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Analysis: Understanding financial inclusion to expand financial services
The Asian economy grew rapidly in the past five decades, but there are still significant numbers of people who remain in poverty caused by inequality in wealth distribution
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The Asian economy grew rapidly in the past five decades, but there are still significant numbers of people who remain in poverty caused by inequality in wealth distribution. One of the key factors to lift them from poverty is better and wider access to finance.
Financial inclusion has been a major global concern. However, a more holistic view of financial inclusion supports the importance of access to a broader range of financial services, including savings, insurance, pensions and payments.
These instruments will also support the credit side, underscoring complementarity and interdependence relationship between these instruments. The changing landscape of financial services is also being reshaped by the digital technology revolution as well as new business models.
According to World Bank’s 2017 Global Findex, Indonesia made the most progress in terms of getting its adult citizens to gain access to the financial system compared to other countries. The claim was possible because of the country’s success in bringing the percentage of adults with bank accounts up to 49 percent from 20 percent in 2011.
This achievement was largely pushed by the government’s effort in channeling non-cash support programs to the poor through the Family Hope Program (PKH) and non-cash food assistance program (BPNT).
It was also made possible by the rising use of digital transactions and economic disruption through fintech, which allows for faster immersion and adaptation to e-wallets, e-money and QR codes. However, financial inclusion is still shallow as most of financial products are not being used by the majority of the people.
To be able to serve the unbanked population, Indonesia’s financial institutions have to tackle several major structural roadblocks. And to handle these problems, it is vital to understand the financial inclusion journey of the major population, especially those with lower education and income.
The foremost fundamental issue is financial illiteracy, especially among low-educated people in rural areas that usually lack basic infrastructure. Aside from the poor and the needy, access to financial services also becomes an issues for those with lower and irregular incomes, as income disparity is still high in Indonesia.
Various and highly segmented classes and generation gaps are also key points in financial literacy approaches, particularly identifying which financial products can benefit them the most and whether these products serve their purpose.
Based on the financial inclusion journeys of low-and middle-income people, most have a little bit of savings but they do not save their funds with formal financial institutions. Their common saving characteristics are high liquidity with low or no return — such as keeping some cash at home and saving money through arisan (rotating savings gathering) — or less liquid investments with high returns, such as land, livestock and jewelry.
This is also in line with their current financial conditions, namely having irregular and uncertain incomes, being vulnerable to financial shocks and needing liquidity, and/or low digital and financial literacy.
As a consequence, this limits them from accessing formal financial institutions, particularly for savings, investment and credit. Moreover, there are also groups of people who do not have the capacity to save and those who do not intend to save even though they have the capacity. The main causes include significant costs of saving, distance to the nearest bank and banking products that are too complex or difficult for them to understand.
There is also very little awareness about the importance of microinsurance and pension plans. These instruments are considered advanced or higher-level products that are very complex.
Indonesia’s insurance penetration rate is still below 3 percent, while the pension penetration rate is still under 1 percent of the population. Lower-income people still feel they do not need to “spend” on microinsurance and pension plans as they are still struggling with their basic needs and spending — even though these products could be very helpful as a shock barrier and long-term investment.
Findings also shows that it is not only difficult for low-income people to gain access to microinsurance and pension plans, but more importantly, it is difficult to implement them. The solution and technology to further expand the products’ usage are already here, but they are not widely available. It also needs greater penetration into the target market and improved products are needed based on consumer needs.
From the challenges stated, the initial steps taken by the government in the past two years, such as the PKH and BPNT, were highly needed — but they have not been enough. It has significantly improved the immersion of the financial inclusion journey, but only the basic steps.
The same applies to the microinsurance and pension fund sectors, despite the government’s push for the Health Care and Social Security Agency (BPJS Kesehatan), Workers Social Security Agency (BPJS Ketenagakerjaan) and old-age benefits (JHT) scheme. Therefore, although the availability of products is improving, low financial literacy and access to financial services, especially to middle-and lower-class communities, are still significant roadblocks.
However, innovations in digital technology is becoming more crucial and can be used in tackling these roadblocks. With the growth of digital financial applications, user adaptation also improves to reach various layers and spectrums of the population.
The LinkAja digital wallet, which offers microinsurance for dengue fever with premiums as low as Rp 100 (0.7 US cents) per day, for instance. There are also several apps that are useful for farmers, one of which initially aimed to cut distribution links but has evolved into peer-to-peer lending.
As for the younger generations, Bank Indonesia (BI) and the Financial Services Authority (OJK) have also launched several financial education initiatives for children and young people. With such rapid development, digital readiness must also be prepared for every layer of society to be able to adapt to these digital financial products and according to their needs.
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The writer is a researcher at the Mandiri Institute, an independent research think-tank of Bank Mandiri that focuses on public policy and the financial and banking sector.
