Mandiri Institute Research Paper Series on Financial Inclusion

Transcription

1

2 Mandiri Institute on Financial Inclusion Indonesia: Moving toward digital payment system December 2014 Research Fellow Prof. Dr. Suahasil Nazara Research Team Dr. Moekti P. Soejachmoen Dr. Ardi Adji Ira Setiati Andjarsari Paramaditha Andrian Bagus Santoso

3 Page4 Indonesia economic profile Progress on financial inclusion is relatively slow with the absent of digital payment system Indonesia average economic growth reached 5.71% ( ) 25 Number of bank branches per 100,000 adults Number of ATM per 100,000 adults Both consumption and investment grew on average at 4.6% and 7.4% ( ) Unemployment rate declined from 9.86% to 5.92% ( ) Number of bank depositors per 1,000 adults Number of bank loans per 1,000 adults Poverty rate also dropped from 16.7% to 11.37% ( ) Number of bank accounts Number of mobile services subcribers Unfortunately, inequality has been constantly on the rise from 32 to 41 ( )

4 Page6 Content : Preface...9 I. Introduction II. National Strategies...10 III. Branchless Banking...15 IV. Adoption of the Model in Indonesia...18 V. Closing Remarks...24 References...26

5 Page8 Preface Global data shows that currently there are more than 2.5 billion people mostly poor people have lack of access to basic financial services. For the poor, access to basic financial services such as payments, savings, credits and insurances will allow them to have a better life as well as increase their welfare. And for traditional and small firms, access to finance means they can expand their business activities and investing more to have better leverage of their business. In Indonesia, like many other developing countries, Financial Inclusion becomes the most important strategy to lift up the number of poor and vulnerable people of around 40% of the population, to a better income class. Only around 20% of the adult population has access to a formal financial system, compared to 73% and 66% in Thailand and Malaysia, respectively. Mandiri Institute acknowledges that the issue of Financial Inclusion is the most crucial and strategic that must be handled properly by all stakeholders. Improving Financial Inclusion will not only support the poor and small business, but will also create more stability in the financial system. This depth research on Financial Inclusion has been prepared by the Mandiri Institute research team, helmed by our research fellow Prof. Dr Suahasil Nazara. This report is the third and the last of our report series regarding Financial Inclusion in Indonesia. It emphasize our recommendation of Financial Inclusion model in Indonesia based on our finding in this research. Considering specific characteristics of Indonesians where majority has not been exposed to financial services, a branchless banking (agent banking) model with digital financial services would be suitable to be implemented to promote financial inclusion in Indonesia. Surely, adoption of the model would be ideal upon implementation of supporting regulatory environment to guarantee infrastructure reliability and to protect consumer privacy. In addition, adoption of the model should be initiated by jumpstart approach, using government s social assistance program. With G2P cash transfers, there will be 15.5 million households directly exposed to digital financial services. In this opportunity, please allow me to thank all stake holders that have contributed to this research. Hopefully our report will add value and shape the Financial Inclusion policy that is essentially needed by Indonesian. Destry Damayanti Executive Director

6 Page10 I. Introduction For the last ten years, Indonesia has been advancing its development stages to enter the world elites. All indicators showed positive growth, even when the other part of the world suffered from their financial crisis in and has not fully recovered until now. On average, Indonesia s economic growth reached 5.71% per year in (BPS, 2014) with two key drivers, i.e consumption and investment growths. Both grew on average at 4.6% and 7.4% respectively during the period At the same time from , unemployment rate declined from 9.86% to 5.92% (BPS, March 2013) and poverty rate also dropped from 16.7% to 11.37%. Unfortunately, inequality has been constantly on the rise from 32 in 2004 to 41 in While it is normal for a country to experience an up rise of unequal distribution of income at the start of their development stages, many country such as Japan and South Korea shows economic growth is possible to achieve with only a small increase of inequality. This fact demonstrated that a small number of Indonesians had access to certain assets whose values grew higher than others such as property/real estate and financial assets such as company stocks and equities. As their wealth grows exponentially, they have better access to good education and ultimately, able to find better jobs with higher income. The rest of the society do not have assets and can only increase their income with working. The worst part was as the WorldBank highlighted (IEQ, july 2014), most of jobs created between came from low productivity sectors and it supressed workers income further. As an initiative to develop inclusive financial system for all, in 2012 the Government of Indonesia released the National Strategy of Financial Inclusion. This Strategy outreached to the wider development framework as it is titled the National Strategy of Financial Inclusion to foster economic growth and reduce poverty. Such a strategy puts the financial sector in the wider picture of economic development. Financial inclusion is seen as an anchor for economic growth and poverty reduction. Nevertheless, such a strategy still needs further elaboration for its appropriate implementation. A model of financial inclusion needs to be identified for Indonesia, where roles of different stakeholders should be elaborated. This paper will identify a practical model of financial inclusion for Indonesia. Roles of different key stakeholders to promote financial inclusion will be elaborated. A special attention will be provided to roles of regulators (BI, OJK, and MoF), banks, and telecommunication companies. Following this Introduction, Section 2 of this paper will elaborate the National Strategy of Financial Inclusion and the National Strategy of Financial Literacy in Indonesia. Subsequently, Section 3 will elaborate how the model of branchless banking can be used to promote financial inclusion in Indonesia. Furthermore, Section 4 will discuss gradual steps and preparation needed to initiate and adopt the branchless banking model in Indonesia including using G2P transfers program, migrating the data from G2P program and aligning all regulatory requirements to support financial inclusion goals. Section 5 will wrap up the report. sector will people with limited cash liquidity to smooth-out their consumption and do investments. In addition to that, financial access will be able to get insurance protection (Cole, Gine, Vickery 2013) and to expand their entrepreneurship skill, depending on their lending capacity (Bruhn and Love, 2014). Since 2010, Bank Indonesia has launched financial-inclusion related programs such as Ayo ke Bank program, Indonesian Saving Campaign and Tabunganku a basic saving account product. In 2012, the Government introduced the National Strategy on Financial Inclusion (June 2012). A year later, in 2013, a pilot project of branchless banking was launched with participants from 5 banks and 2 telecommunication companies. Figure 1. Financial inclusion indicators between selected ASEAN countries Loan to GDP Ratio of ASEAN Countries (2013) Deposit to GDP Ratio of ASEAN Countries (2013) Singapore 158% Indonesia 36% Malaysia 122% Philippines 37% Thailand 103% Malaysia 147% Indonesia 39% Singapore 155% Philippines 53% Thailand 93% Number of ATM per adults (2012) Number of Branches per adults (2012) Thailand 84 Philippines 19 Malaysia 53 Source: IMF - FAS Access Indicators, CEIC Singapore 58 Indonesia 37 Thailand 12 Indonesia 10 Malaysia 20 Philippines 8 Singapore 10 II. National Strategies The Government of Indonesia has attempted to address inequality challenges by improving fiscal/ tax structure, refining its subsidy policies and encouraging financial inclusion. Exposure to financial

