Access to Formal Financial Services in Indonesia

Transcription

1 Access to Formal Financial Services in Indonesia - Evidence from the World Bank s Nation-Wide Household Survey & tmigrant Worker Household in East Java and Nusa Tenggara Survey - Yoko Doi, Financial Specialist December 9, 2009 The Shangri-La Hotel, Jakarta 1

2 Agenda. I. Current Bank Engagement on Access to Finance in Other Countries II. Access to Finance in Indonesia III. The Indonesian Financial Sector IV. Nation-wide Household Survey V. Migrant Worker in East Java and Nusa Tenggara Household Survey VI. Policy Recommendations 2

3 The World Bank s Initiatives Worldwide. World Bank has conducted a series of Access to Finance reports in different countries such as Mexico, Columbia,Brazil, Ghana, Namibia, Botswana, Iran, Pakistan, India, Nepal, Timor-Leste 3

4 Motivation for Access to Finance Assessment in Indonesia. Financial access for the poor is particularly relevant for developing countries Banking and financial systems are usually underdeveloped and cater only to large, wealthy firms and individuals but not smaller firms and poorer households Increasing access to formal financial services fosters economic growth and can improve income distribution The poor benefit greatly from increased access to financial services Fostering economic inclusion, and providing financial institutions with new and expanding markets Requires actions on both the supply and demand side The Government of Indonesia recognize the problem and strongly feels the need to alleviate the constraints in access to finance and improve financial intermediation Good data and analysis on what exactly the demand-side view of the constraints is one of the key constraints to concrete policy action in improving access to financial services, in particular at the household level 4

5 The Indonesian Financial Sector is Heavily Concentrated in Banking. Insurer Finance Companies 2% 5% 6% Pension Funds Mutual Funds Securities Firm 2% 1% Rural Inst. Pawnshop, VC 2% 4% Banks 79% *** by asset size as of December 2008 References: Bank Indonesia, Bapepam-LK, Association, Ministry of Cooperatives and Small-to-Medium Enterprise (MCSME), Infobank 5

6 Financial Intermediaries. 1) Commercial banking sector: Banks 130 BPR (people s credit banks) ) Non-bank financial institutions: Cooperatives 147,000 Pawnshop (branches) 899 LDKP (Village Credit Fund Institution) NGOs Grameen Bank replicas Unofficial money lenders Small, informal savings and credit societies (arisans) 3) Sharia finance and banking Sharia commercial banks 3 Sharia business unit 26 Sharia rural banks 114 *** All data is as of

7 Main Regulatory Bodies. 1) Bank Indonesia (BI): Central bank oversees the banking system and monetary policy 2) Ministry of Finance (MoF): regulates capital markets and most Non-Bank Financial Institutions (NBFIs) through Bapepam-LK 3) Ministry of Cooperatives and Small-to-Medium Enterprise (MCSME): has jurisdiction over the establishment of cooperatives service outlets (either branches, sub-branches, or cash offices) 7

8 Nation-Wide Household Survey. Methodology and Findings 8

9 Methodology. Nationwide representative household survey to identify constraints / challenges households face in accessing financial services Population weighted selection and multi-stage random sampling (province, sub-province (kabupaten/kotamadya), and village (RW) Total final sample: 3,360 HH respondents, 1,920 on Java and 1,440 off Java (randomly selected 30 households per village in 112 surveyed village ) Head of village survey: Randomly selected 112 villages and the Head of Village were surveyed. 9

10 Nearly Half of Indonesians Do Not Have Access to Formal Financial Services. Access to Financial Services in Indonesia (All sample) Financially Served - 83 % Using Formal - 52 % % 20% 40% 60% 80% 100% Bank Formal Other Informal & Semi-formal Underserved Access to Financial Services in Indonesia Financially Served - 61 % Using Formal - 21 % (Poor Households) Underserved Underserved 31% of Indonesian households are served by the informal & semi-formal sector About 17% of household population live without savings or credit Poor households are most likely underserved if not using informal financial service provider: 40% of those use informal and semi-formal provider and 39% are underserved. Only 1/5 of poorer households use formal financial services 0% 20% 40% 60% 80% 100% Bank Formal Other Informal & Semi-formal Underserved *** Considered poor by BPS if monthly expenditure per capita falls below 204,896 rupiah for urban dwellers or below 161,831 for rural villagers 10

