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Jakarta Post

Let's talk hand-in-hand financial inclusion and literacy ... before P2P

  • Evy Mulyani

    Analyst, Fiscal Policy Agency, Ministry of Finance

Jakarta   /   Fri, February 28, 2020   /   07:43 pm
Let's talk hand-in-hand financial inclusion and literacy ... before P2P (Illustration of digital financial services) (Shutterstock/Zapp2Photo)

Indonesia's market landscape and principles-based approach to regulation provide a unique financial technology (fintech) lending ecosystem that offers an opportunity to pursue financial inclusion. 

The local fintech lending industry marked a regulatory milestone with the enactment of Financial Services Authority (OJK) Fintech Lending Regulation No. 77/POJK/2016, which provides legal protection for fintech peer-to-peer (P2P) lending.

Prior to this, the OJK, in collaboration with the Indonesia Fintech Association (Aftech), introduced the public to P2P lending through activities such as fintech festivals and conferences.

Since the issuance of the P2P lending regulation three years ago, the industry has become one of the most widely known market segments, underpinned by the immense growth in the number of P2P lending platforms and the amount of loans disbursed. According to the OJK's data for October 2019, there are 144 registered P2P lending companies with 14.3 million total borrowers and an accumulated value of Rp 60.4 trillion (US$ 4.3 billion) for all loans.

A PricewaterhouseCoopers (PwC) study found that fintech lending has taken over conventional lending by providing multiple access channels for consumers.

Indonesia is Southeast Asia’s biggest economy with its population of more than 260 million people. With its huge productive age population and rapidly increasing cellular phone and internet penetration, the country has an exceptional range of untapped fintech prospects, including P2P lending. Around 40 percent of Indonesia’s vast population of young adults are unbanked, offering a wide opportunity for the industry to grow.

Although fintech lending has been growing in the country, the OJK has shut down 1,773 illegal P2P companies from 2018 to October 2019, according to the official data. The emergence of P2P lending in Indonesia has also been accompanied by growing concerns over consumer protection, particularly in light of the numerous consumer complaints on aggressive collection methods and misuse of consumer data. 

The OJK has implemented a set of regulations that is deemed to instill balance between fintech innovation and consumer protection. The regulation does this by adopting consumer protection principles (transparency, fair treatment, reliability, data security and secrecy security, dispute resolution, along with guidelines on clear product information, among other measures. However, OJK regulation and supervision might not be sufficient on their own to improve consumer protection and mitigate the other consumer risks related to this industry. 

In addition to proper regulation and supervision, financial literacy can be the key to alleviating turmoil toward the long-term stability of the finance  sector. A growing body of empirical studies has highlighted the importance of financial literacy in arming consumers with the knowledge skills needed to mak sound financial decisions. 

In the case of Indonesia, we are seeing people with financial access without financial literacy that is likely contributing to consumer concerns over protection, aggressive collection methods and data misuse. 

The latest OJK data released at the end of 2019 showed that Indonesia's financial literacy was 38.03 percent and financial inclusion was 76.19 percent. Meanwhile, urban financial literacy at the regional level was 41.41 percent and urban financial inclusion was 83.60 percent, while the rural figures were respectively 34.53 percent and 68.49 percent. The figures showed an increase from the previous survey in 2016, alongside the ongoing commitment of all related institutions to improve people's access to finance. 

Despite the promising progress, if we compare the levels of financial inclusion and financial literacy in Indonesia, we can see that the level of financial inclusion is higher than the level of financial literacy. This indicates that people have access to financial services, but they do not have the awareness, knowledge, skills, attitudes and behaviors necessary to make sound financial decisions and ultimately attain individual financial wellbeing. 

People who have access to and use P2P lending must at least have basic knowledge and understanding about legal P2P companies, the terms and conditions on entering into a lending agreement, their basic rights and how to secure their rights. Consumers need to have know-how in a number of key points, including the need to select legal P2P companies, the likelihood that fintech lending charges higher interest rates compared to conventional lending, and the potential for data misuse.

Consumers also need to be fully aware of the risks that may arise from being overleveraged and the resulting behavior, as the PwC data shows that debt refinancing was one of the top three loan purposes in 2019. These are all essential aspects of basic financial knowledge that people need to be literate in.

The OJK, along with the industry and related institutions, should develop a mechanism that enables people to be not only financially inclusive but also financially literate. Focusing on improving financial knowledge, behavior and attitudes across the country's different regions and sociodemographics is crucial. The lack of financial knowledge among a substantial proportion of the population causes disruption in the development of the financial sector.

The nation's financial inclusion policies must be geared more toward financial literacy, including educating people from an early age through formal education. Financial education should also be adapted to the sociodemographic conditions of different regions. Financial inclusion and literacy should go hand in hand to mitigate turmoil in financial services, including fintech lending.


Evy earned her PhD in accounting and finance from Deakin University, Australia, and worked for the Indonesian Capital Market and Nonbank Financial Institutions Supervisory Agency (Bapepam-LK) from 2000 to 2011. She joined the Finance Ministry's Fiscal Policy Agency in 2011 and works on financial sector development in collaboration with international organizations like the ADB, World Bank, IMF and IsDB.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.