7 Page12 Figure 2. National Strategy of Financial Inclusion Table 1. Targeted Segments and Financial Products in National Financial Inclusion Strategy Source: Bank Indonesia, OJK, TNP2K (2012) In line with the Indonesian Financial Inclusion vision, which is to achieve a financial system that is accessible by all layers of the community to promote economic growth, poverty reduction, and income equality, insuring financial stability, since 2012 Indonesia has developed a National Financial Inclusion Strategy. This strategy was developed with close cooperation with Bank Indonesia and several government ministries. There are three main target groups of this strategy, which are low-income poor, working poor, and the near-poor, who have limited access to financial services. More specifically, low-income poor group consists of people with very limited or no access to any type of financial products, no ability to save, no ability to repay credit, and those highly exposed to community level shock. The working poor consists of poor people who are self-employed or run MSMEs, informally saves, have access to informal credit, and have some buffer against shock, although still heavily affected. Lastly, the near poor group are the people with some ability to save with access to formal banks, some access to formal and informal credit, and a wider range of coping mechanism against shock. Besides, some other groups that have special needs are also targeted in the strategy. These groups include domestic and international migrant workers, women, and people living in the remote areas. The National Strategy for Financial Inclusion consists of several initiatives related to saving, credit (both for MSMEs and individuals), insurance, remittances, financial education, financial identification number, and regulation and consumer protection. Each of these initiatives is tailored to the needs of specific targeted segments. Savings Credit Savings + Credit Insurance Savings + Credit + Insurance Transfer Facilities Financial Education Financial Identity Regulation Special Needs Low-income poor Productive poor/msmes Remote MWs Areas No frills account TKI savings & (TabunganKu) remittance PKH through savings services (BRI) Mandatory no frills type account (e.g. TabunganKu) to banks/ NEW TabunganKu Cluster program PNPM KUR KUR TKI Linkage program Credit rating and establishment of private credit bureau Link of TabunganKu to start up loan Agent banking Jamkesmas TKI insurance Microinsurance development Jamkesmas microinsurance link Bundle insurance program (Credit/savings + insurance) G2P Branchless banking link Mobile money Ayo ke Bank & 3P Financial education by local government Financial education for SME Financial education training for MWs & families Non-poor Mobile banking Financial education through intra-extra curricular activities for students (start at elementary & junior high school while senior high and university will be in the following stage. Financial Identity Number Financial Identity Number Single identity number (link between financial identity number and e-ktp) Microinsurance regulation development KYC Assessment to small value customer using outsourcing party Regulation on Financial Identity Number Legend On going Will be implemented Potentially implemented Source: TNP2K s National Strategy for Financial Inclusion (2012) Saving-related initiatives are aimed to improve access to saving, especially among the low-income poor group. These initiatives include promoting Government-to-Person (G2P) transfers through saving accounts, promoting Basic Bank Accounts for the poor and low-income customers, strengthening cross-institutional (especially between banks, post offices, and retail networks) cooperation to offer non-traditional way of savings, and revisiting the Know-Your-Customer (KYC) regulations for small value customers. For the working-poor group, the proposed initiatives are to support the development of Micro, Small, and Medium Enterprises (MSMEs), using either some already-existing or new activities. These activities include providing sustainable PNPM Revolving Loan Funds (PNPM-RLF), better targeting of Credit for the People (KUR) program, providing credit rating services for MSMEs, expanding the local

