particular constraints to which there are specific solutions, which are discussed further below. Non-Bank
Financial Institutions (NBFIs) play a less significant role in terms of the services they offer to lower income
earners, although there has been some encouraging progress in a few areas in recent years. In particular, a
number of these institutions offer micro insurance and leasing products that are of particular relevance to
MSMEs.
Main Recommendations
Improved access to financial services by lower-income Indonesians requires both public and private sector
interventions and innovative public-private partnerships. Based on the self-identified needs of lower
income Indonesians, the focus should be on access to a broad range of financial services, rather than merely
on access to credit. Credit is important for the poor, but savings facilities rank much higher. A significant
proportion of lower income earners find existing financial products to be inappropriate to their needs.
Designing and pilot testing appropriate products through partnerships could potentially facilitate access to
formal financial sector by a greater proportion of the population, to the benefit of both clients and financial
institutions themselves.
From a public sector perspective, strengthening the existing legal and regulatory framework for various
formal financial institutions would be a good first step in aiding the process. For every important service
provider, there are aspects of the regulatory framework that could be reformed for the sake of improving
access to financial services, without compromising prudential safety.
For commercial banks, the most promising simple, low-cost regulatory reform would involve steps to create
a conducive environment for mobile banking, which holds considerable promise in terms of improving
access to financial services. Mobile banking holds great promise for reducing costs and extending reach
– although, in line with international experience, it is likely to initially focus on payments services and
remittances. BI has recently made notable regulatory advances, although much more is still possible. For
instance, revised regulations now permit non-bank service providers to issue e-money, but only for payment
purposes. If non-bank service providers want to offer person-to-person services, they need a remittance
license. At present, eligibility requirements are a significant, unintended barrier to entry. Simpler ways are
available to accomplish the same regulatory purpose, without creating such barriers.
To deliver mobile banking services cheaply, the economies of scale offered by a network of non-bank retail
agents is vital. This would entail allowing banks the discretion to outsource services using a network of nonbank third parties, with the banks remaining responsible for their agents’ activities. For mobile banking to be
able to meet the needs of the ‘financially excluded’, there are also important Know Your Client (KYC) issues to
be addressed. For example, simplified KYC requirements for low-risk, low-value accounts and transactions
would permit the remote opening of bank accounts in isolated areas, allowing non-bank agents to facilitate
the opening of new accounts.
Smaller regulatory changes involving commercial banks might also be helpful. For example, an official policy
on dormant accounts might help reduce banks’ monthly administration fees. Policies to make it easier for
banks to unilaterally close inactive, non-zero accounts could be developed, with institutional arrangements
in place for the management of such accounts after they are closed. Bank Indonesia’s recent arrangement
15
Chapter 1
Executive Summary
with major commercial banks to introduce basic banking services, with the proposed launch of a new
saving product called TabunganKu (My Saving) in early 2010, is also a step in the right direction. In the
area of reporting requirements, annual business plans could be combined with the banks’ annual reports.
Regulations concerning the relocation of branches and ATM machines are currently unnecessarily restrictive,
with a reporting and approval process required even for minor relocations within the same geographical
area. Instead, the regulations should require general descriptions of the location of such facilities. It would
also be useful to ease official regulations on the establishment of new branches, at least to bring them into
line with Bank Indonesia’s current, relatively liberal interpretation of theoretically stringent regulations.
Concerning BPRs, there are several regulatory barriers that could be eased to improve access, although
Bank Indonesia seems to be re-thinking policy in this area already. Consideration could be given to a lower
tier of minimum start-up capital for small BPRs in remote locations. Also, NGOs and foreign investors could
be allowed to participate in BPRs that are looking for capital. Reporting requirements could be revised for
small BPRs in locations without adequate communications services. Written disclosure requirements could
be waived in areas of low financial literacy, to be replaced by oral briefings for new customers, perhaps using
the local language if appropriate.
As with commercial banks, Know Your Customer (KYC) regulations that demand the presentation of a full
set of documentation to access financial services could be eliminated or simplified for small accounts.
Similarly, the requirements for taxpayer numbers could be waived for small loans below a pre-specified
threshold. Again, as was the case with commercial banks, while the regulations regarding the establishment
of new branches are theoretically quite restrictive, in practice these are interpreted fairly liberally. However,
the regulations should perhaps be revised so that they reflect actual practice. In other areas, to enforce
regulations on BPRs, BI is already working hard to augment its capacity. As an additional interim step, BI might
seek additional, temporary assistance by outsourcing certain tasks to firms that specialize in micro-finance,
a measure for which there are already precedents, with BRI already been charged with the supervision of
certain financial institutions in specific areas.
Important regulatory steps could be taken to improve the capacities of cooperatives, pawnshops and other
microfinance institutions and to ensure that they are better able to provide increased access to financial
services. With cooperatives, the most important issues appear to be prudential. These should be addressed
on a sector-wide basis before any significant problems surface and potentially erode memberships’ existing
access to financial services. Concurrently, there needs to be an upgrading of the MSME’s regulatory and
supervisory capacity. Measures to address this could include the temporary outsourcing of certain functions
to firms specializing in micro-finance.
With pawnshops, the state-owned monopoly could be officially opened up to competition from the private
sector. At present, a number of private pawnshops are already offering services on the fringes of legality, so
opening up this sector would serve the double purpose of encouraging healthy competition and facilitating
better regulation of the currently unsupervised and unregulated private pawnshops. In parallel, there needs
to be a discussion on the extent to which these institutions needs to be brought under a formal regulatory
umbrella, keeping in mind international experience.
With regard to other microfinance institutions, the most productive step is probably to restore momentum
to the drafting of a new Micro-Finance Law. A vital part of this process would involve encouraging public
debate on the relevant issues. It is important that the new Law emphasizes facilitation and access, taking
into account emerging global experience regarding regulation and supervision of such institutions. In
support, linkage programs between commercial banks and BPRs could be expanded to include non-bank
MFIs. In addition, it would be helpful if a similar role could be defined for NGOs.
16
Chapter 1
Executive Summary
In the area of insurance, a stronger foundation is needed for healthy expansion of this industry, with this
industry being challenged by several fundamental structural issues. In particular, the industry is currently
characterized by the existence of a number of weak and unviable firms. This needs to be addressed before
the industry can play a significant role in expanding access to financial services. An important exception is
the micro-insurance business, which is currently expanding rapidly, with the benefit of a successful publicprivate partnership. This could serve as a model for other products targeting lower income earners. There
are also emerging models being developed elsewhere in the world that should be explored to determine
their relevance to the Indonesian context.
This report also addresses issues relating to MSMEs and migrant workers as special topics of interest in the
context of accessibility to financial services. MSMEs’ issues of access to financial services are virtually onedimensional: that is, the most significant issue by far involves access to credit, with the level of difficulty
being in the inverse proportion to the size of the business. While Indonesia has striven to develop policies
to promote access to finance by MSME, there is general dissatisfaction with results to date, despite the
large expenditures by the government. This is due in large part to the past emphasis of the government’s
programs, which has been on subsidized credit programs. In line with international experience, these
subsidized credit programs have not been overwhelmingly successful. The Government continues to make
access to credit for MSMEs a major policy issue. As part of its endeavors in this regard, it has initiated the
Kredit Usaha Rakyat (KUR) program as a means to consolidate the existing programs and put in place an
integrated credit guarantee scheme to bring previously unbanked MSMEs into the formal banking sector.
While a formal review of this program was underway at the time of writing of this report, the Government
has also announced a significant scaling up of the program. Depending upon the results of the assessment,
the government may consider strengthening or modifying the existing KUR program.
Issues related to migrant workers and their access to financial services are also high on the Government’s
agenda. From an access to finance perspective, this group should be of particular interest to financial
institutions, given the large remittances that these workers send home. In general, in several areas, to
assist migrant workers, Indonesia could seek to re-negotiate the terms of its Memoranda of Understanding
on Migrant Workers with recipient countries3 in order to better balance the interests of the workers
themselves with the interests of employers and recruitment agencies. From the perspective of increasing
access to financial services, specific points of negotiation could include a discussion of acceptable forms of
identification and the exemption of small transfers from these formal identification requirements keeping
in mind global AML/CFT efforts.
To convince banks of the commercial value of this market, it might be useful to explore the possibility of
developing innovative public private partnerships to bring greater segments of these workers into the
formal financial sector. One possibility is to encourage the wider use of domestic guarantors (or co-signers)
for pre-departure loans to migrant workers. Development partners (or NGOs) with particular interests in
migrant worker issues might consider acting as a guarantor in pilot projects that may perhaps later be
scaled up. Another possibility would be steps to encourage the design of innovative savings instruments
that would permit these workers to save their earnings for use over a longer period of time.
The Way Ahead
In order to facilitate financial inclusion in a manner that truly meets the needs of lower income earners,
it is clear that the government must strive to improve access to a broad range of financial services, rather
than merely focusing on improved access to credit. A number of developing countries have implemented
3
A recent World Bank study makes several practical suggestions in this regard; see The Malaysia-Indonesia Remittance Corridor
(2008a).
17
Chapter 1
Executive Summary
policies and strategies to achieve this result. Access to finance is an issue that involves a number of different
stakeholders, including government agencies and authorities such as Bank Indonesia, Bapepam-LK, Ministry
of Finance, Ministry of Cooperatives and SMEs; financial institutions from the private sector, including state
owned and private banks, non-bank financial institutions; and NGOs, foundations, development agencies
and think-tanks working in this area. Technology and education will play a key role in scaling up access
rapidly. Thus, telecommunications service providers, academic institutions and financial literacy providers
are also significant stake holders. Indonesia’s international development partners can provide knowledge
and financial inputs. With all these stakeholders working together, it is possible to significantly improve
access to financial services by a large segment of the population. In the short and medium term, this will
provide significant benefits both to the individuals who are able to access the services and to the financial
institutions that provide them. In the longer term, improving access to financial services in this fashion will
facilitate the achievement of broader economic development and poverty alleviation goals.
18
Chapter 2
The Current Supply of Financial
This Chapter looks at the current supply of financial services in Indonesia. It begins with an overview of the
Indonesian financial sector and attempts to put the different service providers in context, particularly in
terms of the different segments that each of the varying service providers caters to.
2.1 Overview of Indonesia’s Financial Sector
By international standards, Indonesia’s financial sector is still small in relation to GDP (see Table 1 and World
Bank [2006a]). In terms of the nation’s total financial assets, the size of the financial sector is equivalent
to only slightly more than 100% of GDP. This is considerably less than the size of the financial sectors in
large Asian economies such as those of India and China, where the equivalent figures are 300% and 500%
respectively. Rather, the size of Indonesia’s financial sector is barely comparable to those of countries such
as the Philippines and Pakistan. Among other indicators, as a proportion of national GDP, the value of
credit made available by Indonesian banks to the private sector is lower than almost any other comparable
country in the region (Table 1). In addition, in terms of the geographical area and the number of people
served by each branch, Indonesia has a relatively low rate of bank branch density (Table 2).4 The number of
people served by each branch is high relative to that in other comparable countries, while the geographical
territory is served by each branch is about average, although notably lower than Mexico and Brazil.
4
The data in Table 2 include BRI’s Unit Desa system, which account for almost 1/3 of all bank branches in Indonesia.
19
Chapter 2
Table 1.
International Comparison of Financial Sectors: Selected Financial Indicators
Total Financial
Assets
Credit to
Private Sector
Equity Market
Capitalization
Private
Bonds
Public
Bonds
GNI
per capita
(% of GDP)
(% of GDP)
(% of GDP)
(% of GDP)
(% of GDP)
(Atlas Method,
in US$)
China
542.5%
114.5%
189.8%
0.2%
0.4%
$ 2,360
Malaysia
383.5%
108.8%
180.2%
4.4%
7.1%
$ 6,540
India
298.3%
47.4%
155.4%
0.7%
0.2%
$
Thailand
210.6%
84.2%
79.8%
1.4%
1.2%
$ 3,400
Brazil
205.1%
49.8%
104.3%
2.9%
3.6%
$ 5,910
Pakistan
150.2%
29.4%
48.9%
0.6%
1.3%
Philippines
128.7%
23.8%
71.6%
1.7%
11.3%
Indonesia
103.6%
25.4%
48.9%
2.1%
1.1%
$ 1,650
Sri Lanka
60.8%
34.0%
23.3%
0.3%
0.2%
$ 1,540
Bangladesh
54.8%
37.7%
10.0%
…
…
$
950
870
$ 1,620
$
470
Source: World Development Indicators, 2008 (data for 2007) and Bringing Finance to Pakistan’s Poor, 2009, World Bank
In terms of the type of institution offering financial services, Indonesia’s formal financial system is heavily
dominated by banks (see Figure 4). Other types of financial institution remain insignificant and are
concentrated heavily in western Indonesia, particularly Java, Sumatra and Bali.5 Some of these other types
of financial institution are discussed briefly in Section 2.7 below. However, among formal institutions that
have the potential to provide access to financial services to poorer households, only commercial banks have
a wide geographical spread among formal institutions. Even pawnshops (see Chapter 4) play an extremely
insignificant role by comparison.
Table 2.
International Comparison of Bank Branch Density
India
Indonesia
Mexico
Brazil
U.S.
France
Japan
Germany
Population per
Branch
14,888
12,547
11,924
9,331
3,568
2,331
1,959
1,479
Source: “Brazil: Access to Financial Services”, World Bank, 2004.
5
20
See World Bank (2006b).
Land Area per
Branch (sq km)
44
110
236
470
117
22
6
6
Chapter 2
Figure 4.
Financial Structure (December 2008)
Mutual Funds
2%
Securities Firm
2%
Rural Inst,
Pawnshop, VC
2%
Finance Companies
5%
Insurer
6%
Pension Funds
4%
Banks
79%
Source: Bank Indonesia, Bapepam LK, Ministry of Cooperatives, Association, Infobank magazine
2.2 The Commercial Banking System
Since the financial crisis of 1997/98, there have been significant changes in the composition of financial
institutions in Indonesia in terms of the number and range of service providers and the number of branches
operated by these providers. In particular, the number of commercial banks (especially private banks; see
Figure 5), people’s credit banks (BPRs) and multi-finance companies have all declined markedly (Table 3).
This is largely a result of government policies aimed at consolidating the number of institutions in these
sub-sectors (see Chapter 4).6 By contrast, the numbers of bank branches, bank ATMs, pawnshop branches
and cooperatives have all increased significantly (Table 3).
Figure 5.
Total Banks by Type of Bank
160
140
Numbers
120
100
80
60
40
20
0
1997
1998
1999
2000
2001
2002
State Owned Banks
Regional Banks
2003
2004
2005
2006
2007
2008
Private Com. Banks
Foreign & Joint Banks
Source: Bank Indonesia
6
For example, during 2007, Bank Indonesia approved 105 BPRs for consolidation into 19 entities and 5 others had their operating
licenses revoked. BI issued approvals in principle for 27 new ones (Bank Indonesia (2007), p. 131).
21
Chapter 2
This change in composition has been defined by at least two key significant characteristics. First, although
the number of financial service providers, including both banks and BPR, has fallen, the reach of existing
financial service providers has increased significantly. For example, the number of bank branches has
increased by 70% since 2000, while the number of ATMs has almost tripled (Figure 6). Secondly, the
expansion has been most significant amongst institutions that serve lower income groups, particularly
cooperatives and pawnshops. At the same time, when formal banks have expanded, they have often done
so by expanding low-cost facilities, such as new branches, ATMs and mobile banking facilities. It is likely
that the expansion of such facilities is making these banks increasingly better positioned to serve lower end
markets.
Table 3.
Indonesia, Number of Financial Institutions
Banks
Bank Branches,
including cash
offices
2000
151
6,374
2001
145
6,657
2002
142
2003
138
2004
Bank
ATMs
BPRs
Venture
Capital
Multifinance
7,114
2,419
59
245
692
103,077
8,997
2,355
60
245
722
110,766
6,844
10,613
2,143
60
244
739
118,644
7,554
11,837
2,141
60
239
774
123,181
134
7,808
13,772
2,158
60
237
806
130,730
2005
131
7,918
15,862
2,009
60
237
840
134,963
2006
131
8,980
16,991
1,880
60
214
869
141,326
2007
130
9,535
18,596
1,817
60
211
899
147,000
2008
124
10,868
20,792
1,772
60
210
1,331
149,913
Source: BI, Bapepam-LK, Annual Report of Perum Pegadaian, Ministry of Cooperatives & SMEs
22
Pawnshop
(branches)
Cooperatives
Chapter 2
Figure 6.
Number of Bank Branches and ATMs, by Type of Bank
7,000
400
6,000
350
300
5,000
250
4,000
200
FOB
SOB, BPD, PCB, & BPR
Number of Branches, by Type of Bank
3,000
150
2,000
100
1,000
50
0
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Year
Regional Bank
State Owned Bank
Private Com Bank
BPR
Foreign Owned Bank (Incl Joint Banks)
ATMs, by Type of Bank
12,000
Numbers
10,000
8,000
6,000
4,000
2,000
0
1997
1998
1999
State Owned Banks
2000
2001
Regional Banks
2002
2003
2004
Year
Private Com. Banks
2005
2006
2007
2008
Foreign & Joint Banks
All types of banks, including state-owned banks, regional banks, private commercial banks, and foreign and
joint banks have on average expanded the number of branches they operate a (Figure 6). The number of
branches operated by foreign banks has increased the most significantly in terms of percentage, by some
350%, although this expansion has built on a relatively small base. Among the other types of bank, the
number of branches operated by state-owned banks has increased by about 80%; by regional development
banks (BPDs) by approximately 70%; and by private banks by approximately 60%. In terms of the number of
ATMs operated by the different types of banks, state-owned banks also expanded more rapidly than private
banks. The size of the ATM network operated by the state banks more than quadrupled from approximately
1,900 in 2000 to 8,225 in 2007. By contrast, the size of the ATM network operated by private banks more than
doubled from nearly 4,700 to more than 11,350 over the same period (for a discussion of the geographical
expansion of ATM networks, see Chapter 2.3).
23
Chapter 2
Box 1.
The Role of State Vs. Private Banks in Indonesia
Prior to the financial deregulation drive in the 1980s, Indonesia’s seven state banks dominated the local financial
sector. This was largely due to the establishment of these banks on the basis of the nationalization of Dutch banks
in the 1950s and 1960s. Each state bank had a somewhat specialized focus, with official statements underscoring
their ‘social and development role’. For example, Bank Ekspor Impor (ExIm) focused on international trade and
finance; Bank Pembangunan Indonesia (Bapindo) was a development bank; Bank Tabungan Negara focused on
facilitating the needs of housing development; and Bank Rakyat Indonesia (BRI) concentrated on the provision of
rural credit. The other three, Bank Dagang Nasional (BDN), Bank Bumi Daya (BDN) and Bank Negara Indonesia (BNI;
the first and largest) leaned more towards the provision of services to the corporate sector.
On a system-wide basis, licensing, credit and interest rates were tightly regulated by the central bank. There were
also a large number of central bank re-financing schemes targeting politically important sectors. All of the state
banks—some more than others—suffered internal governance problems. Much of this changed during the 1980s,
when a series of so-called deregulation packages lowered entry barriers and increased the level of competition in
the sector (see, for example, Cole and Slade [1996] and Binhadi [1995]). The state banks lost market share rapidly,
although their official roles were little changed.
Two subsequent developments had a major impact on the role, composition, and structure of the state banks. The
first was the financial crisis of 1997/98, which led to the merger of Bank Exim, BDN, BBD and Bapindo into Bank
Mandiri. The second was a series of partial privatizations through the listing of the state-owned banks on public
stock exchanges and the release of minority stake holdings on these exchanges, beginning with the listing of the
BNI in 1996. Within a decade or so, all the state-owned banks except BTN had been partially privatized. During
this same period, critical changes were made to the management of a number of state banks, with these changes
improving internal governance appreciably.
Today, of the state banks, only BTN and BRI largely retain specialized roles. Bank Mandiri and BNI operate in direct
competition with the private banks, with few special privileges. The state banks main advantages are at present
mainly derived from their size. Mandiri is the largest bank in the country, accounting for almost 16% of the total
assets of the financial sector. BRI and BNI occupy third and fourth place respectively, with each controlling a market
share of approximately 10%. BRI has an operational advantage over other banks in the field of micro-finance
because of its extremely wide network of branches that reach down to the village level, with the width of this
network making it difficult for any newcomer to challenge this banks position. Nevertheless, and despite the large
growth in the number of branches and facilities such as ATMs (noted in the main text), the share of the state banks’
assets in the banking sector has continued to decline over the long-term. By 2007, the share of the state banks
assets have declined to 37%, compared with 49% in 2001 and almost 80% in the early 1980s.
It should also be mentioned that the government, as the majority shareholder, still makes occasional special
demands of state banks. For example, the state-owned banks are often the target of ‘moral suasion’ when particular
policies prove difficult to implement by conventional means; the source of temporary expertise in times of crisis,
for instance when weak banks need to be closed; and the leading edge of special programs, like the Kredit Usaha
Rakyat (KUR) and the Linkage Program between commercial banks on the one side and BPRs and cooperatives on
the other.
24
Chapter 2
2.3 Regional Reach of Indonesia’s Commercial Banks
In a country as large and diverse as Indonesia, when examining issues related to access to financial services,
it is very important to look at the regional distribution of commercial bank services. Unfortunately, data
on the dispersion of banking services is not available in sufficient detail to permit a robust spatial analysis
across the country. For many purposes, data for provinces and special regions, such as DKI Jakarta, are the
best that available. However, these data played a great deal of residual diversity in and between Jakarta,
Banten and East Java, for example.
Using a relatively coarse indicator (see Figure 7), it is obvious that the density of bank outlets is considerably
higher in the more heavily populated regions. Specifically, it is highest in Jakarta, West Java, Central Java
and East Java. It is arguable whether this unequal distribution of bank services can be accounted for by
population (or land mass) and income levels.
Figure 7.
Bank Head Offices & Branches, by Province
2700
2500
2300
2100
1900
1700
1500
1300
1100
900
700
500
300
100
Pa
pu
a
Nu
Ba
li
sa
Te
ng
Ce
ga
ra
nt
ra
lK
ali
m
an
ta
Ea
n
st
Ka
lim
an
ta
n
G
or
on
ta
So
lo
ut
h
Su
So
la
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aw
es
i
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rt
h
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al
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en
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gy
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a
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li t
un
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-100
Head Quarters
To investigate this issue, the number of branches and branch density existing at the end of 2006 are
regressed in terms of real per capita GDP on a provincial basis. The results are presented in Figure 8 with
branch density measured in two ways: on a population-adjusted basis (see the middle panel in Figure 8) and
on a land areas basis (see the lower panel in Figure 8).7
7
The size of the bubble in the top panel of Figure 8 indicates the relative size of GDP in that province. In the middle panel, it
indicates relative population; in the lower panel, relative land mass.
25
Chapter 2
Figure 8.
Bank Branches & Density Vs. Per Capita Income, by Province
Total Branches, at Dec 2006
2750
Jakarta
2250
West Java
Branches
1750
East Java
1250
Central Java
750
Bali
East Kalimantan
250
Riau Islands
Riau
-250
-1500
3500
8500
13500
18500
23500
28500
33500
38500
Branch Density per 100,000 persons, at December 2006
29
Jakarta
Total Branches per 100,000
persons
24
19
14
9
Bali
Central Java
Riau Islands
East Kalimantan
East Java
4
Riau
-1
-1500
3400
3500
8500
13500
18500
23500
28500
33500
38500
Branch Density per 1,000 sq km persons, at December 2006
Jakarta
Total Branches per 1,000 km2
2400
1400
Papua
400
Riau Islands
East Kalimantan
Riau
North Maluku
-600
-1500
3500
8500
13500
18500
23500
Constant GDP per Capita (IDR Thousand)
Source: Bank Indonesia, BPS, staff calculation
26
28500
33500
38500
Chapter 2
As indicated in Figure 8, there is clearly a strong positive correlation between the number of branches and
branch density and real per capita income. The relationships are all statistically significant (t statistics on
real capita GDP ranging from 2.3 to 5.1), with reasonably good fits (R2s ranging from .38 to .67). Statistical
significance and fits are better for branch density (that is, for the lower 2 panels in Figure 8) than for the
number of branches. This implies that adjusting for land mass or population is helpful in explaining the
relationship.
Exactly the same conclusions hold when ATMs are used as the metric instead of bank branches (see Figure 9).
Indeed, the statistical fits are slightly tighter and the statistical significance slightly higher. This is important
for policy purposes. Specifically, the relatively low-cost of service provided by ATMs is more responsive to
income levels than are the relatively high-cost services provided by bank branches. By implication, if service
costs can be further reduced through means such as mobile banking, it is likely that banks would become
more deeply involved in regional markets.
Looking at Figures 8 and 9, it is clear that Jakarta is consistently a large, high-side outlier. Jakarta has far
more bank branches and ATMs than would be expected on the basis of population, land mass and income.
All other provinces8 fall more or less in line with expectations after adjustment for income and population
or land mass.
How can the figures for Jakarta be explained? Two explanations are plausible. First, agglomeration
theory (see the World Development Report 2009) postulates that economic development tends to occur
disproportionately in clusters. Specifically, economic development is likely to occur in relatively small,
densely-populated regions like Jakarta. The second explanation concerns income inequality. The relatively
large number of very wealthy people and businesses in Jakarta probably lead to a disproportionately
large number of bank services in that region. This underlines the fact that the use of average income as an
explanatory variable doesn’t necessarily capture the effect.
And what can be said by way of policy conclusions? This analysis provides strong prima facie evidence that
variations in the existing supply of financial services at the provincial level are largely explained by variation
in population, land mass and income. Only Jakarta and East Kalimantan are clear exceptions, Jakarta being
‘over-serviced’ and East Kalimantan ‘under-serviced’. By implication, targeted efforts on ‘financially underserved’ areas will need to operate below the provincial level and they will need to take clear account of
banks’ demonstrated capacity to respond to broad market conditions.
8
Another exception is the resource rich, but sparsely populated province of East Kalimantan. It is consistently a low-side outlier,
implying that it has fewer bank branches and ATMs than would be expected on the basis of income, population and land mass.
27
Chapter 2
Figure 9.
Total ATMs & Density Vs. Per Capita Income, by Province
Total ATMs at December 2006
7000
6500
6000
Jakarta
5500
5000
4500
Total ATMs
4000
3500
3000
West Java
2500
East Java
2000
1500
Central Java
Bali
1000
500
East Kalimantan
Banten
Riau Island
Riau
0
-500
-500
4500
9500
14500
19500
24500
29500
34500
39500
ATMs Density per 100,000 persons, at December 2006
70
Jakarta
Total ATMs per 100,000 persons
60
50
40
30
Bali
20
Riau Island
East Kalimantan
East Java
Central Java
10
Riau
0
-10
-500
4500
9500
14500
19500
24500
29500
34500
39500
ATMs Density per 1,000 sq km, at December 2006
Jakarta
Total ATMs per 1,000 km2
6000
3500
1000
Riau
East Kalimantan
Riau Island
Papua
-1500
-500
4500
9500
14500
19500
24500
Constant GDP per Capita (IDR Thousand)
28
29500
34500
39500
Chapter 2
Some data are available on the number of local jurisdictions (kabupaten in rural areas and kotamadya in
urban areas) with no commercial bank branches. Surprisingly, this number has gone up substantially from
16 in 1997 to 156 in 2007 (Table 4). Upon closer inspection, this larger number appears to be entirely due
to the creation of new local government jurisdictions, with the total number of such jurisdictions having
increased from nearly 314 to 464 over the same period (Table 4). By contrast, the number of local jurisdictions
with branches has remained fairly constant at around 300. On this basis, it seems clear that banks do not
move into new regions just because political boundaries have been re-defined. Rather, the decision to open
new branches is based upon commercial viability, which is normally insensitive to political segmentation of
existing jurisdictions.
Table 4.
Year
Number of Kabupaten/Kotamadya With and Without Branches of Commercial Banks
# of Kabupaten/
Kotamadya
with Branches
Total Kabupaten/
Kotamadya
Percentage
# of Kabupaten/
Kotamadya
with no Branches
Percentage
1997
298
314
94.9%
16
5.1%
1998
304
314
96.8%
10
3.2%
1999
299
316
94.6%
17
5.4%
2000
306
334
91.6%
28
8.4%
2001
268
349
76.8%
81
23.2%
2002
304
362
84.0%
58
16.0%
2003
303
384
78.9%
81
21.1%
2004
311
424
73.3%
113
26.7%
2005
305
448
68.1%
143
31.9%
2006
309
448
69.0%
139
31.0%
2007
308
464
66.4%
156
33.6%
Source: Bank Indonesia, Ministry of Home Affairs, Decentralization Support Facility and World Bank Estimates
The regional distribution of the local jurisdictions without a branch of a commercial bank provides additional
evidence that Indonesia’s banks are sensitive to commercial opportunities as measured by population
density. Most ‘unserved kabupaten’ are in the relatively remote, sparsely populated provinces of Papua,
Kalimantan and Sulawesi (see Figure 10).9 However, there is no strong relationship between ‘unserviced’
locations and per capita income (see Figure 10).
9
The ‘unserviced’ jurisdictions were Sumatra (56); Sulawesi (23); Kalimantan (22); the Papua island group (19); the Malukus (11);
and Nusa Tenggara (6). As of 2007, there were only a handful (6) on Java and none on Bali.
29
Chapter 2
Figure 10.
Number of Kabupaten without Bank Branches, by Province
(GDP increases to the right)
14
12
D K I Jakarta
Riau Island
East Kalimantan
Nanggroe Aceh Darussalam
Riau
Bangka Belitung Island
West Papua
East Java
South Sumatera
Papua
North Sumatra
South Kalimantan
Central Kalimantan
West Sumatra
West Java
Bali
North Sulawesi
Banten
West Kalimantan
Central Sulawesi
D I Yogyakarta
Jambi
Central Java
Lampung
South Sulawesi
Bengkulu
West Nusa Tenggara
Maluku
Southeast Sulawesi
2
West Sulawesi
4
Gorontalo
6
East Nusa Tenggara
8
North Maluku
# Kabupatens
10
0
2.4 People’s Credit Banks (BPRs)
As will be clear from the subsequent section and from Chapter 4, BPRs10 play an important role in providing
access to financial services for lower income clients. BPRs are a subset of Indonesia’s formal banking system,
but they cater to lower income clients; they are not part of the payments system; they face strict branching
restrictions; and they are subject to different regulations than commercial banks (see Chapter 4). In total, the
combined market share of the BPRs is tiny compared to that of the commercial banks: at the end of 2008,
the total value of outstanding loans at rural banks was less than 2% of that at commercial banks.
Also, there has been considerable consolidation in recent years (see Table 3). In addition, the failures of
certain BPRs have led to Bank Indonesia taking steps to strengthen the regulation and supervision of this
sector. While BPRs as a group do have a higher rate of NPLs than commercial banks, the level of profitability,
capital adequacy stability of funds, and loan-to-deposit ratios (LDR) of BPRs are all comparable or better
than commercial banks. In the context of access to financial services, this is important, as it shows that these
institutions are likely to continue to play an important role in the sector in the future11.
The main criticisms of BPRs are similar to those that are normally directed at commercial banks. Specifically,
it is often said that BPRs serve only down to the middle segment of the microfinance market; they do not
directly target micro-entrepreneurs; publicly-owned BPRs cover different locations, operating as quasimonopolies; and Bank Indonesia’s regulations push them to conduct conservative, collateralized lending.12
For its part, BI has been emphasizing their ‘community development’ role, and may be considering a
requirement that 80% of their lending be made in local areas. This is also discussed in Section 2.9, below.
30
10
They are commonly called ‘Rural Credit Banks’ in English, but this is very misleading since many BPRs are in urban or peri-urban
areas.
11
BPRs have fewer sources of funding than commercial banks. For example, they can’t borrow from capital markets or from
off-shore; they aren’t publicly listed; and they can’t accept demand deposits. They do, however, have ‘linkage programs’ with
commercial banks and some get relatively cheap financing from private foundations (yayasan).
12
See, for example, http://www.bwtp.org/arcm/Indonesia/I_Country_Profile/Indonesia_country_profile.htm, in particular the
discussion under ‘BPRs or People’s Credit Banks’.
Chapter 2
Box 2.
BRI’s MASS Survey: Insights to Banks’ Capacity to Reach the Poor
As noted in the main text, Bank Rakyat Indonesia (BRI) is Indonesia’s premier lender to MSMEs, having built upon
a long history of micro-lending in Indonesia (see Box 4). In the fall of 2002, BRI conducted a Microfinance Access
and Services Survey (MASS) of 1438 households in six provinces (roughly half the size of the Survey of Chapter 3)
to map the financial landscape and to gauge potential markets. The enumerators were BRI loan officers and other
staff. The survey, which provided a unique opportunity to assess the creditworthiness of households using BRI’s
standard commercial procedures, included other detailed information on assets, businesses and economic and
social changes. Many of the results are useful for the purposes of this report, as summarized immediately below.
First, loans for small businesses are important. However, in 30% of cases, households use the loans for consumption
needs, including school fees; medical treatment; household improvements; meeting daily consumption needs;
and contributing to social and holiday expenses. This finding, which holds across a wide range of low income
households, dilutes the case that lending to MSMEs will unleash a burst productive investment spending.
Second, concerning the creditworthiness of the ‘unbanked’, results indicate that creditworthiness increases with
income, but 40% of the unbanked poor and very poor were deemed creditworthy by the examiners. At all levels of
income, more borrowers were judged to be creditworthy than are currently borrowing or saving.
Third, the lack of collateral was cited as a deterrent by only 10% of households that are creditworthy and not
borrowing. The BRI examiners concurred with this conclusion. This confirms the insights of successful micro lenders,
which is to lend on the basis of income, rather than assets.
Fourth, and possibly most important, about half of creditworthy poor households are risk averse and do not seek
credit. Some households simply don’t want it. The caveat here is that clearly some households voluntarily exclude
themselves due to the prevailing price of credit.
Fifth, of those poor unbanked households who did seek credit, most desired relatively small loans, even by BRI’s
standards. Calculations by the researchers showed that BRI, given its current fee structure and banking practices,
would lose money if it lent at the small scale sought by poorer households. The authors conclude that it remains
commercially unviable for banks to lend to many poor households, even for BRI, Indonesia’s microfinance specialist.
Summarizing these conclusions, the evidence suggests that about 40% of the unbanked poor are creditworthy
by MFI standards. However, roughly half of them do not want to borrow. And of the unbanked poor who did seek
credit, about half are seeking loans that are too small to be commercially viable even for BRI, given that bank’s
current commercial standards. This survey, which was heavily tilted towards credit services, provides support for
the findings of Chapter 3 that access to financial services covers much wider ground than access to credit, including
for the poor.
Source: Johnston and Morduch (2007) and (2008).
31
Chapter 2
Figure 11.
Financial Performance of BPRs
Total Assets & Loans
Loan to Deposit Ratio
NPL Ratio
14
12
12
10
10
8
8
(%)
(%)
NPL Ratio
14
6
6
4
4
2
2
0
0
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
NPLs
Rates of Return on Equity and Assets
NPL Ratio
14
12
12
10
10
8
8
(%)
(%)
NPL Ratio
14
6
6
4
4
2
2
0
0
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
Source: Bank Indonesia.
2.5 Microfinance Institutions
In Indonesia, the term ‘micro-finance’ can be used to describe a wide range of institutions. This can be very
confusing. Unlike the case in a number of other countries, where the term ‘micro-finance’ is used to describe
providers in the informal sector or at the edges of the formal sector, in Indonesia, the biggest proportion of
micro-finance institutions are well within the formal sector.
BRI Unit Desa
BPRs
LDKP, Coops, BKDs, Pawnshops,NGOs,Etc.
Conceptually, Indonesia’s system of micro-finance may be
envisaged as a pyramid (see the accompanying Figure and Box 14
in Chapter 4), 13 with different layers serving different segments and
regulated differently. At the apex of the pyramid is BRI’s Unit Desa
system (see Box 4). Formally, this system resides well within the
commercial banking system. Indeed, BRI is the third largest
commercial bank in terms of the value of its assets and the provision
of micro-credit is its core business.14
In the mid-section of the MFI pyramid are people’s credit banks
(BPRs; discussed above), which are also part of the formal banking system. The BPRs are not a homogeneous
group of institutions. For instance, they vary widely by size (some are larger than the smaller commercial
32
13
The pyramid is reproduced from Bank Indonesia and GTZ (2000).
14
BRI units dominate micro borrowers’ deposits. They constitute 72% of deposits and 68.8% of total micro-deposits (Marutowijoyo,
2007), setting a high competitive standard for other players in this market.
Chapter 2
banks); market niche (urban versus rural); differential performance as between urban and rural;15 and
operations (e.g., the former Badan Kredit Desa (BKDs; see Box 14) officially do not accept voluntary deposits).
At the lower end of the pyramid, a bewildering array of institutions overlaps the formal and informal
sectors. They include financial cooperatives; pawnshops; LDKPs (Lembaga Dana Kredit Perdesaan - see
Box 16), which go by different names in different provinces and are mostly owned by provincial/district
governments;16 NGOs; Grameen Bank replicas; unofficial moneylenders (see Box 4); and probably millions of
small, informal savings and credit societies (arisan). Their main characteristics, which separate them from the
regular commercial banks, are that they operate on a very small scale and they tend to lend against income,
whereas the commercial banks lend against collateral. Little formal data are available on the number of such
institutions, although one estimate (Morowijoyo, 2007) puts their number at 46,248 (excluding arisan) as of
2005. This report relies largely upon the Survey reported in Chapter 3.17
Effectiveness of the players at the lower end of the pyramid in reaching the poorest depends in large part
upon operational soundness of the MFIs, especially their sustainability. For example, if they are competing
with subsidized government credit programs, their commercial viability is probably at risk. Likewise, if a
significant portion of the MFIs’ financing originates with governments, international institutions or private
donors, they are exposed to shifts in the internal policies of those collaborators. Global experience shows
that for such institutions achieve independence and viability, they must achieve a self sustaining profitability,
rather than dependence upon transfers, no matter how well-meaning the source of those transfers.
As a general rule, segments lower in the customer pyramid have a larger potential customer base but
consisting of customers with an average lower income. At the same time, segments higher in the customer
pyramid have higher effective interest: of all the listed segments, effective rates of interest at BRI are the
lowest, followed by BPRs and LDKPs. Cooperatives (Koperasi) and NGOs usually provide subsidized loans for
their membership and target groups.
At the lower end of the pyramid, there is a number of subsidized government lending programs. These
programs are run by different government departments and state-owned enterprises, with different cultures,
philosophies of economic development and supervisory skill sets. These compete with—and sometimes
undermine—the micro-finance providers, often by replenishing schemes that aren’t working18,19
Many of these lower-end micro-finance service providers operate without a firmly established legal basis.
This incomplete legal and regulatory framework limits reach of MFIs. Specifically, it restricts their sources
of finance, because Banks are penalized for lending to organizations without legal status. It also creates an
incentive for other players to operate in the least regulated segment. The formulation and implementation
of the law governing micro finance has been under debate for almost 10 years with various proposals having
been submitted to parliament. However, the law has yet to be approved. Many questions remain on the role
15
See, for example, Bank Indonesia and GTZ (2000), p. 16.
16
In Bali and West Sumatra, they are owned by the villages in which they operate. LDKPs are concentrated on Java and Bali,
and they are usually supervised and supported by the Regional Development Banks (BPDs). See http://www.profi.or.id/index.
php?option=com_content&task=view&id=44&Itemid=55.
17
Other useful details on some micro institutions are provided in http://www.bwtp.org/arcm/.
18
‘Finance for the Poor’, Indonesia Policy Brief, January 2005, available at http://www.worldbank.org.id.
19
Bank BRI’s Annual Report for 2007, p.57 notes its participation in two programs: the P4K program (Pembinaan Peningkatan
Pendapatan Petani Nelayan or Assistance in Income Generation for Marginal Farmers and Fishermen) run by the Ministry of
Agriculture; and Micro and Small Business Loans (KUMK-SUP). It’s notable that the P4K program has sometimes been identified
as an exception to the general rule that subsidized credit programs don’t work (‘Rural Investment Climate Report’, World Bank,
July 206). Other sources have criticized it as extremely expensive and heavily subsidized (Banking with the Poor, Asia Resource
Centre for Microfinance; http://www.bwtp.org/arcm/Indonesia/)
33
Chapter 2
of various institutions in the implementation of any regulatory and supervisory framework. In early 2009,
under the leadership of the Coordinating Ministry of Economic Affairs (CMEA), a joint decree was signed
between the Ministries of Finance, Cooperatives, Home Affairs and Bank Indonesia. The joint decree created
a regulatory framework under existing laws to govern non-bank and non-cooperative MFIs that currently
operate outside a regulatory framework. The Joint Decree recognises four categories of MFIs: (1) People
Business Credit, or BPR; (2) Saving and Loan Cooperatives; (3) Village-owned microfinance institutions, or
BUM Desa; or (4) Venture Capital Companies. However, the joint decree has yet to be fully implemented.
Box 3.
The Shadowy Faces of Indonesia’s Lintah Darat
As in many developing countries, informal moneylenders abound in Indonesia, in both urban and rural areas.
Understandably, they are reluctant to talk with World Bank researchers, even trusted ones, because they operate
outside the law and shun public exposure. Even borrowers are hesitant to talk much about their experience with the
lintah darat.
The lenders’ collective name, lintah darat, literally means ‘land bloodsucker’, and it indicates the disdain that most
Indonesians hold for the profession. Still, there is strong demand for their services because they provide a vital source
of quick, short-term credit, despite usurious rates of interest. The lintah darat seem to fall into two broad categories:
those who do it as a profession; and those—often women—who do it part-time on a small-scale basis, operating
within their own peer group. The two mentioned below are in the former category. One person in the latter category
declined to discuss her business with the Bank’s field team, knowing that the information would be used for this
report. Instead, her input (among several others) helped to develop the characters described below.
Johannes Hutabarat (JH is a fictional character, pieced together from partial, anecdotal information) lives in Jakarta.
Originally, JH is from Medan and he maintains a strong local network among his regional ethnic group. He operates
out of a middle-class residential neighbourhood in central Jakarta and he mainly serves retail clients. Typically, his
clients come to him on a word-of-mouth basis. They are normally desperate for credit and need it fast (‘uang panas’),
usually for personal emergencies. JH prefers to service salaried workers, especially government employees. However,
the competition for this clientele from the banks is tough; they, too, see salary earners, with the regular incomes they
generate, as attractive clients. JH’s typical loan is small, maybe only a few million rupiah. The term of the loans he
provides varies from between a few weeks and a few months. The effective annual rate is often well in excess of 50%.