11 Banks Relatively More Accessible Than Selected Public Institutions. >25 min Average Time to Reach Select Institution Banks are relatively more accessible within 10 minutes travel compare to Puskesmas or Public Hospital >15-25 min >10-15 min <= 10 min School Public Hospital Puskesmas Bank (Non-savers) Bank (savers) % However, at least one fifth of the respondent needs more than 25 minutes to reach financial institutions; hence outreach improvement is still required 11

12 Banks Have a Wide Coverage- But One Third Still Do Not Save. Financial Institution Usage In village BRI BPR Other comm. Bank KUD LKD LDKP 9 7 Cooperatives Revolving fund Arisan Other com. Welfare scheme Pawn shops Daily bank On credit from a shop Other than above 18 7 Findings from the nationwide village head survey show that 109 out of 112 villages use BRI unit/bri branches, though it exist in only 23 villages. Although banks are widely use for savings purpose, 32% of the population still do not save 12

13 Only 41% of Indonesians Have Their Own Bank Account. At Bank (46.7%) At Formal (47.6%) Use own account (41%) Use other s account (6%) Save (68.1%) At other formal (3.1%) Total Population At only informal (18.2%) Don t Save (31.9%) Main reason: i) No money (79%) ii) No job (9%) iii) No benefit (4%) iv) Don t understand (3%) Only 47% of the respondents use bank savings accounts Out of those 47% that have savings account, only 41% of the respondents have their own savings account, 6% is using others account Yet, about 32% of the population do not save Not having money and job are the two main reasons for not saving 13

14 Owning Bank Accounts Provides Access to Other Forms of Savings. Nationwide Access to Finance Overlap Usages of Saving Instruments Banks 16.6% 20% 2.6% 7.5% Formal Non-Bank 1.2% 1.9% 18.2% Savers who use banks savings accounts also make greater use of other formal and informal providers. Among exclusive use savers, informal vehicles (i.e., community welfare or informal savings clubs) are the most important category. No Saving 31.9 % Informal 14

15 Un-educated & Off-Java Residents More Likely Not to Have Bank Account. % Never go to school Freelance Worker Unpaid HH Worker Self Employed Bank Account Ownership by Education Incomplete Primary School primary school Secondary School High School Currently Banked Previously Banked Never Banked Private Government 18.3 Usage of Savings Account By Type of Occupation University Currently Banked Previously Banked % Urban Rural Off-Java Java Off-Java Java Percent Usage of Savings Account Urban vs. Rural in Java and Off-Java Percentage Currently Banked Never Banked Usage of Savings Account By Gender Previously Banked Male Female Total Currently Banked Never Banked Previously Banked Data confirms assumptions that lower education-level prevents respondents from making use of savings accounts. Freelance and unpaid household worker are least likely to have formal savings accounts Data confirms the assumed gap between Java and off-java regions in terms of access. Almost 70% of off-java rural residents have never had a bank account, compared to 47% for Java. There are no significant differences between males and females towards savings patterns. 15

16 Only 17% Borrow from Banks, 40% Do Not Borrow at All. Borrow (60%) Informal only (34%) Banks (17%) Semi Formal* (9%) Total Population Don t Borrow (40%) Reasons for not saving** i) Not Creditworthy (60%) ii) Don t want it (20%) iii) No collateral (4%) iv) Other 16% 40% of Indonesians do not borrow at all The Informal sector plays a significant role in serving Indonesians on the lending side Only 17% borrow from banks Creditworthiness is the most significant reason why people do not borrow. *Semi-formal: MFI & Pawn shop; Informal: Community welfare scheme, On credit from a shop, Employer, Daily bank, Neighbor, family, friends **Source: BRI Mass Survey (2002) 16