8 Page14 credit guarantee corporations (PPKD), and encouraging value chain financing linkages which involve banks/finance companies, large scale enterprises and SMEs. Initiatives to improve access to insurance among the poor focus on promoting insurance products for the poor, such as micro insurance. In addition, the government s role with respect to this is to foster the innovations using incentive schemes and provide a robust regulatory framework. One of the initiatives stated is to encourage financial institutions to promote insurance products through bundling together with saving and credit products. Migrant workers and their families will benefit from a more intensive use of Information and Communication Technology (ICT), particularly for the convenience of distributing the remittances. Therefore, the strategy also includes initiatives to promote studies and pilot projects on mobile money, which include among other things, finding the appropriate incentive schemes to ensure the involvement of private sector. A pilot study on expanding financial transactions through ICT will be conducted according to the strategy, given that Indonesia already has a relatively good rate of cellular phone usage in Indonesia to begin with. Some financial education initiatives, intended to increase consumers knowledge and awareness of financial products, are also mentioned in the strategy. These activities include strengthening existing financial education programs (such as Ayo ke Bank and 3P) and recommending some new and innovative programs, such as national saving day, and including financial education in the school s curriculum. Other initiatives are: encouraging local government to provide financial education and providing financial education for future migrant workers and their families, which may include entrepreneurship and financial management. In order to reduce asymmetric information regarding customers profiles, the strategy encourages pilot project on Financial Identification Number (FIN), which is to be designed in line with the Single Identification Number (SIN). However, finding the right incentive schemes for MSMEs to voluntarily register remains a challenge. Meanwhile, with regard to regulation and consumer protection, the initiative is to support consumer protection rights related to micro-finance institutions (MFIs), particularly by providing an enabling regulatory environment for strengthening MFIs at the regional level. The strategy also states some institutional and functional arrangements to consider before implementing the strategy. Firstly, since the banking sector will remain key in the context of financial inclusion, it is critical to strengthen the branch networks to reach greater proportion of population. Secondly, a good synergy between banks, MFIs, non-bank financial institutions, and non-financial institutions is required. More specifically on MFIs, government needs to provide a legal basis for their operations that will give them authority to deliver various financial services and activities and simultaneously provide consumer protection. Thirdly, in order to expand the coverage of financial services, government needs to support information and communication technology (ICT). On more specific issues regarding supervisory arrangements for MFIs, the strategy mentions the importance of establishing new institutions to deliver two key functions: (i) supervisory and development of MFIs, (ii) consumer protection (risk management and deposit insurance). The proposed institutional arrangement in the short to medium term is to establish supervisory and development institution for cooperatives and to focus on establishing consumer protection, risk management, and deposit insurance units for financial cooperatives. Finally, in order to measure the effectiveness of the strategy, some key performance indicators (KPIs) were developed. Based on an AFI study, there are four dimensions to assess the effectiveness of national financial inclusion strategy, which include: (i). Availability (or access), (ii). Usage, (iii). Quality, (iv). Welfare. Meanwhile, the financial services to be assessed by KPIs are divided into supply, demand, and financial identity. Below is the set of KPIs for key financial services based on the strategy: Table 2. Key Performance Indicators of National Strategy on Financial Inclusion III. KPI Availability Usage Quality Welfare Supply: Services (Saving, credit transfers, insurance) Demand: Basic Financial Literacy Education Identity Branchless Banking Model with Digital Payment Service (LKD) Most recent data from the Central Bank (Bank Indonesia) showed that bank branches and ATM (each for per 100,000 adults) were recorded at and 51.0 in 2013, a slight increase from 2010 indicators (14.10 and respectively). On the demand side, number of bank depositors per 1,000 adults increased from in 2010 to 1, in 2013 while number of bank loans per 1,000 adults rose from in 2010 to in These numbers showed that financial inclusion progressed slowly, even after the Government initiated programs and strategy Branches/ATMs/Agents per area or population Hours open per week Time, documents and cost to open accounts % Population with access to financial education Effective % people able to get Identities Time, documents, and cost to client. Figure 3. Development in Indonesia financial services penetration Number of bank branches per 100,000 adults Number of active accounts per capita Size of active accounts relative to GDP (For loan size categories IDR <5mn and <50mn) Number of people who go through basic financial education % people with identities Source: TNP2K s National Strategy for Financial Inclusion (2012) Rate of Usage = Usage/availability Consumer protection Number of competing products Financial Literacy Exam score improvements Rate of Usage Number of ATM per 100,000 adults Improvement in poor categorization Increased consumption Usage of Services Usage of Services