In the event that repayment difficulties develop, JH turns to his network of strong-arm friends from his hometown.
Their first resort is intimidation of the client, followed, only if absolutely necessary, by physical violence. JH needs his
clients to repay—out of fear, if necessary—but he also values return business and needs to maintain his reputation
within the community as a serious businessman.
Djoko Tanuwijoyo (DT) is a real person, although that is not his real name. He lives in a mid-sized city on Java and
he runs his operation differently to JH. His clients are usually SME businessmen who have problems with bridge
financing. He is often asked for loans to meet a payroll or to cover an unexpected cost overrun. They come to him
because ‘the banks ask too many questions’ and because banks demand collateral. In addition, the closely-held nature
of local businesses puts a premium on confidentiality and quick response. Often DT’s clients are family members who
fully understand the nature of his business and expect little by way of special favors in return. Actually, DT prefers
family members (or best friends referred by them) because ‘they are trustworthy’. This is important to DT because
his business is largely based upon mutual trust. DT’s typical loan is much larger than JH’s, sometimes running into
billions of rupiah. His interest rates are lower than JH’s, although they may still run up to 5% per month, with rates
varying according to his assessment of the risk involved in the loan. Because he lives in a smaller city and operates
without a sizable band of enforcers, DT relies more on personal relationships and less on intimidation and violence.
Still, his willingness to turn to such methods should not be tested because his patience with debt write-offs has its
limits.
Source: World Bank field interviews.
NGOs tend to serve the very lowest level of customers defined in the pyramid. The NGOs often operate on
the basis of a quasi-humanitarianideology, sometimes in the most remote corners of their host country.
Their main advantage is a willingness to provide services to levels of society that are not commercially
viable that are not considered commercially viable by other operators. However, in part, NGOs operations
34
Chapter 2
were hampered by their poor relations with the government.20 Also, the 2001 Law governing Foundations
(Yayasan) put certain NGOs in a difficult position. According to the 2001 Law, foundations may only provide
social, humanitarian and religious services, which prevents them from being involved in income-generating
activities, such as microfinance. They were required to cease micro-finance operations, or become BPRs or
cooperatives. This has proved difficult for some NGOs that lack the funds or expertise to become BPRs or are
reluctant to adopt the cooperative model.21 Virtually no data on NGOs were available for this report. However,
there are anecdotal indications that some NGOs are making significant progress towards overcoming their
limitations in this area. One example of this might be the case of a major internationalfoundation that has
been involved in the purchase of a weak local bank and its conversion into a wholesale bank (Bank Andara)
for the financing of BPRs and cooperatives. Another, longer-standing example involves the Rabobank
Foundation, which focuses on the development of small cooperatives in rural regions.22 23 given previously
stated significance of NGOs in terms of reaching the poorest levels of society, these trends should be
encouraged whereever possible.
Box 4.
BRI’s Unit Desa System
Bank Rakyat Indonesia (BRI) runs one of the largest micro-credit programs in the world. By the end of December
2007, it had 3.52 million customers. Its genealogy is complicated, as it has undergone name changes and changes
to its structure, composition and ownership over the period in it and its predecessors have operated. However, this
genealogy can be traced back to 1895, when a small association to manage the funds of a local mosque in Central
Java was established. In recent years, micro loans have comprised around 30% of BRI’s total loan portfolio. The
remainder of its loan portfolio is comprised approximately as follows: small loans (50%); medium loans (6%); and
corporate clients (14%). As a matter of BRI corporate policy, loans provided to MSME should make up at the least
80% of BRI’s total portfolio. BRIs various programs are run out of approximately 5,200 branches, the vast majority of
which are included in the bank’s ‘Unit Desa’ system, which manages the rural finance network. With his network, BRI
reaches deeply into Indonesia’s villages (see Chapter 3).
BRI’s main savings product, Simpedes (Simpanan Pedesaan), is offered through the Unit Desa system. This product
is intended to service the needs for saving system for middle-low income people, mainly in rural areas. During the
5 years in the period up until 2007, Simpedes grew at more than 18% per annum, accounting for almost 2/3 of BRI’s
total deposits. The defining characteristics of the product include the following: a low opening minimum deposit
(Rp100,000, without an ATM card); low minimum deposits (Rp10,000); a low monthly admin fee for small deposits
(Rp2,000); and regular lotteries based upon minimum monthly balance. As of April 2009, Simpedes paid 2-4%
interest, depending upon the size of account.
BRI’s premier micro loan product is Kupedes (Kredit Umum Pedesaan), which provides loans of up to the to the Rp100
million through the Unit Desa network. Kupedes’ clients are economically productive individuals who fall into the
lower to lower middle income bracket. Typically, these clients are small traders who live and operate businesses in
rural and urban areas close to BRI units. These clients take out loans to finance working capital, fixed assets and other
purposes. During the past 5 years, the total value of loans has grown by an average of more than 22% per year. By
way of comparison, the total value of small loans has grown by an average of 22%; medium-scale loans by 40%; and
corporate loans by almost 30%. Kupedes’ interest rates are currently around 1½% per month. In general, loans are
made on the basis of the client’s income and perceived character, not collateral. Other features include convenient
location of the banks units; simple, quick procedures; flexible terms; and access to larger loans for borrowers who
repay on time.
Sources: BRI Annual Report for 2007; http://www.bwtp.org/arcm/; and field interviews.
20
See, for example, Schwarz (1994), p. 253-4, and p. 60 and Haggard (2000), p. 186.
21
See http://www.bwtp.org/arcm/
22
See http://rabobank.com/content/about_us/rabobank_foundation/
23
For other information on NGOs operating in financial services, see http://www.bwtp.org/arcm/.
35
Chapter 2
2.6 Sharia Finance and Banking
Sharia finance refers to a system of finance based on accepted interpretations of Islamic law. At present,
service providers who operate according to this system command a very small market share (roughly
2-3%). However, this market share is much higher for MSMEs (about 10%)24 and it is growing very rapidly.
On the basis of available information, it is difficult to determine if this expansion is the result of existing
users of financial services provided by other institutions switching their allegiance to sharia banking, or if
new customers are being attracted to financial services for the first time. Both possibilities seem equally
plausible in the local context. However, the important point is that a very popular, new service is on offer. At
a minimum, this puts pressure on existing providers to improve service and reduce prices.
In recent years, Sharia products have expanded to cover all the major financial services and are now
offered by to a range of different service providers. The service providers offering sharia products include
conventional bank, BPRs and cooperatives, with these products including stocks; bonds; mutual funds; and
insurance. Even the state-owned pawnbroker has a Sharia arm. Furthermore, the first commercial bank
Sharia in Indonesia, Bank Muamalat, is a leading innovator in the outreach of financial services (see Box 5).
For its part, Bank Indonesia has been supporting the market development of sharia service providers and
their products through its ‘Accelerated Islamic Banking Development Program’, including its ‘iB Campaign
2008’.25
By the end of 2008, there were five commercial banks that operated entirely according to Sharia principles
and 27 conventional banks that operated more or less self-contained Sharia business units (Table 5). Adding
in rural banks and their service outlets, the total number of Sharia service outlets reached 2,658 by the end
of 2007, the representing a growth of approximately 600% in three years. The geographical area in which
these service providers operate has also increased dramatically in the same time period, extending to an
additional 70 regencies and municipalities in 31 provinces. Their outreach has been extended to more than
70 regencies and municipalities in 31 provinces. Amongst these institutions, non-performing loans account
for a very respectable 4% of the total portfolio at the end of 2007, although the proportion appears to be
increasing (Chart 9.6 in Bank Indonesia 2007).
Table 5.
Sharia Banking Offices (number of banks, etc.)
Sharia Commercial Banks (SCB)
Sharia Business Units (SBU)
2003
2004
2005
2006
2007
2008
2
3
3
3
3
5
8
15
19
20
26
27
253
355
458
531
597
790
Sharia Rural Banks
84
88
92
105
114
131
Sharia Service Outlets
…
…
…
456
1,195
2,658
Total SCB & SBU network
For the purposes of this report, it is important to note that these institutions cater mainly to the lower
end of the market, offering their services to small businesses and lower to middle income individuals.
The proportion of the total value of loans provided by institutions of the this sort to MSMEs amount to
more than 70%, while the vast majority (almost 98%) of their customer accounts are held by individuals
(Bank Indonesia, 2007, p. 135 and 137). As for Sharia rural banks, which offer services almost exclusively
to lower-income groups, their numbers have been increasing steadily with their funds mobilization and
36
24
See p.13 of Bank Indonesia (2005).
25
This is essentially a public information and training program. See Chapter 9 of Bank Indonesia (2007), p. 146-147.
Chapter 2
disbursement expanding at around 35% during 2007 (Tables 5 and 6). Their financing-to-deposit ratio is
very high, at over 120%, while their proportion of non-performing loans—which had been around 10% in
2005—is now down to 8% (Table 6). Despite this rapid expansion in lending, their level of non-performing
loans compares unfavourably with that of the conventional banks, which as mentioned previously is around
4%.
Table 6.
Sharia Rural Bank Performance Indicators
2005
2006
2007
chng 2007
Total Assets (Rp, billions)
605.0
906.3
1207.2
33.2%
Depositor Funds (Rp, billions)
353.6
530.2
711.3
34.2%
Financing Disbursed (Rp, billions)
435.9
636.3
879.7
38.3%
123.3%
120.0%
123.7%
3.7%
10.6%
8.3%
8.0%
-0.3%
9.5%
7.1%
6.6%
-0.5%
Ratios:
Financing/Deposits
Non-performing financing (gross)
Non-performing financing (net)
The Sharia banking sector is currently expanding very rapidly. It is difficult to conceive to policy prescriptions
that could further accelerate this expansion in a healthy way. Indeed, there are some indications that the
expansion is currently too rapid to be sustained and may be creating potential problems for the future. First,
the rapid gains in market share may be masking problems that will only come to light when the growth in
assets and liabilities eventually stabilizes closer to industry averages. In particular, relatively high NPLs is
bothersome, especially since some loan restructuring was necessary26 to bring them down to current levels
.27 The second risk is that the current political popularity of Sharia financing will become an obstruction for
strong, effective regulation and supervision.28 Bank Indonesia’s efforts to date (see Bank Indonesia 2007, p.
138-139) mainly emphasize industry promotion and expansion, with virtually no reference to prudential
compliance.
26
See Bank Indonesia 2007, p. 137.
27
See Bank Indonesia 2007, p. 137.
28
For a Malaysian view on the regulatory situation of Islamic financial markets in the Persian Gulf region, see http://www.reuters.
com/article/IslamicBankingandFinance09/idUSTRE53EFE20090416
37
Chapter 2
Box 5.
Wider Access to Financial Services through Sharia Mobile Banking
Bank Muamalat is Indonesia’s first Sharia bank, established in 1992. It is a leading innovator in development of
financial products that reach out to poor, remote regions through the use of mobile banking. In January 2005,
it launched Shar-e, a full banking services card that Bank Muamalat promotes as “the first investment card”. It is
unique in that the card has no limit in its wallet size; it can be used as a savings account; and it functions as an ATM
and debit card. Essentially, it is a “virtual bank account”.
By the end of 2007, the number of Shar-e card holders was 1.2 million, with average deposit per customer of
approximately Rp 700,000 (US$70). In 2007, the bank announced that it planned to attract an additional 700,000
customers in 2008. Fifty percent of Shar-e card holders are active customers who on average perform 15 transactions
per month. Any single transaction involving an amount in excess of Rp90 million has to be reported to BI by the
customer. Apart from this, however, there is no limit on transactions per day.
A potential Shar-e customer can open an account by going to a post office or a Shar-e agent to complete a
KYC form and present identification. The potential customer must pay an opening fee of Rp 25,000 and make a
minimum initial deposit of Rp 100,000. The Shar-e card holder needs to activate his or her account by contacting
the Muamalat call center, with activation permitting the card to be used in ATMs. Shar-e card holders are expected
to conduct transactions via phone banking, post offices, retail agents, or ATMs. It is very rare for them to have to go
to a Bank Muamalat branch.
In 2007, Bank Muamalat worked with 1,800 post offices throughout the country. In 2007, it announced plans to add
500 more post offices in the following year. In total, there are 5,000 post offices across Indonesia, so the bank still
has significant potential to expand its network in remote places. The bank has entered into an exclusive deal with
the post office that gives it a monopoly over the provision of sharia-based services through the post office system.
In addition to providing revenue to the post office, Bank Muamalat also provides computer terminals in each post
office and trains postal workers in banking transactions.
The Shar-e card can be used at any of the five major ATM networks in the country, including BCA’s Prima network,
which included approximately 6,000 ATM units by the end of 2008, accounting for approximately 30% of all ATMs in
Indonesia (Table 3). For most transactions conducted through an ATM network, such as purchasing or bill payment,
the card holder is charged between Rp2,000-4,000 (20-40 US cents). Phone banking facilities are also provided,
with these facilities allowing the cardholder to activate the account, check the balance, and transfer funds to other
card holders.
Of the total number of Shar-e card holders, 30% live in rural areas and 70% in cities. To promote Shar-e and educate
its customers, Bank Muamalat uses TV ads and billboards. Also, representatives visit Islamic schools to promote the
use of the card. It’s notable that many Shar-e card holders are not Moslems, with a large number of card holders in
Papua and North Sulawesi, where non-Muslim ethnic groups predominates. Most users state that the convenience
of the product to and the access it provides to many ATM networks is their main reason for using Shar-e.
Bank Muamalat plans to extend its networks beyond the post office system to include other outlets such as the
Fuji Image Plaza, a chain of film processing kiosks for the facilitation of Shar-e transactions. In addition, Shar-e card
holders have access to 2000 ATMs in Malaysia. There have been discussions on the provision of services to facilitate
remittances from workers in Malaysia, Hong Kong and Saudi Arabia.
Shar-e card is probably one of most successful examples of Indonesian branchless banking to date. However,
Bank Muamalat appears to be cautious about extending and expanding mobile banking services to facilitate
transactions. At present, mobile banking can be used to check balances, but not to conduct other transactions,
although there has been some discussion about extending the service to facilitate deposits.
Source: IFC, Jakarta.
38
Chapter 2
2.7 Non-Bank Financial Institutions (NBFIs)29
NBFIs have not yet played a significant role in enhancing access to financial services amongst lower income
earners. Indonesia’s non-bank financial sector is small, comprising approximately 20% of the total financial
system. This is considerably lower proportion in relative terms than that found in several other large
developing countries and many countries in the East Asia region (World Bank (2006b), and Figure 4). At
the present time, government policy aims at eliminating smaller, weaker finance and insurance companies
by mandating minimum levels of the capital and capital adequacy. As can be seen from experience with
commercial banks, these mandated minimum levels are not necessarily inconsistent with the provision of
services to poorer members of society. However, it does create effective entry barriers, which may limit
access. Until this phase passes, most of Indonesia’s NBFI sector are likely to continue to offer products that
are mainly relevant for larger corporates and the better-off segments of society. The important exceptions
to this rule involves servicing providers offering leasing and micro-insurance products.
The leasing/multi-finance industry is important for some MSMEs, particularly those involved in fields such
as construction. The main distinguishing advantages for the client are simple collateral arrangements;
availability of medium- to long-term financing to purchase equipment; more financing (relative to cost of
the equipment) than provided by banks; flexible contracting arrangements; and tax incentives. For the multifinance company, collateral is easier to repossess, despite being movable;30 capital requirements are lower;
and there is less supervision than for banks. Presently, the Indonesian leasing industry is heavily dependent
upon banks for its financing, and many finance companies have joint financing arrangement with banks.
While leasing firms do reach the lower income segments through products such as motorcycle financing,
A number of significant initiatives have been made in terms of the provision of microinsurance products.31
In 2004, GTZ engaged in a public-private partnership with German insurer Allianz to develop a range of
micro-insurance products, with this program being supported by the United Nations Development Program
(UNDP). The partners aimed to develop an a range of demand-based private micro-insurance products
on a model basis. The resulting study concluded that the legal framework for insurance needed to be
strengthened. It also concluded that the capacity of insurance agents needed developing and that market
education was necessary.32 As a result of this program, a regulation was issued to allow BPRs to sell insurance
as agents of established insurers. Furthermore, a credit life insurance with additional benefits covering the
loan client, named ‘Payung Keluarga’ (Family Umbrella), was developed.
After one year of pilot testing, more than 30,000 policies were sold with the number of active policyholders
exceeding 15,000. GTZ and Allianz were satisfied that micro-insurance could be a sustainable, commercially
viable business for the insurers. They identified the prerequisites for sustainability as: i) sound product
design; ii) a conservative premium calculation; iii) a clear definition of benefits; and iv) efficient operations.
ProFI continues to monitor regulatory developments and to lobby for a conducive regulatory framework for
micro-insurance in Indonesia.
29
This Section draws heavily upon World Bank (2006b), using that report’s definition of NBFIs, which excludes MFIs.
30
Technological advances have helped, too. GPS monitors can now be secured inside the equipment, which allows the leasing
company to monitor continuously the exact geographical location of the equipment.
31
This paragraph is drawn from GTZ (2007).
32
See http://www.microfinancegateway.org/content/article/detail/36433
39
Chapter 2
Since its establishment, Allianz’s micro-insurance business has grown rapidly. In 2008, the number of policies
increased by 400% compared to the previous year, to backspace to more than 178,000. By 2008, Allianz had
entered into cooperative agreements with 21 MFIs, including four cooperatives, eleven social foundations,
four rural banks and two commercial banks. The main regions in which these products are offered include
Sumatra; Jakarta; West and Central Java; Bali; Sulawesi; and Sumba. By 2009, Allianz expects to attract at
least 200,000 new policyholders.33
In a related development, Munich Re-insurance Company (the world’s largest re-insurance company) has
teamed up with Indonesian insurer Asuransi Wahana Tata to offer innovative micro-insurance products
called ‘Alert 1 Manggarai Protection Card‘, which are index-based flood insurance policies available cheaply
and easily to low income families in Jakarta.34 The new product was initiated through a feasibility study
between Munich Re (as partner and sole reinsurer), Asuransi Wahana Tata and GTZ. In mid-2007, a pilot
study was undertaken with the product being made available in 23 sub-districts of Jakarta.
2.8 Financial Services in Support of Remittances
As described in Chapter 5, trade in labor services is potentially very important in the alleviation of poverty.
On the international side, large numbers of Indonesians officially work overseas (Tenaga Kerja Indonesia,
TKI; Table 7), with the total estimated at about 4.3 million (World Bank, 2008). This represents about 4% of
Indonesia’s total work force, and many more work illegally. These workers send considerable amounts of
money home (that is, remittances), making Indonesia the second largest (after the Philippines) remittance
receiver in East Asia and the Pacific. These remittances have a direct impact on the reduction of poverty in
Indonesia insofar as they boost local consumption and investment. The extent of the impact is, however, in
doubt. World Bank (2008a) argues that much of remittances are spent on repaying debt, and on consumption
and luxury goods.
Table 7.
Official Overseas Worker Placement, 2004
Region/Country of Placement
Formal
Male
Informal
Female
Male
Total
Female
Asia-Pacific
68,022
47,284
497
45,167
160,970
o/w Malaysia
62,254
43,179
404
21,338
127,175
Hong Kong
-
-
2
14,181
14,183
Singapore
8
30
25
9,068
9,131
Brunei Darussalam
2,481
3,458
34
530
6,503
609
312
14,930
203,848
219,699
Middle East & Africa
o/w Saudi Arabia
432
191
13,724
189,099
203,446
29
9
1,206
14,745
15,989
Europe & America
17
3
-
1
21
Total
68,648
47,599
15,427
249,016
380,690
Kuwait
Source: Ministry of Manpower and Transmigration, cited in Manning and Cronin (2008)
40
33
See www.allianz.co.id.
34
The product offers cheap and easily understood risk protection, specially designed for the local population. There is no lengthy
policy document; rather, the insured receives a simple protection card. One card costs Rp50,000 and guarantees a one-time
payment of Rp250,000 should the waters rise above 950cm (Alert 1) at the Manggarai Water Gate in Jakarta.
Chapter 2
Despite the large number of Indonesian workers abroad, the total value of international remittances from
these workers to Indonesia is small compared to many other comparable countries in the region and
elsewhere (see Figure 12). Indeed, in proportion to national GDP, Indonesia does not even come close
to being in the top 20 recipients of overseas remittances according to recent indicators. This raises the
question of whether Indonesia’s financial infrastructure is sufficiently developed to support transfers from
abroad and whether there are barriers that might be removed through policy changes. This Section looks
at these particular issues, which are essentially a subset of the broader issues of access to financial services
for migrant workers (see Chapter 5).
Figure 12.
Top 20 Developing-country Recipients of Remittances, 2005
(In billions of US$)
25
Billions of US$
20
15
10
5
In
d
M ia
Ph ex
ili ico
pp
in
e
Ch s
Le ina
ba
M n on
or
o
Ro cco
m
an
i
Eg a
Pa y p t
Ba kis
n g ta n
la
d
Co es
lo h
El m
Sa bi
D
lv a
om
ad
in
o
ic
an B r
Re raz
pu i l
bl
ic
Ru
In s
do sia
ne
s
Bo ia
s
Ho n
nd ia
ur
as
Pe
A l ru
ba
ni
a
0
(As per cent of GDP)
35
30
As % of GDP
25
20
15
10
5
M
ol
d
Le ov
ba a
Ho no
nd n
u
Bo ras
Ta sni
jik a
El ist
Sa an
lv
a
Al dor
b
Ph an
ili ia
Do
p
m N pin
in ic e
ic ar s
an ag
Re ua
pu
M bli
or c
o
Ye cco
m
Ar en
m
en
U ia
Ba gan
ng d
la a
d
Ge esh
Az org
er ia
ba
Ro ijan
m
an
i
Eg a
y
Bu pt
(In lga
do ria
ne
sia
)
0
Source: UNCTAD Handbook of Statistics, 2006-07, cited in Manning and Cronin (2008)
In its examination of international remittances, this report relies upon a recent World Bank report, which,
amongst other issues, explores and investigates financial services available for Indonesians working in
Malaysia (World Bank, (June 2008a)). As noted in Table 7, Malaysia employs the second largest number
of Indonesians working abroad. The issues and policy conclusions for Malaysia are likely to apply for
41
Chapter 2
Indonesians working in other major destinations, such as the Middle East and elsewhere in Asia.
To briefly summarise the findings of this report, the Malaysian-Indonesian study argues that the formal
financial sector in its current state does not meet the need for financial services of the migrant worker.
Amongst other points, the services provided by the formal financial sector are uncompetitive in terms of
accessibility and the range of products offered. The formal sector little little financial literacy training and few
pre-departure credit products, especially for illegal workers. This poor service accounts for the large number
of informal agents, many of whom exploit migrant workers for their own purposes. The report concludes (p.
49) that migrants are often trapped in cycles of continuous migration as their families become dependent
upon the remittances. Although these abuses at home dilute the value of having a family member working
abroad, it is hard to imagine that the family is financially worse off as a result of the family member working
abroad.
Indonesian bankers claim that credit risk is the biggest barrier in the face of extending services, particularly
if the worker is overseas commercial banks offering personal loans might consider making a loan if there
was a co-signer or guarantor, probably a family member in the home village, in Indonesia35. However, in
these cases, the co-signer’s creditworthiness is the principal consideration, not the potential income flow
from the migrant worker. In discussing the provision of remittance services, a major Indonesian bank with
representative offices in Hong Kong and Kuala Lumpur said that the bank values the remittance business of
migrant workers because of the fee income. With many of the remittance services offered by such banks, the
migrant worker can place cash with a representative office of overseas for it to be immediately delivered to
one of their many branches in Indonesia without the recipient needing to hold an account with that bank.
That bank’s staff believe that the remittance services they offer are very competitively priced, at least in
Hong Kong. For its part, Bank BRI reports large incoming and outgoing remittance transfers, with the total
value of these remittances increasing by more than 65% in 2007 compared to the previous year.36
In terms of the provision of services to domestic migrant workers, studies have noted that there is a high
level of flexibility in Indonesia’s labor markets,37 with a high degree of inter-island and rural-urban mobility.
Data on the volume of domestic transfers are difficult to track down. 38 however, the importance of cheap,
convenient methods for transferring money—perhaps in relatively small amounts—from workers in the
cities to their families back in the villages is self-evident.
This study shows that a number of well designed products that facilitate domestic remittances are available
(Table 8). If the sender values convenience and speed, Western Union is the best option, particularly as
it has more outlets than any other service provider in Indonesia. Indeed, its network is roughly twice as
large as that of BRI. However, Western Union is expensive for small transfers, with the cost of these transfers
amounting to more than 15% of the total value of the remittance for amounts less than Rp 750,000. The cost
drops off sharply as the size of transfer rises, although these costs are still high. For example, to transfer the
sum of Rp 37 million, the cost of a transfer amounts to 5% of the total value of the remittance.
35
42
Field reports indicate that BRI is conducting a pilot project for credit to migrant workers, to be co-signed by family members.
Details could not be confirmed with BRI, but the development sounds encouraging and further collaboration could be explored
by development partners with special interests in this area.
36
See Bank BRI Annual Report for 2007, p. 62.
37
See, for example, Manning (2000).
38
Work related to this area includes a study on internal migration, pending from Australian National University.
Chapter 2
Table 8.
Cost of Domestic Remittances, April 2009
Service Provider
Cost
Notes
BRI (to BRI)
Free within Jabotabek.
Excludes Unit Desas in very remote locations (i.e. offline).
Rp2,000 for <5,000,000.
Cost rises to Rp20,000 for Unit Desas not on-line.
Rp3,000 for >5,000,000.
Likely takes 3 days or more to reach off-line Unit
Desa.
Small additional charge if above
Rp 50,000,000.
Receiver must have a BRI account.
BRI (to other bank)
Rp25,000 if <12 PM.
Cost rises to Rp100,000, if 2-3 PM.
Money is transferred through the regular bank
clearing system.
Western Union
Rp112,500 for < Rp750,000.
Instantaneous delivery to all 10,000 locations in
Indonesia.
Costs rise in 18 steps, to
Rp6,000 stamp duty paid by receiver if receiving
outlet is physically located in a bank.
Rp1,750,000 for transfers
from Rp37,500,001
to Rp41,250,000.
Money Gram
Post Office
Larger amounts can be sent, but costs are not
published locally.
Does not remit domestically.
Rp11,000 for <200,000.
Sender must return subsequently, if sending from a
small post office.
Cost rises to Rp21,000 if
Cost rises by Rp2,000 to 12,000 for ‘Instant’ service,
which is only available in large post offices.
Rp10 -25 million.
Recipient may live some distance from the local post
office.
For regular remittances, special arrangements can be
made for local delivery from large offices, but courier
requires a ‘tip’.
Money order is electronically, not by regular post.
Source: World Bank field research.
There are other very cheap, fast options available when the recipient is the holder of a BRI account39 or if the
recipient lives near a large post office. BRI’s cost is extremely low, representing only around 0.5% of the total
value of the remittance. In addition, if the Unit Desa branch is on-line, service is fast. The service available
through the post office is also cheap, although not as cheap as that offered by BRI (see Table 8).
If the recipient lives in a very remote location, the options are services available through BRI’s Unit Desa or
the post office, if the recipient does not have a bank account. Financial costs are still low, although the time
taken for the remittance to become available to the recipient increases to 3 days or more. In addition, there
may be additional, informal delivery charges (Table 8).
39
BRI offers transmission to branches of other banks, still at very low cost (roughly ½ of 1%) in the mornings. However, the cost
rises sharply in the course of the clearing day (see Table 8).
43
Chapter 2
2.9 Summary of Policy Issues, by Area
This section summarizes the policy issues that are raised by this Chapter. Policy recommendations are
provided in Chapter 6.
Analytics of the Issue: The analytical evidence of this Chapter indicates that on a provincial basis, per
capita income and population density are strongly and positively correlated with the availability of services
provided by Indonesia’s commercial banking system. The only notable exceptions are Jakarta,which is
‘over-serviced’ and East Kalimantan, which is large, resource rich, sparsely populated and is relatively ‘underserviced’. The availability of financial services in all other provinces is more or less positively correlated
with levels of per capita income. In order to identify ‘under-serviced’ regions, it is necessary to extend the
examination beyond the provincial level to the district and subdistrict level. This issue is taken up in the next
Chapter.
Conventional Commercial Banks: Indonesia’s commercial banks are opportunistic, profit-oriented
institutions that will move aggressively into new, commercially viable markets. The evidence of this Chapter
indicates that they have quite a wide regional reach, although the range and extent of services they offer to
the poorer strata of Indonesian society is limited. Virtually all of the conventional commercial banks target
the more lucrative middle income and higher segments in preference to the lower income segments. The
implications of this are discussed in the next Chapter.
However, the commercial banks have two important roles to play in extending access to financial services.
First, banks have the financial and other resources to develop and introduce new technologies to deliver
relatively high-cost services to low-income clients in remote areas. Recent technological advances, such as
mobile banking, discussed later in this report, have interesting potentialities in this regard, with technology
having the potential to reduce unit costs to the point where services can be extended at affordable prices
to the poorer strata of society, even in remote regions of the country. Second, the banks put competitive
pressures on the other service providers, which holds down prices and improves the quality of services. This
competitive pressure also facilitates the expansion of financial services.
BRI’s Unit Desa System: This is Indonesia’s premier micro-finance provider, and its client base is among
the largest in the world. Nonetheless, questions remain as to whether the reach of the Unit Desa system is
sufficient to service lower income clients. To extend its current reach—at least until lower-cost technologies
are available—a policy decision on the part of the bank’s management and its regarding current fee
structures and lending policies may be required. Higher interest rates on its major lending products to micro
borrowers may be needed make loans to lower income clients more commercially attractive. Alternatively,
might place additional fees for the administration of small loans, with the size of the fee roughly proportional
to the additional costs of supervising small loans.
People’s Credit Banks (BPRs): These institutions have significant potential to extend access to financial
services to lower income households and MSMEs. In large part, this is true because they are relatively lowcost operations and because they have better local knowledge than regular commercial banks. To support
the extension of financial services through these institutions, however, Bank Indonesia must continue to
take measures to strengthen the regulatory environment and to improve the capacity of these institutions
in order to protect the public against unviable banks.
In this regard, recent developments have been encouraging. For example, the 15 BPR failures since 2004
have been handled without any marked loss of public confidence. Another encouraging development is
that Bank Indonesia appears to be considering changing its current regulatory framework according to
44
Chapter 2
which all BPR are governed by the same regulations, regardless of size, to a new approach in which the BPR
may be divided into three categories, depending on their size. This new approach appears to be promising
and is discussed with further suggestions in Chapter 5.
Other Micro Finance Institutions: a new Micro-Finance Law has been under discussion and in draft for many
years. The finalisation of this legislation and its eventual implementation is a critical element for the further
development of these institutions. Also, there are several government programs that offer subsidized credit
to special groups in the Micro Finance segment, and there is significant room for improvement in many of
these programs.
Regarding other issues this sub-sector, NGOs offer an important range of services to clients in the lowest
income brackets, often in the country’s most remote regions. Since Indonesia’s shift to democracy, there has
been considerable expansion of NGO services. However, further development is certainly possible. These
possibilities are explored in Chapter 4, together with measures that might be implemented to strengthen
cooperatives and pawnshops.
Sharia Banking: This type of service provider, although still serving a small market segment, is very important
in terms of expanding access to financial services in Indonesia. Sharia banking has been expanding rapidly
for the past decade or so, with Sharia rural banks offering bed services almost exclusively to the poor. In
addition, a major Sharia bank is a market leader in terms of implementing technological innovations that
extend financial services to the poor and to residents of remote areas.
The key issue for policymakers is how to continue progress at a sustainable pace. Two issues arise in this
context. First, rapid expansion may be masking serious problems, such as the relatively high rate of nonperforming loans, the effect of which may become apparent only after the growth in assets and liabilities
eventually stabilize at levels closer to industry averages. And second, the current political popularity of
Sharia financing might undermine strong, effective regulation and supervision.
Non-bank Financial Institutions: With some notable exceptions, particularly in terms of leasing and microinsurance products, the majority of NBFIs currently offer products of limited relevance to poor households
and MSMEs. Creating new, more relevant product lines will require innovative thinking. There are some
good examples of such innovative thinking, involving the development of products such as micro-flood
insurance and micro-life insurance. Public-private partnerships, like that established between Alliance
AG and bank Indonesia, and supported by GTZ and the UNDP, may help foster the development of such
innovative thinking. However, this must be supported by a stronger legal framework; capacity development
for insurance agents; and market education.
Remittances: This report finds no evidence of any serious problems in the area of financial services that
facilitate remittance payments. There are several good options available, depending upon the circumstances
and interests of sender and receiver. Even for the most remote locations, there are good, cheap options
whose only disadvantage compared to services are available in major city centres is a delay of a few days
or more. Issues concerning international remittances are discussed at the end of Chapter 5, together with
more general issues related to migrant workers and the financial services required by and available to them.
45
46
Chapter 3
Demand-side Aspects: What do
People Want?
3.1 Introduction and Overview
The entire analysis in this Chapter is based on two nationally representative surveys on Access to Finance
(A2F) in Indonesia (see Box 7). The results of the first large survey, which is of households, is summarized
in Box 8, while its technical details, including a discussion of the differences between a household survey
and an individual survey and of the various merits of each, are described in Annex B. The second survey, of
village heads, is much shorter and complements the material found in Chapter 2.
The household survey was designed with several important goals in mind. First, it was intended to facilitate
the identification and understanding of Indonesian households’ access to financial services. This includes
a discussion of access facilitated through all institutional sources of financial services, including banks,
non-bank finance companies, micro-finance institutions, insurance companies, informal money lenders,
community based welfare schemes and savings associations, family and friends as well as all types of access.
On the savings side, this includes everything from bank accounts to savings in community welfare schemes.
On the borrowing side, it includes everything from bank loans to loans provided by moneylenders.
A second goal of the survey is to identify existing constraints to accessing financial services. On the demandside, these are income barriers, cost, financial literacy and so forth. Innovative public-private partnerships,
possibly with the involvement of development partners, are required to identify the major, on-going supplyside constraints and to find solutions that can be pilot-tested in the market.
A third goal is to determine the extent of the potential, unmet demand for financial services. Specifically,
this means measuring the scope of unmet demand for certain financial products, including savings, loans,
47
Chapter 3
Demand-side Aspects; What do People Want?
insurance, retirement plans, etc, that households would like financial institutions to offer. A significant
proportion of the questions in the survey are intended to explore this and related issues, including pricing
issues.
Finally, looking further ahead, another goal is to integrate the A2F Survey with existing household level
socio-economic surveys in Indonesia, such as SUSENAS. The end result would be a continuous stream
of annual data on financial access in Indonesia, which would allow researchers to track financial access
indicators for the country on an on-going basis. By doing this, access to finance issues and their links with
poverty alleviation could be monitored on an ongoing basis and form the foundation for policy action.
Box 6.
What Do Household Surveys in Other Countries Tell Us?
Access to financial services is increasingly recognized around the world as a critically important element in poverty
alleviation. Banking and financial systems in poor countries are typically underdeveloped, often catering mainly
to large firms and wealthy individuals. This skewed distribution of financial services hinders the growth and
development of smaller firms and poorer households. Consequently, increasing access to financial services is a
policy goal being advocated by development institutions worldwide.
A necessary step towards improving financial access for households is to understand the constraints they currently
face in accessing formal financial services. Household surveys are a useful tool in addressing this issue. Such
surveys have been conducted by the World Bank in several other countries, including Brazil, Colombia, India,
Mexico, Nigeria and Pakistan.
Data from these surveys indicate that banking services vary widely across countries. Population per bank branch
ranges from 9,331 in Brazil to 14,888 in India, whereas the area covered per branch ranges from 470 square
kilometres in Brazil to 44 square kilometres in India. Among survey respondents, 48% have bank accounts in India,
43% in Brazil, 41% in Colombia, 25% in Mexico, and only 13% in Pakistan. (By way of comparison, almost 90% of
households in the United States have bank accounts). A majority of survey respondents identify high bank fees as
the main constraint to accessing financial services. Other factors, such as lack of documentation and convenient
bank location, are also hurdles to access.
As for the financial characteristics of survey participants, more than 50% of respondents, on average, report having
no financial savings of any kind, while about 30% report using informal saving mechanisms, such as community
savings associations. Among people who do use formal financial services, bank accounts are dominant. Around
the world, surveys indicate that proportion of those who use formal financial services and to have bank accounts
is 96% in Mexico; 95% in Brazil; 90% in India; and 85% in Colombia. Other formal institutions, such as Cooperatives
and Post Offices, are much less popular.
On the credit side, loan rejection rates are quite high, except for Pakistan. Out of all loan applicants, 10% are
rejected in Pakistan, compared with 32% in Brazil, 26% in Colombia, 20% in Mexico, and an overwhelming 80% in
India. According to applicants’ perceptions, 56% of respondents in Brazil feel that commercial banks reject their
loan request due to a lack of earnings or lack of steady income. By contrast, 44% in Colombia and 41% in Mexico
believe that it is the lack of loan guarantees or collateral.
These data collection efforts at the household level are a useful step towards identifying key constraints faced by
households in accessing financial services, and designing policies to reduce those constraints.
Source: Various World Bank reports.
48
Chapter 3
Box 7.
What Do Other Surveys for Indonesia Tell Us?
Several other surveys in Indonesia address issues more or less related to access to finance.
BRI’s 2003 MASS Survey (see Box 2) is the most extensive alternative survey on access to financial services in
Indonesia. It estimates that less than 50% of rural households have access to banking services. It also provides
other important details that are summarized in Box 2.
Other studies on this topic are more specialized, with a significant proportion addressing MSMEs’ access to credit.
These surveys tend to yield information on access to financial services as a by-product of other analysis. For
example, a 2003 study by the Banking With The Poor network (see http://www.bwtp.org/arcm/Indonesia/) cites
several secondary sources indicate that a majority of rural households do not have access to semi-formal or formal
institutions as a source of funds. The same study asserts that less than 25% of microenterprises have access to credit
from a formal institution.
The Bank Indonesia’s 2005 survey of SMEs showed that approximately 71% of micro business capital is raised
through self-financing, while 29% is borrowed from friends, business partners and families. More details on BI’s
survey are provided in Chapter 5.
The World Bank’s Rural Investment Climate Assessment (RICA; 2006) devoted an entire chapter to constraints
on accessing credit by rural non-farm enterprises. It found that access to credit was the second most important
constraint for the 15.7 million micro and small enterprises in rural Indonesia and demonstrated that access to
credit is a far bigger constraint the cost of credit. It recommends against subsidies to make borrowing cheaper,
but rather encourages incentives for extending the reach of the commercial banking sector to connect with rural
household enterprises. The RICA survey indicated that borrowers believed their major constraints to be: collateral
requirements; the perceived complexity and cost of application procedures; and the legal standing of the enterprise
in question, particularly given the high costs of registration of a business to fulfil the requirements set by formal
lending institutions. For their part, banks feel constrained by the cost of collecting the information that allows them
to identify which micro and small enterprises are good credit risks.
Box 8.
The sample selection methodology was designed to ensure national representation. Multi-stage random sampling
was employed with population-weighted selection occurring first at the province level, next at the sub-province
(Kabupaten/Kota) level, and finally at the village (RW) level. Overall, four provinces on Java and six provinces outside
Java were selected. The provinces in Java included Banten, West Java, Central Java, East Java, while provinces
outside Java included Aceh, Jambi, West Kalimantan, North Sulawesi, Maluku, and Nusa Tenggara Barat.
Out of the four selected provinces in Java, 16 population-weighted sub-provinces were chosen at random. Within
each of these 16 sub-provinces, four population-weighted villages (RW) were chosen at random, resulting in a total
sample of 64 villages. The selection was stratified according to existing between urban and rural, with the final
sample containing 34 urban villages and 30 rural villages.
Outside Java, one population-weighted province was chosen within each six regions, these being 1) Northern
Sumatra, 2) Southern Sumatra, 3) Bali-Nusa Tenggara, 4) Kalimantan, 5) Sulawesi, and 6) Maluku-Papua. Next, within
each of these provinces, two population-weighted sub-provinces were chosen at random. Finally, within each of
these 12 sub-provinces, four population-weighted villages (RW) were chosen at random, resulting in a sample of 48
villages. The urban/rural stratification resulted in a final sample of 18 urban villages and 30 rural villages, with the
predominance of rural villages in the explained by the overwhelmingly rural nature of these areas outside Java. .
Within each of the 112 villages in the survey, 30 households were randomly selected in each village for survey
interviews, resulting in a final sample set of 3,360 survey household respondents (1,920 on Java and 1,440 off Java
closely equal to 60:40 ratios).
An outline of the characteristics of the respondents is provided in Annex B in the section entitled “Some
Characteristics of Access to Finance Sample Respondents”.
49
Chapter 3
Access to Finance Province Distribution Map (2007)
Given the multiple goals of the survey, the survey questionnaire was quite lengthy and detailed, consisting
of almost 50 pages. In addition to information related to access to financial services, the survey sought to
determine information on household demographics, household financial preferences and special modules
on financial literacy, household enterprises and households of migrant workers. As mentioned, there is
also the much smaller (8 page) village head survey, which was designed to capture some key supply side
characteristics of every sample village, such as available infrastructure and number of financial service
providers. The survey data is available on the World Bank’s Indonesia Office website.
3.2 Survey Results: Supply of Financial Services
As a complement to the preceding Chapter, this Sub-Section looks at the supply of financial services as
indicated by the Access to Finance Survey. Results are based upon the survey of village heads, as mentioned
above.
In terms of the supply of financial services in Indonesia (Figure 13), Bank Rakyat Indonesia (BRI) clearly has
the widest coverage in the country, as stated previously in Chapter 2. Of the 112 villages in the survey, 29
have at least one commercial bank branch. Of these, 23 are BRI Unit Desas. Indeed, BRI has branches in areas
where institutions such as credit cooperatives and pawnshops are absent. Of individuals with bank accounts,
40% do business with BRI. The private banks and the non-BRI state banks are also well-represented at the
village level. In total, these banks account for more than 50% of accounts, compared with about 45% for BRI
(Figure 13).
50
Chapter 3
Figure 13.
Bank Account Distribution, by Type of Bank
1,0
0,2
2,8
20,5
44,5
BRI Unit
State Bank non BRI Unit
Private Bank
BPR
Syariah Bank
Other
31,0
The rate of coverage at the village level (29 out of 112 villages) is not particularly impressive. However,
follow-up questions indicated that 109 of the 112 villages used commercial bank services, even if the
physical infrastructure was not present in their village. Also, the vast majority of villages believe that bank
branches are well-located with all but 6% of respondents reporting that bank branches are conveniently or
very conveniently located (Figure 14).