17 Urban Population More Likely to Have Access to (Formal) Credit. % Currently Loan by Urban-Rural Bank MFI Employer Pawn Daily Bank Community Welfare Urban Rural Scheme Neighbour, Family On Shop Pawn Community On Loan Bank MFI Shop Welfare Scheme Informal Male Female Two forms of informal loan, borrowing from neighbours and on credit from shops, are most common The formal, bank, and the near-formal types of loan, MFI and Pawn Shop, are more used by the urban For the urban, there are at least three common source of debt, informal (neighbour and on shop credit), formal (banks), MFI For the rural, the informal sector (neighbour and on shop credit) seems to be more apparent than the formal one (banks) 17

18 Informal Borrowing Is Significantly More Expensive Than Bank Loans. Indicative Interest Charge on Loan Daily Bank On Credit From Shop Community Welfare Scheme MFI Bank Neighbor, Family, & Friends, Employer Daily Bank MFI Community Welfare Scheme On Credit From Shop Neighbor, Family, & Friends, Bank Employer Indicative Interest Charge on Loan by Savings Account Ownership % /annum The lowest loan rate is given by the employer Data confirms the assumption that daily banks loan is particularly expensive because of the very short-term maturities (1 day) More formal institutions charge markedly less interest, if the borrower has a bank account % /annum Without savings account With savings account 18

19 Voluntary Insurance Coverage Is Low. Not insured (51%) Reasons: i) No money (53%) ii) Nothing known about insurance (34%) iii) No need (20%) Total Population Provided (by employer/ insitution) (25%) Insured (49%) Personnally bought (24%) % Medical Asset Education Life Medical Asset Education Life Total Government medical insurance and travel insurance are mostly covered by firms or government institutions (automatic coverage) Overall, penetration of voluntary insurance product is considerably low (24%) Important insurance products such as life insurance and private medical are used by less than 10% 19

20 Significant Market Potentials Ahead: Many Indonesians With Stable Income But Without Automatic Insurance Coverage. Education insurance Insurance Ownership by Types of Work Education insurance Insurance Ownership by Gender Self employed are the most likely to buy insurance of all four kinds Asset insurance Private Health insurance Life insurance Self Employed Government Employee Private Employee Freelance Other Private Health insurance Asset insurance Life insurance Female Male Women have strong preference towards education insurance while men prefer life insurance Salaried employees are usually 10 times more likely to buy insurance-of all types-than agricultural workers % Insurance Ownership Agriculture Sector Worker & Salaried Employee % % Insurance Ownership by Non-farm Enterprise Ownership % Owners of non-farm enterprises are much more likely to buy insurance than the non-owners Education insurance Asset insurance Private Health insurance Life insurance Education insurance Life insurance Private Health insurance Asset insurance Agriculture Sector Worker Salaried Employee Non-Owners Owners 20

21 Potential Demand for Insurance Products If available, could you get it if you wanted it? (positive response, by percentage of non-insured households) Asset insurance Home owner's insurance Life insurance policy Travel insurance Private medical insurance Would you willing to pay if its available? (positive response, by percentage of non-insured households) Education insurance On average about 30% of the non-insured household (within each category) know that these type of insurance are available and are accessible to them when they want it. On average about 20% of the non-insured households (within each category) are willing to pay the insurance premium Asset insurance Home owner's insurance Life insurance policy Travel insurance Private medical insurance Education insurance 21

22 Migrant Worker Household Survey*. Methodology and Findings * Kindly co-financed by Australia-Nusa Tenggara Assistance for Regional Autonomy (ANTARA) 22

23 Significance of Migrant Worker Households. 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Remittance inflow in thousand USD Number of legally departing migrant workers Indonesia ranks third by dollar value of remittances received among regional comparators, behind China and the Philippines. Steady growth in remittance inflow: 6.5 billion USD in 2008 Steady growth in the number of MW (legally departing): almost 700,000 MW in 2007 An estimated total of 4.3 million Indonesians working abroad in

