Republic of Indonesia: Promoting Innovative Financial Inclusion (Financed by ADB Technical Assistance Special Fund)

Transcription

1 Technical Assistance Report Program Number: Transaction Technical Assistance (TRTA) June 2017 Republic of Indonesia: Promoting Innovative Financial Inclusion (Financed by ADB Technical Assistance Special Fund) This document is being disclosed to the public in accordance with ADB s Public Communications Policy The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.

2 CURRENCY EQUIVALENTS (as of 5 June 2017) Currency unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp13,310 ABBREVIATIONS ADB Asian Development Bank G2P government to people NSFI National Strategy for Financial Inclusion OJK Otoritas Jasa Keuangan (Financial Services Authority) SDG Sustainable Development Goal TA technical assistance TASF Technical Assistance Special Fund NOTE In this report, "$" refers to United States dollars. Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD) Director K. Bird, Public Management, Financial Sector, and Trade Division, SERD W. Wicklein, Country Director, Indonesia Resident Mission, SERD Team leader P. Jayawardana, Financial Sector Specialist, SERD Team members P. Aji, Senior Economics Officer, SERD E. Allen, Country Economist, SERD A. Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department C. de Vera, Operations Assistant, SERD R. Hattari, Public Management Economist, SERD K. Hattel, Financial Sector Specialist, SERD S. Ismail, Financial Sector Specialist, SERD L. Jovellanos, Senior Economics Officer, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page TRANSACTION TECHNICAL ASSISTANCE AT A GLANCE I. THE PROPOSED PROGRAM 1 II. THE TECHNICAL ASSISTANCE 1 A. Justification 1 B. Outputs and Activities 2 C. Cost and Financing 3 D. Implementation Arrangements 3 APPENDIXES 1. Cost Estimates and Financing Plan 5 2. List of Linked Documents 6

4 Project Classification Information Status: Complete TRANSACTION TECHNICAL ASSISTANCE AT A GLANCE 1. Basic Data Project Number: Project Name Promoting Innovative Financial Department SERD/SEPF Inclusion /Division Nature of Activity Policy Advice Executing Agency Modality Regular Country Indonesia Fiscal Policy Office-Ministry of Finance 2. Sector Subsector(s) ADB Financing ($ million) Finance Inclusive finance 0.80 Total 0.80 qq 3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic Pillar 2: Access to economic Climate Change impact on the growth (IEG) opportunities, including jobs, made Project qq Regional integration (RCI) more inclusive Pillar 2: Trade and investment 4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity development (GCD) Institutional development Effective gender mainstreaming (EGM) qq 5. Poverty and SDG Targeting Location Impact Geographic Targeting Yes Household Targeting No Nation-wide SDG Targeting Yes SDG Goals SDG1, SDG2, SDG3, SDG4, SDG5, SDG6, SDG7, SDG8, SDG9, SDG10, SDG16 Qq 6. Risk Categorization Low Qq 7. Safeguard Categorization Safeguard Policy Statement does not apply qq 8. Financing Modality and Sources Amount ($ million) ADB 0.80 Transaction technical assistance: Technical Assistance Special Fund 0.80 Cofinancing 0.00 None 0.00 Counterpart 0.00 None 0.00 Total 0.80 qq Qq Low High Source: Asian Development Bank This document must only be generated in eops Generated Date: 02-Jun :58:02 AM