Figure 14.
6.1%
10.4%
83.5%
Very Convenient
Convenient
Inconvenient
Not surprisingly, physical access varies between rural and urban areas (Figure 15);. As might be expected,
more sparsely populated areas are served by fewer bank outlets. In rural areas, the average travel time to the
nearest branch is more than 25 minutes for almost 35% of the respondents, while this was true of less than
12% of respondents in urban areas. Indeed, for the respondents in urban areas, a bank branch is located
within 10 minutes traveling time for 62%, while this was true for only 31% of respondents in rural areas.
51
Chapter 3
Figure 15.
Travel Time to Nearest Bank Branch
Time Average for Traveling to
Nearest Bank Branch
Percent
Time Average for Traveling to
Nearest Bank Branch
Percent
Rural
40
Urban
60
30
40
20
20
10
0
<= 10 min 11-15 min
16-25 min
> 25 min
0
<= 10 min 11-15 min
16-25 min
> 25 min
Looking in more detail at the issue of travel to bank branches (see Table 9), it can be seen that public transport
is the most common method of travel, followed by bike/motorcycle and by foot, with the use of a personal
car being quite infrequent. There is relatively little difference in time requirements as between savers and
non-savers (see the middle columns of Table 9). However, the rupiah cost is generally considerably higher
for savers than non-savers. Since savers actually use banking services while non-savers do not, this indicates
that both groups have a good idea of where the physical outlets are located, although non-savers have less
of an idea about how much it actually costs to get there.
Table 9.
Travel to Banks, Time & Cost
Respondent
(One way trip)
Average time (minutes)
Average cost (rupiah)
Savers*
Non-savers
Savers
Non-savers
On foot
148
342
13
15
1,193
926
Bike/Motorcycle
777
722
18
20
2,586
3,119
Personal car
Savers
Non-savers
71
6
17
20
8,830
3,208
Public transportation
293
603
22
22
3,781
2,988
Water transportation
4
6
356
263
186,531
4,830
13
18
72
67
42,904
2,615
Other (mainly becak)
*Bank savers
The available data can be broken down according to distinctions between urban/rural and Java/off-Java
locations (Tables 10 and 11). For bank savers (Table 10), average times for urban residents are very similar
when comparing respondents in Java/off-Java locations. However, there are striking differences when
comparing urban/rural respondents, with rural savers on-Java requiring approximately 50% more time than
urban residents. With respondents off Java, the distinction was even more striking, with respondents in
the rural areas requiring far more time than those in urban areas (2-10 times), especially if water transport
is involved. Rupiah costs also vary markedly. The rupiah cost is lowest for on-Java urban residents, slightly
higher for off-Java urban residents, and far higher for those who live in rural areas. Again, the cost is
particularly high when water transport is required.
52
Chapter 3
Table 10.
Saver’s Travel to Banks, by Urban/Rural & Java/Off Java
Urban
(One way trip)
Rural
Urban
Java
Off-Java
Java
Off-Java
Java
On foot
11
11
15
171
225
Bike/Motorcycle
12
14
22
28
2,142
Personal car
11
12
24
36
5,907
15
18
26
109
NA
24
NA
392
Other
21
24
21
392
Rural
Off-Java
Java
Off-Java
850
1,426
93,326
3,181
2,669
5,109
3,976
14,070
9,272
2,583
3,836
3,365
27,636
NA
402,577
NA
137,535
27,314
402,577
3,517
137,535
For non-savers, the travel pattern is similar to that of savers, but with less pronounced variation between
regions (Table 11). It is also notable that the rupiah cost estimates by non-savers are much lower than
savers’ costs in rural locations, particularly off-Java, suggesting that the actual transportation cost may be
contributing to exclusion in those areas.
Table 11.
Non-savers’ Travel to Banks, Urban/Rural & Java/Off-Java
Urban
Rural
Urban
Rural
(One way trip)
Java
Off-Java
Java
Off-Java
Java
Off-Java
Java
Off-Java
On foot
14
13
15
69
783
661
1,017
4,485
Bike/Motorcycle
11
9
20
40
1,941
2,990
2,967
6,813
Personal car
15
NA
16
31
3,000
NA
2,356
5,556
15
15
19
50
2,541
2,227
2,565
5,834
NA
10
NA
277
NA
5,000
NA
4,805
Other
5
10
21
277
3,000
5,000
2,300
4,805
The various travel times noted above may seem excessive. However, by local standards, the averages actually
compare favourably to key public services (see Figure 16). For example,40 some 48% of Indonesians can reach
a bank branch in less than 10 minutes compared to the 7% of Indonesians a public hospital in the same time.
By contrast, approximately 28% can reach a Puskesmas (a basic health facility) and approximately 57% can
reach a school in the same time. At the other end of the scale, only about 7% of Indonesians require more
than 30 minutes to reach a bank branch, which is similar to the proportion who require that time to reach a
school school, and far better than proportion of 33% who require that time to reach a Puskesmas and 69%
who require that time to reach a public hospital. These data indicate only modest differences in physical
access as between those who already have a bank account (savers) and those who do not (non-savers; see
Figure 16).
This comparison is important for policy purposes when allocations of public funds are involved. In particular,
it suggests that public monies would be well spent on improving physical access to key public services such
as basic health and education facilities – physical access to financial services would improve in line with
such overall improvements. Other instruments, such as policies governing competition, would be more
appropriate for improving access to financial services.
40
World Bank, Governance and Decentralization Survey. See http://www.dsfindonesia.org/apps/dsfv2/cgi-bin/dw.cgi
53
Chapter 3
Figure 16.
Average Time to Reach Select Institutions
6.6
68.8
more than 30 min
33.1
8.7
6.5
20.4
17.8
22.6
20.7
21.9
> 15 to 30 min
School
Public Hospital
Puskesmas
Bank (Non-savers)
Bank (savers)
16.7
6.8
> 10 to 15 min
16.7
26.5
23.7
56.3
6.6
27.6
Up to 10 min
44.1
47.8
0
20
40
60
80
100
%
Once inside a bank, the average time spent waiting to be served is fairly short. More than a third of clients
are served within 10 minutes of arrival, with less than 18% of clients in rural areas stating that they had to
wait for more than 30 minutes to be served. Wait times are fairly uniform when the responses of those in
urban and rural areas are compared (Figure 17).
Figure 17.
Waiting Time to be Served in a Bank
Urban vs Rural
<= 10min
38.8
>10-15min
Urban
26.6
>15-30min
22.3
>30min
12.4
<= 10min
33.4
>10-15min
18.3
Rural
>15-30min
30.5
>30min
17.8
0
10
20
Percentage
30
40
To summarize, these results suggest that in urban areas, the physical proximity of bank branches is not a
constraint to financial access. Once inside a bank, processing and waiting times also do not appear to be
a significant constraint. In rural areas, where distances are longer and transportation is more difficult, it
takes substantially longer to get to bank branches and hence this may pose something of a supply-side
impediment. Nevertheless, according to survey respondents and their assessments of convenience, it is not
54
Chapter 3
a significant barrier. As stated previously, the time taken to travel to a bank branch compares favourably to
the time taken to travel to key public services, such as health care facilities and schools.
These results have implications for for policy. In subsequent sections, the demand analysis by product is
presented for urban and rural areas separately and the differences are statistically tested. For policy, it is
important to know why access is low, even if physical accessibility is not a problem, and whether something
can be done about the constraints.
3.3 Survey Results: Demand for Types of Financial Services
Figure 18.
Financial Products Used by Households
Financial Services Used by Households
Bank Savings A ccount
40,6
Loan from Neighbors, Family, & Friend
25,9
On Credit from Local Shop
19,7
ATM/Debit Card
19,6
Loan from Bank
17,4
Loan from MFI
10,2
Community Welfare Program
6,1
Loan from Daily Bank
5,3
Loan from Employer
4,5
Loan from Pawn Shops
3.4
Survey Results:
Demand for Savings
Accounts
2,9
M - banking
2,9
Credit Card
2,5
This Chapter now turns to results of the
household survey. Beginning at a broad
level, the survey results indicate that there
is a demand for a wide range of financial
services (see Figure 18). Of services in
demand, the single most important is a
bank savings account, with 40% of
respondents having a bank savings
account compared with only 17% who
have a bank loan. Other types of credit
services rank high, too, but these services
are mainly provided by informal sources
and institutions, such as friends and
family (26%) and local shops (20%). ATM
and debit cards are relatively popular
(20%), but mobile banking and credit
cards rank at the very bottom of the list.
Much of the higher-level survey
information on Indonesia’s savers is
%
summarized in Figure 19 (for borrowers,
see Figure 28 in Section 3.5). Roughly
one third of the population in Indonesia does not save at all, formally or informally, and might be considered
‘financially excluded’. Considering the remaining 68% of households who do save, 50% do so at a formal
savings institution and the remaining 18% save informally via community welfare schemes or informal
savings clubs. Decomposing the 50% who save at a formal institution, only 47% of the population saves using
formal banks and 3% use other formal institutions, such as cooperatives and credit unions.
0
10
20
30
40
50
These data point to an important weakness in the Indonesian banking system’s ability to provide access to
financial services. Specifically, less than half (47%) of the total population save in a bank, and the majority of
these save informally, too. This is striking evidence of the limited extent to which Indonesia’s banks actually
deliver services to the great bulk of the country’s population.
55
Chapter 3
Figure 19.
Summary of Survey Results for Savers
Looking in more detail at the 68% who are ‘financially served’, there is a great deal of overlap among their
use of formal institutions (Figure 20). In particular, savers who use banks also actually make much greater
use other formal and informal providers (30.1% versus 16.6%). Also, among ‘exclusive use’ savers, informal
vehicles, such as community welfare or informal savings clubs, are the most important category, accounting
for 18.2% compared to 16.6% for banks and 1.2% for other formal institutions.
Figure 20.
Overlap Among Savings Providers
Formal O
Fo
Other
er
Banks
ks
1.2%
2.6%
1.9%
7.5%
16.6%
20%
No Acc
ccount
31.9%
31
18.2%
Info
formal
The survey continued with an attempt to determine why the ‘financially served’ respondents saved, with
these results broken down according to the type of bank or other institution which they saved (see Figure
21). The most common response related to ‘security’, which underscores the importance of prudential
supervision of savings institutions and the maintenance of financial stability. It was notable that respondents
who kept their savings at Sharia banks were particularly likely to cite security as the main reason why they
56
Chapter 3
saved. This suggests that the rapid growth of this sector may be the result of new clients participating in
formal banking for the first time because they are attracted by the perceived safety of Sharia banking. For
most depositors (other than those at BPRs, which often have very limited transfer capacity), it was also very
important that they be able to transfer money and borrow money. Other reasons cited by respondents for
maintaining savings accounts were relatively insignificant.
There is some regional variation in the pattern of responses to the survey. Most notably, respondents in urban
areas tended to save in formal institutions primarily for predicted future needs. By contrast, respondents
in rural areas were significantly more motivated by a desire to gain access to loans. There were also some
significant gender differences. In particular, male respondents were more likely to be motivated to have a
bank account in order to obtain a formal loan, while women were more likely to be motivated to have a bank
account in order to save for future needs.
Figure 21.
3.4.1
Reasons for Having a Bank Account, by Type of Bank
Barriers to Accessibility: Reasons for Savers Being Unbanked
Turning to those who are ‘unbanked’, those who do not save and do not maintain accounts at any form of
financial institution, the Survey attempted to determine the major constraints to having a bank account
(see Figure 22). By far the most common response of respondents in this category (almost 80%) was the
perceived lack of money to make saving possible. The second most common reason was ‘Do not have a
57
Chapter 3
job’ (about 10%), which is highly correlated with not having any money. An insignificant proportion of
respondents gave other reasons for not having accounts including, ‘Don’t understand banks’ (3.1%) and ‘Do
not see the advantage of having a bank account’ (3.6%).
It is striking that the least significant constraints in the face of holding savings account were ‘Bank fees are
too high’; ‘Distance to the bank’; and ‘Deposit rates are too low’. This confirms the point, noted above, that
long travel times to reach facilities of all different kinds are considered normal in rural areas. Thus, they are
not perceived to be an inconvenience. This is probably because the opportunity cost is lower for people in
rural areas, their incomes being lower, on average. Also, these results suggest that the great majority of bank
savers are not particularly concerned about interest rates.
Figure 22.
Main Reasons for Not Having a Bank Account
The Survey also sought to break down the perceived constraints in the face of holding savings account in
terms of income level (see Figure 23)41 with all the respondents stratified into ten income deciles. Across all
41
58
In this report, the measure of ‘income’ is actually household consumption, because estimates of expenditure are
typically more reliable than estimates of income. In general, the results noted throughout this report also apply
for household income, although the relationship isn’t quite as tight.
Chapter 3
income deciles, the dominant response (75% or more) was ‘Don’t have enough money’. There is more variation
among the secondary reasons for not opening a bank account. For example, respondents in the lowest
deciles cite ‘No job’ far more often than the middle- and upper-income deciles, indicating that their reasons
are almost entirely economic. Among the middle- and upper-income deciles, more common responses (510%) were: ‘Don’t see the advantage’ and ‘Don’t understand banks’. This may indicate the potential for a
marketing or education campaign by banks to attract potential customers in these categories. There are also
indications that the higher income earners might be slightly more price sensitive and likely to be concerned
about issues such as high bank fees than low- and middle-income customers.
Figure 23.
Main Reasons for Not Opening a Bank Account, by Income Deciles
The fact that even at the lowest income deciles, at least a small proportion of respondents did have bank
accounts is consistent with other studies which show that even the poor and very poor people are capable
of saving. However, the finding that people in all income brackets identified lack of income as the most
important constraint to opening a bank account is somewhat surprising. In order to explore the reasons
for this finding, Figure 24 provides a distribution of the sample across expenditure levels in Rupiah per
year. This shows that the average household expenditure of the highest income decile in the survey was
about Rp 50 million per year (about US$5000 per year, or about US$1250 per capita assuming an average
household size of four). Of the sampled population, 80 per cent reported an annual household expenditure
of Rp 25 million per year or less (less than US$ 625 per capita assuming an average household size of four).
With the average national per capita expenditure standing at US$1942.1 (BPS 2007), the sample is therefore
representative of lower-income households. This income distribution provides a clue as to why households
across the income distribution report lack of income to be a constraint. It is likely that the majority of savings
accounts in the formal banking sector held by a small segment of households that are much wealthier than
the mean household in this survey. While this latter issue is not explored in detail in this report, it is clear
that incomes are a major barrier to accessing formal financial services. This is consistent with studies and
surveys conducted in a number of other countries, such as Brazil, India, and Pakistan (The World Bank, 2004,
2006c and 2009b).
59
Chapter 3
Figure 24.
Yearly Total Household Expenditure
These results have two important implications for policy. First, the dominant reasons for not saving or
holding savings accounts of any kind are economic. This implies that growth in average incomes driven by
stronger, sustained economic growth is the most significant factor in eliminating constraints to accessing
financial services and particularly to holding a bank account. Second, because results hold across all deciles
levels, these results suggest that even when incomes go up, a significant proportion of the population still
feels that they don’t have enough money to open a bank account. These findings also suggest that there
are threshold income levels at which people start to become ‘financially included’. This issue is explored
in greater depth in Chapter 3.6. These results also suggest that consumer education aimed at convincing
people of the advantages of saving, especially those who have never had a bank account, may serve a
valuable purpose. Section 3.8.2 explores the possibilities for reducing the impact of these constraints.
3.4.2 Key Socio-economic Characteristics of Indonesia’s Savers
There is a great deal of interest regarding the social and economic characteristics of Indonesia’s savers. This
Section describes their salient features according to the information provided by the Survey. The statistically
significant features are summarized in Section 3.4.3.
The use of bank savings account is clearly related to the education level of the respondent (see the upper
left panel in Figure 25). For example, respondents who are university graduates are almost four times more
likely to have a savings account than respondents who did not complete primary school and eight times
more likely than a respondent who never went to school.
As regards an urban/rural split (the upper right panel of Figure 25), urban populations make greater use
of formal and informal savings instruments compared to rural households. By contrast, the exclusive use
of informal service providers is considerably higher amongst rural households than urban households.
Whereas 53% of the urban population saves at a formal bank, only 32% do so in rural areas. By contrast,
while 16% of the urban population saves exclusively in informal institutions, 20% of the rural population
does so.
60
Chapter 3
Several points emerge when attempting to extend this breakdown to inter-island comparisons. First, the
level of access to savings account amongst urban households is similar both on and off Java (Figure 25).
However, differences amongst rural households in the two different zones are striking. In Java, almost 35%
of households in rural areas have bank accounts, compared to only 20% of households off Java. Further,
almost 70% of residents of rural areas outside Java have never had a bank account, compared to 47% of
residents of rural areas in Java Java. This is additional evidence of unmet demand for financial services in
rural areas outside Java.
In terms of gender dimensions, there are no significant differences between male and female respondents
(Figure 25). Female respondents are just as likely to have a savings account (68%) as males; 41% have bank
accounts (compared to 40% for male respondents); and 49% save informally (compared to 47% for male
respondents). These results stand in a stark contrast with some other countries, such as Pakistan, for example,
where the proportion of women with savings account is dramatically less than the proportion of men.
Figure 25.
Savers’ Socio-economic Characteristics
By occupation, government employees are the most likely to have formal savings accounts. It is very likely
that this is because their salaries are paid into these accounts. Freelance workers (18%) and unpaid family
workers (36%) are considerably less likely to have formal bank accounts (see the lower left panel of Figure
25). The survey finds that households involved in agriculture are substantially less likely to have either
formal or informal savings. Indeed, salaried employees are more than twice as likely to have a bank account
as agricultural workers (Figure 26). From another angle, respondents operating household enterprises are
substantially more likely to have a savings account, and particularly at a bank (Figure 26). This suggests that
enterprise ownership is simply acting as a proxy for income and/or wealth, which is normally associated
with savings. This strong positive relationship is discussed below.
The analysis finds no substantial variation in savings account usage by age of respondent. Those in the 4051 age bracket have only slighter higher usage rates than the other 10-year age brackets.
61
Chapter 3
Figure 26.
More Savers’ Socio-economic Characteristics
Turning to the all-important metric of income, the survey analysis shows that income levels are positively
and strongly correlated with the likelihood of having a savings account (Figure 27). This result holds across
all income deciles with no indications of a critical threshold level of income, including the official poverty line.
This is true both in urban and rural areas, although the gains accrue more quickly (that is, at lower income
levels) for urban residents (Figure 27).
Figure 27.
Savings by Per Capita Expenditure
Do you have a savings account of any kind?
By Monthly Per Capita Expenditure
Rural
.5
0
Weighted Means
1
Urban
0
5
10
0
5
Monthly Per Capita Expenditure Deciles
Note: Vertical line corresponds to poverty line.
62
10
Chapter 3
3.4.3
Econometric Analysis of Savings
Table 12.
Summary of Indonesian Savers’
Characteristics
i) Who Saves Formally?
--Smaller, older, urban households
--Individuals who are financially literate
--Households (HH) with higher income
--HHs with larger houses
--HHs with basic amenities
--HH that own an enterprise
--HH with a migrant worker abroad
In this Sub-section, the preceding analysis
is taken a step further by investigating the
correlations between the likelihood of
holding savings accounts with various
several socio-economic characteristics
covered by the Survey. The analysis is in
two parts: i) the probabilities of households
having a savings account of any kind, and ii)
the probabilities of formal and informal
savings accounts.
The regression analysis, which uses a
weighted linear probability model, is
ii) Who Saves Informally?
presented in detail in Annex C.42 These
indicate that households are more likely to
--Individuals who are financially literate
have a savings account of any kind (formal
--Respondent is not head of HH
or informal) if the respondent attended
--Respondent is younger & risk-taker
school and is financially literate, as
--Wealthier HHs with some amenities
measured by his/her score on the financial
--Own an enterprise
literacy questions of the A2F Survey.
--HHs without a migrant worker abroad
Specifically, controlling for all observed
and unobserved variation across villages,
schooled respondents are 11% more likely
to have a savings account compared to respondents who did not attend school. In addition, financially
literate respondents are 8% more likely to have savings accounts than financially less literate respondents.
Other characteristics also help explain the likelihood of having savings accounts. Specifically, these include
the following factors: higher income households (as measured by consumption expenditure); households
that reside in larger houses (with more rooms); and households that have basic amenities such as electricity,
telephone and tap water. Also, households that own an enterprise and have migrant workers abroad are
substantially more likely to hold savings accounts. This indicates a low savings rate at all income levels for
reasons that are not pursued in the Survey. These findings indicate that overall household income and
wealth is positively correlated with having a bank account, which is fully consistent with previous findings.
Similarly, households that own an enterprise or have migrant workers abroad likely require savings accounts
in order to conduct business and to send and receive remittances.
The results of the breakdown between those who save formally and informally is summarized in Table 12
(regression results are in Annex D and E, respectively). The main difference concerns relates to households
with a migrant worker abroad. Such households are most likely either to have savings accounts at formal
institutions or they do not save at all. It is highly likely that they have savings accounts of formal institutions
in order to facilitate the receipt of remittances.
42
This determines the baseline model with follow up by non-parametrically controlling for all province and then all village fixed
effects. These non-parametric controls are included to absorb all unobserved variation across provinces and villages, respectively.
For analytical purposes, the interest in including these additional controls is to check the robustness of regression coefficients on
our main covariates of interest. The regressions prove robust to alternate limited dependent variable regression specifications,
such as probit and logit specifications. The choice of a linear probability specification was made for ease of interpretation of the
regression coefficients.
63
Chapter 3
3.5 Survey Results on Demand for Loans
This Section then examines the issue of access to loans, following the same logical sequence as the
examination of access to savings accounts in the previous section. First, the reasons for people taking out
loans are examined, as is the choice of institution from which these loans are sought. In addition this section
investigates the rates at which people borrow; and the average size of loans sought from bearing institutions.
The issue of ‘Why people do not borrow’ is pursued in some detail in Section 3.5.2. This section draws upon
a variety of sources of information owing to certain limitations in the access to finance survey. Subsequent
Sections focus on the socio-economic characteristics of borrowers (Section 3.5.3) and econometric analysis
to identify statistically significant factors (Section 3.5.4).
The higher-level survey results for borrowers are summarized in Figure 28. As indicated previously, a fairly
large proportion (60%) of the Indonesian population borrows money, but only 27% do so from a formal
bank or microfinance institution. A much larger proportion (43%) borrows from informal sources, such as
neighbourhood schemes, friends and family. Smaller proportions borrow from community welfare schemes
(6%) and pawnshops (3%).
Figure 28.
Summary of Survey Results for Borrowers
43 44
The data on borrowers in Figure 28, like those for savers (Figure 19), demonstrate the shortcomings of
the formal banking sector in terms of accessibility. It shows that they remarkably low proportion of the
64
43
Source: BRI MASS Survey (see Box 2), which refers to the poor and very poor.
44
Based upon a very small sample; see main text.
Chapter 3
population (17%) currently borrow from banks. Far more, roughly twice as many, borrow from the informal
sector, while even more borrow from institutions like MFIs, pawnshops and community welfare schemes.
Loans from formal sources are used primarily for business loans, while loans from informal sources are more
often used to finance consumption. This simple observation has important policy implications. Namely,
policies that aim at different users of credit (e.g., investment versus consumption) need to aim at different
financial services providers (e.g., rural banks versus pawnshops).
Continuing to look at Indonesians who borrow money by moving down the left branch of Figure 28, it
appears that the most popular service providers are in the informal sector. According to 40-50% of
respondents , loans provided by service providers in the informal sector are generally used for consumer
expenditure, while 25-40% of respondents stated that these loans were for business & investment spending.
The proportion of loans for other purposes was quite small, with this pattern being relatively uniform across
informal providers (the left panel of Figure 29).
The patterns for the purpose of loans taken up by those who borrow from banks and formal MFI’s (the
right panel of Figure 29) is considerably different.45 Most of these loans were taken out for business and
investment purposes, with the proportion of loans for consumption purposes being considerably lower.
Within this category of service provider, the proportion of loans taken out for business and investment
purposes were somewhat higher from banks, while the proportion taken out for consumption purposes
was slightly higher for MFI’s.
45
Definitions are important. This Survey defines a Micro Finance Institution (MFI) as a small credit program to finance small
business to produce income for oneself and the family. For the survey, micro credit is disbursed by non-bank finance institutions,
for example: BKD (Village Credit Body); savings and loan cooperatives (KSP); savings and loan unit (USP); village credit fund
institution (LDKP); baitul mal wattanwil (BMT); non-governmental organization (NGO); arisan; Grameen financing programs; ASA
financing programs; self-help groups (KSM); and credit unions. This definition overlaps with that discussed in Chapter 2.5.
65
Chapter 3
Figure 29.
Purpose of Loan, by Service Provider
The average size of loans vary significantly according to the type of institution providing them (Figure 30).
Not surprisingly, banks provide the largest loans to households, with 25% of such loans being in excess of
Rp20 million, or roughly US$2,000. The average size of loans shrinks dramatically when they are provided
from the informal sector. Indeed, almost 25% of loans provided through community welfare schemes were
for less than Rp100,000 (about US$10).
66
Chapter 3
Figure 30.
Loan Sizes, by Institution
Bank Loan Size
MFI Loan Size
20.2
23.9
26.4
25.4
16.6
36.7
<= 0.5 million
>0.5-1 million
>1-3 million
>3 million
23.1
Pawn Loan Size
27.5
22.2
<= 4 million
>4-10 million
>10- 20 million
22.2
>20 million
26.9
28.7
Informal Loan Size
25.0
25.3
24.5
25.2
<= 0.2 million
>0.2-0.5 million
18.1
>130- 600 thousands
>600 thousands-9 million
>1.3 million
Community Welfare Scheme Loan
Size
29.3
<=130 thousands
>0.5-1.3 million
>9 million
23.4
29.1
<= 100 thousands
>100- 300 thousands
>300- 500 thousands
>500 thousands
Interest rates charged by the varying types of institution also vary widely (Figure 31). At the lower end,
employers charge relatively low rates (less than 10% per annum); loans provided by friends and neighbours
are also relatively cheap, with an average charge of approximately 17%. Banks come next, at about 25%,
compared with over 40% for MFIs and Community Welfare Schemes. The most expensive are shops (that is,
store credit) and daily banks (see the upper panel in Figure 31). The latter are particularly expensive because
of the very short-term maturities (1 day) and these build up enormously with compounding at annual
rates. For policy purposes, it is important to note that most institutions—especially banks and to a lesser
extent MFIs—charge markedly less interest, if the borrower has a bank account (see the lower panel in Figure
31), Probably because this is a low-cost indicator to lenders of creditworthiness. By implication, one of the
simplest ways to reduce interest costs would be for borrowers to open a bank account.
Three qualifications should be made regarding the survey’s findings on interest rates. First, the survey
respondents often did not know the interest rate that they paid for their loans or the maturity period.
Usually, they seemed more concerned about the size of the monthly payments and whether they had the
cash flow to make repayments. Second, within institutions, there is a wide range of rates charged on loans,
with the upper end typically 2-3 times the mean or median. And third, some of the findings are based on
very small datasets, which makes a strict interpretation of these rates problematic.
67
Chapter 3
Figure 31.
68
Indicative Loan Interest Rates
Chapter 3
3.5.1 Who Does Not Borrow?
The Survey identified several socio-economic characteristics of Indonesians who have never borrowed,
namely:
1.
They are relatively more concentrated in the lowest income deciles (Figure 32);
2.
Concentration in the lowest income deciles is more pronounced for rural areas (Figure 32). However, on
average there is virtually no urban-rural difference (see the lower left panel in Figure 33);
3.
They tend to be poorly educated and live off-Java (see the upper panels in Figure 33);
4.
They tend to be women somewhat more often than men (see the middle lower panel in Figure 33). And;
5.
Usually, they are not owners of non-farm enterprises (see the lower right panel of Figure 33).
Figure 32.
Non-Borrowers by Per Capita Expenditure
69
Chapter 3
Figure 33.
3.5.2
Non-Borrowers’ Characteristics
Barriers to Accessibility: Why Do People Not Borrow?
As suggested by the right-hand branch of Figure 28, the survey did not pursue the reasons as to why
respondents have not borrowed. However, the Survey did probe non-borrowers who had applied for a loan
within the last 12 months; if they were rejected, the Survey asks ‘Why rejected?”
As indicated in Figure 28, the principal reasons cited were:
1. Lack of documentation (45%), for example: personal identity; land ownership certificate; or proof of
permanent address;
2. Insufficient collateral (32%);
3. Insufficient income (22%); and
4. Too much debt (10%).
It should be noted that the number of data points in these categories is very small, which undermines their
statistical reliability. For instance, only 1% of population has had a loan application rejected in the past year,
and each of the rejection reasons, noted immediately above, is a subset of this 1%.
To provide more insights into this critical issue, this report turns to the BRI MASS Survey, which provides the
following critical results (Box 2):
70
1.
40% of the unbanked poor and very poor are creditworthy by the commercial standards of BRI’s
examiners;
2.
By implication, 60% of the unbanked poor and very poor are not creditworthy by the standards of
BRI’s examiners;
3.
Of the creditworthy poor and very poor, 50% do not want credit – that is, they are voluntarily selfexcluded – at the prevailing price of credit; and,
Chapter 3
4.
Of those creditworthy, 10% were excluded owing to a lack of collateral.
What can be inferred from this? First, a very rough picture can be drawn regarding the reasons why 25%
of poor or very poor households (that is, those in the 2 lowest income deciles; see Figure 32) have never
borrowed. Using the MASS results, the reasons that this group have never borrowed break down as follows:
1.
15% are not creditworthy (by BRI Unit Desa standards);
2.
5% don’t want credit and are therefore are voluntarily excluded;
3.
1-2%, are excluded because they have no collateral; And,
4.
The remainder, roughly 4%, are excluded for other, unknown reasons.
According to the BRI MASS Survey, lack of collateral does not look appear to be the major constraints in the
face of seeking a loan by members of this group. Evidence from the Access to Finance Survey is weaker on
this issue, but does not contradict the conclusions of the MASS survey. As stated previously, the significance
of this latter survey is doubtful given the small sample size involved (about 1/3 of 1% of the population).
Rather than lack of collateral, a more significant constraint appears to be lack of documentation. This
conclusion is supported by both the A2F and MASS Surveys. The findings of the two surveys on other
constraints, such as insufficient income and too much existing debt, are roughly consistent.
3.5.3
Key Socio-Economic Characteristics of Indonesia’s Borrowers
As in the case of savers, there is a great deal of interest in the main social and economic characteristics
of Indonesia’s borrowers. The remainder of this Section describes their salient features according to the
information gathered through the Survey. The statistically significant factors are summarized in Section
3.5.4.
One important point needs to be made at the outset of this Section. Namely, the size of an average household
debts in Indonesia are moderately high (see Table 13). For most socio-economic groups, household debts
are on average equal to 25-30% of annual income. For those below the poverty line, average total household
debts are around 19% of annual income. These levels of debt already constitute a sizable burden for
households. For example, at typical rates of interest (say 30%; see Figure 31), the average household needs
to spend about 1/10th of its income on interest payments, if it can continually rollover its short-term debt. If the
debt has to be re-paid, repayment will consume almost 40% of an average household income in that year.
71
Chapter 3
Table 13.
Household Indebtedness
Average Indebtedness
(in US$ @ 9056 Rp/US$)
Total Indebtedness
Average Annual
Expenditure
$
783
$ 2,829
As % of
Expenditure
27.7%
- Rural
- Urban
$
$
680
926
$
$
2,400
3,422
28.3%
27.1%
- Male
- Female
$
$
796
771
$
$
2,830
2,828
28.1%
27.3%
- Above poverty line
- Below poverty line
$
$
881
155
$
$
3,143
806
28.0%
19.3%
For those below the poverty line (see Table 13), the situation is similar despite much smaller levels of debt,
because they will probably need to pay considerably higher rates of interest, perhaps in excess of 50%
(or more, if they need to access the services of a lintah darat; see Box 3). If the short-term debt cannot be
continually rolled over, repayment of the loan would consume almost one third of the annual household
income. One important limitation of the survey is that it did not explore the non-financial assets of the
households. Therefore, an estimate of the level of debt as a function of overall household wealth is not
available. Thus, the above findings will need to be interpreted with caution. However, these findings suggest
that there is a need to explore the level of debt of lower-income households much more closely. In terms of
policy, they also suggest a need to further focus on increasing access to credit.
Turning to socio-economic characteristics, 50% of households with savings accounts also borrow from
a bank (see the left panel of Figure 34). By contrast, less than 10% of households without bank savings
accounts borrow from a bank. Several explanations could account for this large difference. Possibly it merely
reaffirms an established finding of loan financing, that having a savings account acts as guarantee/collateral
against which banks can lend money to clients. Alternatively, it could also reflect an unwillingness of certain
segments of the population to engage with the formal financial sector, for religious or other reasons. On
the other hand, from an economic point of view, the discrepancy might be caused by the fact that if poorer
segments of society don’t have enough income to open a savings account, neither do they have enough
income to establish creditworthiness, so they are unlikely to receive loans from formal providers. The
evidence, presented earlier (Figure 31), supports the first explanation, namely that banks and MFIs charge
lower rates of interest on loans to customers who have a bank account.
72
Chapter 3
Figure 34.
Characteristics of Borrowers
On a regional basis (Figure 35), the Survey shows that loans from banks, MFIs, and pawn shops are more
frequently made to households in urban areas. To a Significantly higher degree, rural households rely on
informal sources of loans. The volume of loans derived from Community Welfare Schemes are very similar
in rural and urban regions.
Figure 35.
Borrowers’ Characteristics, Urban/Rural
By gender (Table 14), there are no significant differences, although women are slightly more likely to borrow
from informal sources. As noted earlier, these findings are in sharp contrast to surveys conducted another
other developing countries where the majority of the population is Muslim.
73
Chapter 3
Table 14.
Borrowers’ Characteristics, by Gender
Bank
MFI
Pawn Shop
Community
Welfare Scheme
Informal
Male
17.4
11.0
2.5
6.8
41.9
Female
17.3
9.4
3.4
5.4
44.2
In contrast to gender, there is a significant correlation between the age of the respondent and the source of
loans, with an opposite relationship between formal and informal loans. Respondents in older age brackets,
except in the very oldest group, are more likely to receive loans from banks or MFIs. Those in younger age
brackets are more likely to receive loans from informal sources. These results suggest that formal financial
institutions take experience (proxied by age) into account when establishing the creditworthiness of
applicants. The drop off in bank loans for the highest age category (which is faster for MFI loans) is not
surprising, as this category largely consists of retirees, with limited incomes.
Figure 36.
Borrowers’ Characteristics, by Age
Do you have a ... loan?
Do yo have an informal loan?
%
by Age Bracket
%
25
60
20
50
by Age Bracket
40
15
30
10
20
5
10
0
0
<=32
>32- 40
Bank Loan
>40- 51
>51
<=32
MFI Loan
>32- 40
>40- 51
>51
Informal Loan
By type of employment, government employees are substantially more likely to have formal bank loans,
whereas freelance workers and unpaid households (the ‘other’ category) are significantly more likely to
borrow from informal sources. These findings point towards both supply and demand side factors. On the
supply-side, formal bank institutions may consider government employment as a significant, positive factor
in establishing the creditworthiness of an applicant. On the demand-side, government employees, because
they receive their salaries through banks, have a greater degree of interaction with banks and are more likely
to be better informed regarding banking procedures and the products that banks offer.
Figure 37.
74
Borrowers’ Characteristics, by Employment Status
Chapter 3
Reflecting similar patterns for savings, salaried employees are almost three times more likely to have a formal
bank sector loan and four times more likely to have an MFI loan than agricultural workers. The difference
between the two groups when it comes to receiving loans from informal sources is far less significant (Figure
38). This implies that the two types of workers have equal access to the informal market, but formal financial
institutions prefer regular versus irregular income flows, which would be a low-cost proxy for risk.
Figure 38.
Borrowers’ Characteristics, by Type of Job
Do you have ... loan?
%
Do you have informal loan?
Agriculture Sector Workers & Salaried Employees
35
%
Agriculture Sector Workers & Salaried Employees
50
30
40
25
30
20
Bank Loan
15
MFI Loan
10
Informal Loan
20
10
5
0
0
Agriculture Sector Workers
Salaried Employee
Agriculture Sector Workers
Salaried Employee
Households that operate non-farm enterprises are more likely to borrow from banks, MFIs, and informal
sources (Figure 39).
Figure 39.
%
Borrowers’ Characteristics, by Enterprise Ownership
Do you have ... loan?
by Non-farm Enterprise Ownership
Do you have an informal loan?
%
by Non-farm Enterprise Ownership
50
25
40
20
30
15
Bank Loan
10
Informal Loan
20
MFI Loan
10
5
0
0
Non-Owners
Owners
Non-Owners
Owners
Finally, looking at the critical metric of income, there is no pronounced relationship between borrowing
from any source and total household expenditure, except that borrowing declines dramatically amongst
households below the poverty line (Figure 40). This is true to a very similar extent in both urban and rural
areas. However, borrowers preferred financial institutions to vary with income or expenditure. As income
rises, borrowers (urban and rural) make a significantly greater use of banks (see Figure 41). By contrast, as
incomes rise, borrowers use of pawnshops and community welfare schemes drops off sharply. The drop-off
at higher incomes tends to be less pronounced for MFIs and informal sources.
75
Chapter 3
Figure 40.
Borrowers, by Region, by per Capita Expenditure
Figure 41.
Bank Loan, by Region, by per Capita Expenditure
3.5.4 Econometric Results for Loans
Based upon an econometric analysis (see Annex F), borrowing from any source is more likely if: the
respondent is married; has attended school; has a relatively higher income; and is employed. For formal
76
Chapter 3
sources (Annex G), older respondents and those with better math skills are more likely to take out loans.
Household level characteristics include household wealth and access to basic amenities.
Households are more likely to borrow from informal sources if the respondent is married; employed; and if
the household as a whole is wealthier but does not own property (Annex I). Borrowers that own property
and are not in the formal loan market probably have other avenues for funding or chose not to borrow at all.
3.6 The ‘Truly Financially Excluded’: No Loans And No Savings
Accounts
This Section looks at those Survey respondents with neither a savings account nor a loan, loosely referred
to here as ‘the truly financially excluded’. In total, they constitute about 17% of the (weighted) A2F sample.
In terms of the socio-economic characteristics of this group, the rural poor stand out from all other categories
(see the right panel of Figure 42), with more than 20% of this group falling into the category of the truly
financially excluded. Indeed, improved access is almost exponential as income rises, right up to the seventh
income decile. For the urban poor (see the left panel of Figure 42), the improvement is only pronounced
at the lowest levels of income; after that it is relatively flat through the fifth income decile, when access
improves again. At the middle and higher income levels, there is very little difference between urban and
rural regions.
Figure 42.
Characteristics of ‘Truly Financially Excluded’, by per Capita Expenditure
Looking at their other characteristics (Figure 43), the ‘truly financially excluded’ tend to be poorly educated;
they live off Java, in rural regions; and they are not owners of non-farm enterprises. Gender differences are
relatively minor (see the lower left panel of Figure 43).
77
Chapter 3
Figure 43.
Characteristics of the ‘Truly Financially Excluded’
Among other indicators (see the final panels of Figure 44), the incidence of respondents without a loan or
savings account tends to increase in a pronounced way with age. By type of employment, they tend to be
unemployed, self-employed and freelance workers. Furthermore, they tend to score low on the math and
financial literacy scores (see Section 3.8.1), probably reflecting their relatively low levels of education.
These results have significant implications for policy, providing clear evidence that policies to improve
access to financial services should target the rural poor and poorly educated in off-Java regions.
78
Chapter 3
Figure 44.
Characteristics of the ‘Truly Financially Excluded’, continued
3.7 Survey Results on Demand for Insurance
At the most aggregate level, the Survey showed that approximately 50% of Indonesian households
have some kind of insurance (see Figure 45). This indicates a remarkably high use of insurance products,
considering the evidence on penetration and density from previous studies.46 However, the composition
of coverage by type of insurance (Figure 46) is very important in this regard. It indicates that by far the
most significant proportion of insurance coverage was travel insurance and public sector health insurance.
After further consideration (Box 9), subsequent analysis focused on only four categories of insurance (asset,
education, life and private health).
46
Compare, for example, with World Bank (2006d).
79
Chapter 3
Figure 45.
Box 9.
Insurance Holders, by per capita Expenditure
Some Details on Insurance in the Survey
The Questionnaire asked about seven different types of insurance, as indicated in Figure 46, namely: i)
public medical; ii) private medical; iii) home owners’; iv) education; v) travel/accident; vi) vehicle/asset
insurance; and vii) life insurance. Beyond these seven categories, the questionnaire was not specific
about types of insurance, leaving detailed interpretation to the discretion of the respondent. Further
questions in the survey related to ownership; availability; willingness to pay; reasons for not having
insurance; and risks.
As mentioned in the main text, overall results indicated a surprisingly high level of insurance coverage,
with around 50% of all households having some form of insurance. However, the details of composition
indicated that almost 33% of respondents have (or had) government medical coverage and almost 30%
have (or had) travel or accident insurance (see the upper half of Figure 46).
The high rate of coverage with public health insurance is almost certainly accounted for by the
compulsory coverage of government workers by PT ASKES and by Askeskin (which is social insurance for
the identified poor).a/ As for travel/accident insurance, such a high rate of coverage was not envisaged
when the survey was designed, and the inclusion of figures for this type of coverage appeared to inflate
the overall numbers. To avoid distortions of overall results and conclusions, these two categories were
excluded from further aggregate analysis. By contrast, the rate of coverage for home owners’ insurance
was miniscule, at around 1%. As a result, the small statistical sample undermined detailed statistical
reliability. Thus, this category of insurance was amalgamated with the much broader ‘assets insurance’
category, which also includes ‘home or vehicle insurance’. Further detailed analysis in the main text
focussed on the four remaining categories, which are more representative of insurance in Indonesia.
a/
80
For further information on these types of insurance, see Annex S of World Bank (2008b).
Chapter 3
Looking only at the four, more representative types of insurance, Indonesia has low take-up rates. Even with
the low overall rate of coverage, by far the most significant proportion of those with coverage belong to
the urban, upper income groups (Figure 47). The take-up for those in rural and urban regions is comparable
for the lowest income brackets. However, the take-up rate for urban residents rises much more quickly
as income increases. The effect is especially noticeable for asset insurance and for life insurance. In rural
regions, education insurance is particularly uncommon.