24 Methodology. 1) Non-nationally representative survey of migrant workers or their households 2) Sample Size / Location: 5 clusters in Nusa Tenggara: West Sumba, Timor-Kupang, East Flores (East NT); Sumbawa, East Lombok (West NT). 2 Kabupaten in East Java: Gresik and Malang. 50 villages, 40 from Nusa Tenggara and another 10 from East Java 2724 HHs, in 502 in East Java, 884 in West Nusa Tenggara (NTB), and 1338 in East Nusa Tenggara (NTT) 3) Survey respondents: Family members of the migrant workers (59% are also head of household) 4) Survey Period: July till December

25 Needs for Financial Services Vary in Different Stages of Migration In the pre-departure stage, migrant worker needs credit or savings to finance the up-front cost Pre- Departure Credits Savings Insurance During Migration Remittance Channel Savings Insurance Post Migration Savings Credits During migration, channel for remitting money is the most importance, aside from saving remittance and insurance coverage Entering the post migration, savings and credits are needed to make new establishment to ensure stable financial inflow 25

26 About 18% Are Excluded from Access to Savings and Loans. Access to Financial Services in Indonesia (Migrant worker household in East Java, NTB, NTT) Financially Served - 83 % Using Formal - 68 % Underserved About 18% of the household respondents are living without savings and credit Most bank customers access banking service through other s account 0% 20% 40% 60% 80% 100% Bank (direct) Bank (indirect) Formal other Informal & Semi-formal Underserved Access to Financial Services in Indonesia (Poor migrant worker household in East Java, NTB, NTT) Financially Served - 70 % Using Formal - 52 % Underserved % 20% 40% 60% 80% 100% Bank (direct) Bank (indirect) Formal other Informal & Semi-formal Underserved *** Considered poor by BPS if monthly expenditure per capita falls below 204,896 rupiah for urban dwellers or below 161,831 for rural villagers 26

27 Savings & Sponsor Loans Most Common for Financing of Up-front Costs. Personal savings Borrow from sponsor Borrow from friends Borrow from family Borrow from employer Sale of assets Don't know Other Given by parents Borrow from bank Personal savings Borrow from sponsor Borrow from friends Borrow from family Borrow from employer Sale of assets Don't know Other Given by parents Borrow from bank Sources of Financing Sources of Financing by Freq. of Going Abroad Personal savings Borrow from sponsor Borrow from employer Borrow from family Borrow from friends Sale of assets Don't know Other Given by parents Borrow from bank Personal savings Borrow from sponsor Borrow from friends Borrow from family Borrow from employer Sale of assets Don't know Other Given by parents Borrow from bank Sources of Financing by Gender Female Male Sources of Financing by Legal Status Personal savings, credit from sponsor, and informal loan are commonly used Female workers use savings more often than male, especially if they are repeater Female workers are also more common to borrow from sponsor than male, since most of them are legal worker Apart from personal savings, illegal male worker borrow from friends or family to cover the cost Repeater First Time Illegal Legal 27

28 Strong Preference for Bank Wire Transfers as Remittance Channels. Only on special occasions Once every 3-4 months Only once Every month Every 2 months Every 6 months Other Once in one year Carried on return trips Not applied The migrant him/herself Hiring company (PJTKI) Freq. of Remittance Method of Money Transfer Bank wire transfer Through relatives or friends Carry own on return trips Western Union Bank cheque through air mail Post office Informal money transfer agent Other Employer Family in Indonesia Sponsor Others Who decides remittance channel? Criteria for Choosing Method of Transfer Recipient convenience Speed Security Sender convenience Cost Reliability Flexibility other Who received the money? Family member Account Mediator Other Remittance does not come regularly, and mostly on special occasion Although migrant worker has the decisive power to chose certain remittance channel, recipient convenience, comes as one of the major consideration and playing down the role of cost aspects Most migrant has strong preference to bank wire transfer, while sending informally through relatives or friends come next in line In the receiving side, account mediator plays an important role aside from the family member 28

