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Financial literacy for financial stability
Limited access to formal bank savings products should attract particular attention.
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Prior understanding of financial literacy is only related to knowledge of the basic concepts of interest rates, inflation, time value of money, money illusion and financial products. (Shutterstock/File)
F
inancial disintermediation in Indonesian banking continues to manifest itself after Indonesia experienced a “mini crisis” in 2013. Bank credit growth has halved to around 10 percent year-on-year (yoy) at present from 22 percent yoy in 2013, while the growth of bank third party funds (i.e. savings, current accounts and time deposits) also remains subdued from 13.3 percent yoy ( 2013 ) to around 11 percent yoy in 2018 as projected by the Financial Services Authority (OJK) and Bank Indonesia.
Although this seems to be affected by supply-side factors, such as high net interest margins in Indonesian commercial banking, ranging from 5 percent to 6 percent, while other Southeast Asian banks’ margins are far less than 5 percent, the demand-side factors related to weaker public faith in Indonesian banking and a lack of financial literacy could also play significant roles.
Limited access to formal bank savings products should attract particular attention. As banks still hold around 80 percent of the Indonesian financial system’s total assets in 2017, access to formal savings accounts and credit still plays an essential role for enhanced financial intermediation to spur real-sector development.
Empirical evidence indeed highlights a positive effect of financial literacy on access to finance. A World Bank study ( 2010 ) titled “Improving Access to Financial Services in Indonesia” indicated that higher financial literacy promotes greater access to formal savings and borrowing from banks, although it may also be associated with greater access to other forms of saving and borrowing outside banking.