The main socio-economic characteristics of insurance policyholders are presented in Figure 47. The
self-employed are the most likely to buy insurance of all for four kinds, except for life insurance. Private
employees are far more likely to purchase life insurance. By gender, a far greater proportion of women
purchase education insurance, whereas men prefer life insurance and, to a lesser degree, asset insurance.
There is no difference as regards private health insurance.
Figure 46.
Types of Insurance Ownership
There is a dramatic difference in insurance take-up between agricultural workers and salaried employees.
The latter are more than ten times more likely to buy insurance—of all types—than the former. Similarly, the
owners of non-farm enterprises are much more likely to buy insurance than those who do not operate such
businesses. Further issues related to insurance are included in Section 3.7.1, below.
81
Chapter 3
Figure 47.
47
82
Characteristics of Holders of Insurance47
Note difference in vertical scales in the various panels of this Figure.
Chapter 3
Figure 48.
3.7.1
Characteristics of Insurance Holders, continued
Econometric Results for Insurance
The econometric analysis for insurance
(see Annex J) finds that households are
more likely to have insurance of any kind
if they are located in urban areas; if they
have better than average mathematical
skills; and if they are are relatively welloff with a larger house size with some
amenities. It is notable that results for
migrant workers are negative, indicating
that households with a migrant worker
abroad are less likely to hold insurance.
This is a confusing result since all legal
migrant workers are required to have
insurance (see Section 5.2.3). One simple explanation is that the households with family member abroad,
aren’t aware of that the migrant worker has insurance, which is in line with the results of Chapter 5 concerning
the financial literacy of migrant workers and the families. The income from abroad may serve as insurance
for many migrant worker families, substituting for formal insurance products. This would be consistent with
earlier observations about lower levels of informal savings by families of migrant workers (Section 3.4.3).
Table 15.
Summary of Insurance Holders’ Characteristics
Who Has Insurance?
--Households (HH) in urban areas
--HHs that are well-off
--HHs without a migrant worker abroad
--Civil Servants (public health insurance)
--Male & older
--Less likely if employed, married & head of HH
--Some HH amenities, electricity detracts.
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Chapter 3
3.8 Other Survey Results: Risks to Financial Well-Being
The A2F Survey also asked respondents about their perceptions of risks to their financial well-being. The
results could provide insights into the type of insurance products likely to be of interest to households in
various categories. Among all categories, illness (79%) and loss of employment (56%) are the most serious
perceived risks to financial well-being. Damage to dwelling (33%), poor business performance (30%), death
(28%) and harvest failures (26%) are other frequently identified risks.
By region, illness is the greatest perceived threat to financial well-being in both rural and urban areas.
However, urban households fear loss of employment significantly more than do rural households (62% in
urban areas compared to 52% in the rural areas). Similarly, poor business performance is perceived to be
significantly higher risk factor in urban areas than rural ones (34% vs. 26%). For fairly obvious reasons, rural
households are generally much more concerned about harvest failures than urban households (39% vs. 7%).
In terms of gender differences, there are significant variations in the way men and women perceive risk.
A significantly higher proportion of women perceive illness to be a significant risk than men (82% vs.
77%) with the same being true of loss of employment (60% vs. 53%). By contrast, a significantly higher
proportion of men perceived harvest failures to be a risk than women (32% vs. 19%). A smaller proportion
of higher income households worry about illness compared to poorer households (75% vs. 84%), although
a higher proportion of higher income households worry about poor business performance (33% vs. 26%).
A significantly higher proportion of poor households were worried about crop failure is then were richer
households (30% vs. 22%).
The Survey did not seek to determine how respondents attempted to protect themselves against such
risks or how they manage crisis is when they occurred. However, if these survey results are linked to those
presented earlier, some answers do emerge. For example, a rural family might protect itself against crop
failure by diversifying sources of income, by having one or more family members as migrant workers, either
overseas or in domestic urban areas. Similarly, during good times, rural households often save non-financial
assets. For example, rural households may build up their personal stocks of basic foods, like rice; they may
buy animals such as goats and chickens; or they may buy jewellery, preferably gold. In the event of a family
crisis, when these accumulated assets prove inadequate, the poor access the informal sources to seek loans,
particularly loans provided by employers; friends or family; pawnshops; or the local moneylender.
Overall, these results suggest that there is an unfulfilled demand for formal, low-cost insurance products
that provide protection against the financial impact of illness, especially among poorer populations.
Competitively priced asset insurance products may also be of interest to richer households in urban areas,
many of whom may operate a business of their own. Results on international migrant workers suggest
possible interest among them in commitment savings products (see Chapters II and V).
3.8.1
Other Survey Results: Demand for Other Financial Instruments
The survey finds that there is a significant demand for banking services to facilitate financial transactions.
For example, 22% of households who have bank accounts mainly use the account either to send or receive
money; 12% use their bank accounts to gain access to other banking services, such as loans. This probably
reflects the growing popularity of relatively new services offered by banks such as cash payment, bills
payments and transfer facilities through ATM machines, internet and mobile banking (Box 10 and Chapter
2).
84
Chapter 3
Box 10.
Survey Results on Mobile Banking
As discussed in Chapter 5, mobile bankingbanking transactions through cell phones, commonly called
hand phones in Indonesia) has great potential as a cost-effective means of expanding financial access in
many markets. The use of such technology allows banks to provide better services to existing customers
and to reach out to new customers without establishing bank branches and/or ATM locations. Moreover,
mobile banking presents a promising avenue for future expansion of financial services to the currently
underserved populations.
Almost 95% of respondents to the household surveyed said that they have access to a mobile phone.
However, as mentioned in the main text, only about 3% currently use mobile phones for conducting
financial transactions. The survey asked respondents if they would be interested in using their mobile
phones to conduct such transactions in the future. 22% responded positively, which is promising interest
in such products. More encouraging, the Survey found that 29% of people who do not have a bank
account, have a mobile phone and would be interested in mobile banking.
Why are you not interested in banking se rvices which can use mobile phone ?
0
.1
22.06%
Weighted Mean
.2
.3
.4
Are you interested in banking services which can use mobile phone?
77.94%
Yes
No
Among the respondents who did not express an interest in mobile banking, the greatest (almost 50% of
respondents) concern was difficulty in understanding how the product would work. Some did not have
mobile phones (32%), while some were concerned with costs (21%). Overall, these identified constraints
are promising for banks and other financial institutions, because the major constraints seem to be lack
of knowledge about the product. Potentially, this can be remedied through marketing and product
orientation initiatives.
85
Chapter 3
Box 11.
Survey Results on Financial Literacy
In recent years, there has been considerable attention in policy circles on the provision of financial
literacy training to poorer segments of the population. However, this push for financial literacy programs
has not yet been justified on the basis of solid evidence regarding the needs of target groups and on
the outcomes of these programs. In order to explore these issues, the survey attempted to determine
current levels of financial literacy. As part of this, all respondents were asked to address a set of questions
on mathematics and logic (cognitive ability), which yielded a math skills score.
A significant proportion of respondents scored well on tests of mathematical ability (81% correct).
Among all survey respondents, 74% of households claim they are interested in financial matters. Also, a
large proportion (78%) were able to understand reasonably complicated financial concepts, such as the
concept of compound interest. However, only 52% managed to answer all financial literacy questions
correctly. An even smaller proportion (44%) showed a comprehension of issues related to loan portfolio
choice. And an even smaller proportion again (28%) demonstrated a comprehension of the concept of
risk diversification. It was particularly noteworthy that the worst scores were on a question concerning
an interest rate calculation on alternative loan repayment schemes, with less than half respondents
choosing the correct answer.
A much higher proportion of urban households demonstrated financial literacy than rural households
(60% vs. 47%) with urban respondents scoring higher in all categories related to financial literacy. In
terms of gender differences, a slightly higher proportion of men demonstrated financial literacy than
women (54% vs. 50%), with men doing better in the mathematics test in particular (83% vs. 79%). In
terms of income levels, a markedly higher proportion of better off households demonstrated financial
literacy than poorer households (57% vs. 47%), also demonstrating better math skills (85% vs. 76%).
Finally, a far higher proportion of households with formal savings accounts demonstrated financial
literacy than those without (60% vs. 41%), with these households also scoring better at math (88% vs.
71%).
Taking the analysis a step further, Annex K presents econometric results where households’ financial
literacy score is regressed on a range of potential explanatory variables. The regression analysis shows
that household heads are more likely to be financially literate if they are: male; older; have attended
school; and score well on the math test. Further, urban, wealthier and smaller household heads score
better on financial literacy, as do households that own an enterprise. Owing a house is inversely related
to financial literacy, but this is roughly offset by certain amenities in the house. Investing in housing by
those with limited financial literacy is not surprising, because it is a simple, useful way to save and invest,
especially by lower-income groups who (as noted in Section 3.4.2) do not understand banks or do not
see the advantage of having a bank account.
3.8.2 Other Survey Results: Expressed Demand for Financial Products
As preliminary market research, the Survey asked respondents whether they would be interested in
specific financial products. In response, 43% of the respondents stated that they would be interested in
a commitment savings product, in which funds are is set aside, usually for 6 months to a year, without the
option of withdrawal.48 Also, 50% of respondents expressed an interest in a retirement savings product.
Furthermore, 25% of respondents stated that they would use the services of a deposit collector who, for a
small fee, would come to their village or town to collect monthly savings to deposit them at a local financial
institution.
48
86
Ashraf, Karlan and Yin (2006) find that such programs do lead to significant gains in savings, especially for women.
Chapter 3
A higher proportion of urban respondents were interested in both the commitment savings (49% vs. 39%)
and retirement savings products than rural respondents (54% vs. 47%). A higher proportion of higher
income earners were interested in commitment savings products (50% vs. 41%) and retirement savings
products (53% vs. 47%) than were lower income earners. A higher proportion of respondents who already
have bank savings accounts express a desire for both commitment savings and retirement savings products
compared to the unbanked population (49% vs. 35% and 60% vs. 38% respectively). There were no significant
differences in terms of the gender of respondents. These results are potentially useful for banks and other
financial services companies that may be considering the development of products to meet underserviced
needs. Pilot testing of these types of products would be a useful way to try to increase access to financial
services for the currently under-served population.
Another section of the survey questionnaire sought to determine the deterrents preventing un-banked
respondents from opening a bank account. To determine how best to alleviate two of principle identified
constraints (cost and financial literacy), hypothetical questions were posed to households who currently did
not have bank accounts. The survey results show that 37% of the unbanked population would be interested
in opening a bank account if the bank account fees were cut by 50%. A substantial 58% would be interested
in opening a bank account if these fees were completely eliminated. In addition, 74% of the unbanked would
be interested in attending financial literacy training. Moreover, these results are relatively homogeneous,
except that: urban populations are significantly less interested in financial literacy training programs; and
men seem to be more willing to open bank accounts if fees are cut by 50%, although this difference is no
longer significant if fees are cut by 100% (or more). These matters are discussed further in Box 12.
87
Chapter 3
Box 12.
Evidence on Easing Constraints to Opening Bank Accounts
As noted in the main text, the survey indicated that lack of funds and limited financial literacy were
the main constraints to opening a bank account. A question arises as to whether addressing these
constraints would induce households to open bank accounts. Using a randomized evaluation design,
Cole, Sampson and Zia (2009) use survey data and unbanked respondents from the A2F Survey to
answer this question.
The researchers directly tested the efficacy of financial education by offering a course on bank accounts
to a set of unbanked households that were survey respondents on Java. Among the sample of unbanked
households, half were randomly invited to a group-based, 2-hour financial education seminar in which
participants were educated on the benefits of savings; of having bank accounts; and the procedures to
open bank accounts. The results indicate that the financial education program did not have any significant
overall impact on the likelihood of opening bank accounts. However, the researchers found significant
positive impacts for financially illiterate and unschooled households. In other words, it demonstrated that
providing financial literacy training to people with low levels of education has significant benefits.
A separate experiment was designed to investigate whether lower fees would increase of likelihood of
opening bank accounts. Three levels of incentives were offered to randomly selected households, with
the lowest amount representing a fraction of the bank account opening and maintenance fees. The
largest amount was greater than these fees.
In stark contrast to the results on financial education, the research found a strong, significant impact on the
likelihood of opening bank accounts by offering households financial incentives to cover bank account fees.
For example, the research demonstrated that more than one third of participants would be interested in
opening an account, if fees were cut by 50%. This result is important because the sample size was quite
large, including all those without a bank account, which is almost half of the total population. The large
size of the sample boosts statistical reliability.
These results suggest that lowering banking fees could be a useful mechanism for increasing financial
participation. In addition, it demonstrates that well-targeted financial literacy training might be useful.
3.9 Summary of Policy Issues
This section summarizes the policy issues arising from the discussion of survey results in this Chapter.
Policy recommendations are provided in Chapter 6. The discussion below addresses major service areas. In
particular, it notes that few significant gender differences are uncovered by this survey.
Limited Reach of the Formal Financial System: A recurring theme of this Chapter is the limited reach of the
formal financial system in Indonesia. The reach of banks, even including BPRs and BRI’s Unit Desa system, is
shown to be particularly limited. The survey showed that less than half of Indonesians save at a bank and, of
those who do so, two thirds also save at some type of informal institution. Similarly, the survey indicates that
only 17% of the population borrows from banks, compared to the 43% that borrow from informal sources.
This is striking evidence of the banks’ currently unfulfilled potential to contribute to poverty alleviation, if
sufficiently low-cost means can be found for these markets to be commercially attractive to the banks.
In looking at the constraints to accessing banking services, physical accessibility is not generally regarded as a
significant problem. To be sure, customers in rural off-Java regions require long times to reach bank branches,
especially if water transport is involved. However, the vast majority (over 95%) of survey respondents stated
88
Chapter 3
that bank branches are conveniently or very conveniently located. To underscore this point, bank outlets are,
on average, already more conveniently located than key public services such as basic health and education
facilities. To identify constraints to accessing financial services, it is necessary to look beyond physical access.
Important Financial Services: On the basis of this survey, the single most important financial service is a
savings account, with the most commonly stated reason for holding one being ‘security’ (Table 16). As a
policy issue, this highlights the importance of policies to maintain overall financial sector stability as well
as to promote savings products targeted at lower-income households. Credit is important, too, but usage
is currently concentrated in the local informal sector and is widely diversified among different types of
institutions.
Savings Accounts: As mentioned, approximately two thirds of Indonesians save, although they mainly
use the services of informal providers to do so. Those who do save at banks actually make greater use of
non-bank service providers. Among ‘exclusive users’ (those who use only one type of service provider), the
most commonly used service providers were informal providers. For policy, this implies that there is a large
demand for formal financial services, if conditions are right for Indonesians to move their savings out of the
informal sector and into the formal financial system. The primary reason for saving in banks is ‘security’ (Table
16), which underscores the vital importance of continuing to maintain confidence in the banking sector.
Table 16.
Summary of Households Use & Interest in Formal Financial Products
Use of Existing Bank Products
Reasons for Using Bank Services
Formal Product
% use
Savings Account
41%
Provides Security
ATM Card
20%
Saving for Future Needs
Loans
17%
Transfer Money
Mobile Banking
3%
Emergency Needs
Credit Card
2%
Access to other Financial
Services
Interest in Prospective Financial Products
Formal Product
% interest
Retirement Savings
50%
Contractual Savings
43%
Deposit Collector Service
25%
Mobile Banking
22%
Cheaper products
If bank fees cut in half
37%
If bank fees eliminated
58%
% use
53%
42%
37%
31%
26%
Notes:
Mainly of interest to urban residents; the better-off; and
those already holding a bank account.
Mainly of interest to those in rural areas.
For those who don’t have a bank account.
For those who don’t have a bank account.
As for reasons for not saving, the highest proportion of non-savers stated that economic reasons prevented
them from saving. People believe they don’t have enough money to make good use of a bank account or
they state that they don’t have a job, so they do not have a savings account. This points to the importance
of broad-based policies to raise incomes as the most effective means of eliminating constraints to accessing
financial services. These reasons also tend to hold across all income segments, which provide some room for
targeted policy interventions in the form of public education programs.
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Chapter 3
Credit: The proportion of Indonesians who borrow is approximately 60%, although the great majority
borrow from informal sources and a mere 17% borrow from a bank. Borrowers tend to be married; relatively
well-off ; educated and older. They also to be relatively moderately indebted, which indicates that policies
need to focus more on the broader provision of financial services, rather than being narrowly intended to
raise borrowing.
Nominal interest rates tend to be high, except for loans from employers, friends and neighbours. Informal
sources are the most expensive, whereas banks and MFIs ball approximately into the middle. Both banks
and MFIs charge lower rates to borrowers who have a bank account. For policy purposes, this suggests
that one simple, low cost solution for borrowers who want a lower interest rate is to open a bank account.
Lack of collateral does not appear to be a generalized problem. It is an issue for some banks, but these
currently serve a minority of Indonesian borrowers. Among many providers, including informal providers,
MFIs and BRI’s Unit Desa program, the principle of lending against income, rather than collateral, is already
well-established. Other problems, such as the lack of documentation to access loans, appear to be more
significant constraints than lack of collateral.
The ‘Truly Excluded’: This report investigates the characteristics of a group referred to here as the ‘truly
financially excluded’. This group is defined as those who have neither a savings account of any kind nor
a loan. Predominantly, those in this group are poor and uneducated; they live off-Java in rural areas; and
they do not own a non-farm enterprise. There are slightly more women in this category than men, but the
difference is relatively minor. For policy purposes, it is clear that the rural, uneducated poor in locations offJava should be the target of specific interventions.
Insurance: The survey finds a surprisingly high rate of usage of insurance, but mainly in the form of travel
insurance and public health insurance of one form or another, particularly those provided for government
employees and other specific categories of the population. Other types of insurance tend to appeal primarily
to high income earners in urban areas. Among the poor, it appears that having a household member working
abroad serves as an elementary form of insurance, effectively substituting for formal insurance.
New Products: there is a range of products that could be developed by formal service providers and that
appear to be potentially of high interest to consumers (see Table 16). For example, these include contractual
savings products for urban residents or mobile savings services for rural residents. As for extending the reach
of formal bank services deeper into the lower strata of society, the most promising means for achieving this
appears to be mobile banking. Even the poorest residents of remote villages have access to mobile phones
now. As a result of this, the survey demonstrates that there is considerable interest in mobile banking among
those with a mobile phone but no bank account.
Pricing and Training: regarding the pricing of bank accounts and other financial services, the Survey
indicates that consumers will respond to attractive pricing of financial services. However, the results also
suggest that demand is marginally price inelastic, which means that it may be against the banks’ financial
interests to reduce fees. One policy option – that is currently being implemented by Bank Indonesia in
partnership with several banks – is to offer basic banking services or ‘no frills’ accounts, an option that some
banks already offer. Another option is to encourage technological advances, such as mobile banking services,
that allow banks to reach more customers at lower unit cost.
With regards to financial literacy training, the results of the survey suggest caution regarding recent global
trends towards financial literacy training programs. The experimental results show that financial literacy
training is an effective inducement to participate in the financial sector amongst only specific subsets of the
trainees. The policy lesson is that careful targeting of such programs on specific demographic groups would
be needed to yield significant positive results.
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Chapter 4
Regulatory Impediments to
Access
4.1 Introduction
This chapter attempts to address the following questions: To what extent does the Indonesian regulatory
environment promotes or restricts access to financial services? What policy interventions could improve access
to financial services while at the same time maintaining the prudential safety of the financial system?
As noted in Chapter 1, addressing issues related to access to financial services involves a thorough examination
of price and non-price barriers to the use of those services.49 From the regulatory side, the goal should be
to establish “rules of the game” that create a conducive environment to offering financial services that fulfil
the needs of the market at a fair, market-driven prices. The regulatory environment should facilitate meeting
the needs of potential customers who are voluntarily and involuntarily excluded, as discussed early in the
report. In theory, consumers who choose not to use financial services do not pose a regulatory issue: this
relates to lack of supply, but to a lack of demand resulting from the free decision of consumers. However,
in the case of Indonesia, there are large areas of unmet demand. In this case, it is clear that consumers
want formal financial services but are unable to obtain them, due to issues such as the lack of appropriate
products and geographic isolation.
At the outset, it is also important to note that there is often a conflict between the goal of maintaining the
prudential safety of the financial system and of promoting broader access. In making policy recommendations,
it is very important to balance such conflicting objectives. With specific reference to promoting access to
financial services on the part of low-income households and MSMEs, different countries have taken different
approaches. South Africa, for example, has adopted an affirmative action approach (see Box --). Supporters of
this approach claim that provides a solid policy framework for the future development of the industry, adding
that it will underpin sound business practice and maintain the strength and stability of the financial sector.
This report bases its recommendations on the premise that these recommendations should encourage the
development and maintenance of sustainable practices within the broader Indonesian financial system.
Thus, drawing on international experience, its recommendations for integrating low-income households
and MSMEs into the overall financial system assume the following: 50
49
Demirguc-Kunt, Asli; Beck, Thorsten; and Honohan, Patrick (2008), p. 27.
50
Ledgerwood (1998), p. 2-3.
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Chapter 4
1.
Subsidized credit, policy-directed lending and debt forgiveness in general undermine economic
development, including for poor households;
2.
Interest rates should be set to cover costs of funding, risk, loan losses and transaction costs;
3.
Interest rate caps usually limit service and encourage high arrears, especially in areas of poor financial
literacy; and
4.
Regulation should encourage scale, efficiency and enterprise to integrate microfinance into the formal
financial sector over the long-term.
Absent these, regulation may favor low-income households and MSMEs to such an extent that the supply of
financial services actually deteriorates. For instance, poor regulation could disrupt informal markets that are
not mature enough for formal regulations, but that reliably provide financial services.
Box 13.
South Africa’s Approach to Improving Access to Financial Services
In October 2003, the Banking Council of South Africa released its “Black Economic Empowerment” (BEE) charter.
This charter calls for increased access to financial services for poor households and communities through the
direction of billions of rand into investment in transformational infrastructure, agricultural development, lowincome housing and small- and medium-sized black businesses. Among other things, the charter seeks to facilitate
significant increases in black ownership and control, management and skills development over the next ten years.
The charter was developed by the financial sector as a whole, including representatives of banks, long and shortterm insurers, black professionals and black business, unit trusts, fund managers and brokerage firms. It is a
voluntary commitment that was agreed upon unanimously by ten industry associations in the financial sector. The
charter states that the target should be achieved through sound business practise.
The broad-based thrust of the charter is reflected in the fact that 81% of the charter targets relate to the employment,
training and promotion of black people; improvement of access to financial services by poor people; targeted
investments in projects that address backlogs, underdevelopment and support job creation; and the procurement
of services and goods from black businesses. The financial sector committed itself to fostering new and developing
BEE companies. This includes, where appropriate, referring business opportunities to, and procuring financial
services from, black-owned financial institutions.
With specific reference to access to financial services, there was provision for effective access of 80% of people in
LSM 1-5 (the lower half of South Africa’s measure of living standards) to products and services in life assurance,
collective investments, short-term risk insurance and banking services. There was also provision for 0.2% of the
post-tax operating profits of the financial sector for consumer education.
Concerning empowerment financing, some R75bn of total empowerment financing was directed towards the
provision of financing for or investment in targeted investments and BEE transactions. Of this, approximately two
thirds will be targeted investments in low-income housing, transformational infrastructure, agriculture and black
SMEs; one third would be BEE transactions.
The charter came into effect on 1st January 2004, with the target date for the achievement of its goals set for the
end of December 2014. Companies are committed to publishing annual BEE reports, including audited scorecards.
Achievements, encapsulated in an annual scorecard and charter rating, were to be one of the factors measured by
government in the award of state tenders, and by businesses in their commercial dealings with each other.
A mid-term review is due in 2009 and a comprehensive review in 2015. The intention is that, while the charter
targets have a finite 10-year life, the principles and commitment to empowerment will live on after 2014.
Source: See http://www.fscharter.co.za/page.php?p_id=1 and http://www.banking.org.za/
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Chapter 4
4.1.1 Indonesia’s Financial Regulators & Supervisors
In Indonesia, the main regulatory and supervisory bodies are:
i)
Bank Indonesia (BI) is the central bank, with the mandated role of this institution being the
supervision of the banking system and the maintenance of the stability and value of the rupiah.51
To achieve this, BI implements monetary policy, governs the smooth functioning of the payment
system and regulates deposit-taking institutions, particularly banks;
ii)
Ministry of Finance (MoF) plays a significant role in establishing and maintaining economic and fiscal
policy. This ministry regulates capital markets and most non-bank financial institutions, through
Bapepam-LK. The MoF is also responsible for granting certain licenses that establish legal status
and the issuance of tax regulations for all financial institutions;
iii) Ministry of Cooperatives and Small-and-Medium Enterprises (MCSME) has jurisdiction over the
establishment of cooperatives services outlets.52
In Indonesia, different financial providers are covered by different regulators and regulations (Table 17). This
is as much the result of the historical development of these different institutions as it is about differences in
the products they offer.
51
Article 7 of Bank Indonesia Act No. 23 of 1999, as subsequently amended.
52
Appendix to Minister Decision No. 351/KEP/M/XII/1998. The authority and objectives of the MCSME are detailed out in Decree
No. 9/M/2005, Article 94 and 95.
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Chapter 4
Table 17.
Financial Providers and Financial Services in Indonesia
Financial Provider
Organizational
Format
1st and 2nd Tier
Commercial Banks
(Bank Umum)
Limited Liability
Company,
Government
Enterprise
Private sector
entities, and public
sector ownership
Regulated and
licensed by Bank
of Indonesia
Lending, small scale business
loans (KUK), business
development service
providers (BDSP), savings
facilities
People’s Credit
Banks (Bank
Perkreditan Rakyat
or BPR)
Limited Liability
Company,
Government
Enterprise
Private sector
entities or
stakeholders, no
foreign ownership
As above
As above
Village Credit
Banks (Badan
Kredit Desa or
BKD, currently a
sub-set of BPRs)
Limited Liability
Company,
Government
Enterprise
Private sector
entities or
stakeholders
Regulated and
licensed by Bank
of Indonesia;
supervised by BRI
development service
providers (BDSP), savings
facilities
Rural Credit
Fund Institutions
(Lembaga Dana
Kredit Pedesaan or
LDKP)
Limited Liability
Company,
Government
Enterprise
Mostly owned
by provincial
governments
Mainly regulated
and licensed
by provincial
govts; supervised
through BPDs
development service
providers (BDSP)
Non-Bank
Financial
Institutions (NBFI)
Limited Liability
Company,
Government
Enterprise
Private sector entities
or stakeholders;
some public sector
ownership
Ministry of
Finance
Leasing, consumer financing,
credit cards and provision of
funds and capital goods
Village Unit
Cooperative ( KUD)
Membershipbased
cooperative or
credit union
Members
Ministry of
Cooperatives and
SMEs (MCSME)
Lending to members only
Saving and Loan
Cooperative (KSP)
Membershipbased
cooperative or
credit union
Members
MCSME
Lending, savings, time
deposits to members only
Islamic
Cooperatives
(BMT)
Membershipbased
cooperative or
credit union
Members
MCSME
Lending, savings, time
deposits to members only
Pawnshop
State chartered
institution with
branches
Government/
Ministry of Finance
Government of
Indonesia
Micro-loans, emergency
loans and transactionsfor-cash, certifications for
minerals and stones
NGO MFIs
Non-profit
association, trust
or foundation
Private sector
entities or
organization
No regulation
Savings and lending facilities
and social services
Ownership
Source: World Bank staff research.
94
Regulatory Status
Range of Financial Services
Permitted
Chapter 4
4.2 Assessment of the Current Regulatory System, by Service
Provider
In reviewing the current regulatory framework to assess its impacts on access to financial services, this
report drew on background work related seven broad functional areas, namely:
(i)
Entry into the industry: capital requirements; management qualifications and certification; and
ownership;
(ii)
Activities related to asymmetric information between clients and financial institutions: “Know Your
Customer” principles; the debtor information system (Credit Bureau); customer protection;
transparency of financial conditions; transparency of financial products; and deposit insurance;
(iii)
Prudential supervision: regular on-site supervision; capital adequacy; statutory reserves; legal
lending limits; etc;
(iv)
Pricing of financial products: deposit and lending interest rates.
(v)
Servicing of financial products: saving products; loan products; accessibility; and funding;
(vi)
Exercising claims/remedies: debt restructuring; and execution of collateral; and
(vii)
Sustaining the industry: unsound ratings/conditions; mergers and acquisitions; single presence
policy; and liquidation.
Content summaries of the relevant regulations are presented in Annex L-N. They cover the three most
important types of service provider for current purposes, these being: i) banks; ii) finance companies; and
iii) cooperatives.
4.2.1 Regulatory Barriers to Access: Commercial Banks
With the notable exception of Bank Rakyat Indonesia (BRI; see Box 4) and a handful of other large banks
that have a large branching network,53 commercial banks in Indonesia have yet to play a major role in direct
access to financial services for low-income households.
Current Tight Entry Restrictions
In terms of regulatory barriers, the most significant of these at present concerns entry. In principle, licensing
is open, but minimum capital is fairly high and it is difficult for a financial institution to obtain a new license.
For all practical purposes, newcomers must takeover an existing bank.54 As part of the API, this is explicit
policy on the part of Bank Indonesia, designed to reduce the number of banks by encouraging mergers and
industry consolidation.
53
As of late 2008, BRI had over 5,200 branches. The next largest, Bank Danamon, had around 1,175, including its small, regional
(DSP) outlets. The others with large networks are: Mandiri (almost 1,000); BNI (962); and BCA (819). Another, Panin-ANZ, is
currently implementing a major expansion in its branching network.
54
For example, HSBC has bought some 89% of Bank Ekonomi; Maybank has acquired Bank Internasional Indonesia; and Barclay’s
has bought Bank Akita.
95
Chapter 4
Monthly Fees and Minimum Balances Vary Considerably by Bank: Most Look High
Based upon the Survey results of Chapter 3, the more serious impediments to access arise from high monthly
fees and high minimum account balances. As a result of such charges and conditions, the relative costs of
holding a low value accounts can be extremely high, with, for example, monthly administration fees in far in
excess of interest paid on small deposits.
An investigation of these issues shows that minimum balances and monthly administration fees are matters
determined by internal corporate policy, not BI regulation. Minimum balances vary considerably by bank,
with two of the most popular (BRI’s popular Simpedes account and Bank Danamon’s DSP Savings accounts)
set at Rp100,000 (about US$10),55 which is relatively low. By contrast, BCA’s advertised opening minimum
balance on their ‘Tahapan’ account for individuals is considerably higher (Rp500,000),56 and industry
analysts believe that this is typical of other large commercial banks. On the basis of this evidence, minimum
monthly balances do not look like a major, generalized constraint to accessing financial services.57 However,
some banks are certainly higher than others, which may require lower income households to be selective
in choosing services appropriate to their needs (also see comments regarding fees at BPRs in the following
Section).
Some Monthly Admin Fees Hurt Small Savers
While minimum opening balances may not be a major constraint to accessing financial services, it appears
that bank charges are often a different matter.58 Most banks intentionally structure their bank charges and
interest payments in a way that discourages small deposits. Indeed, the pricing structure usually ensures
that with smaller account balances, charges are such that the balance eventually falls to zero.59 Banks do this
because small accounts are administratively costly to maintain and because unilaterally closing a non-zero
dormant account entails (contingent) financial liabilities. (Also see the continued discussion concerning
BPRs, immediately below). It would be helpful if BI were to establish a clear policy in this area, perhaps
making it much easier for banks to close non-zero dormant accounts after an appropriate period of time
- perhaps two years. One possibility would be to transfer funds from inactive accounts to a centralized
account to be administered by a relevant centralized authority – that would therefore have low-cost funds
available – while having the on-going responsibility to return funds to the depositor through the bank upon
presentation of adequate identification. Further work on this issue, including investigation into the number
of dormant accounts, the total value and average sum of money lying in such accounts, and potential
institutional arrangements to manage this issue would be helpful.
96
55
The rules vary slightly by bank. In general, the Rp100,000 is the minimum opening balance for a basic savings account and
minimum subsequent deposits are Rp10,000.
56
See http://www.klikbca.com/individual/silver/ind/rates.html?s=3 as of 12 May 2009. Subsequent minimum deposits are Rp50,000
and the minimum balance is Rp10,000. BCA staff note that there is no minimum balance requirement for 2 years for their main
TKI product.
57
As for foreign currency accounts (which are little used by poorer households), one upper-tier bank charges a monthly admin fee
of US$1 on its US dollar accounts. At rates of interest on deposits in early 2009, (which were unusually low at that juncture), these
charges exceed interest earnings on accounts of less than some US$950.
58
The monthly fee on BRI’s Simpedes account (without an ATM card) varies between Rp2,000 and Rp5,000, depending upon the
size of the account. The smaller fee is for an account less than Rp300,000 (US$30); the larger amount is for an account above
Rp1,000,000 (US$100). At BCA, the monthly admin fee is Rp5,000 for basic accounts. Bank Danamon’s DSP has no monthly admin
fee for a Savings Account, if the average monthly balance is greater than Rp100,000.
59
BRI’s Simpedes account, for example, has an implicit breakeven point of Rp3 million; above this amount the balance will increase
because interest paid exceeds admin charges. But below Rp3 million, the account will eventually drop-off to zero (because
admin charges exceed interest paid).
Chapter 4
Another approach to improving access to financial services would be to encourage or require banks to
offer a basic or “no frills” account that include a zero (or very low) monthly administrative fee 60. This would
be consistent with an approach that is being tried in several countries, where accounts are offered with a
package of free or low-cost services, with strict restrictions on the menu of services and the amounts that
can be held in the accounts. In some countries, for example, these “no frills” accounts may not attract a
charge provided that transactions are carried out at ATMs or in other ways that minimise the cost to the
financial institution.
Basic banking has been offered in some countries for a long time, including a number of developed countries
such as Canada, France, Sweden, and the United States. In the US, “lifeline” banking was introduced in the
1980s and 1990s. In Sweden, banks are not allowed to refuse applicants wishing to open a savings or a
deposit account. Similar provisions exist in France and Canada.
Although there has been no rigorous evaluation of the efficacy of these schemes in developed countries,
several developing countries are trying to implement similar policies to improve the level of access to
financial services. Pakistan introduced a regulation requiring banks to offer basic-accounts in 2005. Mexico’s
2007 regulation provides a list of services that banks must offer free of charge to any applicant who meets
certain specified requirements and whose account is below a certain size. India regulation mandated the
Zero Balance account in 2005. South African banks voluntarily introduced the so-called Mzansi accounts,
with no minimum-balance requirements and no maintenance fees but with a minimum set of services
offered. A recent evaluation by the World Bank drew a distinction between regulations mandating the
right to basic bank accounts and the availability of such accounts at banks (whether offered because of
mandatory regulation or offered voluntarily)61. The finding was that the availability of basic accounts is
positively associated with the level of access to financial services as measured by the number of accounts
held per thousand adults. However, the evaluation notes that regulations requiring banks to offer such
accounts seemed to have less of an effect on access (although the study qualifies this by stating that not
enough time may have passed between the implementation of the regulations and the assessment for the
impact to have been felt). The bottom line, therefore, appears to be that the availability of basic accounts
in banks facilitates an increase in access to financial services and that the practice of offering basic bank
accounts matters more than regulations mandating such a practice.
In October 2009, Bank Indonesia encouraged 22 banks to participate in the launching of a new saving
product called “TabunganKu” (My Saving) in early 2010. This initiative is intended to provide access to
banking services for the millions of people in Indonesia who are believed to have the financial capacity
to save money, even if only small amounts. As discussed above, small depositors are often discouraged by
the monthly administrative fees that banks normally charge, which often results in the closing of a savings
account of such depositors due to inadequate balance. To appeal to such small depositors, the initial deposit
for the TabunganKu product will be IDR 20,000 (US$2) with no administrative fees. In addition, Interest
will be calculated based on daily balances. To support the introduction of this product, Bank Indonesia is
also promoting improved financial literacy through a new theme called “3Ps”, which stands for Pastikan
Manfaatnya (ensure the benefits), Pahami Risikonya (understand the risk), Perhatikan Biayanya (be careful
of the costs).
Restrictions on New Branches: Not As Difficult As It Seems
Bank Indonesia sets regulations and conditions for established banks intending to open new branches.
First, BI will only issue the license for a new domestic branch office after an analysis of the respective bank
60
World Bank, (2008). “Banking the Poor”.
61
World Bank, (2008). “Banking the Poor”.
97
Chapter 4
capacity and market. In principle, the criteria for BI’s assessment relate to the current level of competition
among banks; the saturation level of the market; and role of the bank in national economic development.
Second, expansion of a commercial bank’s branches needs to have been identified in the bank’s business
plan of the previous year, a condition that may seem to restrict banks’ ability to respond quickly in the face
of changing market conditions.62
In fact, feedback from banks indicates that neither of these requirements create serious problems in
practice, as BI has adopted a relatively liberal attitude in implementing these regulations. Representatives
of Bank Indonesia do inspect the location, but their interests seem to be limited to security and IT capacity
(which is used as a proxy indicator of management capability). Bankers comment that, in most cases, the
site inspections do not pose serious hurdles. Regarding the second requirement, that banks must include
the listing of a new branch in their annual business plans, banks with large branching networks indicate that
this is not a major problem. They comment that one year is not a long planning horizon, and they note the
opportunity at mid-year to modify their plans, with the qualification that they can down-scale their plans
at mid-year, but not up-scale them. Apparently, for a bank with good corporate governance, this limitation
on branching is not a problem, while for others, it may impose a useful discipline. Banks make different
points about the cost of branching regulations. For example,63 they say that their major problem arises in
the negotiation of rental contracts for branch locations. Potential landlords know that the banks have very
limited flexibility in location and timing, and the rental rates are priced accordingly, which unnecessarily
inflates banks’ costs. To the extent that these costs are passed on to customers, it has an adverse impact on
pricing and access.
Restrictions on Relocations of Branches and ATM are More Problematic
Since early 2009, Bank Indonesia (Regulation No. 11/1/PBI/2009, regarding Public Banks) has required
detailed information on the locations of existing branches and ATMs. Even relocations of ATMs to different
floors of the same building must be reported to BI. It would be helpful for BI to reassess the need for
these sorts of detailed information requirements. It seems more reasonable to require descriptions of the
locations of branches and ATMs in relatively general terms, which would allow the banks more flexibility in
their extension of services to customers. This would be particularly helpful for facilitating the development
of branchless banking models, in which ATMs are often a prime point of access for the withdrawal of funds.
Currently, ‘Directed Lending’ is Not a Substantive Policy Instrument
Following an unsatisfactory experience with directed, small-scale lending in the 1990s, in recent years Bank
Indonesia has been using ‘moral suasion’ to encourage bank lending to MSMEs (see Section 5 of Annex L).
Specifically, self-determined targets for MSME lending must be published in the bank’s annual business
plan, which looks like the opportunity for BI to encourage greater small-scale lending. As a matter
of regulatory reform, it looks more cost effective for banks—and would serve the same purpose for
BI—if this information were published in the banks’ audited accounts at year-end. For purposes of the
business plan, a general statement of intentions should suffice. Publication at year-end affords banks
the flexibility to respond in the course of the year to changing market conditions. Feedback from banks
indicates that Bank Indonesia is generally implementing this policy in a liberal way and thus, in practice, it is
not a significant issue for access to financial services.
98
62
Indeed, the time horizon could be 18 months or longer, depending upon the timing of the bank’s internal decision to go ahead
with a new branch.
63
There may also be a problem of policy consistency as between Bank Indonesia’s head office and BI’s regional offices, which do
most of the on-site inspections for new branch office locations. Bankers indicate that exact procedures for local inspections vary
markedly by BI regional office.
Chapter 4
Despite the fact that only a few banks play a significant direct role in facilitating access to financial services
on the part of low-income households and MSMEs, the commercial banks nonetheless played a pivotal role
in ensuring open, competitive financial markets. In particular, the commercial banks are most likely to be the
aggressive newcomers in any promising markets, and they will put competitive pressure on existing entities
to lower prices and improve service. In addition, commercial banks are developing important linkages
with BPRs (see Section 5.5 of Annex L), thereby providing indirect financing for medium- and small-scale
loans. Most importantly, the commercial banks are profit-driven institutions that extremely likely to actively
pursue opportunities in the smaller end of the market, if those opportunities are financially attractive.
As technology advances (see Chapter 5, Box 22) and the cost of servicing small customers declines, the
commercial banks—including foreign-owned banks—will move into commercially viable segments of this
sub-sector, if the regulatory environment permits.
4.2.2 Regulatory Barriers to Access: Bank Perkreditan Rakyat (BPRs)
In contrast to commercial banks, rural banks (BPRs) play a significant and direct role in providing access to
financial services for low-income households and MSMEs in Indonesia. By definition, these rural banks are
relatively small and serve local areas. Often BPRs are the frontline of financial services between this segment
and the wider financial system. Since they are rarely—if ever—large enough to pose systemic risk,64 the
regulation of BPRs is light in comparison with the commercial banks. Nonetheless, systems to ensure that
adequate depositor protection is in place have been implemented (see Section 4.2.4).
Minimum Capital Is Reasonable, Although Too High for Some Regions
The minimum paid-up capital for BPRs was increased by a factor of 10 or more in 1999. However, it is still
not prohibitively high, ranging up to a maximum of US$ 500,000 for Jakarta (see Table 18). The minimum
paid-up capital varies significantly by location, with less populous areas (smaller markets) requiring smaller
amounts of start-up capital (Table 18). This graduated system of minimum capital requirements appears to
be a reasonable policy in terms of facilitating access, because it ensures low entry costs into small markets in
remote regions of the country. Sharia BPRs enjoy even lower minimum capital requirements in certain areas
(Table 18), although the economic rationale for this is unclear. It would be appropriate to reconsider the
capital requirement for Sharia BPRs on the basis of risks that they face and the regions in which they operate,
and to bring these back in line with those for non-Sharia BPRs. In general, strengthening the existing BPR
sector while at the same time easing entry for BPRs would be likely to contribute to increasing access to
financial services.
Table 18.
BPR Start-up Capital Requirement
Conditions
Capital City Territory of Jakarta
The districts/municipalities of Bogor, Depok, Tangerang and
Bekasi
A provincial capital in Java and Bali
Provincial capital outside the area referred above
Outside the area referred to above
64
BPR (conventional)
Rp5 billion
Rp2 billion
Sharia BPR
Rp2 billion
Rp2 billion
Rp2 billion
Rp1 billion
Rp500 million
Rp1 billion
Rp1 billion
Rp500 million
This said, particular supervisory attention would be appropriate, if the BPR has business relationships with commercial banks,
other BPRs and/or cooperatives.