29 Among Households Saving Remittances Banks Are the First Choice Who decides on use of remittance? 0 Head of the household Do you save the remittance? Yes No Sender Other family member Non-family member Daily needs Loan Repayment Built/buy/renovate house Payment of school fee Buying asset Covering health expense Special occasions Business investment Buying motorbike Other Where do you save the remittance? Bank At home Other Coop. Main Use of Remittance Why don't you save the remittance? All spent on consumption Don't know how to save Don't know how to use fin. Inst. Don't want others to borrow Other Remittances are mainly used for daily needs/household consumption They serve as a mean to pay back loans Most household do not save remittance, since all spent for consumption, but if they do save (25%), bank will be the first choice Heads of migrant worker households are the major decision maker of how to use the remittance 29

30 Despite Higher Income Due to Remittance 27% Do Not Save at All. At Bank (60.6%) At Formal (68.1%) Use Own Account (26.8%) Save (72.9%) At Other Formal (7.5%) Total Population At only informal (4.8%) Don t save (27.1%) Main reason: No money (59%) No job (19%) See no advantage (8%) Unfamiliar (6%) Despite higher income from remittances, 27% of households do not save at all Out of those who save, only 26.8% have their own savings account a significantly large number (33.8%) use other s account Not having money and a job are the two main reasons for not saving Use Other s account (33.8%) 30

31 Only 27% Dispose of an Own Bank Account. Overlap Usages of Saving Instruments (Migrant worker households in East Java, NTB, NTT) Banks 48.7% 11.9% 1.6% 2.6% 0.9% Formal Non-Bank 2.5% Although most household save in banks, only 27% of dispose of an own savings accounts 27% do not have access to savings A relatively large portion of households used third party bank accounts (34%) No Saving 27.1 % 4.8% Informal 31

32 Only 41% Have Access to Credit. Overlap Usage of Credit Instruments (Migrant worker households in East Java, NTB, NTT) Banks 1.8% 0.8% 0.6% 0.2% Semi-formal 6% 3.5% About 59% of the household do not have access to credit If they borrow, most household only make use of informal credit provider 28.6% No Credit 58.6% Informal 32

33 Nation-Wide & Migrant Worker Household Survey. Recommendations 33

34 Four Key Areas for Improving Access to Finance. 1) Broader access to financial services: Policy has to focus on a broader access to financial services beyond not just narrowly access to credit. This also involves savings-accounts, insurance products, remittance channels etc. 2) Broader target group of interventions/strategies: Target interventions to reduce the truly excluded population should focus on to the poor, less educated and living in rural-off Java category 3) Involve private sector: Commercial financial service providers can play an important role because they are new aggressive entrants into the market and likely to explore innovative strategies. Encourage private sector in their initiative to diversify their product range and therefore reaching out to lower income segments. 4) Promote public-private partnerships: Public-Private Partnerships should be promoted as vehicles to design and pilot-test innovative products which are appropriate for lower income households and migrant workers households. 34

35 Recommendations for Policy Makers -I- 1) Create policy on savings accounts: Since survey results the primary need for savings account as the most important financial service, policy should be directed to enabling more people to open saving accounts. This includes: Explore possibility of mandatory no frills saving account such as the proposed launch of a new savings product TabunganKu (My Savings); Introduce an official policy on dormant accounts which might help reduce banks monthly administration costs. 2) Promote branchless banking: Focus on the regulatory framework which enables commercial banks to make use for reducing costs and extending reach. This includes: Allow banks to outsource services by using a network of non-bank third parties, while holding the banks responsible for agent activities; Simplify Know-Your Customer (KYC) requirements for low-risk, low-value accounts and transactions; Consider alternatives to the peer-to-peer transactions enabling remittance license within the current regulatory framework on e-money. 35

36 Recommendations for Policy Makers II- 3) Promote Migrant Worker related issues. The aim should be balancing this segments interests with the interest of the employers and recruitment agencies. This includes: Consider Re-negotiating Memoranda of Understanding with recipient countries; Make wider use of local guarantors or co-signers for pre-departure loans which in pilot projects might be also development partners (NGOs) with particular interest in this field; Negotiate minimum documentation requirements for small transfers which will not be a risk to global AML/CFT efforts; Review the compulsory bank account for migrant workers: consider allowing wider access to the account and/or replacing the current compulsory system by a voluntary one. Review the existing compulsory insurance product and promote simplified application and claim procedures whilst improving financial literacy level during pre-departure period. 36

