59833 Technical Note February 2011 Financial Sector Development Broadening financial inclusion: Untapped business opportunities and potential markets for the banking sector Significance: As the major provider of financial services in Indonesia, the banking sector plays a vital role in improving access to financial services by outreaching to some 80 million potential clients. Many international and domestic examples have proven that banks play a vital role and become institutional leaders in promoting financial inclusion. In indonesia, more than half of the population does not have access or does not use formal banking services. Significant business opportunities and markets for banks remain untapped. Just as the Government has an important role to play in broadening financial inclusion, so do the banks. Seeking innovative ways of outreaching to the unbanked population is essential for banks, and the recent evolution of information and communication technology (ICT) and the high level of penetration of mobile phones offer one possible means of addressing outreach as seen in other countries. This technical note addresses the following questions: What is the role of the banks in building an inclusive financial system? What is the relevant banking experience in promoting financial inclusion both worldwide and domestically? What can be done to reach a more inclusive financial system? Background Commercial banks are too `costly` for Promoting Access to Banking Services small customers Benefits of acquiring access to banking Initiatives on financial inclusion by both Aside from low levels of financial literacy, services the private sector (banking industry, bank most small potential depositors avoid Banks play a major role in providing associations, financial sector) and the commercial banks because they perceive financial services. In their simplest form, authorities (central bank, government) banking services to be out of their reach. bank accounts allow people to manage are discusssed below, including both A regular savings account with a bank money more securely and efficiently global experience and Indonesian usually requires a monthly administration than using cash, while loans reallocate examples. fee and a minimum balance -- both of resources from savers to borrowers. The which can be perceived to be high by Financial inclusion initiatives of Bank possession of a bank account provides lower-income populations. For small Indonesia a way to access more affordable loan depositors, the interest earned on the Bank Indonesia (BI) has introduced a products and better linkages to other deposit is often less than the total basic bank account, TabunganKu, and has financial products. Savings can act administration fee, hence the amount proposed financial identity regulations as a safety cushion during times of of savings decreases over time. Some to promote financial inclusion. In economic hardship, while loans provide small borrowers are also considered non- conjunction with the Alliance for Financial opportunities to create productive creditworthy by banks, because they lack Inclusion (AFI), BI is hoping to conduct a investments that can increase future collateral or a financial history, leaving pilot project to develop financial identities income flows. Bank loans are usually more expensive informal loans as the for the unbanked. The project aims to offered at lower interest rates than loans only option for borrowing. create a financial identity database for from the informal sector. the unbanked population. Unbanked BPRs have good prospects... but are still Huge market potential still exists individuals will be provided a financial facing difficulties The banking sector controls almost 80 identity number (FIN) from which they BPRs (rural banks) are relatively small and percent of total Indonesian financial can be identified and their data accessed serve local areas. BPRs' banking products assets. Since 2000, bank branches have by authorized financial institutions. The are often priced below commercial banks increased by 70 percent, while the blueprint for the program is still under with lower administration fees and lower number of ATMs has almost tripled. review by the relevant agencies, along minimum balances. Some allow deposits Despite this increasing outreach, about with a preliminary survey of the pilot in small denominations (even coins) half of Indonesian households do not project in a particular segment of the and offer door-to-door deposit (loan have a bank account.i In 2008, over 54 unbanked population (Arisan, Savings repayment) collections. Despite this, million people were accessing non- School Movement, Tasik Loan's Scheme, BPRs feel that they still lack technology bank financial services (mostly from the and MFI Customers). Basic bank accounts (networks) to support banking services, informal sector) while over 27 million will be offered to these groups once they as well as qualified and