99
Chapter 4
Minimum Balances and Monthly Admin Fees are Variable
Field interviews indicate that minimum balances and monthly administrative fees at BPRs are quite low.
Indeed, they are roughly half—or less—than similar fees and balances at commercial banks, with some
accounts, including products intended for students, having no administrative fees whatsoever.65
compared to savings accounts or regular commercial banks, it could be argued that typical accounts at BPRs
would all be classified as ‘no frills accounts’. Typically, these institutions offer passbook savings accounts
with no minimum number of transactions per month. Perhaps surprisingly, some BPRs also have forms of
‘contractual savings accounts’. With these products, every month a customer deposits a certain amount and
receives the cash at the end of the term of the contract. There are also ‘mandatory savings accounts’ for loan
customers: with these products, when a new loan is approved, the money is deposited in the account and
the customer withdraws only the amount needed at the moment, leaving the rest to earn interest until it is
needed. Issues concerning dormant accounts are similar to those at commercial banks.66
Significant Ownership Restrictions
At present, the ownership of BPRs is restricted to Indonesian citizens (see Annex L). In particular, foreign
ownership and ownership by foundations, including NGOs, is not allowed. This has worked to the
disadvantage of BPRs, which often require capital, management skills and technical knowledge that could
be acquired in cooperation with foreign owners and/or NGOs. While it is not clear that a large number of
foreign investors would be interested in such businesses, it is difficult to see what the advantages in closing
this possibility to the management of BPR.
Relatively Easy to Open New Accounts
Currently, customers can only open new accounts at the BPR’s heads office, branches offices or cash offices.
Independent of KYC regulations (see immediately below), BPRs are cautious in this regard because of the
risk of fraud. In particular, there may be some legitimate concern that fake employees of BPRs may solicit
new customers and abscond with the proceeds.67 Nonetheless, despite these conditions, opening a new
account appears to be a quick and convenient process. In addition, special arrangements can be made, with
BPR account officers being able to come to new depositors homes, places of work or schools to open a new
account and pick up the money if so requested.
100
65
A typical opening minimum deposit for a BPR is Rp50,000 (US$5) which is half that at a regular commercial bank (Section 4.2.1).
Often there are no minimums on subsequent deposits. Monthly admin fees are normally Rp1,000 to Rp2,000 which is less than
half of commercial banks.
66
For example, the BPR will close an account unilaterally if the balance has fallen to zero and if there has been no activity for
6 months. For non-zero accounts, if the account has been inactive for a long period of time, the account will be temporarily
de-activated. It will be re-activated if the customer wants to perform a transaction, but the customer must present adequate
personal identification to prevent fraud.
67
One BPR owner specifically made the point that their customers are mainly low-income with little or no educational background.
This segment of customers looks especially vulnerable to this kind of crime.
Chapter 4
Box 14.
Some History on the Regulation of Other Microfinance Institutions
Microfinance in Indonesia dates back more than a century to the establishment of the Priyayi Bank of Purwokerto
in 1895 and the Poerwokertosche Hulp- Spaar en Landbouwcredietbank established one year later. The early
Volkscredietwezen (popular credit system) fostered the emergence of thousands of small village banks with millions
of micro-borrowers. The movement culminated in the foundation of the Algemeene Volkscredietbank (AVB-Bank) in
1934, which later became Bank Rakyat Indonesia (BRI). It is worth noting that the founders of BRI’s Unit Desa system
consulted extensively the credit manuals of the AVB-Bank to design the now famous Kupedes loan and Simpedes
savings products. a/
Other financial activities of MFIs have traditionally been conducted by Village Credit Banks (BKDs) and Rural Fund
and Credit Institutions (LDKPs). BKDs were formed at the end of the 19th century under Dutch colonial rule in Java
and Madura as ‘village banks’ and ‘paddy banks’. LKDPs refer to various regional MFIs, most of them established
between 1970 and 1990 by provincial administrations.
The Banking Act of 1992 led to a fundamental change in the regulation of micro-finance, with BKDs and LKDPs
being required to convert into BPRs. For BKDs, the conversion was relatively simple, with the Ministry of Finance
granting them a collective BPR licence, with certain exemptions from BPR regulatory requirements (e.g. minimum
capital requirements, compliance with soundness ratings and the submission of standardized reports). Also,
supervision was turned over to Bank Indonesia, which out-sourced this function to BRI, which had had previously
supervised BKDs. BI continues to supervise commercial banks that conduct micro-finance operations.
For LKDPs, the transition was far more difficult, due to a number of factors, including confusing regulations; special
exemptions; and splintered supervisory authority, including involvement by the Ministry of Home Affairs and some
provincial governments (e.g., Central Java, through its Regional Development Bank (BPD)). In the end, an estimated
27% of LKDPs converted to BPRs (or cooperatives or other permitted institutions). Others closed down or became
illegal operations. At the present time, an unknown number of these institutions continue to operate on the fringes
of the financial system.
It is worth noting that many of these institutions that were forced out of existence were some of the first institutions
in Indonesia to offer Micro finance products. Usually, they did this sustainably and on a commercial basis, without
subsidies from the government. Also, the managers of BKDs and LKDPs were prominent village members who knew
their customers well, meaning that these institutions operated according to KYC principles. The fact that managers
were well known in villages also improved transparency of product information, in that these managers were well
positioned to explain the terms of loans to borrowers in a manner that they could understand. Finally, a strong BKD
or LKDP in a village was often well-positioned to open effective branches, thereby expanding sustainable outreach.
Given the many advantages of these institutions, it is perhaps worth reflecting on the rationale for the regulations
that have pushed many of them into an unclear, probably illegal status.
At this point, there are legitimate issues as to whether it is worth trying to formally clarify this situation until a new
MFI Law can be drafted and passed by Parliament. A ‘hands off ’ approach is one serious possibility, and probably
the default case. Other options might include:
a/
•
Acknowledgement of the situation by the authorities, with the licensing of these institutions as semiformal institutions that abide by non-prudential regulation
•
Adding a new licensing tier for MFIs that accommodates the functions performed by these institutions.
This paragraph is borrowed from Bank Indonesia and GTZ (2000). The same source is used elsewhere in
the Box.
Know Your Customer Principles (KYC) Requirements May be Problematic
In 2001, BI mandated the implementation of Know Your Customer Principles (KYC) for commercial banks
101
Chapter 4
and BPRs in an effort to improve transparency and to achieve compliance with international Anti-Money
Laundering (AML) standards. Unfortunately, the implementation of these principles may have reduced
access to financial services for low-income households.68 As an example of a new mandated requirement
that may have reduced access for low income households, it is now a requirement that new depositors must
sign-up in a branch office. This limits the ability of banks to implement outreach services and to offer effective
mobile banking products (see Chapter 5). In addition, more stringent identification requirements have been
implemented, with acceptable documents including identity cards (KTP), driver’s license or passport and
other documents that list date of birth, permanent address, nationality and taxpayer identification number.69
These regulations adversely affect financial access by low-income households, especially the requirement
that depositors have a taxpayer number (NPWP), as obtaining a taxpayer number is a burdensome process
that may require unofficial payments to acquire.
However, some observers have claimed that the KYC and AML requirements in Indonesia have had no
significant negative impact on financial inclusion. From the demand side, there seems to be no real issue
concerning identification cards,70 which are widely available and come in variety of obtainable forms. On
the supply side, many of the KYC and AML standards coincide with normal business practices, so that the
added costs to financial services providers have been minimal. As evidence, they point to Bank Indonesia’s
Survey of MSMEs, which indicates that most MSMEs do not have a problem achieving compliance with legal
business requirements, such as the requirement to have licenses and taxpayer numbers, when applying for
credit.71
To ensure that the implementation of KYC requirements do not act as a constraint to accessing financial
services, a number of steps might be taken to increase access without compromising security significantly.
For example, BI could exempt small business loans and personal loans under, say, Rp50 million from the
NPWP requirement. For larger loans, BI might try linking NPWPs into a public credit registry, preferably
working with the Directorate General of Taxation of the Ministry of Finance.
Burdensome Reporting Requirements for Small BPRs in Remote Regions
BPRs of all sizes are subject to relatively burdensome reporting requirements. For example,72 they are
required to submit monthly financial reports; quarterly budgets and progress reports against those budgets;
semi-annual reports from the Board of Commissioners; and An annual business plan and budget to BI. In
addition, they are required to publish courtly financial statements in local newspapers and/or to post these
statements in public places. They are also required to prepare an annual report and to submit KYC reports to
BI and STR reports to PPATK (the financial intelligence agency).
For BPRs with good IT systems, these requirements may not be a serious problem. But for smaller BPRs with
limited access to on-line services, they may represent a significant burden. This is particularly the case if
the BPR operates in a remote location, because management may need to deliver soft copies by hand to
the regional office of Bank Indonesia.73 Clearly there is a trade-off between easing reporting or disclosure
102
68
If the amount is greater than Rp100 million, remittances are subjected to KYC principles, usually by way of identification of both
the recipient and sender of monies.
69
Notably, village credit banks, cooperatives, LKDP and other MFIs are exempt from these requirements.
70
For example, everyone has a KTP card. Indeed, many people have more than one.
71
See p. 34 of Bank Indonesia (2005).
72
Source: field interviews by World Bank staff.
73
To be sure, there are very few BPRs in this category, perhaps only 1% of the total. Still, they are exactly the ones that are most
needed to extend financial services into Indonesia’s most isolated regions.
Chapter 4
requirements and prudential requirements. It is important to look at this issue closely and identify any scope
for steps in this area that would help increase access by reducing some of the burdens on BPRs without
significantly compromising the principles of prudence.
Some Demanding Management Requirements
Bank Indonesia requirements state that a BPR’s Board of Commissioners must consist of at least two
people, as must its Board of Directors. The individuals on these boards must fulfill certain educational and
professional requirements. Industry sources say that it is difficult for some BPRs to meet these requirements,
especially in remote locations of the country. Bank Indonesia could examine ways to address these issues in
regions where management resources are hard to find.
Doubtful Benefits from Disclosure Regulations
As mentioned, regulations to promote good corporate governance in general and transparency in particular
in Indonesia require BPRs and commercial banks to publish a full range of financial statements and product
information (see Annex L). The usefulness of these regulations for BPRs is highly questionable, because BPR
clients often have limited levels of financial literacy and may be unable to understand the publications.
For most of these clients, the reputation of the financial institution and their personal relationships with its
managers are far more important than written information. While maintaining certain minimum disclosure
requirements to ensure that it receives adequate information from BPRs, BI could consider loosening these
requirements.
Adding Metrics of Access to CAMEL
Prudential supervision of BPRs (and commercial banks) is implemented utilising the CAMEL method,
(see Box 15). This method does not include any metrics to determine an institution’s level of accessibility.
Notwithstanding recent crisis-driven concerns over international standards of supervision, the current
CAMEL methodology is a reasonable starting point for these institutions. However, the fact that that the
system does not incorporate any measurement (or proxy) relating to the level of accessibility of financial
services is a disincentive for banks to expand access to financial services. In order to address this, this
framework might be revised to include indicators of access while at the same time continuing to implement
a Soundness Rating System. Some suggestions as to how this might be achieved are set out in Table 19.
Table 19.
Access to Finance Indicators-Loans and Deposits
Financial
Service
Physical Access
Affordability (% of GDP per capita)
Deposits
Number
of
banks
Deposit
market share
of bank
Locations
to open a
deposit
minimum amount
to open a checking/
savings account
Loans
Number
of
banks
Loan market
share
Locations to
submit loan
applications
minimum amount
consumer loan
minimum account balance
in checking/savings account
Fees
consumer
loan
Eligibility
annual fees in checking/
savings account
Number of documents to
open checking/savings
account
Fees
Mortgage
loan
Days to process
consumer/mortgage loan
minimum amount
mortgage loan
Sources: World Bank (2008d)
Restrictions on Opening New Branches: Very Restrictive in Theory, Not so Onerous in Practice
BPRs are subject to more restrictions on the opening of new branches than are commercial banks, described
above. For instance, branches may only be opened in the same province as the BPR’s main office; in order
to open a new branch, the BPR must have been financially sound over the past year while maintaining a
capital adequacy of at least 10 percent; and the BPR must have current information technology. Again, Bank
Indonesia seems to be interpreting these rules in a liberal manner. As an example of this liberality, BPRs located
in border areas are allowed to conduct operations (that is, to have clients and supervise lending to clients) in
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neighbouring provinces, even if they can’t open branches. Also, for the purposes of this regulation the entire
area of Jabotabek (greater Jakarta) is considered one province, despite covering parts of two provinces and
the entire Jakarta Special Region. Likewise, when new provinces are created, BPRs that were formerly allowed
to operate in the old province are now allowed to operate in all of the new provinces created from the old
one. While acknowledging BI’s positive approach to managing this situation, it would be helpful if these
restrictions could be officially eased, at least for the sake of regulatory transparency.
4.2.3
Regulatory Barriers to Access: Cooperatives
Table 20.
Legal Basis of the Cooperative System
Regulation/Law
Mandate:
Law No. 25 of 1992
Cooperatives
Government Regulation
no. 9 of 1995
Implementation of Saving and
Lending Activities by Cooperatives
Decree of the Minister of
Cooperatives, Small and
Medium Enterprises No.
351/KEP/M/XII/1998
Operational Guidance for Saving and
Lending Activities by Cooperatives
194/KEP/M/IX /1998
Operational Guidance for Assessment
on the Soundness Rating of Saving
and Loan Cooperatives (KSP) and
Saving and Loan Unit of Cooperatives
(USP)
The function of cooperatives is
to extend loans to members,
member-candidates,
other
cooperatives
and/or
their
members, in that order of
priority.74 Indonesia has roughly
150,000 cooperatives (see Table
3) that serve approximately 28
million members. With this large
customer base, cooperatives
play an extremely significant
role in providing finance
financial services to low-income
households in Indonesia.
A wide variety of cooperatives
are regulated under the
Cooperative Law No. 25/1992.
Of these, this report will focus
Standard Operational Manual for
primarily on Savings and Loan
Management of Saving and Loan
Cooperatives (KSP), which our
Cooperatives (KSP) and Saving and
deposit taking institutions, and
Loan Unit of Cooperatives (USP)
96/Kep/M.KUKM/IX /2004
Village Unit Cooperatives (KUD),
which command a significant
market share and which are the traditional disbursement tool for subsidized lending programs of the
government. It should be pointed out that cooperatives have so far played a relatively minor role as financial
intermediaries due to traditionally repressive regulation.
The legal basis for specific types of cooperatives is outlined in Table 20. A summary of the regulatory
framework is provided in Appendix K. It is noted that the Ministry of Cooperatives, Small and Medium
Enterprises (MCSME) is the regulatory authority for all cooperatives. Cooperatives’ main financial services
are noted in Table 21.75
104
74
PP 9/1995, Art. 19 b.
75
Cooperatives have a business strategy towards membership that supports either a “closed” or “open” bond, although the
regulatory regime doesn’t seem to distinguish between the two. An “open” bond cooperative allows a more broadly defined
membership than a “closed” bond. Another distinction concerns the difference between primary cooperatives (which are
founded by individuals and have a membership that consists of only individuals) and secondary cooperatives (which are
founded by other cooperatives to serve a membership of cooperatives).
Chapter 4
Table 21.
Financial Services of Savings and Loan Cooperatives
Type of Service
Purpose
Decree
Description
Short-term (less than one
year)
Medium-term (1-3 years)
Long-term (more than 3
years)
Decree 96/2004,
Art. 21
Amount of consumption
loan is 3 times of savings
and not more than 30% of
income of the applicant
Decree 96/2004,
III.1.3.2
Amount of productive loan
backed up with collateral is
75% of the value of collateral
Art. 19 a.PP No.
9/1995
Decree 96/2004,
III.1.1.2
Interest rate on savings for
members is higher than nonmembers
Loans
Consumption
Loan
Term
Working Capital
and Investment
Loan
Sectoral
Trade, industry,
agriculture, livestock or
services
Savings
Deposits
Time
Share
Mobilize savings for
members
Background work for this report revealed several areas of weakness in the regulatory framework to ensure
the prudential oversight of cooperatives, although these weaknesses are not discussed in this report in
detail. These weaknesses should be addressed in order to ensure a healthy cooperative sector that provides
greater access to financial services to its members. This is particularly important, given the danger that
widespread insolvency of cooperatives poses to the poor and to MSMEs.76 The main regulatory barriers to
access are as follows:
1.
The establishment of cooperatives services outlets (branch offices, sub-branches or cash offices) must
comply with the strict licensing standards of the MCSME (see Annex M). The requirement that a
primary cooperative must be in operation for two years appears to be excessively burdensome. For
example, if a financially sound cooperative wants to open a branch to serve a broader membership,
the two year time limit may allow competitors to move into that market space, thereby resulting
in a lost investment opportunity. The regulation should perhaps also be modified to correlate the
time limit with the function and size of the branch that the cooperative intends to open;
2.
In an effort to improve transparency, cooperatives are required to fulfil substantial reporting
requirements, with requirements to submit and publish standardised financial reports and product
information.77 Given the limited financial literacy of the clientele served by cooperatives, it is highly
76
Recent reports of widespread insolvencies in East Java and high NPLs are particularly worrisome in this regard. See ‘Hundreds of
cooperatives in Malang liquidated’, The Jakarta Post 05/04/2009.
77
Under the Operational Standard for Financial Reporting (Attachment of Decree No. 96/2004), financial statements must be
understandable, reliable, relevant and up to industry standards in order to provide a reliable source of information for members,
potential creditors and regulatory bodies. More specifically, the regulation states that annual financial statements for KSP that
disburse more than Rp1 billion per year must be audited by an independent auditor or by the Auditing Department of the
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Chapter 4
unlikely that this requirement fulfils its intended purpose. Rather, it might be more helpful if the
regulatory authorities paid a stronger role in informing the public about potential problems with
specific institutions;
3.
The management of cooperatives and the Board of Supervisors establish the interest rates and
administrative fees on loan products in the Member Meetings. These are established according to three
prescribed methodologies.78 A regulatory framework to better promote access to financing would
endorse flexible and market-based interest rates that facilitate the development of sound business
strategies for cooperatives.
4.
Cooperative regulations set the criteria for lending.79 Currently, it is difficult for a cooperative to
determine the credit history of a loan applicant, with very few cooperatives being able to implement
systems such as the commercial banks’ Debtor Information Systems. More importantly, in a group
lending model, it is the strength of the relationship among the members and not necessarily the
creditworthiness of an individual that determines the success of cooperative operations.
In summary, cooperatives in Indonesia seem to be challenged by a large number of issues that extend well
those relating to access to credit. These problems mainly relate to prudential supervision, with the current
system creating the risk of insolvencies, which would reduce existing access to credit among cooperative
members. These issues need to be addressed as a matter of priority. Once these matters are addressed,
there are several smaller steps that could be taken to broaden access, including a regulatory framework
that endorses more flexible, market-based interest rates; less stringent criteria for establishing new service
outlets; and less onerous reporting and disclosure requirements.
4.2.4 LPS’s Role in the Regulatory Environment
The Indonesian Deposit Insurance Corporation (IDIC, or LPS by its Indonesian initials) plays a very important
role in the structure of the Indonesian financial system. Law No 24 of 2004 provides the legal basis for LPS’s
operations, with this law clearly detailing its functions and responsibilities 80 Issues related to the LPS and
its role in the banking system are discussed in a separate document. 81 Rather, this report focuses on LPS’s
relationship with the BPRs and other microfinance institutions. Several points are notable in this regard:
1.
LPS’s responsibilities cover only commercial banks and BPRs; they do not include, for example,
cooperatives that take deposits;
2.
Because of their limited size, BPRs are all considered ‘non-systemic risks’, so the authority for
problem resolution rests entirely with LPS;
MCSME. Cooperatives are mandated to publish product information on savings facilities and loans (Decree 96/2004 para III.1.2.3
and Decree 96/2004 para III.1.3.8, respectively). Particular to savings, cooperatives are required to detail how deposit interest
rates are determined, reward policy for participation and what – if any deposit protection practices are used for members. On
the lending side, information includes a written policy on interest rate calculation, membership rewards for participation, types
of loans, preconditions for applications and terms of loan.
106
78
These are: a) expected interest margin based on computation of total costs borne by the KSP; b) an indexed market pricing
mechanism; and c) rates to attract new members or restrict current membership.
79
In terms of borrowers, cooperatives screen loan applicants based on the stipulations in Decree No. 96/2004, Art. 19, which state
a) members and member candidates must reside in the operational area of a cooperative; b) have a business/fixed income; c)
have active savings deposits; d) have no arrears in lending from other cooperative or other party; e) have never been involved in
crime; f ) have good morality; and f ) take a part in a pre-disbursement initiation program.
80
‘The Bank Resolution Process Undertaken by the Indonesia Deposit Insurance Corporation’ Powerpoint presentation by LPS in
April, 2009.
81
See Hanson (2009).
Chapter 4
3.
Decisions regarding resolution of issues lies with LPS’s six person Board of Commissioners;
4.
Since September 2005 (when LPS was established), it has closed 16 BPRs, including PT BPR Tripanca
Setiadana (see Chapter 2), which was the third largest BPR in the country. 82 To date, LPS reports
that all rules (regarding, for example, maximum deposit size and interest rates) have been observed
during liquidation processes. Dissatisfaction among uninsured depositors looks like it has been
relatively limited and well managed;
5.
LPS staff acknowledge that their rules regarding deposit and interest rate limitations are probably
not well understood among depositors at the village level. However, they believe that the BPRs
themselves are primarily responsible for addressing this issue through the provision of information,
while BI is responsible for enforcement;
6.
A significant proportion of closures of BPR have been in populous urban locations, with at least two
in the area around Jakarta and seven in Bandung;
7.
The most significant problems that LPS must address probably relate to the financial cost of
resolving failures that might occur among much larger commercial banks.83
Field interviews indicated that LPS has a good track record in the management of the liquidation of BPRs,
including relatively large BPRs in major urban areas, with these liquidations being handled without triggering
wider problems in the banking system. There is no evidence of regulatory issues that could compromise
LPS’s capacity to close insolvent BPRs and to pay off eligible depositors. In this regard, the financial costs of
failures among the commercial banks, which are much larger and therefore more expensive to liquidate,
appear to be far more significant, although such problems could ultimately spill over to affect the BPRs.
There may also be issues related to the adequacy of information being provided to depositors with limited
financial literacy.
4.2.5 Regulatory Barriers to Access: Finance Companies
In Indonesia, finance companies (sometimes referred to as ‘multi-finance companies’) offer a wide range
of services, including leasing, consumer financing, mutual funds, factoring, credit card financing, and
securities trading (see World Bank (2006)). Their common characteristic is that they are non-deposit taking84
and they fall under the jurisdiction of Bapepam-LK, the regulatory arm of the Ministry of Finance (for a brief
description of their legal basis, see Table 22). The regulatory objectives of Bapepam-LK in its management
and supervision of finance companies is similar to that with commercial banks, this being to improve the role
of finance companies as engines of national economic growth and support the efficiency of economic activities
in Indonesia. It should also be noted that the operations of finance companies in Indonesia are usually
relatively sophisticated and are less likely to be designed to serve the needs of MSMEs and low-income
households (with the exception of those that provide certain leasing and insurance products, as mentioned
in Chapter 2).
82
The closure of Tripanca created temporary, local spill over effects on other BPRs in the Lampung area, but LPS was able to calm
the situation by direct discussions with depositors.
83
See Hanson (2009).
84
It is notable that venture capital activities are no longer regulated as finance companies as of 2000 (Decree No. 448/KMK.017).
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Chapter 4
Table 22.
Legal Basis of the Finance Companies
Presidential Decree No. 61 of
1988
On Financial Institutions (including Security Traders and Venture
Capital Companies),
Minister of Finance Decree No.
1251/KMK.013/1998
On the Provisions and Implementation Procedures of Finance
Companies (including Security Traders and Venture Capital
Companies),
Minister of Finance Decree No.
448/KMK.017/2000
On Finance Companies (excluding Security Traders and Venture
Capital Companies),
Minister of Finance Regulation
No. 64/PMK.012/2006
On Finance Institutions (excluding Security Traders and Venture
Capital Companies),
Traditionally, start-up owner’s equity for finance companies was low and roughly proportional to the size
of its outreach and scope of operations (Annex N). However, in 2006, regulations were amended (MoF
Regulation No. 84/PMK.012, Article 13) to increase significantly the minimum level of paid-up capital, by a
factor of ten or more, for prudential reasons. This probably squeezed out many smaller players (or at least
rendered them inactive), which may have reduced the provision of services in some areas, although these
services were probably intended to meet the needs of mid- and upper-end clients. Similarly, the industry
was effectively closed to new entrants from 1995 to 2000 and then again from 2002-2006 (Annex N). From
the point of view of accessibility to financial services, these actions may well have hampered the expansion
of formal financial services, including to some small-scale borrowers.
With regard to these measures to consolidate the operations of finance companies, the underlying issue is
whether the regulator has the institutional capacity and resources to weed-out the weaker institutions in an
even-handed way on a timely basis. If not, the blunt instruments of high minimum capital and closed entry
appear to be of dubious efficiency (see a similar discussion below, for insurance companies). As mentioned
in Chapter 2, Indonesia’s leasing industry is of particular significance in terms of facilitating accessibility, as
leasing is extremely important for some MSMEs.85 Currently, the main regulatory issue concerns industry
consolidation. As with the rest of the finance sub-sector, the leasing industry has an access of small companies
of questionable viability. Nonetheless, there are regulations that are not conducive to consolidation. For
example, foreign investment is limited to 85% of owner’s equity. There are also relatively restrictive limits
(40% of equity) on the size of certain investments (see World Bank (2006b) for details).
4.2.6
Regulatory Barriers to Access: Insurance Companies86
Indonesia’s insurance industry is small and highly fragmented, with a large number of relatively small
operators specialising in life insurance and other insurance products. By international standards, the rate of
penetration (premiums relative to GDP) and density (premiums per capita) are low, but the industry is only
moderately concentrated (World Bank (2006b)). It is significantly less concentrated than it is in Thailand and
the Philippines, and a bit less concentrated than Malaysia. A rapidly growing proportion of operators offer
108
85
See Chapter 7 of World Bank (2006b), which looks at leasing companies. Some data in that report are somewhat outdated, but
the issues remain the same, including as regards the regulatory framework.
86
This Section draws heavily upon Chapter 6 of World Bank (2006b). Details comparable to those in Annex N are available from
that report, and not repeated here. Some data in that report are somewhat outdated, but the main issues are the same.
Chapter 4
Sharia related products. The legal framework for the insurance industry is established by the Insurance Law
of 1992, which was significantly modified in 1999/2000 to introduce risk-based capital requirements.
Bapepam-LK, the regulatory arm of the Ministry of Finance, regulates and supervises the insurance sector.
There are also important issues of transparency in the industry, with public disclosure requirements being
particularly important in the insurance business.87 At present, companies are required to publish their
financial information, including their risk-based capital ratio, but a complete set of all risk-based capital
ratings is not available from the regulator and there are no private sector ratings of insurance companies
available in Indonesia. The regulator monitors company information and validates the companies’ reports,
but it does not publish risk-based capital ratios. Measures to increase the level of transparency by the
publication of such information, possibly implemented in cooperation with the industry associations, would
be a useful step in broadening access to insurance services.
The weak prudential state of the industry creates significant complications in terms of establishing policy
to facilitate broader access to insurance services in Indonesia. Some large companies in the industry are
widely considered to be insolvent. These companies could potentially pose a systemic risk. On the other
hand, many smaller companies are undercapitalized and seem unlikely to be able to withstand stiffer
market competition in the future. In this situation, the top priorities for policy should be the development
of measures to achieve industry consolidation and to address these systemic risk created by weak and
bankrupt firms. In addition, policy should strive to facilitate the upgrading of the institutional capacity as of
regulators and improvements in enforcement. Until matters such as these are addressed, issues of broader
access to insurance services are of secondary importance. At present, it is more important to facilitate the
development of reliability and focus on broadening access.
In particular, virtual absence of an appropriate regulatory framework has created a great deal of uncertainty
in the development of the micro-insurance segment (discussed in Chapter 2.7).
4.2.7 Barriers to Access: Pawnshops
Pawnshops in Indonesia have been an important source of financial services for low-income households
and MSMEs since 1928 (Government Regulation No. 81, Staatsblad Nomor 81/1928). They are often the
most convenient and trusted source of quick, short-term liquidity for low-income households and MSMEs,
particularly as a source of funds for personal purposes in times of individual or family crisis. Pawnshops are
relatively insignificant as a source of finance for business,88 and the only official pawnshop, Perum Pegadaian
(PP), is a state-owned monopoly.
Since 2004, PP has scaled up micro-lending and its outreach efforts by opening a significant number of
new branches. As of December 2007, the state-owned monopoly had 900 branches throughout Indonesia,
concentrated in urban areas. These 900 branches (of which 52 are sharia-based) serviced 17 million people
in 2007, an increase from 797 branches servicing 10.8 million customers at end-2004. In early 2008, PP began
to offer money transfer services in cooperation with Western Union. The Government has been discussing
the possibility of listing this company on the Indonesian Stock Exchange in the near future89.
87
Unlike other finance companies (where the public can react to worsening news by slowly withdrawing its business), clients
of insurance companies enter into long-term arrangements that normally cannot be broken without significant penalties.
Consequently, disclosure and transparency at the outset are especially important for consumer protection.
88
About 25% of customers use the financing for business activities; another 15% use the financing for both personal and business
purposes. Women use much more of the financing for personal purposes than men. (World Bank (2008c)).
89
The Jakarta Post, 15 May 2009.
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Chapter 4
Regulation and supervision of the state pawnshop is the responsibility of the Bapepam-LK (Government
Regulation No. 103 of 2000). As a state-owned enterprise, the management of pawnshops is given
considerable independence by the Ministry of Finance. In general, financial services it offers loans according
to the terms set by the State Pawnshop Law; fiduciary guarantees; the provision of deposit boxes; and
certification of precious minerals and stones.
To ensure the financial integrity and performance of PP, management is required to demonstrate that 45
percent of the company’s profits for each fiscal year is allocated for: a) general reserve until this amount
reaches 200 percent of owner’s equity; b) social purposes and education; c) bonuses; d) contributions to
pension funds; and e) provisions for loan losses. Levels of capital adequacy and owner’s equity established
through decisions of the Finance Minister (Art. 10, PP No 103/ 2000). Operationally, the most important
operation is the valuation of the goods at hand rather than the determination of the creditworthiness of the
customer; the main risk for PP is that pawned articles are stolen. Local pawnshop procedures established
that the branch level determine the penalty rates for failure to repay loans on time.90
As mentioned previously, the pawnshop business is officially a state-owned monopoly. However, unlicensed
(and therefore technically illegal) private outlets have operated in relatively open competition with Perum
Pegadaian for a long time, usually working out of local gold and jewellery stores. For example, a 1986 SEACEN
study on informal markets estimated that the proportion of Indonesia’s pawnshop industry controlled by
the government was 42%, while the proportion controlled by private operators was around 58%.91
The state-owned pawnshop has expanded its branch network steadily over the past decade, with the
number of branches increasing by approximately 4% per year from 2000 to 2007. In addition, it has plans
for a major expansion in the number of its branches in the next year or so. This is an important step towards
improved access for the poor. However, compared to BRI, which itself has come under criticism for not
reaching deeply enough into the nation’s remote kabupatens, PP has significantly fewer branches than this
bank (5,214 branches as of September 2008) and is concentrated in urban areas to a far more significant
degree.
If the state-owned pawnshop maintains its current rate of branch expansion of recent years, it will be
another decade or more before it has the same regional reach as BRI, even allowing for a major expansion
this year and next. To accelerate the process, other options could be considered. For example, regulations
could be reformed to allow the official participation of the private sector.92 Considering the success with
which the banking sector has been opened up to the private sector over the past two decades, there is
little justification for not opening up the pawnshop sector in the same way. Private sector participation may
well be an effective means of ensuring more competitive pricing (that is, higher appraisal values and lower
interest rates) and better services for the poor. The sector might even be opened up to a broader set of
private investors.93 Needless to say, a stronger supervisory framework would need to be established in order
to ensure the integrity of such a liberalised environment.
90
110
For instance, late payment usually results in the borrower losing ownership of the pawned good, which is essentially collateral.
With this in mind, precise records of transactions are important. In most cases, procedures for delinquent borrowers are quickly
handled with collateral already in custody. A unique feature of PP concerns official policy regarding proceeds from auctions. If
these proceeds exceed the value of the outstanding loan, the difference is returned to the delinquent borrower. However, no
data are available on how often this happens and actual practice has not been confirmed with defaulting clients or with bidders
in the auctions.
91
The work is cited in Skully (1994).
92
In 2007-08, a Law was being drafted to open up this business to private participants.
93
Weak management and low profitability of the state-owned pawnshop do not appear to be major issues, which reduces the
case for steps like partial privatization of PP. Likewise, surveys indicate high levels of satisfaction among customers (World Bank
(2008c)).
Chapter 4
Box 15.
Legal Framework for Microfinance Institutions in Indonesia
There are number of factors which prevent micro-finance institutions (MFIs) in Indonesia from effectively
providing financial services to the poor. Three primary reasons are as follows; 1) the legal framework for
non-bank and non-cooperative type of MFIs is uncertain. This may well make existing MFIs reluctant
to expand their services to new and potential clients and markets; 2) the cost of reaching out to many
small and potentially high risk customers is still a significant barrier; and 3) many MFIs lack sufficient
access to capital.
The Indonesian government has recognized the constraints the MFIs are facing and is eager to address
the issue of strengthening the legal framework for MFIs in order to foster the development of a vibrant
and comprehensive national financial system. The government also recognises that, along with other
partners, it can play a significant role in providing guidance, support, and strategies to ensure that
MFIs play their role in providing needed financial services to lower income earners. Moreover, it is clear
that there is a need for a strong policy framework to create an environment in which MFIs can become
sustainable and offer a diverse range of products while at the same time protecting small depositors
and creating stability and integrity in the microfinance sectors.
A micro-finance law has been under debate for the better part of a decade and has gone through
various revisions, a number of which have been submitted to Parliament. However, the law has not yet
been approved and questions remain regarding the role of the various institutions that will be involved
in supervising and regulating the MFIs.
In early 2009, under the leadership of the Coordinating Ministry of Economic Affairs (CMEA), a joint
decree was signed between the Ministries of Finance, Cooperatives, Home Affairs and Bank Indonesia
to provide a regulatory framework under the existing laws to the non-bank and non-cooperative MFIs
that currently operate outside such a framework. The Joint Decree aims to formalize MFIs into one of
four categories: (1) people business credit, or BPR; (2) saving and loan cooperatives; (3) village-owned
microfinance institutions or bum desa; or (4) venture capital companies.
To implement the above decree, detailed activities for improving the legal framework for MFIs in the
period from 2009 – 2011 have been developed. A working group consisting of the representatives from
the technical ministries, BI, and CMEA has been established and is expected to work to establishing
implementing regulations so that MFIs could improve financial inclusion in Indonesia.
4.3 Summary of Policy Issues, by Service Provider
There are several aspects of Indonesia’s regulatory framework which could be reformed to improve the level
of accessibility to financial services for low income households are MSMEs, as discussed below.
At present, the biggest issue is entry barriers that act as a constraint against the establishment and expansion
of commercial banks; BPRs; insurance; other finance companies; and pawnshops. In most cases, little can be
done about this, because official policy is currently focused on promoting industry consolidation as a means
of eliminating or reducing the number of weak companies. This policy is something of a blunt instrument,
reflecting the difficulty of weeding-out the weaker institutions—large and small—in an even-handed,
timely manner. Until this policy of consolidation runs its course, the most realistic means for new entrants to
these industries is participation in existing—and perhaps failing—companies.
Commercial Banks: Current banking policy is controversial for at least two reasons: i) licensing policies are
largely designed to reduce the number of banks; and ii) minimum capital requirements are intended to
ensure the emergence of larger banks. It is debatable whether either of these policies increases access to
111
Chapter 4
financial services by poorer households and MSMEs. However, it appears unlikely that the direction of this
policy will be changed in the near future.
In the meantime—and with the exception of mobile banking (which is discussed in Chapter 5) —there are
no easy regulatory reforms that can significantly increase access to financial services via commercial banks.
For example, oversight concerning ‘directed lending’ to MSMEs and the rules on opening new branches look
restrictive, but BI is enforcing them in a relatively liberal manner. Regulatory easing in both areas would be
helpful, but it would simply bring official policy into line with actual practice.
Recent regulations regarding the relocation of branches and ATM machines are somewhat more problematic,
with these regulations appearing to be unnecessarily restrictive. Rather than requiring extremely specific
reports on the location of ATMs, it would be much less burdensome on banks if they could report these
locations in more general terms. Also, there is a considerable degree of reduplication in reporting
requirements, which adds to the burden of banks. This could be reduced, for example, by making the annual
business plan a part of the company’s annual report, rather than requiring the submission of two separate
reports, as is currently required.
The constraints to access created by banks’ minimum balances and monthly administration fees are not an
outcome of the regulatory environment, because those fees are set according to internal corporate policies
of individual banks. For both minimum balances and administrative fees, there is considerable variation
among the commercial banks, but good low-cost options are available through BRI and BPRs.
The lack of official policy on dormant accounts may be contributing to higher-than-necessary administrative
fees on small accounts, because banks are reluctant to close dormant accounts unilaterally unless the balance
falls to zero. Consequently, banks establishe pricing formula to ensure that the balance in small accounts
eventually falls to zero. It might be useful if Bank Indonesia were to set an official policy in this area, with
a view to making it easier for banks unilaterally to close dormant, non-zero accounts. As part of the new
BI policy, the responsibility for administration could be transferred to a centralized account after a certain
well-defined time period, with the central authority assuming responsibility for the administration of such
accounts.
Another possibility is to introduce basic banking or ‘no frills accounts’, which would feature very low monthly
administrative fees while at the same time offering a limited range of services and imposing upper limits on
the value of accounts. Bank Indonesia has already implemented measures to develop such products, which
are expected to be available in early 2010. International experience has shown that when commercial banks
offer basic, low-cost banking services, the rate of uptake is significant.
BPRs: Bank Indonesia could address a number of issues to ease the regulatory burden on BPRs, especially
for small ones in remote regions. For example, the restriction on ownership by individuals or entities other
than Indonesian citizens creates unnecessary limitations. The sector could usefully be opened up to NGOs
and foreign ownership, possibly on a joint venture basis. Also, a new, lower tier of minimum start-up capital
could be set for particularly small BPRs. Minimum standards for managerial resources of BPRs could be eased,
especially for regions where management expertise is in short supply. Reporting requirements are currently
excessively burdensome for BPRs in regions without good IT services, and BPR managers may actually have
to hand-deliver reports to the closest Bank Indonesia regional office. As part of reporting requirements,
disclosure requirements should be examined to determine their effectiveness in the context of the low levels of
financial literacy of their clientele, with better alternatives being developed.
As for commercial banks, theoretically, the regulations on the expansion of branch networks currently
appears to be too tight, although bank Indonesia is implementing these regulations in a liberal fashion. Still,
these could be eased for the sake of regulatory transparency. In the case of both commercial banks and BPRs,
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Chapter 4
KYC requirements may act as a constraint to accessibility. In particular, MSMEs may have their own reasons for
not wanting to other tax number. Since KYC requirements mandate possession of a tax number foe MSMEs
seeking credit, this may act as a constraint., This is particularly the case for credit to MSMEs who have their
own reasons for potentially not wanting a taxpayer number. An exemption from these requirements, with a
relatively low threshold, could alleviate this problem. Bank Indonesia is currently considering a revision of its
regulatory policies on BPRs, which creates an opportunity to put in place a framework that will allow these
institutions to extend and improve access on a sustainable basis.
Other MFIs: Many of these institutions operate with no formal legal status. Probably, the most productive
thing that can be done is to restore momentum to the process of drafting a new Micro-Finance Law. One vital
step towards this would be to encourage public debate and discussion on the relevant issues. It is important
that the new Law facilitates increased access on the basis of best practice from international experience.
In the meantime, it is important to ensure that the vital services these institutions provide continued to
function.
Cooperatives: Cooperatives play a key role in providing access to financial services to a large segment of the
population. Their ability to perform this role should be strengthened to ensure sustainable operations. There
are some regulatory impediments in this area, particularly in relation to issues such as the establishment of
branches, pricing and reporting processes. However, more fundamental reforms are needed in many areas,
preferably before the sector faces any major difficulties that may jeopardize members’ existing access to
financial services.
Insurance and Finance Companies: By and large, these sectors currently cater mainly to higher income
earners in urban areas. With some significant exceptions amongst providers offering leasing and microinsurance products, it appears unlikely that this sub-sector’s reach will extend the services it offers so
that they are particularly significant for lower-income households. However, if the industry could be
consolidated effectively, the foundation would be laid for these sectors to provide better access to a larger
share of Indonesians. The micro-insurance business has significant potential to provide valuable services for
lower income households. A regulatory framework more focussed on micro issues would give the industry
a boost.
113
Chapter 4
114
Chapter 5
Special Topics Concerning
Access to Finance
This Chapter looks at three special topics that are closely connected to issues of access to financial services,
namely:
1.
Micro- Small- and Medium-sized Enterprises (MSMEs);
2.
International workers’ remittances; and
3.
Mobile banking.
Each of these areas is characterised by specific issues, which in each case must be addressed through specific
policy options.
5.1
MSMEs and Access to Finance
94
MSMEs play a critically important role in a country’s economic development. International evidence
indicates that around the world, in numerical terms, they account for approximately 98% of all enterprises;
they employ about 60% or more of the private sector workforce; they create about 50% of value added; and
they account for about 30% of direct exports.95 In rural areas of developing countries such as Indonesia,
where large enterprises are few in number, development of MSMEs is almost synonymous with sustainable
94
On Government of Indonesia definitions, a Micro Enterprise is a productive business unit owned by an Indonesian family or
individual and with turnover up to Rp100 million per annum (Decree of the Minister of Finance No. 40/KMK.06/2003, issued
on January 29, 2003). A Small Enterprise is any kind of business unit with net assets up to Rp200 million (excluding land and
building for business site), or with turnover up to Rp1 billion per year, owned by an Indonesian, independent and not a branch or
subsidiary of certain firms (Law No. 9 Year 1995 on Small Businesses). A Medium Enterprise is a business that has annual turnover
of between Rp1 billion to Rp50 billion and with net assets between Rp200 million and Rp10 billion, excluding land and building
for business location (Presidential Instruction No. 10/1999 on the Empowerment of Medium Businesses).
95
See APEC (2002).