5 I. THE PROPOSED PROGRAM 1. The proposed Financial Market Development and Inclusion Program supports the Government of Indonesia s main reform priorities in developing and making the finance sector more inclusive. The program comprised three outputs: (i) strengthened regulatory structure for financial stability, (ii) deepened financial market, and (iii) enhanced financial inclusion. The technical assistance (TA) will support the implementation of output 3, which aims to promote financial inclusion through improving access, financial literacy, and the consumer protection framework. A. Justification II. THE TECHNICAL ASSISTANCE 2. Income inequality in Indonesia has increased with Gini coefficient rising from 0.30 in 2000 to 0.39 in 2016 despite the significant reduction in poverty during this period. The government has committed to achieving the Sustainable Development Goals (SDGs) and mainstreamed this agenda into its national development planning, including the National Medium Term Development Plan, , to address inequality and promote inclusive economic growth. Financial inclusion is crucially important to this end as it will contribute toward eliminating extreme poverty (SDG1); reducing hunger and promoting food security (SDG2); achieving good health and wellbeing (SDG3); fostering quality education (SDG4); promoting gender equality (SDG5); enhancing access to infrastructure, water, sanitation, and energy (SDG6 and SDG7); achieving broader economic and social goals by promoting shared economic growth (SDG8); and promoting innovation and sustainable industrialization (SDG9) toward equitable and peaceful societies (SDG10 and SDG 16). 3. Indonesia accounts for 6% of the world s unbanked population. 1 According to the latest Global Findex data in 2014, 64% of the Indonesian adult population is financially excluded. The government has set an ambitious financial inclusion target of 75% by 2019 under the National Strategy for Financial Inclusion (NSFI) launched in August Since 2010, Indonesia is committed to implement nationally the G-20 principles for innovative financial inclusion that recognize innovative financial inclusion, financial literacy, and consumer protection as three key elements to improving individual financial well-being and strengthening the overall financial system. The new NSFI provides an enhanced and more focused legal framework for financial inclusion in line with these key elements. To oversee the NSFI, the National Council for Financial Inclusion has been established. The council is chaired by the President of Indonesia, elevating the financial inclusion agenda to the highest level of the government, and it is supported by five working groups. The Ministry of Economic Affairs leads the coordination of the NSFI in collaboration with 13 other implementing agencies. The Team for Acceleration of Regional Financial Access has also been formed for regional NSFI implementation. 4. The Government of Indonesia requested the Asian Development Bank (ADB) to provide TA to support the financial inclusion reform efforts under the Financial Market Development and Inclusion Program. During a consultation mission in September 2016, ADB discussed priority areas for support with the Fiscal Policy Agency, Bank Indonesia, and a number of departments within the Financial Services Authority (OJK), including the International Directorate, Financial Literacy and Education Directorate, Education and Consumer Protection Policy Research and 1 A. Demirguc-Kunt et al The Global Findex Database 2014: Measuring Financial Inclusion around the World. World Bank Policy Research Working Paper Washington, DC.

6 2 Regulation Directorate, Sharia Non-Banking Financial Industry Directorate, Microfinance Institutions Unit, and the OJK Training Center for Microfinance and Financial Inclusion. Further discussions were held with the Ministry of Social Affairs, National Team for the Acceleration of Poverty Reduction, and private sector representatives and development partners active in financial inclusion. The TA is included in the country operations business plan, and aligned with the priorities of the ADB country partnership strategy, for Indonesia which supports enhanced financial inclusion. The TA will be implemented during in parallel with subprogram 3 of the Financial Market Development and Inclusion Program. B. Outputs and Activities 5. The TA comprises three outputs: (i) increased access to financial services through innovative approaches, (ii) broadened financial literacy, and (iii) an enhanced consumer protection framework. These three areas together can effectively address various supply- and demand-side constraints that cause financial exclusion. 6. Output 1: Increased access to financial services through innovative approaches. Indonesia has a population of over 260 million, comprising 360 ethnic groups, speaking 719 languages, and living on 6,000 islands. 4 This diversity undeniably poses significant challenges to deepening financial inclusion. The financially excluded people in the country are largely the poorest 40% of the population (78% of all financially excluded people) and rural people (71%). Innovative approaches to increase access to finance therefore remains crucially important. Digitization of government-to-people (G2P) payments is one of the notable recent initiatives by the government. There is considerable overlap between social transfer beneficiaries and the financially excluded. Digitization of G2P has therefore been initiated with the twin goals of achieving efficiency in implementing social protection programs and deepening financial inclusion in line with the NSFI. Complementary to this initiative, the TA will support the design of a pilot program with innovative finance and technology measures to increase access to financial products and services. This will include an assessment of the digital G2P payment initiative, recommendations for possible complementary innovative approaches to increase access to finance, and identification and design of a pilot program to be implemented during the proposed Financial Inclusion Sector Development Program in Output 2: Broadened financial literacy. Financial literacy is a significant demand-side constraint for financial inclusion, and it is vitally important to maximize the potential benefits of emerging innovative approaches. Financial literacy benefits poor consumers in numerous ways. It can reduce the cost of information search, educate on available financial products and services, and inform on their risks and benefits. Developing skills and discouraging the use of informal channels can change the financial behavior of poor consumers. According to the OJK s financial literacy survey in 2016, % of Indonesian people are financially illiterate. An InterMedia survey in the same year identified lack of knowledge and understanding as the biggest barrier to using mobile money by Indonesian women, 6 73% of whom are financially excluded. Well-designed financial literacy interventions therefore need to target different groups through appropriate channels to ensure both access and use. There are still many communities to reach through 2 ADB Indonesia: Country Operations Business Plan Manila. 3 ADB Indonesia: Country Partnership Strategy Manila. 4 KPMG New Indonesian Branchless Banking and Microfinance Laws A Catalyst for Microfinance Growth? Jakarta. 5 Indonesian Financial Services Authority Financial Literacy Survey. Jakarta. 6 InterMedia Financial Inclusion Insights Tracker Survey. Washington, DC.