affordable others did not use any financial services acquire a FIN. BI also plans to develop human resources. The high cost of funds at all.ii With the right approach, banks financial identifiers for the banked also often creates difficulties for BPRs in are well placed to reach these potential population which will include customer competing with the micro divisions of clients, especially those who regularly ID numbers (CIN) for those with bank use informal financial service providers. commercial banks. accounts and debtor ID numbers (DIN) for borrowers. In due course, FIN, DIN, Financial Sector Development Technical Note and CIN will be integrated into a single ID In Peru, more than 7,000 rural women banks and do not earn interest. number (SIN), a unique financial identity living in the Puno-Cusco Corridor · WIZZIT, a division of the South for each person recorded in the system. participated in a 1-to-1 matched savings African Bank of Athens, offers a scheme with initial deposits of up to transaction banking account that is A. Basic Bank Accounts US$34. Withdrawals could be made for accessible through mobile phones Mainly intended to attract unbanked productive purposes such as investments and (Maestro) debit cards. The potential customers, the basic bank in education, health, housing or signing-up fee is US$5.26, there is no account features a low or zero minimum microenterprise. Matched savings are minimum balance or monthly fees, balance and no monthly administration also practiced in Australia, Singapore, only a pay-as-you-go pricing model fees. The application procedure is South Korea, the UK and Uganda. with charges ranging from US$0.13 simplified and few identity documents to US$0.66 per transaction. WIZZIT are needed. Since 2005, the Reserve Bank C. Branchless Banking had an estimated 250,000 customers of India (RBI) has encouraged banks to The convenience of shorter trips to at the end of 2008. offer such `no-frills' accounts. Also with deposit-taking facilities can increase · G-CASH in the Philippines is a limited free transactions, the Mzansi transactions and banking participation. mobile-wallet-type phone-banking account has been offered in South Africa technology provided by Globe. The since 2004. In 2008, two thirds of the 3.5 Doorstep savings collection schemes P2P transfer costs from PhP 1 to million active Mzansi users were first- are one useful traditional example. PhP 40,000 per day or a total of PhP time bank customers. From the 1970s to · The Pygmy deposit scheme,iii 100,000 per month. In addition to the the 1990s, the Indonesian Government a daily deposit commitment PhP 1 cost of sending a text message, offered Tabanas savings accounts to savings scheme, was successfully a flat fee of PhP 10 is charged for any specific target groups such as students, implemented by the Syndicate Bank transaction below PhP 1,000 and youth organizations and government in Karnataka State, India. Field agents about 1 percent of the amount for employees to nurture saving habits. collected a minimum quarter of a transactions over PhP 1,000. In 2008, Interest rates were paid on a sliding scale rupee per day from the doorsteps of G-CASH had over 6,000 domestic with a higher rate for the lower balance customers (street vendors, laborers, outlets providing services to 1.9 to encourage small savers, calculated village traders) with a lower-than- million subscribers. based on a minimum monthly balance, regular interest rate to cover the disbursed annually, and exempted from high collection costs. Mobile electronic data capture (EDC) tax. In late February 2010, BI along with 70 · Bank Dagang Baliiv offers daily mobile technology enables bank employees to commercial banks and more than 1,000 collections as part of its service. It conduct teller transactions at consumers' rural banks introduced TabunganKu, has three types of collection team: locations (their house/business place), a basic bank savings account. Notable one on foot, covering the areas reducing the need for customers to visit features such the low minimum balance, nearest the branch; one traveling by their bank branch. It can process deposits, no administration fees, and low interest motorcycle, covering more distant withdrawals, money transfers or balance rates (up to 1 percent). While making clients; and one traveling by car, inquiries. The GPRS module enables saving cheaper, TabunganKu offers serving the furthest clients from the online transactions; a biometric sensor no incentives for making more bank branch. and a card chip reader set up a verification transactions. process; and a print-out provides a record Mobile banking technology allows of transactions. Bank Mandiri, Danamon B. Savings Encouragement lower-income customers to access Simpan Pinjam, Bank Sinar Harapan Matched savings is an incentive to banking services using their mobile Bali, and BTPN have been utilizing this encourage saving habits in marginalized phones. Transactions