115
Chapter 5
poverty alleviation. Moreover, the micro enterprise component is the backbone of the informal sector,
which accounts for some 70% of total employment in Indonesia.96
Several international surveys have found that financing issues create some of the worst critical constraints
faced by MSMEs, with cost of and access to credit usually being a major problem. In the specific case of
Indonesia, a Bank Indonesia survey, described in Section 5.1.1, took a broader perspective and found that
micro and medium enterprises have different problems when it comes to accessing credit.97 For its part,
The World Bank/IFC’s ‘Doing Business’ indicator98 for 2009 ranked Indonesia 109th out of 181 countries in
terms of access to credit, putting it on a par with countries such as Uganda, Nepal, Bolivia and Belarus. The
OECD, in its pioneering Survey of Indonesia,99 asserted that access to credit is particularly difficult for SMEs,
especially those operating in the informal sector, and highlighted that lack of collateral was a significant
constraint.
Large
Medium
Enterprises
Small Enterprises
Micro Enterprises
Household Level (informal Economy)
As suggested by the preceding discussion, most financial studies of MSMEs focus almost exclusively on
access to credit. By contrast, this study considers access to a much wider range of financial services, especially
for micro-enterprises, which often operate in the informal economy at the household level (as indicated in
the pyramid diagram, above).
5.1.1 Key Findings of Bank Indonesia’s Survey of MSMEs
The survey discussed in Chapter 3 focused specifically on households’ access to financial services rather
than MSMEs’ access to such services. However, much of the data reported in Chapter 3 is relevant to a
116
96
For August 2008 on OECD definitions. See footnotes to Table 3.1 of OECD (2008) and http://wwww.bps.go.id/sector/employ/
table3.shtml.
97
For example, almost all micro and small businesses, and all medium businesses, have used banking services. For credits, the
main considerations are the interest rate and location; the main obstacle for micro businesses is collateral whereas for small and
medium businesses, it is high interest rates.
98
See http://www.doingbusiness.org.
99
OECD (2008).
Chapter 5
discussion on micro- and small enterprises, because these enterprises are usually operated by family units
at the household level. To broaden the results—so as to include medium enterprises or to ensure that only
enterprises are included—it is useful to examine a survey directly targeting MSMEs.
In 2005, Bank Indonesia conducted such a survey of MSMEs and their characteristics in Indonesia.100 The
survey polled 11,000 respondents in eleven provinces and covered a wide range of topics, including those
related to managerial issues, inputs and production, marketing, and manpower. The survey also included a
review of six other studies into issues related to the problems faced by MSME in Indonesia. For the purposes
of this report, the BI study serves as the main source of descriptive information on MSME and the problems
they face in Indonesia. The highlights of the study are summarized immediately below, by topic area of
special interest to this report. The interested reader is referred to Bank Indonesia (2005) for moreextensive
details.
BI Survey Results: Legal Issues & Business Development
•
Most MSMES, especially at the micro level, do not have an official legal status;
•
Most micro businesses don’t have business licenses (TDI/TDP and SIUP) or a Tax Registry Number
(NPWP); half of small businesses have them; most medium-scale businesses have them;
•
Costs, procedure and administrative requirements are not obstacles to obtaining business licenses
and NPWP;
•
The main reasons for having business licenses and NPWP is to obey government regulations and
to obtain credit;
•
Few micro and small businesses have cooperative agreements with big businesses, despite the fact
that they are aware of the advantages of such arrangements;
•
Few MSMEs believe that they benefit from existing government programs;
•
MSMEs overwhelmingly state that the assistance they require from the government relates to
credit, training and market information.
BI Survey Results: Financing Issues
100
•
Most MSMEs conduct the vast majority of their transactions in cash. Nonetheless, almost all micro
and small businesses, and all medium businesses, have used banking services;
•
In choosing banks, the vast majority of MSMEs state that security and safety is their main
consideration when depositing funds of a bank. On the other hand, when seeking loans, their main
considerations relate to interest rates and collateral;
•
For micro businesses the main obstacle to seeking finance is collateral requirements. For small to
medium businesses, the main obstacle to seeking finance is high interest rates;
•
Most micro and small businesses believe that banks allocate insufficient credit for MSMEs. Medium
businesses believe that the level of allocations is fair.
See Bank Indonesia (2005).
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Chapter 5
BI Survey Results: Banks’ Policies towards MSMEs
•
To increase the level of credit provided to MSMEs, commercial banks believe that better credit
analysis is vital, with measures to achieve this including elements such as training of their staff.
BPRs believe the most vital step is the development of systems for supervision and collection of
payments;
•
The external key for banks is linkage programs with BPRs and cooperation with the credit guarantee
institution;
•
For loans to micro-businesses, most banks do not require complete documentation (SIUP, NPWP,
etc.). For small businesses, requirements are tighter; for medium businesses, almost all banks
require all types of licenses;
•
For micro businesses, most collateral is in the form of movable assets, such as cars and motorcycles.
For small and medium businesses, land and buildings are most commonly used as collateral for
loans;
BI Survey Results: The Main Constraints
•
Lack of human resources and a number of areas, including in finance, marketing and production;
•
A non-conducive legal environment, particularly in the area of licensing and permits;
•
The credit guarantor institution (e.g., offices, premiums, and claim procedures)
In reviewing these results, three main points stand out from the rest. First, access to finance becomes
increasingly problematic as the scale of the business decreases, despite efforts at increased flexibility on the
part of the banks. Second, existing government programs are not working well. And third, human resources
deficiencies (on the sides of the MSMEs, banks and possibly government institutions) are probably the root
of many of the most basic problems.
5.1.2 MSME Lending & Policies in Indonesia
Notwithstanding the many problems mentioned in the previous Section, loans to MSMEs in Indonesia
comprise a significant proportion of banks’ total loans portfolios. The proportion of such loans has been
climbing in recent years, but may have stabilized around 50% (see Figure 49). This is just a bit lower than
the 55% of GDP which they produce, according to the Minister of Cooperatives and Bank Indonesia. In
addition, the quality of loans to MSMEs compares favorably with conventional loans, using the metric of
non-performing loans (Figure 49, and a presentation by Bank Indonesia staff during field work for this
report). This is consistent with the experience of BRI, where loans to MSMEs comprise a total of 86% of the
banks total loan portfolio and where the NPL ratio is considerably below the industry average (2.9% vs.
industry’s 3.3%, as of September 2008).
118
Chapter 5
Figure 49.
54
52
50
48
46
44
42
40
38
MSME Lending
52
51
50
49
47
43
2002 2003 2004 2005 2006 2007 2008
Source: Bank Indonesia; data for end 2008
For Indonesia’s policymakers, the issue of the availability of finance to SMEs has long been on the policy
agenda. For example, in 1992, regulations were promulgated to require banks to lend at least 20% of their
credit portfolio to SMEs, although this policy was abandoned in 2001. Instead, banks were asked to establish
self-determined targets, and to report against them (see Chapter 4; for other government programs, see
Chapter 2). In late 2007, the Government launched its People’s Business Credit program (KUR), which is
guaranteed by PT Asuransi Kredit Indonesia (Askrindo) and Perum Sarana Pengembangan Usaha (SPU) up
to a limit of Rp500 million per small business unit. In parallel, Askrindo and SPU were recapitalized (at a cost
of Rp850 billion and Rp600 billion respectively) to allow them to increase the level of loans insurance that
they offered to banks for protection against non-performing loans amongst the SME sector.
Despite its short lifetime, anecdotal evidence suggests that the KUR program is already encountering
challenges.101 By way of examples, in early 2009, only six banks102 were eligible for the guarantee program,
which gives these six banks a considerable competitive advantage over others, most notably the BPRs. It
is unclear how the guarantee program’s terms (e.g., coverage for first time, unbanked borrowers starting
up new businesses) are being enforced. It is also unclear how the authorities can ensure that banks aren’t
channeling bankable projects into the KUR program in order to benefit from the guarantee program. In
responding to these points, BI notes that the Government is considering expanding the KUR program to
include the Regional Development Banks (Bank Pembangunan Daerah; BPDs). Regarding enforcement of
KUR terms, BI appears to rely heavily upon its Debtor Information System (SID) to check the borrower’s
credit history and to see if the project has already received credit. In the course of its review of the KUR
program, the government might consider allowing more banks to qualify for the program, including a good
mixture of private banks and BPRs, rather than just state-owned banks. Also, the pricing structure of the
guarantee could provide an incentive to increase the quantity and quality of small loans, with the terms
being designed to ultimately convince bank management that the guarantee is not needed.103 An exit
strategy for the program should also be implemented.
As a next step, the Government could look at the other programs run out of various ministries that attempt
to channel financing into preferred sectors (see Chapter 2.5). These programs are heavily dependent upon
101
The Government of Indonesia is currently undertaking a review of the KUR program. The KUR program has been doubled in size
in 2009 from that in 2008.
102
These were Mandiri, BRI, BNI, BTN, a Sharia arm of a state bank and Bukopin. Notably, all are state banks except for Bukopin,
which historically has been very close to Bulog, the state logistics company. It’s also notable that the BPDs (under consideration
for expansion of the KUR program, as noted in the main text) are also state banks, because they are owned by the provincial
governments.
103
For example, the price of the guarantee could be proportional to the size of the MSME portfolio. And, the guarantee could only
kick-in after a time threshold (say 3 months) when NPLs exceeded some pre-determined ratio (say 3%).
119
Chapter 5
government financing. Often, they crowd-out other micro-finance operations that may be struggling to
be self-sustaining. Also, these programs’ subsidized nature invites corrupt administrative practices and
encourages a culture of non-repayment. Like the KUR program, these would benefit from an independent,
external assessment of their effectiveness. Participation in such an assessment could include local think
tanks, industry associations and NGOs with special interests in the area.
Reflecting the ineffectiveness of many of these programs, there are continuing controversies as to whether
MSMEs have adequate access to finance, with some observers arguing that this sector is under financed
because while MSMEs account for 99% of all business units and employ 96% of the employed labor force
(Figure 50), they receive only around half of bank credits. Comparing output to lending by sector (Figure
50), SMEs operating in the agriculture, construction, trade, transportation and business (financial) services
sectors are often said to be particularly underserviced in terms of access to finance. Proponents of this
view conclude that there are many untapped, potential investments that could be undertaken by MSMEs,
if the financing were available. Foreign-owned and joint venture banks are often seen as being particularly
prejudiced against businesses of this type and in these sectors, with these banks accounting for 14% of total
lending, but only 4% of lending to MSMEs 104. Proponents believe that actively supporting the provision of
financing to SMEs would boost job creation and real sector growth in Indonesia.
It should be pointed out that Bank Indonesia’s definitions do not match those of the Government.105 For
practical reasons,106 Bank Indonesia currently defines small-scale credits by size of credit, not by size of the
borrower. Consequently, roughly half of MSME credits are for consumption (that is, for consumer loans), not
for investment.107 Effectively then, lending to MSMEs is only about half the amounts normally cited from
official sources.
120
104
State-owned banks (SoB) are sometimes cited as neutral is this regard (see Figure 50), but this is only true for them as a group.
The great majority of SoB lending to MSMEs is accounted for by BRI.
105
BI defines a micro credit as up to Rp50 million; a small credit is between Rp50 million and Rp500 million; and a medium-sized
credit is between Rp500 million and Rp5 billion. (p. 79 of Bank Indonesia (2005)). According to BI staff, this definition is under
review, with the intention of bringing it into line with the government’s definition. For GoI’s definition of an MSME, see footnote
116.
106
For example, it is very difficult to tell the difference between a motorcycle purchased for personal use and one that is purchased
for small business purposes, like an ojek (a motor cycle taxi).
107
See Table 9.5 in Bank Indonesia (2007).
Chapter 5
MSME Characteristics
MSME & Large Enterprise Business Units
Financial, Rental,
and Business
Services
1%
Transp ortation
and
Communication
Trade,
4%
Restaurants, and
Hotel
24%
Agriculture
53%
Construction
0%
Others
Services
92%
12%
13%
46%
36%
24%
47%
52%
22%
75%
3%
8%
0%
Sosial Services
75%
87%
20%
30%
Business
Transportation
25%
Trade
Construction
Electricity,
21%
Gas, and Water
Agriculture
20%
Manufacturing
9%
0%
52%
40%
89%
LEs
44%
30%
8%
1%
8%
40%
17%
Services
64%
31%
60%
MEs
Rental, and
70%
90%
31%
34%
80%
48%
75%
SEs
and
69%
4%
21%
Financial,
79%
4%
9%
Agriculture
80%
(%)
91%
Mining
(%)
100%
Trade,
36%
69%
40%
20%
By GDP
LEs
10%
Restaurants, and
SME
Buildings
By Lending
60%
Manufacture
Industry
11%
Breakdown by Output
100%
80%
Mining
1%
Transportation
Breakdown by Loans
and Water
Manufacture
Industry
7%
Agriculture
43%
Construction
1%
Electricity, Gas,
and Water
0%
Mining
1%
Industry
Electricity , Gas,
and Water
0%
Electricity, Gas,
Transp ortation
and
Communication Trade,
Restaurants, and
6%
Hotel
27%
LEs
4%
Services
11%
LEs
0.01%
Mining
Services
6%
Financial, Rental,
and Business
Services
0%
MSME & Large Enterprise Employees
Manufacture
Figure 50.
Breakdown of SME Lending by Type of Bank
Source: Bank Indonesia.
Data for June 2007
Another factor concerns the high overheads associated with conventional commercial bank lending to
MSMEs, in part because they are subject to relatively strict regulatory oversight. More to the point, MSME
lending is still risky unless there is a strong supervision of loans, which entails high administrative costs that
121
Chapter 5
can only be borne by institutions with a strong local presence. Even BRI, with one of the largest branching
networks in the world, leaves the lower end of this segment to other players. For most conventional
commercial banks, especially foreign and joint venture banks, this business is difficult, because they lack
the requisite neighbourhood knowledge, relationships and trust. As technology brings costs down (see Box
56), the more aggressive commercial banks can be counted upon to move into these segments, because
they will be attracted by the opportunities for profit. In the meantime, the real issue is how to bring down
artificial barriers to faster progress; how to rationalize existing ineffective government programs; and how
to find better ways to deliver financial services by institutions better-equipped to do the business.
5.2 Migrant Workers and Access to Finance
As mentioned in Chapter 2, large numbers of Indonesians work abroad. In 2006, approximately 680,000
Indonesian migrant workers left Indonesia to work overseas, bringing the estimated total to about 4.3
million (World Bank, 2008). This section examines two aspects of the phenomenon of migrant workers that
are relevant to the subject of this report, these being the socio-economic characteristics of these migrant
workers, using results of the household survey of Chapter 3; and their difficulties in accessing financial
services at different stages of their migration.
It is notable that there is a strong disconnect between existing TKI financial products (e.g., insurance and
savings) and the needs for financial products as expressed by the migrant workers themselves. In this
context, it should be noted that the World Bank conducted a more extensive survey devoted expressly
to migrant workers in late 2008. Material from the survey will add substantially to the survey material of
Chapter 3.
5.2.1
A2F Findings on Indonesian Migrant Workers
This Section expands upon previous studies (e.g., World Bank (2008a)), using data derived from the survey
described in Chapter 2. This survey provides information on households that have a migrant worker living
abroad, with the sample size consisting of about 10% of total respondents (see the upper left panel in Figure
51). It is not a survey of migrant workers per se, and for some sub-categories the number of observations
is small, which reduces statistical reliability. With these qualifications in mind, the main patterns of these
workers are as follows:
•
About 80% of the legal migrant workers are female, and more than 85% of them work in informal
sector in relatively unskilled jobs, such as household domestics, maids and nannies (Figures 51 and
52);
•
By education level, just over half (53%) have a primary school education or below, with males
dominating the extreme ranges, making up the majority of both the least and most well-educated
educated (see the middle panel of Figure 51);
•
Of all the respondents, 45% have worked overseas more than once, with Kuwait, Saudi Arabia,
Hong Kong and Taiwan being the most popular repeat destinations. Singapore is the least popular
repeat destination (the lower panel in Figure 51).
The limited, available data suggest that many Indonesians work abroad illegally, which greatly complicates
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Chapter 5
policy in this area.108 As illegal workers, they simply cross the border on foot or by boat, usually to a
neighboring country, such as Malaysia. Results of this survey indicate that 10% are illegal workers, but that
looks low based upon other available information.109 Most seem to be men in Asia-Pacific destinations,
dominantly Malaysia. It appears that they tend to work on construction projects, in plantations and service
industries, including as domestic workers (Figure 52).
108
Legal migrant workers are defined as those who register as a migrant worker to Ministry of Manpower and Transmigration, and
hold a proper migrant workers’ passport and working permit in the destination country.
109
For example, see http://www.reliefweb.int where 600,000 were estimated to be in the state of Sabah alone in 2002. In 2005,
the Government of Malaysia estimated that there were more than 1 million illegal migrant workers in the country, mainly
from Indonesia and other countries in South and SE Asia (reported on http//burmalibrary.org). Joseph Liow (‘Malaysia’s Illegal
Indonesian Migrant Labour Problem: In Search of Solutions’, on http://www.questia.com) writes that Indonesians into Malaysia
are arguably the second largest flow of illegal immigrants in the world (after Mexicans into the United States).
123
Chapter 5
Figure 51.
124
Characteristics of Migrant Workers
Chapter 5
Figure 52.
Migrant Workers, by Type of Work and Legal Status (in per cent)
5.2.2 Migrants & Access to Financial Services
For purposes of this report, issues of migrant workers’ access to financial services are reviewed according to
the different stages of the migration process, namely: i) pre-departure (pre-migration); ii) during migration;
and iii) post-migration. This approach is useful because migrants’ needs are different at different stages of
the process (see Figure 53).
125
Chapter 5
Figure 53.
Indonesian Migrant Workers and Access to Finance
5.2.3 The Pre-Departure Stage
Registration with PPTKIS: Legally registered migrant workers are normally recruited either by a PPTKIS110 (a
licensed Indonesian Overseas Employment Agency) or by agents of PPTKIS, usually referred to as ‘sponsors’.
PPTKIS’s functions are:
•
To receive the placement request from overseas clients;
•
To recruit migrant workers in Indonesia;
•
To prepare all necessary documentation for migrant workers; and
•
To provide training, especially for those who plan to work as household domestics.
Depending on the type of job and the timing of the job order from overseas, migrant workers usually stay
at PPTKIS’s training center with accommodations for migrant workers for a period ranging from a few weeks
up to a year, before departing for the destination country.
Credit Needs during the Pre-departure Stage. As soon as they decide to work abroad, either formally or
informally, most migrant workers face an immediate need for credit. The credit is needed to cover the cost
of PPTKIS fees, agents of PPTKIS and sponsors.
A series of administrative services and training programs are provided by the PPTKIS, many of which incur
a fee. These include: the administrative cost of a passport; government levy and working visa for their
destination country; medical examination fees; insurance; transportation; and the fee for PPTKIS. The cost
varies by the destination country, but generally ranges from US$335 to US$950 for legally registered migrant
workers.111
126
110
Perusahaan Penempatan Tenaga Kerja Indonesia Swasta (PPTKIS), it used to be known as Perusahaan Jasa Tenaga Kerja
Indondesia, popularly known as “PT” Indonesia (PJTKI).
111
Fees for securing plantation and construction job are between $335 and $560. Clearly, the cost for illegal migrant
workers is cheaper than for legals, which is part of the incentive for migrants to choose the illegal route (World
Bank, 2008a).
Chapter 5
Figure 54.
Migrant Workers in the Formal Sector, Financed by Employers
For workers hired through some PPTKIS, formal financial service providers (e.g., commercial banks, BPRs and
overseas employers) do provide loan schemes to cover pre-departure costs. However, such opportunities
are usually limited to those who work in the formal sector, for example in plantations or factories. In those
cases, the employer in the destination country usually makes monthly deductions from the migrant worker’s
salary to repay the loan. Banks indicate that credit risks are too high for them to consider financing migrant
workers’ expenses at this stage. They would consider financing through a co-signer, but normal commercial
considerations would apply to the co-signer (that is, they would lend against the co-signer’s collateral, not
the prospective income of the migrant worker).
The survey results of Chapter 2 indicate that the most popular way (20%) of financing these expenses is from
personal savings, especially for repeat migrants (Figure 55). The use of savings for this purpose by repeat
migrants is evidence that financial benefits do accrue to migrant workers, despite the many problems they
encounter along the way. Other popular ways, especially among first time migrants, are: borrowing from
the employer (17%); borrowing from family members (16%); and borrowing from the work sponsor (15%).
Only 5% borrow from a bank, which highlights the banks’ limitations in servicing this group. Products more
suitable to migrant workers’ needs could greatly facilitate the migration process.
127
Chapter 5
Figure 55.
How Migrant Workers Finance Pre-departure Expenses
As mentioned, the majority of Indonesian migrant workers work in the informal sector in jobs such as
housemaids, baby-sitters or drivers. Very few formal financial institutions of loan products to migrant
workers in these categories. Despite their good income prospects, the migrants are usually forced to obtain
credit from informal providers who charge relatively high interest rates. From the banks’ perspective, these
potential clients are very risky, because the loan recipient is physically abroad, which risks default without
recourse by the lender. Also, the loan amounts are small, probably only Rp3-5 million, so the interest
payments may not cover the bank’s administrative costs. This said, a few banks view migrant workers as a
potential market and do have a special department to deal with the needs of migrant workers, although
most of these are involved in the supervision of remittance payments services.
To assist with the shortage of credit for migrant workers, especially those working in informal sector
(i.e. housemaid, babysitter etc), government of Indonesia through BP2TKI (The National Commission for
Placement and Protection of Indonesian Migrant Workers), has initiated a credit scheme for Indonesian
migrant workers going to work in Taiwan (see Box 16). Interest rates and charges appear to be quite
expensive.
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Chapter 5
Box 16.
Case Study: Migrant Workers Bound for Taiwan
Indonesian migrant workers to Taiwan have access to finance through a mandatory credit scheme. It covers their
placement fees, thanks to an initiative established between the Indonesian and Taiwanese governments. PPTKIS
covers the placement fee for migrant workers going to Taiwan up front, in principle allowing Taiwan-bound migrant
workers to register with PPTKIS without having any initial credit. Prior to departure, migrant workers sign a loan
document with one of several banks appointed by BP2TKI. (As of November 2008, these were: Hua Nan Commercial
Bank; China Trust Overseas Bank; Sani Bank; First Bank; Bank Mandiri; BPR Tatakarya; and BPR Peranragmada). The
loan document and job contract are submitted as supporting documents for visa application to the Taiwanese
Embassy prior to their departure.
Upon arrival in Taiwan, the migrant worker obtains the requisite local identification, assisted by the agent in Taiwan,
who is usually contracted by banks. The migrant worker opens the bank account, with the signed loan agreement
and other necessary documents. With proof that migrant workers are physically in Taiwan and have a legal status
in Taiwan, the bank releases the loan proceeds to PPTKIS, initially covering the cost of migration. Once migrant
workers start working, the employer deposit the salary of migrant workers into the bank account, and the bank will
deduct the agreed amount every month, usually for one year, to repay the loan. It would be useful to review this
credit scheme more closely, especially the prospects for transferability to other destination countries.
Box 17.
Perum Pegadaian (The State-owned Pawnshop) & Access to Credit
Perum Pegadaian, the state-owned and only legal pawn shop in Indonesia, has a long history of providing lower
income Indonesians with access to credit. It has a substantial presence in the Indonesian microfinance sector
with around 900 branches nationwide, serving 16.7 million clients and providing Rp 22.8 trillion in loans in 2007.
Migrant workers with certain physical assets are among those who use Pegadaian’s credit services. Once migrant workers are
abroad, family members of the migrant workers pay the interest rate on the credit received from Pegadaian until the migrant
worker remits earnings. Once family members receive the remittance, Perum Pegadaian is re-paid and the asset is returned.
Example:
The credit to cover migration costs
The collateral
Appraised value of the collateral
Loan to be provided
Administration fee
Interest Rate
Maturity
Repayment by the end of 4th months
: Rp 4 million
: Gold jewellery
: Rp 5 million
: 80% of appraisal (the percentage depends on the item): Rp 4 million
: 1% of Loan: Rp 40,000 (to be paid up-front)
: 1.3% per 2 weeks: Rp 52,000
: 4 months
: Rp4million + (Rp 4 million*1.3%*8) = Rp 4,416,000
Perum Pegadaian has recently established a corporate partnership with Western Union to provide money transfer services at their
branches. This service started in 60 branches from early 2008.
Perum Pegadaian also finances investment activities, such as farming, fisheries, and small scale industries and merchandising.
Currently, these account for 25% of their customers. Pegadaian issues bonds which hold a AA+ credit rating by PT Pefindo,
indicating a sound financial condition. Pegadaian is a government monopoly and a very profitable business.
Source : Perum Pegadaian Annual Report, the Staff Field Interview at Perum Pegadaian Cibadak office, West Java, Indonesia.
Needs for Saving Products during the Pre-departure Stage: By government regulation, migrant workers
are required to open a savings account at a commercial bank and to buy an insurance policy prior to their
departure (see the continued discussion of insurance products a few paragraphs below). Some commercial
banks, such as Bank Negara Indonesia (BNI), have special saving accounts for migrant workers. These require
a very low initial deposit and minimum balance, with low monthly admin fees (Table 23).
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Table 23.
Sample Savings Product Offered by Banks and the Post Office
Savings Product
e-Batara Pos
Simpedes
Tabungan Mandiri
Initial
Deposit
Rp20,000
Rp100,000
Rp50,000
Minimum
Balance
Rp20,000
Monthly
Cost
Notes
Rp1,500
Product of BTN Bank jointly
operationalized with PT Pos
Indonesia
ATM card available
Rp50,000
Product of BRI Bank
ATM card available (with an
additional monthly cost of
Rp 3,000)
Rp50,000
Rp9,000
Product of Mandiri Bank
ATM card mandatory
Minimum deposit Rp
10,000
BNI TKI
Rp10,000
Rp250
Product of BNI
Should be requested
collectively (minimum 10
persons) and coordinated
or recommended by the
PPTKIS
BNI Taplus
Rp200,000
Rp6,000
Product of BNI
ATM card available
Source: Interview with banks & post office, Cirebon, September 2007, www.posindonesia.co.id, www.btn.
co.id, www.bri.co.id, www.bankmandiri.co.id, www.bni.co.id.
PPTKIS normally have a partnership with a bank. As part of pre-departure preparations, an official of that
bank usually provides a short (1-hour) training program for migrant workers, including details on opening
a special savings account and providing a bank book to migrant workers before departure.112 This saving
account constitutes proof of migrant worker status at the airport, where the migrant worker is exempted
from paying the exit tax (of Rp1 million, commonly known as ‘fiskal’).
There are limitations on the use of this saving account by migrant workers. For example, the account is
created only under the migrant worker’s name, so that family does not have an access to this account while
the worker is abroad.113 Effectively, this prohibits use of the account for remittance purposes. Also, these
130
112
Such savings accounts for migrant workers are not available at the branch level. The support given by bank officials is mainly
administrative; there is no financial literacy training or explanation of bank products.
113
BRI recently started a pilot program for a migrant worker’s savings account, which can be accessed by his/her family members
with little administration process. There are also special migrant workers’ loan products that can be extended to a migrant
worker’s family, once migrant worker repay a certain percentage of loan. This is a promising step that needs to be investigated
further, and possibly adopted by more banks.
Chapter 5
accounts still require a minimum balance, and monthly admin fees can result in the account being closed by
the bank while the migrant worker is abroad.
Insurance Products for Migrant Workers: As mentioned, legal migrant workers going abroad through
PPTKIS are required to have an insurance policy for the duration of their time overseas, as well as during
the pre- and post-migration periods. As of early 2009, five consortiums of insurance companies provided
insurance products for migrant workers.114
By regulation, every departing Indonesian migrant worker must pay Rp400,000 for insurance, which is
included in his or her placement fee.115 However, it is highly debatable whether these insurance policies are
of significant value to the migrant worker. For instance, migrant workers are often unfamiliar with insurance
products. They are often unaware of the terms of their coverage and tend to treat premiums as just an
overheard cost of working abroad. Consequently, in case of accident, illness or death during the insurance
coverage period, claims are rarely submitted by the migrant worker and his/her family. Even if migrant
workers do submit a claim, the process is often too long or too complicated for migrant workers.116 As a result,
the claim rate by migrant workers and their families is low, according to discussions with representatives of
the insurance consortium.
5.2.4
Financial Service Needs During Migration
The typical period spent overseas by Indonesian migrant workers is two years. However, if both the employer
and the migrant worker agree, there is the possibility of extending the contract for another one or two
years. During the migration period, the workers often send some of their earnings back to their family in
Indonesia, probably after having saved up for 2-3 months or more (Box 18).
114
The biggest is Consortium Jasindo with 7 member of insurance companies lead by the Asuransi Jasindo. Another is the
Konsorsium Asurasi TKI “Mitra Dhana Atmharakhsa”, currently a consortium of six insurance companies (PT. Asuransi Ramayana
Tbk., Jasa Tania, General Insurance, BNI life, PT Asuransi Asoka Mas, PT. Fadent Mahkota Sahid General Insurance and Megalife
Asuransi Jiwa). It has 19 offices throughout Indonesia and 6 international offices, in Kuwait, Bahrain, Malaysia, Singapore, Hong
Kong and Taiwan.
115
This covers a total of 30 months of insurance, including the pre-departure, placement and post-placement stages. In the predeparture stage, the insurance program covers death due to accidents or illness during training period; permanent partial
disability; and medical treatment due to illness or accident. In the placement stage, insurance will cover accidents during and
outside working hours; medical treatment expenses; death due to accident or illness (including expenses for burial and corpse
repatriation); unpaid wages; and premature contract termination by the employer. During the post-placement stage, the
insurance covers death due to accident or illness; permanent partial and total disabilities; and medical expenses due to accident.
(Manpower and Transmigration Ministerial Decree no 157/MEN/2003, dated 9 June 2003).
116
There are instances where the PJTKI assists the migrant workers with the claim, but this is rare because the PJTKI’s responsibilities
end when the migrant worker departs Indonesia for the destination country.
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Box 18.
Remittance Method and Frequency from a Middle East Country
Source: Bank staff interviews and focus group discussions, Cirebon, September 2007, FMW is female migrant worker
Transaction Channels: Indonesian migrant workers use both formal and informal channels for sending money
home (Box 19). The choice depends upon the status of migrant workers (illegal or legal); the employment
sector (informal or formal); and their country of employment. Other factors include: accessibility (physical
accessibility, ease of remittance process, opening hours, etc.); affordability; trust; and the migrant worker’s
financial literacy. Notwithstanding the noted weaknesses of the banking system (Figure 56), formal channels
dominate.
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Chapter 5
Box 19.
The Methods of Remittance: Formal vs. Informal
With regard to gender issues in this area, female migrant workers in the Middle-East rarely remit money
to Indonesia for social/cultural reasons. In that region, females are not allowed to go on the street
unaccompanied by a male, and language is often a problem. As a result, they rely heavily on their employers
to remit their salary to Indonesia.
Formal Remittances: The great majority of formal remittance inflows are through banks, with non-bank
financial institutions accounting for the remainder (Figure 56). The overseas transaction does not require
the sender to hold a bank account in the destination countries; the sender simply makes a request to remit
money with the submission of certain documents, such as an ID card, to comply with anti-money laundering
regulations. The cost per transaction varies by institutions, by the amount remitted and according to the
destination country (see Table 24). Further investigation into comparative costs by country would be very
useful information, especially if the information could be made available to workers before going abroad.
Further issues related to formal remittances and mobile banking are discussed in Chapter 5-3.
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Chapter 5
Table 24.
Indicative Cost of Remitting Money from a Middle-East Country
Sending
Method
Cost Borne by
Duration
Notes
None
1-2 days
In the form of cash, gold, goods
Policy on maximum amount of
currencies leaving a destination
country applies
20 Riyal
6 Riyal for
mail
Revenue stamp
ID photocopy
Indicative ‘gratitude
tip’ for post office
2-4
weeks
Cheque is sent via registered
mail
Need valid ID to cash out
Post office called or sms migrant
family for incoming registered
mail
Account
Transfer
25 Riyal
None
2-3 days
Need bank account & valid ID
Western
Union
Rp 100 000
to transfer
home Rp 1
million
Formally none
Indicative ‘gratitude
tip’ for post office
1 hour
Need valid ID & PIN code
Can be cashed out in any WU
outlet (banks, post offices)
For post offices that are not yet
online, PIN code confirmation is
done through phone calls with
the Cirebon City Central Post
Office
Remitter
Recipient
Hand
Carry
None
Draft
Cheque
Source: Interviews and focus group discussions, Cirebon, September 2007
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Chapter 5
Figure 56.
Method of Receiving Remittances, by Host Country (in percent)
Informal Remittances. The use of informal channels for overseas transactions is common for Indonesian
migrant workers in Malaysia, where they are often illegal. The informal channels include hand delivery,
informal agents, informal money changers and shops. The process tends to be simpler and quicker although
the financial costs are usually higher. Illegal migrant workers are likely to use such informal channels due to
the lack of proper ID, which is required by the formal channel.
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Chapter 5
Box 20.
Voices of Hard Experience
“I worked in a kedai minum in Kuching. I lived in a 3 X 4 m room that I rented for 150 Ringgit a month. I kept all my
valuables and money in my room. It is safe, but I was once robbed by my own friend. I lost 2000 Ringgit (Rp 5,667,020),a
necklace and a ring. I keep some of my money with my tauke now. I must be careful not to keep too much money there.
When it amounted to 400 Ringgit, I have to cash it out because if he holds too much of my money, it would be more
difficult for me to cash it out. He would say that he doesn’t have enough cash to give me my money.”
Rosalia, Sahan Village
“I worked in a kedai minum in Kuching. I send money home through a friend or by going home. I frequently go home. I
always exchange my Ringgit at Ahie’s store. When sending money through a friend, I usually send around 100 Ringgit
(Rp 283,350). Sometimes I send Rp by exchanging my Ringgit in Kuching. The two rates are very similar. We could also
exchange our Ringgit in shops at the border.”
Dedek, Sahan Village
“I used to work in a kedai kopi in Kuching. I was paid monthly in cash. I always keep my own money; I never opened an
account in Malaysia. I married a Malaysian in 2007 and now live in Malaysia. I send 200 – 300 Ringgit monthly to my
parents through friends. Sometimes I asked my brother to go to the border in Sirikin. I will meet him there and hand over
the money. It doesn’t cost us a thing.”
Mega, Sahan Village
“I worked in a plywood factory in Miri. I just completed my contract and will shortly go back to Malaysia to work again.
What concerns me is what’s happening on the border: people are being cheated by the preman who forces returning TKI
to exchange their Ringgit. They ran away before giving you the full amount Rp that was promised based on an exchange
rate that you both agreed on. And this only happens on the Indonesian side of the border. The Malaysian side of the
border is OK.”
Tadi, Sei Pangkalan I Village
Source : The World Bank staff interviews in Kalimantan, December 2007.
There are also risks in using the informal channel. For example, migrant workers returning to Indonesia may
carry money (or gold or jewellery) on behalf of others from the destination country. Before the couriers
return home, they may be robbed; they may be charged higher fees for transportation; or they may be the
target for corrupt immigration officials who know that returning migrant workers usually carry the cash on
their person. Informal money changers and agents may also charge higher commissions of the recipient
and the family of migrant workers.
In December 2006, Bank Indonesia issued a regulation that allows informal transfers by remittance agents.
The regulation aims to prevent money laundering by allowing a gradual transition from registration to
licensing of these agents. According to the regulation, existing agents are required to register by the end of
2008, and new agents will need to apply for a license from the beginning of 2009. Agents who are registered
and/or licensed are obliged to record money transfer transaction, submit periodical and incidental reports
to Bank Indonesia and to report any suspicious transactions to Bank Indonesia (World Bank, 2008b).
Saving During Migration: Migrant workers working in the formal sector are likely to have a bank account
in the destination country, because their employer may transfer their salary to the bank account instead
of paying the salary in cash. These migrant workers accumulate their savings in the bank account until the
amount is large enough to send back to Indonesia. In the case of migrant workers in the informal sector (e.g.,
a housemaid or babysitter), the employer may keep the earnings on behalf of the migrant workers until they
are ready to send their earnings home. Or the migrant workers simply keep their money themselves, perhaps
hiding it in their room. Typically, the migrant worker has limited free time; hours of banks’ operations may
be a problem; and they are usually unfamiliar with the process of opening a bank account in the destination
country. Consequently, migrant workers usually do not open a bank account unless their employer does it
on their behalf to transfer their salary to the account.
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5.2.5 The Post-Migration Period
Based on the evidence of this study, remittances are generally not used for investment, with the notable
exception of building or renovating a house. Rather they go towards meeting the daily needs of family
life in the village, re-paying loans, school and medical expenses and so forth. After returning home, many
migrant workers find that their remitted earnings have been fully used up. Repeat migrant workers are likely
to accumulate some assets (such as some savings or a better home) but there is limited evidence that their
post-migration livelihood has improved much on a self-sustaining basis. Indeed, less than half (41%) of
respondents reported that they had saved money from abroad.
In part, this reflects the dire on-going needs at home as well as the capacity of dependent family members
to consume transfers from abroad virtually as fast as the migrant worker can remit them. But it is also due
to a lack of financial planning and financial management. As mentioned, the great majority of Indonesian
migrant workers are from poor rural areas, with a low level of education. These migrant workers and their
families tend to have limited knowledge of financial services and products. This problem of low financial
literacy is one of key constraints to improving migrant workers’ livelihood recognized by the Indonesian
Government. Still, there are very few financial literacy education programs for migrant workers. Such
information as migrant workers obtain comes from their own experience, friends, family members, the
employer, neighbors or other migrant workers in the same destination country. Rarely does it arise from any
form of established, formal training intended to assist with making the best choices regarding the available
financial services and products. Uninformed decisions early in the process often appear to trap the migrant
into unfavorable loan arrangements are often compel them to spend the bulk of their earnings to repay
loans, rather than spending to improve their livelihood.
5.3 Mobile Banking
5.3.1 The International Context
Branchless banking,117 whether it involves telephone-based mobile banking118 or card-based transactions,119
has considerable potential to extend access to financial services to the ‘unbanked’. For the purposes of this
study, mobile phone technology is particularly interesting, because it provides a method for the unbanked
to access financial services easily, conveniently and securely through a popular, existing delivery channel.
Customers no longer have to travel a distance or wait for a long time to conduct a financial transaction, they
can conduct this transaction through their mobile phone, perhaps followed by a visit a nearby cash-in and
cash-out agent.
There are two basic models of branchless banking, bank-based and non-bank based. Both models deliver
financial services through channels other than traditional bank branches. In the bank-based model, every
customer has a direct contractual relationship with a prudentially licensed and supervised financial
117
The term ‘branchless banking’ refers to financial transactions conducted by means other than formal bank branches or their
field offices. For example, the transaction may be done through post offices or common retail outlets, like grocery stores or gas
stations.
118
There is some disagreement over the term ‘mobile banking’. Some experts define mobile banking as any financial transactions
conducted with the use of mobile phones, regardless of who provides the services. Others argue that banks must provide the
underlying service; they believe that, if telecommunication companies provide the service, it should be called an ‘m-payment’ or
something similar.
119
ard-based transactions include debit card or prepaid card transactions using a device that can transmit data over a network such
as electronic data capturer (EDC) or by using a mobile phone.
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Chapter 5
institution. In the non-bank based model, the customer buys an electronic store of value, the current value of
which is tracked on the server of a non-bank institution such a mobile phone operator or telecommunications
company. If the system is mobile-phone based, customers only need to visit a retail agent to top-up the
stored value or to convert the stored value back into cash (i.e., ‘cash-out’). These stored value instruments
are referred to as e-money, effectively substituting for cash.
Recent years have seen a boom in mobile banking operations in a number of developing countries. In Kenya,
a country of roughly 39 million people, where fewer than 4 million have bank accounts, the M-PESA mobile
wallet service offered by Safaricom attracted 1 million registered users in 10 months.120 In the Philippines, the
country’s two mobile network operators offer the functional equivalent of small-scale transaction banking
to an estimated 5.5 million customers.121 For the unbanked poor in countries such as these, conducting
transactions using a mobile phone is far cheaper than going to a bank branch in terms of both time and
out-of-pocket expenses.
These Kenyan and Filipino examples illustrate telco-led mobile banking operations that specifically target
the unbanked; they are known as “transformational mobile banking”. Variations on this model include a
joint venture between a telco and a bank, or a technology company with a bank, such as WIZZIT in South
Africa (Box 21).
Box 21.
Promising Technologial Advances – South Africa’s WIZZIT
There are good economic reasons to believe that the formal banking sector will extend its services to remote
regions if the cost of providing those services is sufficiently low. One promising technological advance in this
regard is cell phone banking, introduced into South Africa under the branding of ‘WIZZIT’. The service is premised
on the simple observation that even the poor in remote regions of the country have access to a cell phone these
days (As indicated in Chapter 3, almost 95% of survey respondents said they have access to a cellphone.)
In South Africa, branchless banking through retail agents is permitted only for licensed financial institutions, with
non-bank institutions being prohibited from accepting public deposits. Consequently, mobile operators interested
in branchless banking have created joint ventures with licensed banks to offer cell phone-based banking. WIZZIT, a
third party technology company, became a division of the South African Bank of Athens in order to be able to offer
cell phone- and card-based bank accounts for the unbanked.
WIZZIT’s resulting product is a cellphone-based banking facility whose immediate target market is the estimated
16 million unbanked or underbanked South Africans (about 60 percent of the country’s population). The initiative
was conceived in early 2002 and commercially launched in March 2005. Once successful, the company plans to
expand into the rest of Africa. In addition, the company reports having received enquiries from as far afield as
Latin America and Asia. Because it is bank-based, WIZZIT can provide a wide range of regular bank services, such as
deposit, withdrawal, payment and airtime reload services, through a mobile phone interface, ATMs, bank branches
and post offices.
WIZZIT is compatible with early generation cell phones, which are popular in low-income communities. In addition,
the services can be accessed through pay-as-you-go cellphones. As part of the service, WIZZIT account holders
are issued debit cards that can be used at any ATM or in the formal retail sector. WIZZIT charges per-transaction
fees that range from 99c (US$0.15) to R4.99 (US$0.78); it does not charge a monthly fee; there are no transaction
limitations; and it does not require a minimum balance. WIZZIT employs over 800 “Wizz Kids”, typically unemployed
university graduates from low-income communities, to promote the product and help unbanked customers open
accounts.