9 Page Number of bank depositors per 1,000 adults Source: TNP2K s National Strategy for Financial Inclusion (2012) It is true that one of the reasons people are excluded from financial services is due to their low income. However, in the case of Indonesia for the last 10 years, the Government (Statistics Indonesia) database demonstrated how Indonesian middle class expands significantly in the last 10 years. In terms of income classification, the bottom of the pyramid which is defined as less than US$ 2 per capita consumption per day, declined from 62.2% in 2003 to 37.4% in More detail classification showed that 11.5% of them were considered poor (less than US$ 1.25 per capita consumption per day) while the rest (25.9%) was the vulnerable/near poor. The middle class (with US$ 2 to US$ 20 per capita consumption per day) increased substantially from 37.6% in 2003 to 62.4% of the Indonesian population in Surely, one cannot call people in this group as well-off but they do have small amount of money to save after paying for their minimum expenses. In the case of Indonesia, 62.4% reflected a massive number of people moving from unbanked to bankable Number of bank loans per 1,000 adults As income rises and many previously unbanked become bankable, one must consider the transition from informal to formal financial sector. There are many factors to be taken into consideration. From customers perspective (demand side), some people do not have regular cash flow and just manage to have small savings. They cannot commit funds all the time, either. Therefore, product fees and high minimum balance will usually deter them from using financial services/savings. Other than income, social relationship should also be taken into account when designing financial inclusion strategy. Pilot projects conducted by Bank Mandiri (part of 5 big banks and 2 telecommunication companies in Indonesia who undertook branchless banking pilot project) showed that people who were not familiar or first-time user of formal financial sector still needed assistance in filling out forms and other documentation requirements. Some people also need to have face-to-face encounter when cashing-in their money 1. Therefore, the business model suggested to promote financial inclusion in Indonesia is branchless banking with agents. However, to reach massive targets in remote areas, the existence of branchless banking with agents needs to be supported by technology-enhanced delivery channels that could drive cost down. Figure 5. Branchless Banking Mobile-based with Agents Figure 4. Indonesian household expenditures group, 2003 & % 0.2% Source: Mandiri Institute 37.7% 62.4% 62.2% 37.4% Low & Vulnurable Income Group Middle Income Group High Income Group 64% 36% Research has showed that mobile banking technology are able to reach previously unbanked and low-income people in relatively short period of time (Center for Financial Inclusion, 2011). This type of branchless banking mobile-phone based with agents 2 drastically reduces branching costs as well as minimizing transaction expenses for customers. In Indonesia, mobile phone penetration is high 240 million mobile phone subscribers (Bank Indonesia Survey, 2012 and Telco s Marketing Comparison Data, 2012) across all income levels while number of bank account holders comprised only 62 million. Most recent data from BLSM (Bantuan Langsung Sementara Masyarakat/Temporary Direct Cash Transfer) 2013 showed that 5 out of 10 households who received direct transfers owned cellular phones. Note that BLSM recipients comprised of the lowest 25% households. Sixty percent of Source: Susenas (2013) 1 Branchless Banking Bank Mandiri, Focus Group Discussion Material with OJK/Financial Services Authority, April 3, Other lesson learnt from the pilot project revealed that there was an actual demand for saving accounts, transactions conducted were in small and routine amount of money, customers are more sensitive to fees than to interest. 2 Defined as delivery of services outside conventional bank branches through the use of retail agents and ICT to transmit transaction details (Nazara, 2014)

10 Page18 those who did not receive BLSM (but received other social assistance such as PKH and comprised of the lowest 40% of household distribution) owned mobile phones. So even among the poor and the vulnerables, mobile phone penetration is quite high. Figure 6. Cell-phone ownership among the poor * BLSM recipient belongs to to the the lowest lowest 25% 25% of household of household distribution distribution ** Non-BLSM belongs to the lowest 40% of household distribution Source: CEIC Ownership of cellular phone among the poor & vulnerables: Comparing BLSM and non- BLSM recipients 2 BLSM Recipients* Among 10 households Cellular phone Motorcycle 6 4 Non- BLSM Recipients** balance in the e-money remained constrained. In addition to that, Bank Indonesia released a guideline to outsource some banking operations to UPLK (Unit Perantara Layanan Keuangan/Financial Intermediary Service Units) in May Weighing in the risk associated with financial access, the Central Bank amended Layanan Keuangan Digital/LKD (Digital Financial Services) regulation and issued PBI no 16/8/ 2014 in April Followed by issuance of two Surat Edaran/Circulating Notes (SE BI no. 16/11/DKSP and SE BI no. 16/12/ DPAU) on July 2014 which regulated that banks and non-bank institutions that can provide Layanan Keuangan Digital/Digital financial service (including fund transfer) must have e-money products. The latest regulations also rules that branchless banking with individual agents can only be performed by commercial banks with core assets of more than IDR 30 trillion or USD 5 billion (Bank Buku IV). Commercial banks with core assets less than IDR 30 trillion and non-bank institutions may conduct branchless banking only with agents who have established as legal entity. This is part of consumer protection aspect of the regulation. The Central Bank s careful approach is again reflected in the Circulating Notes 2014, mentioning that regulation on Digital Payment System should able to manage operational risk (associated with reliability of technology network/infrastructure), reputation risk due to agents fraud and system risk stemming from weak security in internal system organization (unencrypted text message, etc). Other than that, the Circulating Notes also rule on cost transparency and consumer complaints procedures. The diagram below showed how Bank Indonesia s cautious approach in regulating current mobile payment system in response to financial inclusion strategy. Figure 7. Framework for Mobile Payment System IV. Adoption of the Model in Indonesia a. Regulatory environment Current financial services development where combination of technology and agents promises a breakthrough 3 in financial inclusion strategy must be accompanied by improvement in the country s regulatory environment. The Central Bank has amended Bank Indonesia Regulation no. 16/8/ PBI/2014 (April 8, 2014) on Electronic Money to support branchless banking with digital services model. Development of e-money was already started in However, they have not really been successful since after five years (2012), the number of registered accounts (maximum balance of IDR 5 million) of e-money holders only accounted at 0.4% and unregistered accounts (maximum balance of IDR 1 million) accounted at 8% of total adult population (CGAP, 2013). Addressing these slow progress, Bank Indonesia issued a new regulation allowing full encashment of P2P transfers on electronic wallets at agents in December The regulation also allows cash payment points to provide a cashout service without requiring individual funds transfer license per agent. However, the maximum 3 since it is able to both reducing costs and reaching out more customers Source: Alamsyah (2014) Besides the Central Bank, the newly-established OJK/Otoritas Jasa Keuangan (Financial Services Authority) has also drafted regulations which they label as LAKU PANDAI (Layanan Keuangan Tanpa Kantor Dalam Rangka Keuangan Inklusif/Branchless Banking for Financial Inclusion) in August The draft has been circulated for some time among stakeholders (including industry experts) to obtain inputs and feedbacks. One of the most advanced articles in the regulation draft was a relaxed