are conducted system to serve their microbanking individuals by matching their savings using secure SMS up to a certain segment. In April 2010, Bank Sinar to a predetermined goal or ratio, with monetary limit in compliance to the Harapan Bali introduced Sir@t, layanan a cap on the total amount. In the Anti-Money Laundering Act (AMLA). The transaksi sarat teknologi (technologically US, American Dream Demonstration services range from person-to-person equipped transaction services), an EDC applied this approach to 2,300 low- (P2P) transfers, payment of bills, airtime service that also serves as a payment income individuals (80 percent were purchases, and even deposits/top-ups or point for bills. Until May 2010, the bank female) in 13 sites. Matched funds withdrawals in certain outlets. operated 20 EDC devices across Bali and were kept in a separate account and · In Kenya, M-Pesa had 9 million completed 2,097 withdrawal transactions disbursed only upon verifying receipts customers in 2007 (40 percent of and 1,694 deposit transactions. Due of small businesses or home repairs. the adult population) with outlets to their widespread acceptance, the The Taiwanese Government's Family outnumbering by nearly five times bank planned to increase the number Development Account is a 1-to- the total number of Postbank of operating EDCs to 100 by June 2010. 1 matched savings scheme for 36 branches, post offices, bank BTPN (Bank Tabungan Pensiun Negara) months after the first deposit by welfare branches, and ATMs combined in the has used mobile EDCs to serve its micro- recipients, targeting women, high school country. The maximum cap for all banking segment since late 2008. Using students, or households with low-income transactions is US$500. Registration mobile EDCs, off-branch transaction single mothers with financial education and deposits are free, but services officers (OTO) on average can process 10 class attendance requirements. Funds are charged from US$1.3¢ to US$40¢ to 25 transactions daily are accessible after three years for per specific transaction. The full investment purposes, higher education, value of all M-Pesa balances is stored D. Linkage Program small businesses, or first home purchases. in pooled accounts of two regulated Self-Help Groups (SHGs)v in India offer Financial Sector Development Technical Note interest-bearing loans to their members Statement 2005-06, RBI applied the short-term risk insurance products. with the funds coming from regular following policies to promote financial Financial institutions are also voluntary thrift activities. Most SHGs are inclusion. obliged to devote a minimum of 0.2 promoted and nurtured by institutions, a) introducing a basic banking `no frills' percent of post-tax annual operating such as NGOs, banks, farmers' clubs, account in November 2005, with profit for consumer education. Each government agencies, or self-employed simplified KYC procedures; financial institution is given a rating individuals. The SHGs' experience in b) introducing a General Credit Card on an annual basis based on the informal loans enables them to learn the (GCC) credit facility in 2005, with results of the scorecard. essentials of financial intermediation, revolving credit entitling the basic account keeping, and the skills holder to withdraw up to the limit Concerns and Recommendations needed to handle resources of a larger sanctioned; size. Encouraged by the Reserve Bank of c) rolling out a financial inclusion Grand strategy on financial inclusion is India (RBI), banks offer non-collateralized drive (starting in 2008) requiring necessary loans to stabilized SHGs that show mature every SLBCvi to identify one or more Developing a comprehensive strategy financial behavior. Banks decide on the districts in its home states for 100 on financial inclusion could offer a more interest rates but terms and conditions percent financial inclusion; cost-effective way of approaching the are up to SHG members. Since the SHGs d) allowing banks to use NGOs, issue. Clearly articulated objectives, have already acquired a certain degree SHGs, MFIs, or other civil society target populations, and inter-linkage of financial discipline (through their thrift organizations as bank intermediaries between initiatives would improve activities and internal lending), as well able to receive deposits and provide the implementation of a strategy. as the existence of peer pressure, timely withdrawals using innovative IT Harmonizing the existing program among repayments and social collateral for solutions in January 2006; departments, ministries, and institutions loans are ensured. Three types of linkage e) expanding the list of priority sectors would help to avoid duplication and model of bank-SHG exist: (1) direct in 2007 to more employment- achieve more effective synergies. The linkage, without facilitation from other intensive sectors such as agriculture, South African experience shows that institutions; (2) indirect