Sources: The World Resources Institute, http://www.nextbillion.net/archive/activitycapsule/wizzit and http://www.
wizzit.co.za/
138
120
See http://www.safaricom.co.ke/index.php?id=745.
121
See Lyman, Porteous and Pickens (2008).
Chapter 5
Box 22.
International Experience in Reducing the Cost of Mobile Banking
In developed countries, commercial banks use ‘direct banking’ technology (e.g. ATMs and InterNet banking) to
process transactions at 20% of the cost of a traditional bank teller. In other countries like Brazil, the Philippines and
Kenya, banks are experimenting very successfully with technology to reduce transaction costs further.
In Brazil, banks use point-of-sale (POS) terminals to deliver financial services in nearly every province at 0.5% of the
cost of a bank branch. POS terminals are electronic devices connected to a telephone or other telecommunications
network and placed at retail outlets for payments and disbursements. The device may read debit or credit cards or
barcodes, or the device itself may be a mobile phone that can accept information transmitted by another mobile
phone through short messaging service (SMS) or another protocol.
Will POS staff of a retail outlet, or a postal clerk, build sufficient trust with a client on behalf of the bank to sell a
wide range of banking services to customers? Recent information from Brazil suggests that this may be difficult.
Thirty percent of the accounts opened at banking correspondents of Banco Popular do Brasil (a division of Banco
do Brasil) never become active. After opening for business in June 2004 and attracting 1.05 million customers
within six months, the division now maintains about 771,000 active accounts and is closing unprofitable banking
correspondents.
In the Philippines, a ‘G-Cash’ product is proving popular. It links the user’s cell phone to a cash account. The
customer can deposit or withdraw cash from this wallet as needed, and credit can be transferred between mobile
users. Registration and transactions (including inward remittances from Filipinos working overseas) are done by
SMS; initially cash is deposited at a designated location and withdrawals require an acceptable ID. The cost per
transaction is the standard SMS fee of about US¢2. However, cash deposits are a bit more expensive; the fee is 1%
of the transaction value with a minimum of US¢19.
It is too early to know whether the use of technology channels will be profitable enough to encourage banks to
target low-income customers. No thorough profitability analysis of replacing bank branches with mobile phones
or POS devices at retail outlets is available. Although using POS systems to move transactions outside the branch
environment for existing customers reduces costs, this approach may take some time before it helps banks acquire
customers who live far from bank branches. Also, regulatory issues must be addressed (see Box 24)
Ultimately, transaction costs still need to come down significantly for lower income groups to manage their own
daily financial lives. To this end, current thinking is that the system should work for transactions of as little as $2—
the daily income for many of the world’s truly poor—on agent commissions of not more than 2 percent. That means
that customers’ transaction fees should be in the range of US¢2–4 (1–2 percent on a $2 transaction). Only then will
the size of electronic transactions parallel the daily cash flow of the poor. In the specific case of Indonesia, costs
look like they could be a small multiple of this amount, considering Indonesia’s level of per capita income, say very
roughly US¢5-10 per transaction.
Sources: “Using Technology to Build Inclusive Financial Systems”, CGAP Focus Note #32, January 2006; “Realizing the
Potential of Branchless Banking: Challenges Ahead”, CGAP Focus Note #50, October 2008; and World Bank ‘Report on
Access to Finance in Pakistan” (draft).
Transformational branchless banking, which is mostly operated by telecommunications service providers
with a limited banking license, usually offer only limited financial services, such as cash-in and cash-out,
payment and person-to-person fund transfers. They cannot usually offer savings accounts. Some countries
have faced a number of further restrictions, only allowing branchless banking services to offer a cash-in
payment, which limits the growth of this former banking. Nonetheless, according to a CGAP report referenced
above, even such limited services are sufficient for many unbanked customers, because branchless banking
is used mainly facilitate payments, not for savings or credit. For instance, in Brazil, almost 78 percent of the
1.53 billion transactions conducted at more than 95,000 retail agents/merchants are for bill payments and
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Chapter 5
for the payment of government benefits to individuals. Similarly, and even though WIZZIT offers a broader
range of services, most of its customers use the service to buy airtime twice as often as they withdrew funds
from a branch or ATM, and five times as often as they conduct money transfers.
With the number of people connected to mobile networks greatly exceeding the number of people with
bank accounts, there is great potential for branchless banking, especially mobile banking, to extend at
least a limited range of banking services to unbanked customers. The main questions are: Will the cost/
unit of this service be reduced low enough to attract the unbanked poor (see Box 22)? And will the unbanked
poor actually use these services once they are readily available on a cost-effective basis? Public education (by
industry players) and transfer of knowledge (by early adopters of branchless banking) have a significant role
to play in this regard.
5.3.2 The State of Mobile Banking in Indonesia
Indonesia is moving ahead quickly with the development of mobile banking services (see Box 23). For
instance, Bank Indonesia is relatively advanced in its thinking about e-money, and Indonesia is among the
few countries with regulations allowing non-banks to issue e-money (As this report was being drafted, BI
had just amended its current regulations, as discussed in Box 24).
By the end of 2007, twenty-three banks offered bearing kinds of mobile banking services to their customers.122
In addition, two mobile telecommunications service providers have been licensed by Bank Indonesia to
offer mobile payment services to their customers, albeit with some limitations.
The rate of mobile phone penetration is quite high in Indonesia, at 37 percent compared to 8.4 percent for
fixed-line telephones.123 Twelve mobile network operators are now competing for market share in Indonesia,
with the big three (Telkomsel, Indosat and Excelcom) accounting for about 85% of the market, with a total of
75 million customers by the end of 2007.
140
122
Information gathered in www.informasi-media.blogspot.com.
123
Paul Budde Communication. 2008. “Indonesia – Key Statistics, Telecommunications Market and Regulatory Overview.”
Chapter 5
Box 23.
Mobile Banking Product Development in Indonesia
Among the commercial banks in Indonesia, Bank BCA and Bank Mandiri are the two biggest mobile
banking operators, in term of number of users, number of transactions and volume of transactions. In
reaching out to the unbanked, Bank Permata is probably the most innovative. Its customers can send
money to an unbanked person with a mobile phone and that person can retrieve cash from a number
of Bank Permata ATMs by pushing a button and keying-in certain data received via mobile phone.
BCA has also launched Flazz, a prepaid electronic wallet targeted at young customers to offer an easy
and convenient way to conduct transactions. Using radio frequency identification (RFID) technology
and taking advantage of its vast ATM network, Flazz users only need to tap the card into an electronic
reader (without PIN numbers, as are needed with a debit card). The maximum value of funds that can
be transferred into a Flazz account is Rp1 million, or US$100, the same as other prepaid limit set by Bank
Indonesia. Flazz can be reloaded in BCA branches or from any ATM.
Telkomsel, the largest cellular operator in Indonesia, launched a mobile payment services called T-cash
in late 2007. Telkomsel customers can register to be a T-Cash user over the network or by coming into
one of Telkomsel’s many centers or retail agents. The maximum wallet size is US$100, which seems to be
small for purchasing and fund transfer. T-cash can only be used to cash in or convert cash to electronic
money and to make payments or purchasing. Cashing out and person-to-person fund transfers are
not allowed. Telkomsel signed up Fuji Image Plaza (a chain of photo processing kiosks) to be their first
retail cash-in and retail agents. Subsequently, Telkomsel has been working with Indomaret, a chain of
hundreds of mini markets, as retail agents.
One year after its introduction, T-cash has approximately 80,000 users with some 500 retail agents.
However, compared to the number of Telkomsel’s subscribers (55 million at end-2007), the number of
T-cash adopters is quite small. Reasons include the a low limit of wallet size; restrictions on m-payment
activities; and slow roll-out of retail agents that can handle cash-in and purchasing.
Indosat, the second biggest cellular provider in the country, has also received a license to operate
m-payments, but has yet to find a good strategy to reach potential customers. They only recently
launched their m-payment service (called Dompetku, or My Wallet), and progress looks slow.
Bank Indonesia regulates all mobile banking activities, whether they are conducted by banking institutions
or by telecommunications service providers. However, banks have greater flexibility in terms of the range
of services they can offer because they carry a full banking license. Under Bank Indonesia regulations,124
commercial banks in Indonesia can offer almost as many services over the internet and mobile banking
platforms as they would over the bank branches, except the exception that it is not possible to open a bank
account in this manner.
124
Bank Indonesia Regulation (PBI) No. 9/15/2007 emphasized the importance of risk management in the use of ICT
by commercial banks. This regulation governs, among others, the use of ATM, phone banking, electronic fund
transfer, internet banking and mobile phone banking.
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Chapter 5
Box 24.
Weaknesses in the Regulatory Environment for Branchless Banking in Indonesia
Despite Bank Indonesia’s relatively advanced position on e-money (described in the main text), there are few
examples to date of the successful provision of financial services to low-income Indonesians through branchless
banking. Some constraints relate to existing regulations, as summarized below. Policy recommendations to relieve
these constraints are provided in Chapter 6.
First, until very recently the regulatory regime limited the use of e-money to making retail payments. This was the
case because BI’s regulations treated e-money as being in the same category as prepaid card payment instruments
such as credit, debit and ATM cards. BI changed its regulations in April 2009 (BI Regulation 11/12/2009), and the
result appears to be a considerable improvement. However, the regulations do not secure the preferential claim
of agents and customers over issuer creditors (for instance, in the case of bankruptcy of the e-money issuer). Also,
non-banks are allowed to issue e-money, but its use is still restricted to retail purchases.
Second, any non-bank e-money provider that wants to extend its services to person-to-person (P2P) transfers
(domestically or internationally) needs a remittance license from BI, and eligibility requirements are very tight. For
example, potential providers may need to change their articles of association, which may be difficult. Effectively,
the eligibility requirements are restricting new entry.
Third, neither banks nor non-banks are currently allowed to use agents to provide financial services, like cash-out
transactions. A network of agents is vital to operate on a sufficiently large scale to make a low-value transactions
business commercially viable.
Fourth, current Know Your Customer (KYC) regulations require banks that provide electronic banking services to
meet the prospective customer, at least when the account is opened. This poses a barrier because sign-up of new
customers can only be done in bank branch offices (or mobile branch offices). Effectively, banks cannot out-source
their KYC procedures, which precludes customer acquisition beyond the reach of bank branches. Likewise, mobile
banking cannot leverage off agents’ networks (or telecos) to sign up unbanked customers who are unable or
unwilling to visit a traditional bank branch.
Source: ‘Diagnostic Report on the Legal and Regulatory Environment for Branchless Banking in Indonesia”, June 2009,
by CGAP in cooperation with IFC and GTZ.
Looking at mobile banking services provided both by banking institutions and by telecommunications
service providers under current regulations, bank-led mobile banking appears to be more likely to provide
a wide range of services to unbanked users. Nonetheless, most banks seem unable to extend these services
beyond their existing customer base, partly because of regulatory issues (see Box 24). One of the solutions
may lie in the Sharia banking system (see Box 6); important innovations are taking place in this segment
and, because it is Sharia-based, some previously unbanked segments are being attracted by the service.
5.3.3 Mobile Banking to Improve Access to Financial Services
By contrast, the telecommunications service provider model offers greater potential for reaching the
unbanked poor in rural areas because of existing wide mobile network coverage. However, the way the
regulatory environment is currently constructed, the services these providers can offer do not meet the
needs of the poor. Specifically, these limitations include no cash-out; no person-to-person fund transfer
capabilities; and small wallet size.
With Indonesia’s wide geographical spread, the main issue is how to reach the unbanked poor in remote,
rural areas in a cost efficient fashion. Because of its reach, mobile banking offers is much more promising than
either internet banking or services offered through brick and mortar venues. Telkomsel (which has applied
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to be a remittance agent) claims that its network covers almost all districts (kacamatans) in Indonesia. The
other players are currently expanding their networks rapidly, sometimes through means such as sharing
base transceivers in the rural areas. These developments look likely to further reduce service providers’ costs
significantly, especially for smaller players that want to focus their reach into rural areas.
On the side of customers, the price of handsets has dropped in recent years, making mobile phones more
affordable for low income earners. These days, many operators even offer a bundling program, whereby the
customer gets a low cost handset if s/he buys Rp300 thousand (US$30) worth of airtime.
These factors, of course, have to be supported by the regulatory environment (see Box 24) and by the services
on offer, which must make conducting mobile banking transactions convenient if they are to succeed. Most
people want the ability to cash-in and cash-out; send money to their families; make balance inquiries; reload
airtime; and purchase goods. Considering the popularity of short messaging services (SMS), if banks or
telecommunications service providers were 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.
Further work is needed to better access the prospects, including for helpful interventions of one form or
another.
Remittances Using Mobile Banking: In some countries, person-to-person fund transfers are allowed under
current regulations. For example, in the Philippines, remittances are one of the driving forces behind the
success of mobile banking, with Filipino migrant workers in Singapore, Hong Kong and the Middle East send
in millions of US dollars back home every month.
This could also be the case in Indonesia, if the regulatory framework permits. Currently, telecommunications
service provider led mobile banking players are not allowed to conduct person-to-person fund transfer,
with only bank-account-to-bank-account transfers being permitted. Maxis, a cellular operator in Malaysia is
able to provide remittance services to Indonesian migrant workers in Malaysia and Singapore. Indonesian
migrant workers in the two countries can use Maxis services by sending money to their relatives providing
their relatives have bank account in one of five banks that cooperate with Maxis in Indonesia.
At the drafting of this report, two operators in Indonesia were working on a pilot with Indonesian banks
to allow Indonesian migrant workers in Malaysia and Hong Kong to remit money using Indonesian mobile
operators. Beyond that, the mobile operators would need to build a chain of cash-out agents to allow for
easy and convenient cash withdrawal. Under current circumstances, it looks quite difficult for small shops
to apply to become remittance agents. To accelerate the process, there may be a role for a pilot program of
some type, possibly in the form of a public-private partnership.
5.4 Policy Issues
MSMEs and Access to Finance: Unlike other parts of this report, the MSME issues of access to financial
services are virtually one-dimensional: they are almost exclusively related to credit. On the basis of available
evidence, the problems of MSMEs in this regard are in inverse proportion to the size of the enterprise, with
problems of access mainly arising at the micro level. At the micro-enterprise level, there are many problems,
only one of which concerns their access to finance. Resolution of access-to-finance issues would certainly
help micro-enterprises, but other, more basic problems need to be addressed, too, such as constraints
related to human resources.
Indonesia has proactively formulated and implemented policies to promote the development of MSME
in this area for many years, but the past emphasis has been on subsidized credit programs. In general,
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Indonesia has not been well-served by most of these programs, and some have already been abandoned. In
a welcome step, the Government is undertaking a review of one of these, the relatively new KUR program.
As part of its review, the Government might consider allowing more banks to qualify for the program
(including more private banks and BPRs); pricing the guarantee to provide an incentive to increase the
quantity and quality of small loans; and designing an exit strategy. Depending upon the outcome of this
assessment, the government could review similar programs.
Another useful step forward would be the drafting of the Micro-Finance law to re-gain some momentum
under strong leadership from key stakeholders such as the Coordinating Ministry of Economic Affairs, Bank
Indonesia, or the Ministry of Finance. As part of the process, linkage programs between commercial banks
and BPRs could be expanded to include non-bank MFIs. It would also be helpful And if a similar role could
be defined for NGOs. At present, there is no obvious vehicle for linking NGOs with MFIs or lower-end BPRs,
even if the NGO is prepared to take an equity position.
Migrant Workers and Remittances: The systems of remittance payments used by Indonesian migrant
workers are, of course, usually regulated by governments outside Indonesia. Nonetheless, many policy
issues in this area could legitimately be raised by the Indonesian government in international fora. For
example, policy issues related to this matter could be addressed during discussions to reduce foreign
barriers to exports of Indonesian labor services in the course of international negotiations for trade in
services, especially in bilateral and regional agreements, or in negotiating its Memoranda of Understanding
on Migrant Workers with host countries.
The objective of such bilateral discussions should be to better balance protection of the interests of the
workers themselves with interests of employers and recruitment agencies. World Bank (2008b) makes several
practical suggestions in this regard, regarding matters such as acceptable forms of identification that do not
constrain worker access to formal sector services and exemptions from formal identification requirements
for small transfers (such a policy was implemented successfully in the Korea-Mongolia migrant worker
corridor, for example). The World Bank (2008b) also recommends the development of customized products
for Indonesian workers and their families during their three phases of migration and the appropriate
regulation of informal service providers, in such a fashion as to stimulate healthy competition between on
and that their services remain accessible to workers.
To make significant, sustainable progress, it is vital to convince the commercial banks that this business is
sufficiently profitable. One practical possibility would be to explore the wider use of domestic guarantors
(or co-signers) for loans granted to migrant workers. In this regard, at one possibility would be to encourage
international institutions or NGOs with particular interests in Indonesian migrant workers to implement
a pilot project in which the institution NGO acts as the guarantor through a public-private partnership.
This may be a viable and effective means of convincing private participants that the provision of loans to
Indonesian migrant workers is a commercially viable business.
An issue that will be explored in greater detail in the Bank’s follow-up study on migrant workers is the degree
to which Indonesian banks are missing a commercial opportunities by not expanding the services that they
offer to migrant workers and developing new products in addition to remittance systems. To determine this,
it would be useful to know the distribution of migrant workers’ net incomes (that is, their gross overseas
salaries less overseas expenses like travel and admin costs) and the number of their dependents back in
the village. This distribution could be compared to the income distribution of bank account holders in
Indonesia by way of comparison to assess their individual commercial potential. In order to determine their
overall market potential, it would also need to consider other factors, such as their total numbers; their
geographical concentration in the overseas market; and possibly their income distribution relative to other
residents in the overseas market.
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Anti-money laundering and anti-terrorism regulations are another barrier to the further development
of international remittance systems, because migrant workers often have difficulty meeting Know Your
Customer (KYC) regulations. The World Bank (2008b) advocates a well-targeted financial regulatory
framework in Malaysia and Indonesia that ensures remittances are not used for illegal purposes, while at
the same time better meeting the needs of migrant workers. As a practical first step, the government could
consider negotiating exemptions in requirements that migrant workers making small transfers present a full
range of documentation, or at least ensuring that these requirements are reasonably easily for the majority
of migrant workers to fulfil. It is possible that such measures could be piloted in countries that are not
considered high-risk conduits for terrorist financing, such as Singapore, Hong Kong and Japan.
Mobile Banking: The policy issues in this area mainly concern the management of prudential risk in a
fashion that nonetheless facilitates the development of low-cost ways to deliver services that lowerend consumers want. Very recently, Bank Indonesia has made some significant progress in the reform of
regulation in this issue, although much still remains to be done. For example, potential non-bank financial
service providers are still subject to special licensing and regulatory regimes that are often unnecessarily
burdensome and restrict new entrants into the sector. Also, to deliver mobile banking services cheaply, the
economies of scale offered by a network of retail agents is probably vital in order to get unit costs down
to a commercially viable level. This may entail allowing banks the discretion to out-source services to nonbank third parties, while holding the banks responsible for agent activities. For mobile banking to be able to
serve the needs of the ‘unbanked’, there are also significant KYC issues to be addressed. For example, it may
be necessary to simplify KYC requirements for low-risk, low-value accounts and transactions. In particular, it
may be necessary to permit the remote opening of bank accounts in isolated areas and to allow non-bank
agents to facilitate the opening of new accounts. Policy recommendations in all these areas are outlined in
the following Chapter.
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146
Chapter 6
Policy Recommendations for Improved
Access to Financial Services
This Chapter pulls together key policy recommendations from the diverse material of the preceding
chapters of this report, offering practical suggestions for improving access to financial services by low
income households.
6.1 General Strategic Matters
The Government of Indonesia recognises that lack of access to financial services by a significant proportion
of the population, particularly low income earners and most especially those in rural areas, and by MSMEs, is
a constraint to development and has made improving access a matter of high priority. The evidence of this
report indicates that it is important for policymakers to maintain certain broad, strategic objectives when
addressing issues of access to financial services. Among the most important of these strategic objectives is
the promotion of economic growth in a manner that generates increases in average and median incomes. It
is noteworthy that these increases are the single biggest determinant of access to financial services.
Likewise, it is vital to maintain the stability of the financial sector in order to ensure confidence in the financial
system on the part of the population at large and all significant stake holders . Policies aimed at increasing
access to financial services are likely to be much more effective if based on the foundation of policies aimed
at sustainable growth and financial sector stability.
Policy should be focused on facilitating broader access to a full range of financial services for lower income
users as opposed to merely facilitating access to credit. Access to credit is important for the poor, but access
to savings facilities are much higher priority. A significant proportion of lower income earners find existing
financial products to be inappropriate to their needs. Designing and pilot testing appropriate products
through partnerships could facilitate access to services provided by the formal financial sector for lower
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income earners, potentially benefiting the financial sector through improved profits derived from opening
up new markets in addition to benefiting the clients themselves. However, wider access to financial services
by lower-income Indonesians needs both public and private sector interventions as well as some innovative
public-private partnerships.
In terms of the proportion of assets that they control, commercial banks dominate Indonesia’s financial
system. However, survey results indicate that they currently service a relatively small proportion of the
population. Most Indonesians still rely on the informal sector for financial services. Expanding the formal
sector’s reach should be a priority: the key to achieving this will be to reduce unit costs to the point where
relatively expensive formal-sector services are available at affordable prices to low-income Indonesians,
who often live in remote, costly locations.
Regulatory reform, detailed below, offers a low cost solution to addressing many of these issues. In refining
this strategy, commercial banks (especially those with a wide regional reach) have an important role to
play because they will be the aggressive entrants into new, profitable markets. Also, they are most likely
to introduce new technologies (like mobile banking) and they will put competitive pressure on other
providers to improve their services and reduce prices. However, they are unlikely to be the primary means of
addressing the short- to medium-term issues of better access to finance, because the commercial banks do
not reach deeply enough into poorer, more isolated parts of Indonesia. As mentioned, the informal sector
currently supplies most Indonesian lower-end households with their financial service needs.
This report finds that improved access to financial services by lower-end households would be better served
by working on the legal and regulatory framework for BPRs, MFIs, cooperatives and pawnshops. Reforms
to the legal and regulatory framework could also facilitate the development of mobile banking, which
holds considerable promise for reducing costs and extending reach for all service providers. In considering
targeted interventions, survey results indicate that the target for improved access to financial services
should be the rural, uneducated poor who live off Java. The need to prioritise this segment is indicated by
the fact that off Java residents are more than twice as likely to have neither a bank account nor a loan, than
are on Java residents.
6.2 Regulatory Issues
In terms of reform to the regulatory environment, the most significant gains that can be achieved without
recourse to sizeable amounts of public financing are outlined in the following sections, by major topic area.
6.2.1 Mobile Banking
This area holds great promise for extending access because of the low unit costs involved. In addition, mobile
banking can build upon the existing widespread use of mobile phones, even among the poor. However, a
necessary condition for success is a regulatory framework that permits commercial agencies to operate
on a large scale. In terms of willingness to implement such reforms, Indonesia is relatively advanced. Very
recently, significant reforms have been made to facilitate an expansion of this sector.
However, there is still room for major improvements. For instance, at present, non-bank service providers
can issue e-money, but only for payment purposes. If such service providers want to offer person-to-person
services, they need a remittance license. The eligibility requirements for such a licence currently act as a
major barrier to entry. BI needs to define eligibility in simpler ways. Also, the regulatory framework should
allow e-money providers to use networks of agents to offer and maintain their products. Furthermore, KYC
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regulations should be made less restrictive to allow third-party agents to sign-up new customers or even to
allow remote applications, at least for accounts below a relatively low threshold, rather than, as at present,
requiring customers to present at the offices of the financial institutions involved.
6.2.2 Commercial Banks
For the time being, the possibility of the expansion of access to services offered by commercial banks
through the expansion of outlets is limited, owing to current policies that emphasize the consolidation of
numbers and larger size of institutions. However, commercial banks can play a vital role in the expansion
and access through other means, most notably through mobile banking, as has already been mentioned.
However, regulatory reform would assist in other areas, as well. For example, monthly administration fees are
often a major issue for small accounts holders. It appears that the absence of an official policy on dormant
accounts contributes to these high monthly administrative fees. Policies that make it easier for banks to
close-out inactive, non-zero accounts could be introduced. Basic banking services, or ‘no frills accounts’,
with low administration fees could be further encouraged, building on the initiatives of Bank Indonesia and
some commercial banks that have already begun offering such services.
Overall, they have been a few slightly regressive steps in terms of regulatory reform. In particular, recent
regulations concerning the relocation of bank branches and ATMs appears to be unnecessarily restrictive.
Rather than requiring approval before a change of location even within a very small geographical area,
general descriptions of location should suffice, thereby giving banks more flexibility to adapt quickly to
local market conditions. It would also be useful to ease official regulations on the establishment of new
branches. While in practice Bank Indonesia is currently interpreting existing regulations in a very liberal
manner, it would be useful to reform regulations so that they reflect this actual practice.
6.2.3
BPRs
Through regulatory reform, it may be possible to significantly expand the role played by BPRs facilitating
access to financial services, particularly in the case of the all-important small BPRs that operate in remote
locations. Bank Indonesia seems to be re-thinking its policies in this area, possibly moving towards stratifying
its regulation of BPRs according to size of the BPR. This would be a welcome move away from the current
one-size-fits-all-BPRs approach to regulation.
Other useful regulatory changes could involve the establishment of a lower tier of minimum start-up capital
for small BPRs in remote locations. Foreign investors and NGOs could be allowed to participate in larger BPRs
that are looking for capital. For small BPRs, especially those in locations without adequate communications
services, some reporting requirements that may be costly and ineffective could be eased. Furthermore,
written disclosure requirements could be waived in areas of low financial literacy, to be replaced by oral
briefings of new (or potential) customers, including in the local language, if necessary. Moreover, the
possibility of easing KYC regulations for opening small accounts and waiving the requirement of taxpayer
numbers for small loans would make formal sector accessible for larger numbers of poor and MSMEs. Finally,
for the sake of regulatory transparency, the current tight branching requirements could be brought into line
with the spirit of BI’s liberal approach to implementation.
At present, BI’s capacity to supervise BPRs appears to be over-stretched, despite strong efforts to strengthen
the function. BI might consider seeking additional, temporary assistance by contracting firms that specialize
in micro-finance, similar to the manner in which it has out-sourced supervision of the former BKDs to BRI.
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6.2.4 LPS
The Indonesian Deposit Insurance Corporation, LPS, has an important role to play in providing security for
depositors. This is so because bank deposits are the single most important financial service and because
‘security’ is bank clients’ main concern and therefore one of the main cornerstones in building confidence in
the banking system. Since it was formed in 2005, LPS has adequately demonstrated its capacity to reimburse
insured deposits and close BPRs, without loss of public confidence in Indonesia’s financial system. At this
juncture, the main policy requirement is a continuation of adequate financing, so that it is able to continue
to play an effective role. This is particularly necessary in the event that LPS gets involved in the larger, more
expensive commercial bank system. Also, it would be useful to find better ways of informing depositors of
the limits to their coverage, especially in regions of limited financial literacy.
6.2.5 Cooperatives
There are a large number of issues related to cooperatives, the most important of which appear to be
prudential. These need to be addressed on a timely basis as a defensive measure against memberships
losing their existing access to financial services. Concurrently, there needs to be an upgrading of the
Ministry’s regulatory and supervisory capacity. If necessary, this could include temporary outsourcing of the
function to firms specializing in micro-finance. In due course, the government could also consider moving
regulation and supervision of deposit-taking cooperatives to a consolidated supervisory authority (OJK)
and providing the members with deposit insurance under LPS.
6.2.6 Pawnshops
The only legal pawnshop in Indonesia is currently a profitable, state-owned monopoly. This area should be
officially opened up to the private participation. In parallel, the Ministry of Finance would need to upgrade
its capacity to supervise a liberalised pawnshop sector.
6.2.7 Other Financial Institutions
The most productive way forward for this diverse group would be a restoration of momentum to the drafting
of a new Micro-Finance Law. It is also vital to encourage public debate during the process. It is important
that the new Law emphasises facilitation and access. It is also important that regulation be formulated to
encourage the extension of the reach of such institutions beyond their traditional base of Java and Bali.
Implementation of the recent joint decree regarding micro-finance institutions would ensure continued
access to financial services on the part of those who need it most, namely, the rural poor.
6.3 MSMEs
Indonesia has a long history of providing support to MSMEs. However, policy needs to move towards more
effective delivery vehicles, including wider access to financing. The process has already begun, with the
Indonesian government initiating a review of its KUR credit guarantee program. Depending upon the
results of the KUR review, the Indonesian government might consider independent, external assessments of
its remaining subsidized credit schemes. These could be conducted under the auspices of the Coordinating
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Ministry of Economic Affairs or the Ministry of Finance and might include input from local universities, think
tanks, the private sector and other stakeholders.
6.4 Overseas Workers and Remittances
The Government could help to facilitate migrant workers’ access to financial services by taking up certain
key issues in negotiations of bilateral (or regional) trade in services agreements and Memoranda of
Understanding on Migrant Workers. The objective would be to better balance the interests of the workers
themselves with the interests of employers and recruitment agencies. Details could focus such as acceptable
forms of identification that do not constrain worker access to formal sector services and exemptions from
formal identification requirements for small transfers. Initially, efforts could be make and to ensure the
implementation of such measures in countries that are low-risk terrorist threats, for example Hong Kong
and Taiwan.
To provide better access to loans during the pre-departure phase, banks could make greater use of co-signers,
probably family members who remain resident in Indonesia. Indonesia’s development partners with special
interests in this area might consider acting as the co-signer for pilot projects to demonstrate the commercial
attractiveness of this market in some form of public-private partnership. During the pre-departure phase,
financial literacy training may well be helpful, as would financial counselling services in the host country.
Ultimately, these services should be provided by the Indonesian government and its agencies. However,
donors and NGOs may have to take the initiative, at least initially. At the village level, it may be possible to
recruit returned workers to assist with the pre-departure training of their less experienced peers.
6.5 Matters of More Limited Concern
Based upon the evidence of this report, note should be taken of several issues that are currently of less
concern for policymakers. This is important because many of these areas are considered problematic in
other countries, or because they are generally believed to be problematic in the Indonesian context. These
include the following points:
•
The number of banks has fallen markedly in the past decade. Despite this, the reach of financial
services has still increased significantly due to ATMs, the opening of new branches and the
expansion of lower-end financial institutions;
•
Physical access is not a generalized problem: The exception is rural off-Java, especially if travel entails
water transport. However, in most of Indonesia, the availability of financial services is actually better
than access to key public services such as health and education services;
•
Credit is not, as is sometimes assumed, the most sought-after product by low income households:
rather, a savings account is the single most important financial service sought by Indonesians, with
credit from banks ranking well down the list. Other forms of credit are widely dispersed among
service providers;
•
Lack of collateral does not appear to be a very significant constraint in terms of access to credit: lack of
collateral is problematic for some banks, but banks are not the main source of credit. Some banks,
like many MFIs, already lend against income rather than against collateral;
Gender is not a significant constraint in terms of access to financial services in almost all areas covered by
the survey of Chapter 3.
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152
Emphasize access to financial service broadly as opposed to a narrow focus on access to credit
Focus primarily on broad-based policies to raise incomes
General Strategy
Commercial Banks
Mobile Banking Ease regulations on branching, to bring them into line with BI’s relatively relaxed policy on implementation.
Loosen regulations on relocations of branches and ATM machines to give banks more flexibility in meeting clients’ needs.
Encourage basic banking account or ‘no frills’ accounts, which would include very low monthly admin fees
Formulate an official policy on dormant accounts, to give banks more flexibility to close out inactive, non-zero accounts.
Ease KYC regulations which require banks to meet prospective customers, at least when an
account is opened. Allow agents to sign-up new customers.
Allow banks and non-banks to use networks of agents to offer financial services.
Ease licensing & eligibility requirements for non-bank service providers to issue e-money.
Legal & Regulatory Framework for:
For severely under-serviced areas, consider a policy of defining minimum service standards and out-sourcing
provision of those services to private providers, using competitive bidding that is funded on-budget and supervised
by stakeholders.
Ensure financial stability and depositor protection, because bank deposits are the single most
important financial service and ‘security’ is clients’ major concern.
For targeted interventions, concentrate on the rural, uneducated poor in off-Java regions.
Focus on the legal & regulatory framework, especially mobile banking, BPRs and MFIs.
Policy Recommendation
(by policy area, with priorities indicated by grey highlighting )
Key Policy Recommendations on Improving Access to Financing
Area
Table 25.
Chapter 6
Address issues of prudential regulation and institutional weaknesses to protect members’ existing access to financing.
---Cooperatives
Up-grade supervisory capacity. In the short-term, the function could be out-sourced to firms specializing in micro-finance.
Officially open this sub-sector to private ownership.
In the meantime, implement the joint decree on micro-finance to ensure continued access to services.
Restore momentum to the drafting of a Micro-Finance Law, which needs to emphasize facilitation and access. ,
Find better ways to inform depositors of limits to LPS’s coverage, for example, a public education program.
Ensure that adequate financing is available for prompt resolution of BPR/bank failures.
Ease official branching requirements, to bring them into line with the current spirit of BI’s implementation policy.
Ease KYC regulations, especially as they apply to potential clients’ taxpayer numbers.
Ease written disclosure requirements in regions of low financial literacy, replacing them with oral briefings to new
account holders in the local language.
Ease reporting requirements for small BPRs in regions with poor IT infrastructure.
Consider lower minimum start-up capital requirements for small BPRs in remote locations.
---Pawnshops
---Other MFIs
LPS
Implement the proposed ‘tiering’ system for regulation, with reduced reporting and management requirements,
especially for small BPRs in remote locations
BPRs
Allow partial ownership by foreign investors and by NGOs in poor remote regions.
Area
Key Policy Recommendations on Improving Access to Financing (continued)
Chapter 6
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154
Overseas Workers &
Remittances
Area
Pre-departure training needs to include briefings on access to financing; NGOs in popular destination countries
might consider offering counselling services to migrant workers; returnees in home villages might be another lowcost source of assistance.
Investigate possibilities for greater use of co-signers of pre-departure loans for migrant workers. Initiate pilot projects
in partnership with banks and (as necessary) development partners
In these forum, seek better balance between the interests of the workers themselves with those of recruiters ands
employment agencies. Details could focus on issues like: acceptable worker ID; limits on KYC reporting; and ID
exemptions for small remittances.
Reduce other countries’ impediments to remittances during the negotiation of Memoranda of Understanding on
Guest Workers or bilateral (or regional) trade agreements on services
Ease policies as regards identification requirements for borrowing from banks & BPRs, particularly as concerns
taxpayer numbers.
Follow the review of KUR by an independent assessment of remaining GoI subsidized credit programs.
Key Policy Recommendations on Improving Access to Financing (continued)
Chapter 6
Chapter 6
Annexes
Annex A:
Access vs. Use of financial services –Some Definitions, Distinctions, and Concepts
Annex B:
Some Technical Details of the Survey
Annex C:
Predictors of Financial Participation; Linear Probability Regressions for Savings of Any Kind
Annex D:
Predictors of Financial Participation; Linear Probability Regressions for Formal Savings
Annex E:
Predictors of Financial Participation; Linear Probability Regressions for Informal Savings
Annex F:
Predictors of Financial Participation; Linear Probability Regressions for Loans from Any Source
Annex G:
Predictors of Financial Participation; Linear Probability Regressions for Formal Loans
Annex H:
Predictors of Financial Participation; Linear Probability Regressions for Semi-Formal Loans
Annex I:
Predictors of Financial Participation; Linear Probability Regressions for Informal Loans
Annex J:
Predictors of Financial Participation; Linear Probability Regressions for All Types of Insurance
Annex K:
Predictors of Financial Participation; Linear Probability Regressions for Financial Literacy
Annex L:
Summary of Regulatory Framework for Banks, with Attention to Issues of Access
Annex M:
Summary of Regulatory Framework for Cooperatives, with Attention to Issues of Access
Annex N:
Summary of Regulatory Framework for Finance Companies, with Attention to Issues of Access
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Annexes
Annex A
Access vs. use of financial services - Some Definitions, Distinctions and Concepts
It is useful to clarify ‘access to financial services’, which is a much broader concept than use of financial services,
or use of specific financial services like credit. For many observers, ‘access to financial services’ is synonymous
with ‘access to credit’. This report takes a much broader view of the issue, seeing credit as only one of several
instruments of financial services that are important to the poor, for instance: their deposits; guarantees of
their deposits; and transfers of remittances. This is illustrated in Figure 57, showing the different products
of banks (including MFIs) and non-banks. Of banks’ products, poor households and SMEs make good use
of the services indicated in green (especially savings accounts and remittances); they make moderate to
good use of those services indicated in blue ; and they make limited use of those services highlighted in
yellow . Pensions, highlighted in red were not covered by this report. It should be noted that as regards
credit services, only the fully collateralized lending of pawnshops is heavily used by the poor and MSMEs.
Figure 57. Access to Financial Services Versus Access to Credit (by financial service and service
provider)
Banks
Credits (roughly half or less to SMEs)
Pawnshops (all are small-scale credits)
Finance companies (limited amounts for SMEs, e.g. leasing)
Non-banks
Insurance (limited amounts for lower-income customers)
Pensions (not covered by this report)
Along similar lines, many households may be genuinely excluded from access because they choose not to
use formal financial services. It is therefore important to distinguish between voluntary and involuntary
exclusion from use of formal financial services, as illustrated in Figure 58. In particular, voluntary exclusion
should not be counted as lack of access, and research indicates that the numbers are large.125 By way of
illustration, some wealthy households may choose not to borrow because they are self-sufficient in cash
flow, or because they are financially very conservative. Similarly, deeply religious households may choose
not to conduct business with mainstream commercial financial institutions. It is important to note that
while these households may choose to remain excluded, voluntary exclusion is defined at the prevailing
price of services. This report finds that demand for financial services is fairly sensitive to their price.
Therefore, although the distinction between access and use is understood, the report focuses on the use
of financial services.
125
156
See, for example, Johnston and Morduch (2008). This work indicates that half of creditworthy, poor households simply do not want
credit.
Annexes
Figure 58.
Difference Between Access to and Usage of Services
price or income
constraint. Assume
will be rejected
Using Financial
services
Voluntarily
Excluded
No need or N o
Awareness
Population
Not Using Financial
Services
Financially Included
Financially Excluded
Due to high
risk/bad c redit
Involuntarily
Excluded
Due to
discrimination
Due to other
product or c lient
features
Source: Claessens (2005 )
Another important distinction regarding access concerns the difference between: ‘add-on’ services for
existing clients; and ‘adding-on new clients’, by reaching more deeply into the population base, possibly
via new channels for delivery of services. This report recognizes the commercial importance of the former,
especially to traditional financial intermediaries, but is more concerned with the latter, essentially because
it is an instrument for poverty alleviation. Credit and debit card and InterNet banking are examples of
add-on services that are essentially only relevant to existing, higher-end financial service providers. Mobile
banking is an example of a new delivery channel with considerable promise to extend services to new,
lower-end customers.
157
Annexes
Annex B:Survey methodology
Survey Unit of Observation
The Indonesian Access to Finance Survey (A2F) is a hybrid household and individual level survey that blends
individual level socio-economic characteristics with household level financial statistics. Whereas the survey
recorded socio-economic data (such as, education level and employment status) for all household members
above the age of 15, questions about finances were recorded for each household as a whole. The interviewee
in the household was the person with financial decision-making power, referred to the ‘head of household’;
59% of the time, this person was also the figurative head of the household.126
Although individual level data are arguably more reliable and permit analysis of within-household
heterogeneity, several factors led to the choice of the above survey design. First, individual level surveys
are time-consuming and costly. By focusing the A2F survey only on the head of household, the survey was
expanded substantially in scope and scale. Second, the overarching theme of the survey is access to finance,
which is generally a household-level decision.
Recent research in household survey design seems to justify a head of household survey. Specifically, Cull
and Scott (2009) investigate whether asking financial access questions only to the head of household
leads to systematic inaccuracies as compared to obtaining this information individually from all household
members.127 The concern is that not all individuals’ use of financial services is known to the head of the
household. Their preliminary results show that for basic financial access questions, there were no significant
differences between answers obtained from the sum of individuals within the household and answers
obtained only from the household head, although the randomly selected household member did provide
less complete data.
The sample selection methodology was designed to ensure national representation. Multi-stage random
sampling was employed with population-weighted selection occurring first at the province level, next at the
sub-province (Kabupaten/Kota) level, and finally at the village (RW) level. Overall, 4 provinces on Java and 6
provinces off Java were selected, namely Banten, West Java, Central Java, East Java (all provinces on Java);
and Aceh, Jambi, West Kalimantan, North Sulawesi, Maluku, and Nusa Tenggara Barat (off Java provinces).
On Java, excluding Jakarta and Yogyakarta 4 provinces were selected: 1) Banten, 2) West Java, 3) Central
Java, and 4). East Java. Out of the 4 selected provinces, 16 population-weighted sub-provinces were chosen
at random. Within each of these 16 sub-provinces, 4 population-weighted villages (RW) were chosen at
random, resulting in a total sample of 64 villages. The selection was stratified by urban/rural, with the final
sample containing 34 urban villages and 30 rural villages.
Off Java, one population-weighted province was chosen within each 6 regions: 1) Northern part of Sumatra,
2) Southern part of Sumatra, 3) Bali-Nusa Tenggara, 4) Kalimantan, 5) Sulawesi, and 6) Maluku-Papua. Next,
within each of these provinces, 2 population-weighted sub-provinces were chosen at random. Finally, within
158
126
The ‘figurative head’ is usually the eldest person in the family. Typically, Indonesian households are joint-family setups where
parents live with their children and the children’s respective families. Under such cases, the figurative head would be the father,
whereas the eldest son may be the financial head of the household who is responsible for all financial decision making.
127
In order to understand and quantify potential errors and biases, the authors conducted a methodological experiment in Ghana
in 2007 where they randomly implemented individual and household head only data collection methods along with a third
method using a randomly selected household member.
Annexes
each of these 12 sub-provinces, 4 population-weighted villages (RW) were chosen at random, resulting in
a sample of 48 villages. The urban/rural stratification resulted in a final sample of 18 urban villages and 30
rural villages, owing to the overwhelming rural nature of off-Java villages.
Within each of the 112 villages in the survey, 30 households were randomly selected in each village for
survey interviews, resulting in our final sample of 3,360 survey household respondents (1,920 on Java and
1,440 off Java closely equal to 60:40 ratios).
Sampling Weights
The results from the Nationwide Access to Finance survey can be extrapolated to represent the whole
population in Indonesia by weighting the result for each household with its probability of being selected
out of the whole household population.