7 3 financial literacy efforts in Indonesia. The emerging branchless banking and digital G2P payments demands that customers are educated so they can reap the maximum benefits. The TA will therefore support the OJK to expand financial literacy programs covering the branchless banking users and digital G2P payment recipients. Continuing ADB s existing support, 7 the TA will also fund the OJK to develop e-modules based on its financial literacy publications for elementary, junior, and senior high school students, and university students. 8. Output 3: Enhanced consumer protection framework. Consumer protection is a part of responsible finance, which discourages harmful and unfair treatment in the process of providing access to finance. It promotes (i) prevention of overindebtedness, (ii) transparent and responsible pricing, (ii) proper collection practices, (iii) ethical staff behavior in client interactions, and (iv) timely and responsive grievance redress mechanisms. 8 These reduce potential risks and increase consumers confidence, promoting efficiency and stability of financial markets. Indonesia outperforms the regional average in terms of market conduct rules and dispute resolution. Yet, given the sector composition, these are applied only to certain types of providers. The emergence of new technological innovations such as digital financial services and branchless banking have particularly heightened risks and fraud. Similarly, during the government s digital G2P payment pilots, consumer protection has been recognized as one of the key issues to be addressed. The TA will therefore support the OJK to assess the consumer protection framework for branchless banking users and G2P recipients to identify and incorporate appropriate measures for greater financial inclusion. C. Cost and Financing 9. The TA is estimated to cost $1,000,000, of which $800,000 will be financed on a grant basis by ADB s Technical Assistance Special Fund (TASF-other sources). The key expenditure items are listed in Appendix The government will provide counterpart support in the form of staff resources, office accommodation, secretarial assistance, and other in-kind contributions. The government was informed that approval of the TA does not commit ADB to finance any ensuing program. D. Implementation Arrangements 11. ADB will administer the TA. The Public Management, Financial Sector, and Trade Division of the Southeast Asia Department will select, supervise, and evaluate consultants. Implementation Arrangements Aspects Arrangements Indicative implementation period June 2017 June 2019 Executing agency Fiscal Policy Agency Implementing agency Financial Services Authority Consultants To be selected and engaged by ADB Individual consultant 10 person-months $250,000 selection Quality- and costbased selection 10 person-months $200,000 7 ADB Technical Assistance to Indonesia for Enhancing Regulatory Framework of Financial Sector Development and Oversight. Manila. 8 Consultative Group to Assist the Poor Implementing the Client Protection Principles. A Technical Guide for Investors. Consultative Group to Assist the Poor: World Bank, Washington, DC.

8 4 Aspects Disbursement ADB = Asian Development Bank, TA = technical assistance. Source: Asian Development Bank. Arrangements The TA resources will be disbursed following ADB's Technical Assistance Disbursement Handbook (2010, as amended from time to time). 12. Consulting services. Five international individual consultants specialized in innovative financial inclusion, financial literacy, and consumer protection, and one international firm specialized in education media development, will be engaged to deliver the activities under the TA. International individual consultants will be engaged for 10 person-months, and an international firm will be engaged for 10 person-months. The contract package is estimated to cost $600,000 and comprises input-based contracts with liquidation of advance for individual consultants and mobilization payment for the firm. Individual consultants will be recruited using individual consultant selection and the international firm will be selected based on quality- and cost-based selection. The consultants will be engaged by ADB in accordance with the Guidelines on the Use of Consultants (2013, as amended from time to time). Terms of references of consultants are in the list of linked documents in Appendix 2.

9 Appendix 1 5 COST ESTIMATES AND FINANCING PLAN ($ 000) Item Amount Asian Development Bank a 1. Consultants a. Remuneration and per diem International consultants b. International and local travel Training, seminars, and conferences Contingencies Total Note: The technical assistance (TA) is estimated to cost $1,000,000, of which contributions from the Asian Development Bank are presented in the table above. The government will provide counterpart support in the form of staff resources, office accommodation, secretarial assistance, and other in-kind contributions. The value of government contribution is estimated to account for 20% of the total TA cost. a Financed by the Asian Development Bank s Technical Assistance Special Fund (TASF-other sources). Source: Asian Development Bank estimates.

10 6 Appendix 2 LIST OF LINKED DOCUMENTS 1. Terms of Reference for Consultants Supplementary Documents 2. Financial Inclusion in Indonesia 3. Financial Inclusion and Sustainable Development Goals in Indonesia