linkage, with small enterprises, the retail trade, a collaborative approach between promoting institutions as the facilitator; educational loans, microfinance, government and the private sector with and (3) indirect linkage, with promoting and low-cost housing, while also clear objectives and guidelines in a viable institutions as a facilitator and a financing promoting financial literacy; and business manner can successfully extend agency. Until March 2007, around 74 f) launching a multilingual website in the reach of financial services to the lower percent of the total linkage came from 13 Indian languages on all matters half of the population. model 2, while model 1 had 20 percent concerning banking and the and model 3 was 6 percent. common person in 2007. Promote financial education at an early stage Swamitra is a partnership between South Africa's Black Economic An example from India shows that Bank Bukopin and cooperatives to Empowerment (BEE) Charter was introducing affordable financial products reach the feasible-but-not-bankable released in October 2003 by the Banking without effective financial literacy small and micro-business customers. As Council of South Africa with the objective intervention for the targeted customers cooperatives, Swamitra partners of Bank of increasing access to financial services results in a low level of usage despite Bukopin are able to offer their members for poor households and communities. 100 percent access availability. Cases in savings and lending services with greater While maintaining sound business Kenya and South Africa show that the ease than banks. Bank Bukopin provides practices, charter membersvii agree that younger generation are more open to IT system enhancement, banking when sourcing products and services technological solutions and this can management training to officers, and the financial sector should apply to help to drag the older generation to working capital to its cooperative the Charter and its scorecard. The also participate. Regular transaction partners that enables the delivery of Charter targeted that by 2008 a certain experience with a bank is also more financial services accessible through percentage of LSM 1-5 (the lower half effective than a conventional financial online networks in a prudent manner. of South Africa's measure of living education approach. Limited free Swamitra has steadily grown over time: standards) would have effective access transactions was the banks` way to units expanded from 387 in 2007 to 488 to appropriate first-order and affordable entice first-time banked customers in 2009, while total asset value increased financial services. The charter requires to realize the costs and benefits of from Rp 670 billion in 2007 to Rp 1,050 increases in access to LSM 1-5 as follows: each bank transaction. In the past, trillion in 2009. Credit ranging from Rp a) 80 percent increase in access to Tabanas had a role in providing first- 2 million to Rp 50 million was given to transaction products and services; hand banking experience for students 103,300 customers in 2009, totaling Rp b) 80 percent increase in access to bank and members of youth organizations 846 billion. savings products and services; since early childhood. Apart from c) a certain percentage increase in making a (mandatory) curriculum on E. Nationally Coordinated access to life assurance products and financial education to school children, Inclusion Strategy services; TabunganKu can be applied to replicate India's financial inclusion program uses d) 1 percent of LSM 1-5 + 250,000 from Tabanas school-segmented penetration. a multi-pronged strategy to promote all segment increase in access to Once familiar with standard banking financial inclusion. After explicitly collective investments products and transactions, these young people can introducing the term `financial inclusion' services; and then become financial education for the first time in its Annual Policy e) 6 percent increase in access to facilitators for the banks by imparting Financial Sector Development Technical Note their knowledge to the older generation. i Improving Access to Financial Services in Indonesia (World Bank, 2010). Improving the capacity of BPRs Savings can better reach low-income BPRs could potentially serve customers ii Bank Indonesia presentation in World Bank Workshop on Enhancing Access to Formal customers than credit living in remote locations. A `tiering' Financial Services in Indonesia assumed that in For unbanked customers, developing system based on the size of BPRs holds 2008 about 70% of 228,523,300 people were a relationship with a bank through a more prospects than the current one- on productive age and potentially banked. World Bank study in 2010 found that out of all savings product is less intimidating size-fits-all approach to regulation. While households in Indonesia about 49% used bank than applying for credit. Basic banking keeping prudential