11 Page20 requirement in opening a basic savings account where it only requires a photo identity card issued by the government or a reference letter from local community leader. Banks and mobile networks operators indicated concerns towards issues in the draft regulation such as agent exclusivity, consumer charges and location prerequisites. Branchless banking agents can be classified into two; (1) individual (individual, airtime reseller/cellular shop, warung etc.) and (2) legal entity (PT Pos Indonesia, PT Pegadaian, private companies with retail outlet network such as Indomaret/Alfamart, etc.). According to OJK s Laku Pandai Guidelines 2014, agents can perform basic saving account service (including closing and opening account, cash in and cash out, transfer intra and inter-bank, balance inquiry), micro loan services including receive microloan/financing application and other services subject to approval by OJK and other authority such as providing micro insurance and digital financial services e-money (should have separate agreement with insurance companies and e-money issuers). Implicitly, OJK draft regulation allows banks and non-banks financial institutions (such as insurance companies (life and asset)) to perform branchless financial service providers using individual agents. This is particularly a shift from existing electronic money regulations, issued by Bank Indonesia, which only allows big Buku IV banks (banks with a minimum core capital of IDR 30 trillion i.e., approximately US$2.5 billion) to appoint individual agents. However, OJK draft regulation adds eligibility requirement that only existing customers associated with bank for at least two year can become bank agents (for both individual and legal entity agents). In addition, OJK draft regulations mandate agents to partner with only one service provider. Many of the regulators such as in Pakistan and Kenya mandate non-exclusivity of agents (i.e. agents can partner with more than one bank/service provider) since sometimes in many remote areas, setting up exclusive agent networks can be expensive and supply-constrained. In addition, it is sometimes difficult to find qualified agents in rural areas given the agents eligibility requirements in term of capital, education level, ability to use technology, etc. For customers, non-exclusive agent is a better option since they will provide them with range of choice between service providers. Indonesia has strong potential to jump start financial inclusion strategy, using the facts that 40% of Indonesians is receiving transfers from government. Right now, G2P transfers have been predominately delivered in cash through post office networks. Other than regulatory enabling environment for branchless banking and e-money 5, there are few challenges that need to be sorted out by financial education and literacy programs such as discouraging regular habits of changing mobile numbers and building awareness/culture of using electronic mode rather than cash. The G2P payment programs by way of branchless banking with LKD have three key features. They are bulk registration, cost considerations and gradual implementation. To receive G2P by digital payment, beneficiaries need to pre-register at both banks and MNO. Following BI regulation on Know Your Customer (KYC) 6, all banks must ask customers to provide name, address, occupation, ID number and expiration date (government-issue ID, driver s license or passport), citizenship, marital status, fund sources and income, telephone number and tax registration number (NPWP). Bank applicants should also inform their purpose of application. In the pilot project held last year, Bank Indonesia relaxed implementation of KYC principles by allowing the use of letter from district head, BLSM card holders and reference letter from employers in lieu of government-issued ID cards for account opening registration 7. On the other hand, registration of mobile phone user needs to be improved as previous regulation (Permeninfo no. 23/2005) was considered having many loopholes. This is particularly due to previous registration administration which was imposed on user, instead of conducted by telecommunication providers. In the new Circulating Notes (Surat Edaran Badan Regulasi Telekomunikasi Indonesia No 161/BRTI/V/2014), registration of new and existing (pre-paid) mobile phones will be administered by officials at authorized telecommunication outlets. Telco outlets which do not have official posters from Ministry of Information and Communication are considered unofficial ones. Figure 8. Physical form of Kartu Perlindungan Sosial Both BI and OJK stipulated that banks and nonbanks institutions should be responsible for their recruited branchless banking and LKD agents actions and they should apply proper risk management towards recruitment (including agents due diligent) and supervision of agents. In their respective Circulating Notes (OJK has only draft Circulating Note), both clearly instructed principal institutions to outline roles, responsibilities and minimum standards of risk management, consumer protection and Anti-Money Laundering rules in the contract between principal and agents. Banks and nonbanks institutions who perform branchless banking with LKD should conduct continuous training to its agents and provide operation manuals. b. Jump start the model Nevertheless, all these exciting regulatory changes have now taken place in order to break the deadlock around development of e-money and branchless banking, both crucial in the national strategy of financial inclusion in Indonesia. To move forward even further, a massive jump start approach in providing access to previously unbanked individuals is necessary as prior experience in introducing e-money since 2007 proceeded very slowly. Similar experience happened with Tabunganku, a basic savings account introduced four years ago (2010) in April 2014, the number of Tabunganku accounts stood at million 4. 4 Data from Bank Indonesia, Source: TNP2K, Including supporting B2B negotiations in system interoperability, building sustainable business models (among and between banks and MNO/other e-payment providers) and industry collaboration. 6 UU no 15/2002, PBI no. 3/10/PBI/2001, PBI no. 3/23/PBI/2001, PBI no. 5/21/PBI/2003, PBI no.5/23/pbi/2003, SE BI no. 3/29/ BPNP/2001, SE BI no. 5/32/BPNP/2003 and SE BI no. 63/37/DPNP/ Bank Indonesia, Modal Sudah Tersedia, Gerai Info Bank Indonesia Newsletter edisi 39 tahun keempat,, Juni 2013, bi.go.id/id/publikasi/geraiinfo/documents/cf3d872a5bab4fda86ada4428bf51162finalgijuni2014.pdf