The sample weights are calculated separately for Java and Non-Java households since sample selection is
stratified this way. The probability of a household being selected is calculated as a function of the probability
of the province being selected, the probability of the kabupaten/kotamadya (regency/municipality) being
selected, the probability of the desa/RW (village) being selected, and the probability of the household being
selected within the desa/RW.
Let p1 denote the probability of the province being selected out of all the provinces in Java and Non-Java,
respectively. Let p2 denote the probability of the kabupaten/municipality being chosen out of all kabupaten/
municipality within the province (with Java and off Java division). Let p3 denote the probability of the desa/
RW being chosen out of all the desa/RW within the kabupaten/kotamadya (with Java and off Java division).
Finally, let p4 denote the probability of the household being chosen out of all the households in the desa/
RW (with Java and off Java division).
The sample weight for each household is then denoted by the expression:
1 / (p1*p2*p3*p4)
or, the inverse probability of selection. The interpretation of the sampling weight is that it characterizes the
number of households in the entire population that are represented by this particular sample household.
Comparison of A2F with PODES and SUSENAS
This section presents some basic comparisons of survey characteristics between the A2F survey and two
existing sources of financial data in Indonesia, namely the PODES and SUSENAS, supply-side census and
demand-side surveys, respectively, both conducted by the National Statistics Bureau (BPS).
Village Potential Statistics (PODES) is a nation-wide census of all villages in Indonesia and contains information
on various socio-economic conditions at the village level.128 SUSENAS is a nationally representative socioeconomic survey conducted annually by the BPS.
128
The PODES is conducted three times every ten years. The main topic of each of these three corresponds to the periodic censuses
(population, year ended with 0; agriculture, year ended with 3; economic, year ended with 6).
159
Annexes
Comparisons here provide evidence that the Access to Finance Survey is nationally representative, within a
reasonable statistical range,
Comparison of A2F with PODES 2005
The latest available PODES census was conducted in April 2005, whereas the A2F Survey was conducted two
years later, in 2007. Also noteworthy is that PODES is a census and therefore covers all villages in Indonesia,
whereas A2F is a sample with 30 households per village presenting our village level aggregate data. Some
representative comparisons are provided in Figures 57 and 58.
Figure 59.
160
Samples in PODES 2005 vs. Access to Finance 2007, at Village Level
Urban Rural
# of Poor Households
Do You Have a Fixed Phone Line?
Do You Have Cell Phone Connection?
Is There any Commercial Bank?
Is There any BPR?
Annexes
Is There any Pawn Shop?
Is There any Other Credit Institution?
Is There any KUD?
More detailed statistical analysis was conducted for basic village level characteristics for the 112 villages
in A2F (Table 26). The results find no significant differences between A2F and PODES in terms of: urban/
rural split; population figures; availability of telephones; the existence of branches of People’s Credit Banks
(BPRs); and Village Credit Unions (KUDs). There were some minor, but statistically significant, differences in:
the proportion of poor households (27% in PODES vs. 33% in A2F); presence of pawn shop (4% in PODES
vs. 9% in A2F); presence of commercial banks (16% in PODES vs. 26% in A2F); and presence of other credit
institutions, such as cooperatives (78% in PODES vs. 93% in A2F).129 Matching observations on deciles
rather than point estimates, there is very little statistically significant difference between village-level
characteristics reported in PODES and those in A2F. Overall, the sample selection in A2F matches fairly well
with census results from PODES.
129
It should be noted that the A2F survey yields higher numbers for each of these important categories.
161
Annexes
Table 26.
Statistical Comparison of Village-Level Variables in the A2F Survey and PODES
Variable
Survey
PODES
Obs.
112
Mean
0.46
Std. Dev.
0.50
Urban Village?
A2F
112
0.43
0.50
Diff
Population Size
0.04
PODES
112
A2F
112
Diff
Number of Poor Households
390.80
452.63
108
542.43
468.06
PODES
112
0.61
0.49
A2F
112
0.70
0.46
-151.63
PODES
112
0.87
0.34
A2F
112
0.95
0.23
PODES
112
0.16
0.37
A2F
112
0.26
0.44
-0.08
*
PODES
112
0.13
0.34
A2F
112
0.14
0.35
PODES
112
0.04
0.19
A2F
112
0.09
0.29
-0.01
-0.05
*
PODES
112
0.78
0.42
A2F
112
0.93
0.26
112
0.21
112
0.13
Diff
-0.15
PODES
Village has a KUD?
**
-0.10
Diff
Village has another kind of credit institution?
*
-0.09
Diff
Village has pawn shop?
5,200
112
Diff
Village has BPR?
6,049
A2F
Diff
Village has commercial bank?
4,854
PODES
Diff
Village has cell phone coverage?
5,824
(225)
Diff
Village has fixed phone line?
Sig. Diff.
A2F
Diff
***
0.41
0.34
0.08
Note: * = significant at 10%; ** = significant at 5%; ** * = significant at 1%.
Comparison of A2F with SUSENAS 2007
SUSENAS is also a nationally representative 2007 survey, but with a much larger sample size of 227,202
households, and comparisons are possible between socio-economic characteristics between SUSENAS and
A2F at the household level.
When comparing households in SUSENAS with A2F (Table 27), there were significant—albeit small—
differences in gender of household head, age composition, education levels, monthly non-food consumption,
and usage of formal credit. These differences are not likely to indicate any systematic sample selection bias.
162
Annexes
Rather, they probably stem from A2F’s randomly chosen respondents being picked, by coincidence, from
the districts that have a slightly higher probability of having male and younger household heads, lower high
school graduates, higher non-food consumption, and lower usage of formal credit.
Table 27.
Statistical Comparison of A2F vs. Non-A2F Villages Using SUSENAS Data
Dependent Variable: A2F District
Coeff.
t-stat
Female Head of HH
Age
Primary School
High School Up
House has Roof
House has Wall
Existence of Migrant Worker
-0.011
-0.019
-0.012
-0.014
-0.002
0.003
0.018
-1.81
-1.86
-1.32
-1.67
-0.1
0.33
0.59
Salary
Consumption: Food
Consumption: Non-food
0.002
0.000
0.034
0.44
0.02
2.51
Credit: from Formal Sector
-0.019
Credit: from Informal Sector
-0.020
Province Fixed Effects
YES
Observations
76,513
R-Squared
0.122
Note: * = significant at 10%; ** = significant at 5%.
-1.96
-1.29
*
*
*
**
**
Some Characteristics of A2F Sample Respondents
As mentioned, the sample for the A2F Survey was selected in a manner to ensure national representation.
Survey questions were posed to the household member ultimately responsible for financial decisions.
Looking at respondents’ broad characteristics, for 59% of the population, the respondent was the household
head; they were overwhelmingly Muslim (93%), married (83%) and half are female (Figure 60).
163
Annexes
Figure 60.
A2F Sample Characteristics
Resp ondent is HH Head
Gend er of Respondent
40.5%
49.5%
50.5%
59.5%
No
Yes
Female
Male
Continuing with the broad picture, respondents indicate that the national population is 42% urban, with
substantial variation on and off Java (Figure 60). On Java, almost 45% of the population is urban whereas,
off Java only 22% is urban (Figure 61).
Figure 61.
Urban/Rural Split
Off Java Respondents
22.3%
On Java Resp ondents
Urban
Urban
Rural
44.9%
Rural
55.1%
77.7%
By regional distribution, most respondents are from Java; 35% of respondents from East Java, 33% from
West Java, and 17% from Central Java. Off Java provinces account for the remaining 15% (Figure 62).
164
Annexes
Figure 62.
Respondents, by Province
Respondents by Provinces (%)
ACEH
JAMBI
2.8
1.6
W-JAVA
33.3
C-JAVA
17.3
E-JAVA
BANTEN
35.0
1.8
W-NUSATENG
2.8
W-KALIMAN
3.1
N-SULWS
N-MALUKU
1.8
.0.7
By age, 90% of the sample respondents are above 25 years old, with the average respondent around 40
years of age, both on and off Java (Figure 63). Splitting the sample by gender, we find that the median
age for female respondents is much younger than male respondents, though both distributions look quite
similar (also Figure 63).
Figure 63.
Sample Characteristics, Age by Gender
Most respondents have attended at least primary school (89%), and only 10% have education beyond high
school (Figure 64). These figures are very similar for on and off Java residents.
165
Annexes
Figure 64.
Respondents, by Employment & Education
Respondents by Employment
3.8%
Respondents b y Education Level
8.9%
10.2%
19.6%
14.3%
25.6
23.1%
1.8%
30.0%
17.1%
45.6%
Govern ment emplo yee
Self emplo yed
Fr eelance/Casual labor
Private emplo yee
Emplo yer
HH wor ker no t being paid
No for mal education
Second ary school/e qui valent
Uni versity
Primary school/ equi valent
Senior High school/e qui valent
A large proportion of respondents are employed (73%) and nearly half of them (47%) are self-employed.
Around 49% are wage earners, and 36% work in agriculture and 22% in trade. As would be expected, there
is substantial variation between and Java and off Java residents; whereas wage income dominates farm
income on Java (51% vs. 33%), these figures are reversed off Java (34% vs. 56%). The large urban-rural divide
is the likely explanation for more farm based activities off Java.
Figure 65.
Respondent Wage Composition
At the national level, the wage composition of respondents presents a complicated pattern (Figure 65). Only
23% receive a regular monthly wage; 32% receive wages on a daily basis; another 8% are paid regularly, but
at different frequencies; and 28% have irregular compensation schedules.
Some 39% of households own and operate a household-level enterprise, whereas only 10% have a migrant
worker abroad, which matches the percentage reported in PODES.130
Home ownership is quite high in the sample--around 3/4s of the population owns their residence, both
130
166
There are regions in the Indonesia where large proportions of the local population have migrant workers abroad, and the
sample was not stratified according to migrant worker status. This could explain why we find such a low proportion of the
national household population as having migrant workers abroad. The World Bank Indonesia office recently conducted another
household survey focusing on access to finance for migrant workers and their families in East Java, Nusa Tengga Barat and Nusa
Tengga Timur in late 2008. This survey will likely provide a better picture of access to finance issues for migrant worker families.
The data from this survey are currently being collected and analyzed.
Annexes
on and off Java. Most houses are permanent buildings made from brick-walls (75%), tile-roofs (86%), and
tile-floors (54%), with the average number of rooms per home is 5. Brick houses are much more common
on Java (79%) as compared to off Java (59%). Of these homes, 99% on Java have electricity and 87% have
telephone service. By comparison, 87% of homes off Java have electricity and only 43% have telephone
service. Access to tap water is low both on and off Java with an average of only 23% of homes having access
to tap water as their main source of drinking water.
Yearly per capita consumption expenditure equals $1,068, and is expectedly higher on Java than off Java.
This average national consumption expenditure figure is roughly half of Indonesia’s GDP per capita ($1,918).
167
Annexes
Annex C: Predictors of Financial Participation131132
Linear Probability Regressions for Savings of Any Kind
Province
Fixed
Basic
Effects132
Results
Urban household
0.032
0.032
--
(0.023)
(0.023)
--
-0.010
-0.001
0.002
(0.006)
(0.006)
(0.006)
-0.094
-0.070
-0.066
(0.030)***
(0.030)**
(0.028)**
0.019
0.008
0.009
(0.029)
(0.028)
(0.027)
0.003
0.001
-0.002
(0.004)
(0.003)
(0.004)
0.000
0.000
0.000
(0.000)
(0.000)
(0.000)
0.010
0.006
0.004
(0.028)
(0.028)
(0.027)
0.045
0.073
0.106
(0.040)
(0.039)*
(0.039)***
-0.072
-0.037
-0.018
(0.027)**
(0.028)
(0.032)
0.100
0.103
0.091
(0.009)***
(0.009)***
(0.010)***
0.057
0.022
0.026
(0.026)**
(0.026)
(0.026)
-0.011
-0.015
-0.001
Respondent is head of household
Male
Age
Age squared
Married
Attended school
Muslim
Log of consumption expenditure
Employed
Own house
168
Effects131
Household size
Village Fixed
131
Exploits within-province variability and controls for heterogeneity across provinces.
132
Restricts analysis to within-village variation and controls for variation across villages.
Annexes
(0.024)
(0.023)
(0.025)
0.013
0.012
0.016
(0.005)**
(0.006)**
(0.006)***
0.142
0.107
0.086
(0.046)***
(0.045)**
(0.053)
0.145
0.109
0.167
(0.029)***
(0.033)***
(0.035)***
0.064
0.057
0.057
(0.021)***
(0.021)***
(0.026)**
0.055
0.061
0.068
(0.020)**
(0.020)***
(0.020)***
0.103
0.125
0.080
(0.033)***
(0.034)***
(0.037)**
0.155
0.114
0.087
(0.038)***
(0.038)***
(0.038)**
0.224
0.196
0.188
(0.056)***
(0.056)***
(0.055)**
-0.026
-0.015
-0.007
(0.020)
(0.020)
(0.019)
0.013
0.012
0.008
(0.029)
(0.028)
(0.027)
-1.480
-1.438
-1.253
(0.141)***
(0.147)***
(0.156)***
Observation
3360
3360
3360
R-squared
0.267
Number of rooms
Have electricity
Have telephone
Have tap water
Own enterprise
Household has migrant worker abroad
Financial literacy score
Cognitive/Math skills score
Risk averse
Time consistent preferences
Constant
0.297
0.372
Standard errors in parentheses: * significant at 10%; ** significant at 5%; ***significant at 1%
169
Annexes
Annex D: Predictors of Financial Participation
Linear Probability Regressions for Formal Savings
Basic
Results
Urban household
0.070
0.075
--
(0.024)***
(0.025)***
--
-0.018
-0.013
-0.005
(0.006)***
(0.006)**
(0.006)
-0.025
-0.012
-0.011
(0.033)
(0.032)
(0.032)
0.007
-0.001
0.012
(0.031)
(0.031)
(0.031)
0.009
0.008
0.003
(0.004)**
(0.004)**
(0.004)
0.000
0.000
0.000
(0.000)**
(0.000)**
(0.000)
-0.011
-0.010
-0.014
(0.029)
(0.030)
(0.030)
0.055
0.068
0.084
(0.036)
(0.035)*
(0.036)**
-0.035
-0.020
0.038
(0.041)
(0.050)
(0.057)
0.131
0.134
0.115
(0.009)***
(0.010)***
(0.010)***
-0.014
-0.030
-0.011
(0.028)
(0.029)
(0.028)
0.003
0.001
0.035
(0.026)
(0.026)
(0.027)
0.022
0.022
0.025
(0.006)***
(0.006)***
(0.006)***
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
170
Province Fixed
Effects
Annexes
Have electricity
-0.028
-0.031
-0.034
(0.044)
(0.042)
(0.050)
0.059
0.040
0.167
(0.029)**
(0.033)
(0.038)***
0.094
0.082
0.063
(0.026)***
(0.027)***
(0.033)*
0.064
0.068
0.074
(0.023)***
(0.023)***
(0.022)***
0.217
0.215
0.207
(0.035)***
(0.036)***
(0.039)***
0.143
0.123
0.072
(0.042)***
(0.042)***
(0.040)*
0.231
0.219
0.190
(0.054)***
(0.055)***
(0.055)***
0.025
0.034
0.031
(0.021)
(0.021)
(0.021)
0.022
0.022
0.019
(0.031)
(0.031)
(0.030)
-2.093
-2.100
-1.869
(0.148)***
(0.160)***
(0.174)***
Observation
3360
3360
3360
R-squared
0.297
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.309
0.381
171
Annexes
Annex E: Predictors of Financial Participation
Linear Probability Regressions for Informal Savings
Basic
Results
Urban household
0.026
0.017
--
(0.034)
(0.033)
--
-0.002
0.007
0.007
(0.008)
(0.008)
(0.008)
-0.167
-0.123
-0.123
(0.044)***
(0.044)***
(0.043)***
0.016
0.000
-0.009
(0.043)
(0.044)
(0.043)
-0.003
-0.005
-0.007
(0.005)
(0.005)
(0.005)
0.000
0.000
0.000
(0.000)
(0.000)
(0.000)*
0.013
0.013
0.006
(0.039)
(0.037)
(0.037)
-0.012
0.021
0.052
(0.044)
(0.044)
(0.045)
-0.134
-0.079
-0.048
(0.043)***
(0.053)
(0.093)
0.063
0.063
0.058
(0.015)***
(0.015)***
(0.015)***
0.129
0.077
0.072
(0.037)***
(0.038)**
(0.036)**
-0.036
-0.061
-0.043
(0.037)
(0.036)*
(0.037)
0.008
0.007
0.013
(0.010)
(0.010)
(0.010)
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
172
Province Fixed
Effects
Annexes
Have electricity
0.143
0.088
0.071
(0.037)***
(0.036)**
(0.039)*
0.184
0.128
0.053
(0.030)***
(0.037)***
(0.052)
0.050
0.046
0.067
(0.045)
(0.046)
(0.066)
0.036
0.040
0.064
(0.032)
(0.031)
(0.031)**
-0.087
-0.060
-0.116
(0.051)*
(0.047)
(0.048)**
0.165
0.126
0.122
(0.057)***
(0.056)**
(0.054)**
0.098
0.080
0.097
(0.064)
(0.064)
(0.065)
-0.063
-0.060
-0.045
(0.030)**
(0.029)**
(0.028)
0.008
0.019
0.002
(0.042)
(0.041)
(0.039)
-0.822
-0.732
-0.598
(0.216)***
(0.222)***
(0.230)**
Observation
1847
1847
1847
R-squared
0.149
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.211
0.336
173
Annexes
Annex F: Predictors of Financial Participation
Linear Probability Regressions for Loans From Any Source
Basic
Results
Urban household
-0.013
-0.035
--
(0.027)
(0.028)
--
0.018
0.021
0.019
(0.007)***
(0.007)***
(0.007)***
0.006
0.000
-0.004
(0.039)
(0.039)
(0.039)
-0.034
-0.027
-0.029
(0.038)
(0.038)
(0.038)
0.002
0.003
0.004
(0.005)
(0.005)
(0.005)
0.000
0.000
0.000
(0.000)
(0.000)
(0.000)
0.088
0.074
0.060
(0.037)**
(0.038)*
(0.038)
0.079
0.090
0.077
(0.044)*
(0.044)**
(0.046)*
0.148
0.095
0.073
(0.047)***
(0.059)
(0.073)
0.045
0.053
0.056
(0.011)***
(0.012)***
(0.012)***
0.076
0.080
0.072
(0.033)**
(0.033)**
(0.033)**
-0.047
-0.054
-0.063
(0.030)
(0.030)*
(0.033)*
-0.003
-0.005
-0.001
(0.007)
(0.007)
(0.008)
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
174
Province Fixed
Effects
Annexes
Have electricity
0.099
0.044
0.010
(0.053)*
(0.053)
(0.065)
0.047
0.023
0.062
(0.030)
(0.035)
(0.041)
-0.042
-0.023
-0.043
(0.031)
(0.032)
(0.042)
0.011
0.005
0.014
(0.025)
(0.025)
(0.026)
0.028
0.022
-0.004
(0.039)
(0.040)
(0.043)
0.076
0.060
0.071
(0.049)
(0.049)
(0.049)
0.088
0.071
0.075
(0.063)
(0.064)
(0.066)
0.003
0.000
0.002
(0.025)
(0.025)
(0.025)
0.001
0.005
-0.004
(0.034)
(0.034)
(0.035)
-0.669
-0.639
-0.691
(0.175)***
(0.187)***
(0.206)***
Observation
3360
3360
3360
R-squared
0.085
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.098
0.147
175
Annexes
Annex G: Predictors of Financial Participation
Linear Probability Regressions for Formal Loans
Basic
Results
Urban household
-0.001
-0.004
--
(0.023)
(0.023)
--
0.004
0.004
0.010
(0.006)
(0.006)
(0.006)*
-0.040
-0.043
-0.041
(0.026)
(0.026)
(0.027)
0.030
0.033
0.033
(0.027)
(0.027)
(0.027)
0.006
0.006
0.004
(0.003)*
(0.003)*
(0.003)
0.000
0.000
0.000
(0.000)
(0.000)
(0.000)
0.002
-0.002
-0.024
(0.028)
(0.028)
(0.028)
0.011
0.010
0.011
(0.025)
(0.026)
(0.026)
0.030
0.040
0.036
(0.038)
(0.050)
(0.059)
0.057
0.060
0.050
(0.009)***
(0.010)***
(0.010)***
-0.019
-0.015
0.004
(0.028)
(0.028)
(0.028)
0.041
0.041
0.049
(0.024)*
(0.024)*
(0.026)*
0.012
0.011
0.017
(0.006)*
(0.006)*
(0.006)***
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
176
Province Fixed
Effects
Annexes
Have electricity
-0.001
-0.005
-0.031
(0.022)
(0.018)
(0.023)
0.041
0.031
0.096
(0.021)**
(0.026)
(0.035)***
0.033
0.039
0.074
(0.029)
(0.030)
(0.041)*
0.020
0.020
0.043
(0.023)
(0.023)
(0.023)*
0.001
-0.004
0.009
(0.032)
(0.034)
(0.036)
0.065
0.063
0.041
(0.037)*
(0.037)*
(0.037)
0.086
0.081
0.126
(0.041)**
(0.042)*
(0.044)***
0.031
0.029
0.024
(0.021)
(0.021)
(0.020)
0.009
0.009
0.003
(0.030)
(0.031)
(0.029)
-1.111
-1.136
-1.057
(0.146)***
(0.158)***
(0.164)***
Observation
3360
3360
3360
R-squared
0.103
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.106
0.219
177
Annexes
Annex H: Predictors of Financial Participation
Linear Probability Regressions for Semi-formal Loans
Basic
Results
Urban household
0.020
0.022
--
(0.018)
(0.019)
--
0.006
0.007
0.008
(0.004)
(0.005)
(0.005)*
0.021
0.025
0.027
(0.022)
(0.022)
(0.024)
-0.026
-0.029
-0.027
(0.022)
(0.022)
(0.023)
0.005
0.005
0.005
(0.002)**
(0.002)**
(0.003)*
0.000
0.000
0.000
(0.000)**
(0.000)**
(0.000)**
0.027
0.023
0.025
(0.0176)
(0.018)
(0.018)
0.016
0.025
0.019
(0.017)
(0.018)
(0.020)
0.060
0.092
0.117
(0.022)***
(0.029)***
(0.048)**
0.012
0.016
0.020
(0.007)
(0.008)**
(0.008)**
0.024
0.014
0.013
(0.020)
(0.020)
(0.022)
-0.036
-0.039
-0.030
(0.022)
(0.022)*
(0.022)
0.005
0.005
0.002
(0.006)
(0.006)
(0.006)
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
178
Province Fixed
Effects
Annexes
Have electricity
-0.043
-0.038
-0.019
(0.025)*
(0.023)
(0.026)
0.030
0.023
0.011
(0.015)**
(0.018)
(0.028)
0.089
0.087
0.038
(0.026)***
(0.027)***
(0.040)
-0.006
-0.003
-0.002
(0.019)
(0.019)
(0.019)
-0.011
-0.012
-0.012
(0.021)
(0.021)
(0.024)
0.031
0.021
0.015
(0.032)
(0.033)
(0.034)
0.076
0.067
0.056
(0.030)**
(0.030)**
(0.033)*
-0.016
-0.010
-0.013
(0.017)
(0.017)
(0.017)
-0.037
-0.036
-0.044
(0.027)
(0.027)
(0.027)
-0.370
-0.431
-0.472
(0.114)***
(0.120)***
(0.129)***
Observation
2870
2870
2870
R-squared
0.068
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.077
0.126
179
Annexes
Annex I: Predictors of Financial Participation
Linear Probability Regressions for Informal Loans
Informal loans
Basic
Results
Urban household
-0.029
-0.059
--
(0.033)
(0.034)*
--
0.018
0.022
0.013
(0.008)**
(0.008)***
(0.008)
0.019
0.011
-0.001
(0.041)
(0.041)
(0.041)
-0.052
-0.043
-0.046
(0.040)
(0.040)
(0.039)
-0.005
-0.005
-0.001
(0.005)
(0.005)
(0.006)
0.000
0.000
0.000
(0.000)
(0.000)
(0.000)
0.096
0.082
0.083
(0.038)**
(0.039)**
(0.037)**
0.073
0.083
0.074
(0.044)
(0.045)*
(0.046)
0.126
0.027
-0.022
(0.047)***
(0.060)
(0.079)
0.016
0.021
0.028
(0.013)
(0.014)
(0.014)**
0.102
0.108
0.088
(0.036)***
(0.037)***
(0.035)**
-0.060
-0.069
-0.094
(0.035)*
(0.035)*
(0.035)***
-0.016
-0.018
-0.015
(0.008)*
(0.009)**
(0.009)*
Household size
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
180
Province Fixed
Effects
Village Fixed
Effects
Annexes
Have electricity
0.133
0.070
0.039
(0.055)**
(0.054)
(0.068)
0.018
-0.009
0.030
(0.032)
(0.038)
(0.048)
-0.137
-0.113
-0.159
(0.037)***
(0.038)***
(0.047)***
0.008
-0.002
-0.005
(0.030)
(0.031)
(0.031)
0.038
0.036
0.006
(0.044)
(0.046)
(0.050)
0.044
0.028
0.054
(0.052)
(0.052)
(0.051)
0.008
-0.006
-0.037
(0.065)
(0.066)
(0.068)
-0.004
-0.011
-0.015
(0.028)
(0.029)
(0.028)
0.016
0.022
0.022
(0.040)
(0.041)
(0.040)
-0.021
0.084
0.008
(0.201)
(0.217)
(0.237)
Observation
2587
2587
2587
R-squared
0.067
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.087
0.162
181
Annexes
Annex J: Predictors of Financial Participation
Linear Probability Regressions for All Types of Insurance
Basic
Results
Urban household
0.065
0.073
--
(0.026)**
(0.027)***
--
0.014
0.016
0.020
(0.006)**
(0.007)**
(0.007)***
-0.122
-0.108
-0.077
(0.034)***
(0.034)***
(0.033)**
0.122
0.115
0.111
(0.032)***
(0.032)***
(0.032)***
0.010
0.009
0.004
(0.004)**
(0.004)**
(0.004)
0.000
0.000
0.000
(0.000)*
(0.000)*
(0.000)
-0.082
-0.068
-0.053
(0.032)**
(0.032)**
(0.032)
0.011
0.012
0.005
(0.040)
(0.040)
(0.040)
0.048
0.015
0.022
(0.041)
(0.049)
(0.053)
0.073
0.064
0.065
(0.011)***
(0.011)***
(0.012)***
-0.071
-0.082
-0.070
(0.030)**
(0.031)***
(0.030)**
-0.020
-0.019
0.020
(0.028)
(0.028)
(0.029)
0.016
0.020
0.020
(0.006)***
(0.006)***
(0.006)***
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
182
Province Fixed
Effects
Annexes
Have electricity
-0.171
-0.185
-0.163
(0.050)***
(0.051)***
(0.061)***
0.175
0.179
0.076
(0.027)***
(0.031)***
(0.041)*
0.081
0.058
0.056
(0.029)***
(0.029)**
(0.038)
-0.008
-0.006
0.000
(0.024)
(0.024)
(0.024)
-0.115
-0.103
-0.121
(0.036)***
(0.037)***
(0.041)***
0.093
0.091
0.049
(0.046)**
(0.045)**
(0.046)
0.200
0.205
0.162
(0.059)***
(0.060)***
(0.059)***
0.012
0.014
0.000
(0.023)
(0.023)
(0.023)
-0.021
-0.026
-0.015
(0.034)
(0.034)
(0.033)
-1.099
-0.950
-0.767
(0.167)***
(0.178)***
(0.190)***
Observation
3360
3360
3360
R-squared
0.188
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.200
0.274
183
Annexes
Annex K: Predictors of Financial Participation
Linear Probability Regressions for Financial Literacy
Basic
Results
Urban household
0.051
0.042
--
(0.013)***
(0.013)***
--
-0.007
-0.003
-0.001
(0.003)**
(0.003)
(0.003)
0.000
0.006
0.010
(0.019)
(0.019)
(0.019)
0.031
0.028
0.028
(0.018)*
(0.018)
(0.018)
0.005
0.004
0.003
(0.002)**
(0.002)
(0.002)
0.000
0.000
0.000
(0.000)***
(0.000)**
(0.000)*
-0.022
-0.026
-0.018
(0.018)
(0.018)
(0.018)
0.094
0.106
0.093
(0.022)***
(0.023)***
(0.023)***
-0.039
-0.054
-0.053
(0.025)
(0.031)*
(0.038)
0.019
0.021
0.019
(0.006)***
(0.006)***
(0.006)***
-0.015
-0.025
-0.016
(0.016)
(0.016)
(0.016)
-0.033
-0.033
-0.015
(0.014)**
(0.014)**
(0.015)
0.001
0.000
-0.002
(0.003)
(0.004)
(0.004)
Male
Age
Age squared
Married
Attended school
Muslim
Employed
Own house
Number of rooms
Effects
Village Fixed
Household size
184
Province Fixed
Effects
Annexes
Have electricity
0.016
-0.015
-0.012
(0.027)
(0.027)
(0.032)
0.045
0.013
0.017
(0.015)***
(0.017)
(0.020)
0.004
0.008
-0.006
(0.015)
(0.015)
(0.020)
0.025
0.026
0.024
(0.013)**
(0.013)**
(0.013)*
0.010
0.017
0.021
(0.018)
(0.018)
(0.019)
0.447
0.420
0.395
(0.030)***
(0.030)***
(0.032)***
-0.017
-0.013
-0.012
(0.013)
(0.013)
(0.013)
0.021
0.021
0.019
(0.017)
(0.017)
(0.018)
-0.292
-0.220
-0.138
(0.090)***
(0.097)**
(0.106)
Observation
3360
3360
3360
R-squared
0.282
Have telephone
Have tap water
Own enterprise
Risk averse
Constant
0.298
0.332
185
186
BI Regulations
BI Regulations
BI Regulations
BI Regulations
BI Regulations
1.2 Ownership Requirements
1.3 Management Requirements
1.4 Fit & Proper Tests
1.5 Risk Management Certification
1.6 Compliance Director
Education, numbers & Supervisory Board (for Sharia)
excessive for small BPRs.
Not significant.
Restrictive certification looks difficult for smaller
banks, but not applicable to BPRs.
Not significant.
Size, composition & competence of Directors,
Commissioners & Supervisors (for Sharia)
Review of controlling shareholders, managers &
executives.
For management & executives; separate requirements for
InterNet banking & mutual funds.
A member of the Board of Directors must be appointed
Compliance Director.
Requires reporting of substantial info on loans of all sizes.
In principle, places a ceiling on insured deposit rates.
BI Regulations
BI Regulations
BI Regulations
Act No. 24 of
2004
2.2 Transparency of Finances
2.3 Transparency in Products
2.4 Debtor Information System
2.5 Deposit Insurance
Written info ineffective for BPRs because of low
literacy in poor remote areas.
Requires transparency in bank products and use of
customer data in written form.
Unclear if the ceiling is operative.
Unnecessary for very small borrowers; questionable if
taxpayer # & business license needed.
Doubtful effectiveness for BPRs because of low
financial literacy in poor, remote areas.
Financials published (& on BI website) regularly; less
frequently for BPRs.
serious sanctions.
BI Regulations
Dismissal of manager is one sanction; very serious for
a small bank or BPR.
No foreign ownership (incl. NGOs) hurts BPRs, which
lack human resources and financing.
Very open for conventional banks. No foreign ownership
for BPRs
Application is part of ‘management’ component of bank
rating. Can entail
Acts as barrier for new, small banks. Less restrictive for
BPRs & Sharia
Notes on Implications for poorer households & MSMEs
Vary by type of bank; high for new banks; Tier 1 for
existing banks rising thru 2010
Summary of Main Content
2.1 Know Your Customer (KYC)
2. Asymmetric Information
BI Regulations
Authority 1/
1.1 Minimum Capital Requirements
1. Entry into Industry
Regulations Concerning:
Annex L: Summary of Regulatory Framework for Banks, With Attention to Issues of Access
Annexes
BI Regulations
BI Regulations
BI Regulations
BI Regulations
3.2 Capital Adequacy Ratios
3.3 Legal Lending Limits
3.4 Loan Loss Provisioning
3.5 Statutory Reserves
Various
4.2 On Lending
Additional reserve requirements soak up excess
liquidity, but reduce loanable funds.
Complicated system including primary, secondary &
additional reserves; addtion’l reserves depend on 3rd
party funds & loan-deposit ratios. Special rates for Sharia
banks
20% withholding tax on time & savings deposits >Rp7 1/2
million.
MoF No. 51/
KMK.04/2001
Not significant, but should be raised to allow for
inflation since 2001.
Borrowers resent requirements to have a taxpayer
number & business license.
Banks encouraged to disburse funds into MSME loans by
inclusion in Annual Business Plan; disclose their MSME
lending plans and announcing results.
Banking Act No.
10/1998
5.2 On Lending
5.3 Taxation of Interest on Deposits
Minimum balances & monthly admin fees can wipe
out interest on small accounts.
Largely definitional.
Subsidized programs hamper development of a
resilient, integrated market.
Banks have additional requirements (e.g., business
licence, taxpayer number, collateral)
BI Regulations
Ceilings on some subsidized credit programs (KKP & KUR,
latter to compensate for higher oil prices). Rates (16%) are
close to market rates, but subsidized or guaranteed.
Unclear if ceiling is operational; better if set as a spread
relative to some benchmark.
If loans not backed by collateral, provisioning
requirements burdensome.
Provisioning %’s less demanding for BRPs than other
banks.
LPS sets nominal ceiling on deposit rate for eligibility for
deposit guarantee.
Broad, complicated definition of ‘affiliated parties’
especially onerous for BPRs.
No evidence of negative impact.
8% CAR, including lower risk for certain guaranteed small
business loans (KUK).
Limits on individual, affiliated & unaffiliated borrowers.
CAMEL does not incorporate ‘access’ criteria. Results
not published.
No evidence of negative impact.
BPRs subject to CAMEL system; commercial banks subject
to augmented CAMEL.
Written policy needed for resolving complaints.
Complaints must be settled < 20 days.
5.1 On Deposits
5. Servicing of Products
Guarantee rate
set by LPS
4.1 On Deposits
4. Pricing of Products
BI Regulations
BI Regulations
3.1 Soundness Rating System
3. Prudential Supervision
2.6 Customer Complaint Resolution
Annexes
187
188
Courts too expensive for BPRs & smaller banks.
Private banks sell directly or by auction, avoiding courts
where possible.
Determines type of surveillance (‘Intensive’ or ‘Special’)
from BI, including liquidation.
Instrument for reducing numbers of banks & increasing
their size.
1/ Details generally available upon request from background study.
Unclear
Indo Banking
Architecture (API)
7.2 Mergers, Acquisitions &
Consolidation
7.3 Supervisory Actions
BI Regulations
7.1 Single Presence Policy
7. Industry Structure
Party allowed to be controlling shareholder in only 1 bank
(with significant exemptions).
Slow process & high cost, in part because kickbacks
must be paid by auctioning agency.
State banks must use State Receivables Settlement
Agency (PUPN).
Presidential Reg.
No.89/2006
6.3 Execution of Collateral
Nothing significant.
evidence. Effectively licensing is closed for commercial
banks; newcomers must buy an exiting bank.
Designed to reduce number of small banks. Assumes
big banks are better, against strong
Unclear if applies to state banks. Distraction for smaller
banks and BPRs.
As above.
Generally restricted to Farm Business Loans (KUT)
Various, some
pending
Moral hazard problem for smaller lenders. Disrupts
micro-finance institutions (BKD & LDKP).
Seems to have benefited BPRs by increasing their
funding.
commercial decisions. Regional restrictions on BPRs
unnecessary
Business plan requirement restricts response to
market changes. BI should not make
6.2 Debt Forgiveness
Defines conditions under which loans may & may not be
restructured
Aims to increase commercial bank funding for MSMEs
through BPRs.
Must be in Business Plan; BI rules on commercial issues;
some regional restrictions.
Unclear
Encouraged by BI
BI Regulations
6.1 Debt Restructuring
6. Exercising Claims & Remedies
5.5 Linkages with Rural Banks
5.4 Establishing Branch Offices
Annexes
Law 25/1992
Decrees & PPs.
N/A
N/A
N/A
Decree
N/A
N/A
N/A
PP & Decree
Decree
2.2 Transparency of Financial Condition
Decree
Decree of Min
Coops & SMEs
Authority 1/
Regulations Concerning
Unlikely to be effective due to low literacy rates in
poor remote regions.
Requires coop to have policy manual covering specific
areas.
Implicitly uses CAMEL & simple rating system
N/A
N/A
No significant impediments.
Potentially a concern.
Disclosure unlikely to be effective due to low
financial literacy.
Determines users, types & disclosure of financial info. Sets
threshold for formal audit.
Information available in members’ book.
N/A
N/A
N/A
Determines requirements for loan applicants; not
specifically AML.
N/A
N/A
N/A
Sets citizenship & min.size of primary (20 persons) and
secondary coops (3 coops).
May be managed by Board or out-sourced to professional.
Very low minimum (Rp15 million); no significant
impediment.
Notes on Implications for poorer households &
MSMEs
Sets minimum paid-up capital for primary and secondary
coops.
Summary of Content
Annex M: Summary of Regulatory Framework for Cooperatives, With Attention to Issues of Access
Annexes
189
190
N/A
Decree
N/A
N/A
PP
N/A
Unclear
3.4 Asset Quality
3.7 Credit Policy
3.8 Good Corporate Governance
3.9 Qualifications of Auditors
Minimum time looks too restrictive.
Minimum time before opening, and minimum equity,
working capital & members.
Ministerial
Decision
No withholding tax on interest income <Rp240,000/
month
5.3 Taxation of Interest on Deposits
Decree
PP & Decree
5.2 On Lending
PP & Decree
5.1 On Deposits
Defines lending priorities; maturities; and collateral
requirements.
Rates & fees decided by Board. Provides options for
determining rates.
Covers qualifications & appointments of ‘Soundness
Evaluators’.
Sets method of distributing ‘Rewards’ , total of which is
decided by the Board.
Must uphold good lending policies by feasibility
assessment & repayment capacity.
Implicit in point 1.3 above.
N/A
Prudentially weak but no significant impediment.
to MSMEs.
Loans to members must be >60% of Ttl loans., but
no real impediment
Prudentially weak but no significant impediments
for MSMEs.
Prudentially weak, but no significant impediments
for MSMEs.
N/A
Scoring system for Loan Loss Provisions/NPLs.
Scoring system for Members’ Loans/Ttl Loans; NPLs; and
Bad debts/NPLs
Limits are decided by the Board.
None, but should ‘remain unchanged over time’.
Main definitions; interest rates paid to members must be
higher than others.
Decree
4.2 On Lending
PP & Decree
4.1 On Deposits
N/A
Annexes
PP & Decree
5.6 Placement
See 6.1
See 6.1
6.2 Debt Forgiveness
6.3 Execution of Collateral
PP
PP
Law 25/1992
7.2 Mergers, Acquisitions & Consolidation
7.3 Supervisory Actions: Liquidation
7.4 Protection of Cooperatives
Rare that problem cooperatives are identified by a
supervision. No impediment or MSMEs.
Potentially problematic for MSMEs.
Provision for certain activities to be managed only by
coops.
Bears no relation to soundness rating, but no
significant impediment to MSMEs
Gives the Minister the right to intervene if a coop’s
operations become unsustainable.
Minister or the Board may liquidate a coop.
N/A
See 6.1
See 6.1
N/A
See 6.1
See 6.1
Odd that write-offs are an option with no LLPs; no
significant impediments for MSMEs
Allows excess liquidity to be placed in wide range of
instruments.
Ways of dealing with loan defaults, including
rescheduling & sale of collateral
Allows funding from wide range of sources.
N/A
Decree
6.1 Debt Restructuring
Law 25/1992
& PP
5.5 Funding
Annexes
191
192
MoF Decree
N/A
N/A
N/A
N/A
2.2 Transparency of Finances
MoF Decree
N/A
3.6 No On-site Inspections
N/A
MoF Decree
N/A
N/A
MoF Decree
MoF Decree
N/A
N/A
N/A
N/A
Not significant for MSMEs.
Requirement for tax number may hinder access for the
poor.
Doubtful effectiveness for poor because of low
financial literacy.
More the important than Financial Transparency for
the poor.
Looks dangerous, but does not affect MSMEs.
N/A
Looks dangerous, but doesn’t hinder MSMEs.
Some limits on leasing; none otherwise.
N/A
N/A
Direct oversight only when there is indication of noncompliance.
N/A except for Leasing companies, which has a maximum
deduction against income.
N/A; a matter of internal corporate risk policy.
Net Worth of 50% of paid-up capital.
Some limited oversight of borrowings by BI.
N/A
N/A
N/A
N/A
Tightened up recently. Some areas (e.g., leasing) require a
taxpayer number.
Requires timely publication of condensed balance sheet
and P&L statement.
N/A
N/A
Required of Directors, Commissioners & Branch Managers Nothing significant.
MoF Decree
N/A
Not on black lists; (limited) experience needed. Special
process for Sharia.
MoF Decree
For coops, min. capital requirement are half regular. No
entry from 1995-2000 and 2002-2006..
Notes on Implications for poorer households and
MSMEs
MoF Decree
In 2006, minimum capital increased drastically (by 10x or
more) to force consolidation.
Summary of Main Content
Indonesians or joint ventures (up to 85% foreign).
MoF Decree
Authority 1/
Regulations Concerning
Annex N: Summary of Regulatory Framework for Finance Companies, With Attention to Issues of Access
Annexes
Defines process for sanctions, through to revocation of
licence and liquidation.
N/A
N/A
N/A
Unclear if need to be reported to MoF or approved by
MoF.
N/A
Concerns distinctions between lessees and leasors, and
venture capital companies.
Equity needs to be >50% of paid-up capital, and been in
Inclusion in annual business plan looks excessive.
previous annual business plan.
Defines scope of borrowings. Non-bank > Rp 1 billion and
Minimum loan size limits sources of funding.
> 1 year maturity.
High geering ratio => strong liquidity & risk
Max, geering ratio of 10.
management.
Allows joint financing with commercial banks.
Mainly definitional, mainly relating to Sharia.
7.3 Supervisory Actions
MoF Decree
MoF Decree
7.2 Mergers, Acquisitions&
Consolidation
N/A
N/A
MoF Decree
5.5 Funding
MoF Decree
Unclear
Bapepam
Regulation
Bapepam
Regulation
5.3 Tax Treatment
5.2 Loan Products
5.1 Financial Products
Annexes
193
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196

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