safeguards in view, service, 3% used other formal financial services, services with free limited transactions consideration could be given to lowering 31% used informal financial service, and 17% were underserved. and a simple KYC procedure are more minimum start-up capital requirements iii The scheme was discontinued in the late `90s. It effective than listing possible assets for small BPRs in remote locations, easing then re-launched in 2007 as Pigmy Plus. that qualify as loan collateral and more reporting requirements for small BPRs in iv It was liquidated in August 2004. complicated KYC procedures in making regions with poor IT infrastructure, and a loan application. Unbanked customers easing written disclosure requirements v Group of 15-20 people with similar social backgrounds to address common issues. should be gradually educated about in regions of low financial literacy and accessing formal banking services to using oral briefings in the local language vi State Level Banking Committee: bank representatives in the state, state government, maintain their motivation while building as a substitute, are possible options and RBI. their asset value through savings. The key for promoting BPRs growth in these vii Representatives of banks, long- and short-term issue here is the profitability of mobilizing areas. Allowing partial foreign or NGO insurers, black professionals and black business, such small deposits taking into account ownership in poor remote regions could unit trusts, fund managers, and brokerage firms. the costs of servicing this segment. also help provide necessary capital for Innovations from other markets can be BPRs helpful guides as to what can be done Further Reading: to lower the costs of deposit collection What the World Bank Can Offer · Bankable Frontier Associates. "The while providing a positive rate of return Mzansi Bank Account Initiative in to clients. Once they understand the Collaboration on developing financial South Africa", South Africa, 2009. mechanics of banking services and own inclusion strategy · Mas, Ignacio and Kabir Kumar. 2008. savings, affordable credit facilities can be Some successful financial inclusion "Banking on Mobiles: Why, How, for offered upon request against depositors' initiatives have already been Whom?", CGAP Focus Note No. 48 savings instead of collateral. Historical implemented in Indonesia, but in a rather June 2008. deposit transactions can supplement sporadic manner. A more coherent · NABARD. "Report of The Commitee financial history information. This approach would benefit both the banks on Financial Inclusion", India, 2008. approach makes for a smoother transition and low-income customers. The World · The World Bank. "Finance for All: from being unbanked to becoming an Bank can assist the Government, Bank Policies and Pitfalls in Expanding active banked customer. Indonesia, and the banking sector in Access", World Bank Policy Research formulating a financial inclusion strategy. Report, 2008. Provide incentives to promote inclusion · The World Bank. "Banking the Poor, Active involvement by the private Bringing in best practice from other Measuring Access in 54 Economies", sector/banking industry is crucial to the countries 2009. sustainability of a financial inclusion Relevant international best practice · The World Bank. "Improving Access program. Authorities in other countrie examples can be provided and tailored to Financial Services in Indonesia", have used the following incentives to the Indonesian context if requested. June 2010. to promote financial inclusion: tax · Zimmerman, Jamie M. and Shweta incentives to banks that serve first- Collaboration to implement pilot S. Banerjee. "Promoting Savings as a time banked customers or poor programs Tool for International Development". households, publicly rating banks on Public-private partnerships could pilot New America Foundation, October their performance in providing basic innovative products and services that 2009. banking/affordable credit to low-income/ can support financial inclusion for low- first-time banked customer, subsidies to income segments. The World Bank can establish a conducive environment for partner with the authorities and the technologically innovative solutions, or commercial banking sector to help restrictive branching laws that require test specific products and services. The banks to open rural branches before success of the pilots would drive the opening additional urban branches. decision to scale up These examples could give Indonesia guidance on some of the options available. For further information, contact: Access to Finance Please visit our website Yoko Doi World Bank Office Jakarta http://www.worldbank.org/id Financial Specialist Indonesia Stock Exchange Building (ydoi@worldbank.org) Tower 2, 12th Floor, Jl. Sudirman, Kav 52-53 P.S. Srinivas Jakarta 12190, Indonesia Lead Financial Economist (psrinivas@worldbank.org) Ph. 62 21 52993000 Fax 62 21 52993111