12 Page22 At this moment in Indonesia, there are 15.5 million households holding the Social Protection Card 8 (KPS) (TNP2K database, 2014). KPS data set which holds 25% of the lowest households is valid until December It means the GoI has already had household information (names including head of households and members of households, address, ID number, month and year of birth, and several other indicators). It is possible to migrate the data into the pre-registration for both the MNOs and banks when the GoI decides to use digital service for G2P transfers. Such data migration will set aside potential hassles when dealing with bulk registration in short period of time. The second feature of G2P transfer by digital services is cost considerations. In general, G2P transfer can be paid out electronically (1) by limited-purpose instrument (usually in the form of smartcard with limited use) transfers are made to a virtual account earmarked for the recipients but functionality of the instrument is restricted 9 and (2) to mainstream financial account. Other countries experiences (Brazil, South Africa, the Philippines, etc.) showed that it is less expensive and more effective for countries using G2P transfer for financial inclusion goals to be paid out all the way to mainstream financial accounts from the start. This is to avoid getting stuck with limited-purpose instrument that will likely be a dead end for financial inclusion purposes. As regulations in Indonesia have now allowed agents to perform functions such as cash-in, cash-out services and account opening, the business model of branchless banking mobile based with agents can work instantly. However, acquiring and managing agent networks still requires high cost investments on the part of banks. The Government needs to pay service charges 10 to service providers (PSPs). However, the government should stay away from strictly business negotiations between these PSPs on how to divide service charges from government. Government also need to keep clear from directly intervening internal negotiations between commercial banks and their agents with regards to agents fees and revenues. Government only need to set guidelines on transparent pricing disclosure once both parties agree on service charges applied to customers when using agents service 11. Aside from registration process and cost considerations, transition period should be tried in stages. In early November 2014, the Government of Indonesia used KPS/KKS scheme to jump start the Model. As mentioned previously, the Family Welfare Program was launched to provide assistance in the form of savings provided to 15.5 million underprivileged families throughout Indonesia, amounting to Rp. 200,000/Family/month for 8 (eight) months to compensate the rising domestic fuel prices. The cash transfer program through electronic/digital money for poor and vulnerable was disbursed to one million families in the first stage 12 with the provision of telephone SIM card (containing Bank 8 Currently Kartu Perlindungan Sosial/KPS is replaced by Kartu Keluarga Sejahtera/KKS (Family Welfare Card). KKS is distributed to poor families who are eligible for a variety of social assistance including raskin (rice for the poor), and savings amounting to IDR 200,000/ month/family for eight months to support the 25% lowest-income families in the wake of rising domestic fuel prices announced by the Government on November 18, Restrictions may take forms in one or more ways: cannot store funds indefinitely (special dormancy rule applies, for example after 90 days, instrument-issuer must return funds to government), cannot deposit more funds, and can only be withdrawn at particular agents/cash points established only for the purpose of G2P transfers. These restrictions renders recipients account into temporary repositories of G2P transfer 10 Cross-country experiences demonstrated that transaction fees ranged between 1 percent and 4 percent of the total amount of government transfers. See for instance, Jamie Zimmerman, Kristy Bohling, Sarah Rotman Parker, Electronic G2P Payments: Evidence from Four Lower-Income Countries (2014). 11 See for instance Michael Tarazi and Paul Breloff, Regulating Banking Agents, CGAP Focus Note no. 68, org/sites/default/files/cgap-focus-note-regulating-banking-agents-mar-2011.pdf, and K. Lauer, Denise Diaz, and Michael Tarazi Bank Agents, Risk Management, Mitigation, and Supervision, CGAP Focus Note no 75, Note-Bank-Agents-Risk-Management-Mitigation-and-Supervision-Dec-2011.pdf 12 First stage disbursement of cash transfer using digital services was conducted in nineteen (19) regencies/cities on November 8, 2014: Jembrana, Pandeglang, West Jakarta, Central Jakarta, South Jakarta, East Jakarta, North Jakarta, Cirebon, Bekasi, Kuningan, Semarang, Tegal, Banyuwangi, Surabaya, Balikpapan, Kupang, North Mamuju, Pematang Siantar and Karo (the program was launched earlier on October 29, 2014 when President Jokowi visited Sinabung evacuees camps. Mandiri s e-cash account). At the same time, Government also paid out cash transfers for the other 14.5 million households in the form of PT Pos Giro/demand deposits. Both e-cash and demand deposits can only be disbursed to eligible heads of targeted households. In 2015, these 14.5 million families will gradually get a telephone SIM card and the subsequent digital financial services. The implementation of Family Welfare program is realization of branchless banking with digital financial services model with cooperation among telecommunication companies, banks and PT Pos Indonesia as agents. c. Avoiding inactive/dormant accounts An even greater challenge comes after successful jumpstart the financial inclusion program through G2P transfers. Setting up network of agents to reach unbanked people in remote areas to disburse G2Ps electronically not only requires deep pockets (high costs incurred for technology platforms and connectivity; maintenance cost of keeping trusted and motivated agents etc.) but also involves planning suitable and relevant products for previously unbanked people. Sometimes, it also needs a stable flow of account-deposited G2Ps for the first few years. The Government of Indonesia still have several G2P transfers that could be channelled by agents through LKD. The G2P programs includes conditional cash transfer (Program Keluarga Harapan/PKH/) which covers approximately 3 million beneficiaries (total budget of IDR 3.8 trillion) and scholarship assistance (Bantuan Siswa Miskin) whose beneficiaries account for almost 11 million students (total budget of IDR 6.3 trillion). On top of G2P transfers, there is also Village Law which upon enactment this year, will transfer around IDR 100 trillion to all villages in Indonesia. The implementation of Village Law can also be transferred electronically using the same account created for the first phase of electronic G2P transfer. Upon successful implementation of G2P electronically, there will be at least 15.5 million new accounts in Indonesia. To prevent these new accounts left dormant, continuous financial education and literacy needs to be seriously enforced so these beneficiaries accounts will not only end up as temporary repositories of G2P funds. G2P recipients need to move to savings and other financial products such as micro insurance and micro credits. These financial products should be carefully designed aiming to add value to the lives of beneficiaries such as helping them manage money on daily basis, build long-term savings and borrow money to expand their entrepreneurship skills. d. Family welfare deposit program Family welfare deposit program is a non-cash transfer from government to the saving/e-money account of targeted household using digital financial services (LKD) and mobile phone numbers. Targeted household will receive 1 sim card. The are several benefits implementing this initiative which are: (1) G2P disbursement through saving/emoney account is a productive activity this scheme persuade G2P recipients to save some of their money; (2) saving/e-money is a part of financial inclusion strategy due to most of the G2P recipient are unbanked people; and (3) flexibility to withdraw fund anytime. In the first phase of disbursement 1 million households will receive G2P through saving/emoney and digital financial services and the rest 14.5 million using current mechanism. This new scheme can be done effectively with collaboration between all related parties describe in the figure bellow:

13 Page24 Figure 9. First phase of G2P disbursement through digital financial services Effective collaboration between all related parties in G2P disbursement through digital financial services Considering specific characteristics of Indonesians where majority has not been exposed to financial services, a branchless banking (agent banking) model with digital financial services would be suitable to be implemented to promote financial inclusion in Indonesia. Surely, adoption of the model would be ideal upon implementation of supporting regulatory environment to guarantee infrastructure reliability and to protect consumer privacy. In addition, adoption of the model should be initiated by jumpstart approach, using government s social assistance program. With G2P cash transfers, there will be 15.5 million households directly exposed to digital financial services. Many previously unbanked will have opportunities to improve their quality of life since they are not restricted by physical existence of banks/other financial institutions. People will be able to turn savings from government into credits to expand their skills or insurance products to provide life protection. On the other hand, disbursing government social assistance through digital services will improve its accountability and allows the government to increase its efficiency since various types of social assistances can be combined. For example, the provision of assistance for fertilizer, fuel assistance to fishermen etc. Spill over effect of this is also to encourage the integration of a variety of individual identity and encourage further innovation if more and more residents using LKD. Source: Mandiri Institute V. Closing Remarks Financial inclusion strategy became central in the fight against rising income inequality in Indoneisa. With only 20% of adults have financial access, current technology developments in telecommunications represent major opportunity since mobile phone penetration reaches over 90% in the country. With access to financial services, people will be able to accumulate their assets, leverage and expand their capabilities; as well as to get better protection for their life through savings, credits and insurance products.