37 Recommendations for Policy Makers III- 4) Promote insurance as a concept for the lower-end of the income spectrum: Since Indonesians have a very low awareness of insurance products and consider them to be expensive, more effort is needed to promote insurance for these income levels. This includes: Create awareness among lower income households; Promote the currently expanding Micro-insurance as a mean of less expensive and simple insurance products to meet the needs of even lower income households for insurance companies to step in this area should be in place; Public-private partnerships have shown success in this field and should be further promoted. 5) Ease regulatory barriers in order for Commercial banks improving access. This includes: Consider easing bank reporting by the possibility to combine business plans with the banks annual reports, and elements of the business plans could be required only in fairly general terms; Easing regulations concerning relocations of branches and ATMs which look unnecessarily restrictive; Consider easing official regulations on branching and bring them in line with BI s current relatively liberal approach to implementation. 37

38 Recommendations for Policy Makers IV- 6) Ease regulatory barriers in order for BPRs improving access. This includes: Give consideration to a lower tier of minimum start-up capital for small BPRs in remote locations; NGO and foreign investors could be allowed to take some ownership positions in BPRs; Reporting requirements could be re-examined for small BPRs in locations without adequate communication services; Consider waiving written disclosure mechanisms in areas of low financial literacy and replaced by oral briefings for new customers, including the local language, where appropriate; Simplify KYC mechanisms for small accounts and requirements for taxpayer numbers waived for small loans below a specific treshold; Consider bringing currently tight branching requirements in line with BI s liberal approach to implementation. 38

39 Recommendations for Policy Makers V- 7) Ease regulatory barriers in order for Cooperatives, pawnshops and other microfinance institutions. This includes: Consider upgrading of the MCSME s regulatory and supervisory capacity. This could include temporary outsourcing of the function to firms specializing in micro-finance. Give consideration to officially open up the state-owned monopoly on pawnshops to competition from the private sector. Bearing in mind international experience, discuss on the extent to which these institutions need to be brought under a formal regulatory umbrella. Restoring the momentum to the drafting of a new Micro-Finance law would be a productive way forward in this regards. Linkage programs between commercial banks and BPR could be expanded to include non-bank MFIs, and potentially define a similar role for NGOs. 39

40 Options for the Private Sector -I- 1) Diversify the product range: Create affordable and relevant saving product to the targeted client; the truly excluded (poor, less educated, living rural-off Java) and the informal savers. This included: Saving products can serve as cross-selling opportunities to get to know the customer and explore creditworthiness/ability to buy insurance cover; Concrete Products could be no-frill savings accounts such as passbooksavings, setting incentives for poorer households to save, e.g. through bonus scheme (instead of lottery schemes). 2) Create a demand-oriented marketing strategy: Innovative ways are key to serve clients on the sub-district level. The use of mobile units to collect loan repayments or contractual savings helps to become competitive with regards to the informal sector. 3) Reach out to migrant workers: Create a one-stop-shop tailor-made product which not only serves as a remittance channel but which links remittance components with savings-, loan-, and insurance components. Product design needs to take into account accessibility not only by the migrant worker but also by the household. 40

41 Options for the Private Sector -II- 4) Explore branchless banking: This area holds great potential because of the low unit costs involved and the existing widespread of mobile phones. The private sector should look into options to explore this segment even under the current regulatory framework, e.g. by cooperating with third-party operators. 5) Design and pilot test appropriate products through partnerships with development partners. Successful examples in the insurance market exist where public private partnerships were able to strategically tap into the market of the unbanked lower income segments. Product options to be pilot-tested include products specifically oriented towards lower-income households with relatively stable income, micro-insurance products, appropriate savings products and new innovative marketing strategies. 41

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