14 Page26 References: Bank Indonesia, Modal Sudah Tersedia, Gerai Info Bank Indonesia Newsletter edisi 39 tahun ke empat, Juni 2013, da86ada4428bf51162finagijuni2014.pdf Box 1. Indonesia Telecommunication Industry Table. Telecom Market in Indonesia Snapshot, 2013 Chris Bold, David Porteous and Sarah Rotman, Social Cash Transfers and Financial Inclusion: Evi dence from Four Countries, CGAP Focus Note no. 77, February 2012 Endang K. Trisubari, Branchless Banking for Financial Inclusion in Indonesia, OJK Presentation at the 2nd International Financial Inclusion Forum, Mandiri Institute, Oct 23, 2014 Gabriela Zabata Alvarez, Preventing the Digital Trail from Going Cold: Lessons from Mexico Halim Alamsyah, Enhancing Digital Payment System to Support Financial Inclusion in Indonesia, Bank Indonesia Keynote Speech Presentation at the 2nd International Financial Inclusion Forum, Mandiri Institute, Oct 23, 2014 Jamie M. Zimmerman, Kristy Bohling, Sarah Rotman Parker, Electronic G2P Payments: Evidence from Four Lower-Income Countries, CGAP Focus Note no. 93, April 2014 Kate Lauer, Denise Dias and Michael Tarazi, Bank Agents: Risk Management, Mitigation and Supervision, CGAP Focus Note no.75, December 2013 Khadija Ali, Umer Khalid and Zahra Khalid, Promoting Financial Inclusion and Literacy in Pakistan via G2P Payment Program, Paper prepared by Pakistan Microfinance Network for the World Bank, October 2012 Michael Tarazi and Paul Breloff, Regulating Banking Agents, CGAP Focus Note no. 68, pdf Ronald Waas, Payment System in Supporting Financial Inclusion Initiative, Bank Indonesia Presentation at the 2nd International Financial Inclusion Forum, Mandiri Institute, Oct 23, 2014 Suahasil Nazara, Toward More Efficient and More Inclusive Financial Services for All, Presentation at the 2nd International Financial Inclusion Forum, Mandiri Institute, Oct 23, 2014 Source: GBG Indonesia (2013) Indonesian telecommunication industry has been growing rapidly since the GoI started reforming the sector in Since then, telecommunication industry has evolved from duopoly market held by state-owned enterprises, PT Telkom and Indosat to become competitive one with 10 players (2013). According to Sabaradin (2014), from 2011 to 2013 there have been increases of about 44% and 19% in internet and mobile services subscribers, respectively. Meanwhile, the growth of the number of fixed-line subscribers is only about 6% for the same period. In 2013, there are 41 million fixed-line subscribers, 6.5 million internet services subscribers, and 307 million mobile services subscribers. The penetration rate of internet services is still about 25% in Table. Number of Telecommunication Services Subscribers in Indonesia, Category Fixed-line subscribers (in million) Internet services subscribers (in million) Mobile services subscribers (in million) Source: Sabaradin (2014) Most of the revenue in telecommunication sector (about 72%) is generated through mobile services, while the broadband and fixed line services make up about 19.6% and 8.4% respectively. Key players in the telecommunication industry in Indonesia are Telkomsel, Indosat, and XL Axiata, which cumulatively hold about 89% of the total market share. Based on the KPPU data on the mobile telecommunication sector, Telkomsel holds 41% of the total market share, followed by XL with 26%, and Indosat with 22%.

15 Page28 Figure 10. Indonesian Mobile Telecommunication Services Market Share in 2014 Source: KPPU 2013 References: Sabaradin, R.Z.R. (2014). Industry Assessment: Telecommunication (Indonesia). Exim Bank of Malaysia. Global Business Guide (2013). An Overview of Indonesia s Telecommunication Sector Global Business Guide (2013). Improving Internet Access in Indonesia.

16 Page30 Mandiri Institute Organization Advisory Board Darmin Nasution Advisory Board Chairman Budi G. Sadikin Advisory Board Member Pahala N. Mansury Advisory Board Member Benjoy Das Gupta Advisory Board Member Scott Mc Donald Advisory Board Member Executive Director Destry Damayanti Executive DIrector Research fellow Moekti P. Soejachmoen Head of Mandiri Institute Suahasil Nazara Research Fellow of Financial Inclusion Andjarsari Paramaditha Staff Ardi Adji Assistant Research Fellow Andrian Bagus Santoso Staff Ira Setiati Assistant Research Fellow Elisabeth Carolina Staff

17