Improvements to Financial Inclusion in Indonesia


The strong efforts that have been made in Indonesia to improve financial inclusion have begun to pay off. The nation has progressed the most in financial inclusion since 2015 among emerging economies in East Asia and the Pacific. Financial inclusion in Indonesia benefits individuals as well as the nation’s economy by giving people access to the services that banks can provide, which helps decrease economic inequality. This progress has been spearheaded by the Indonesian government, which plans to keep the momentum going and work to further increase the financial inclusion rate over the coming years.

The Benefits of Financial Inclusion

Higher rates of financial inclusion have several benefits. First, financial inclusion helps ensure financial stability in a legal setting. If economic activities occur largely in cash in the informal sector, they become difficult to track. This is where illegal transactions occur, which “makes it problematic for the government or regulators to calculate the scale of activities as well as to estimate potential state losses,” according to Indonesia Investments.

Additionally, financial inclusion can help decrease economic inequalities. When financial inclusion rates are low, this generally means that only the wealthy have access to banks and the services and products they offer. Making it easier for those from the poorer classes to create bank accounts, however, helps them save money for future expenses and provides them with opportunities to use financial services. These include loans, which can be essential in being able to afford higher education and housing as well as to access the funds needed to start a small business.

An Increase in Bank Account Ownership

Globally, 69 percent of adults had a bank account in 2017, with the lowest rates found in Africa and Southeast Asia. In 2017, almost 50 percent of the population in Indonesia had a bank account. Though this number is still low, it is a vast improvement on previous years. In 2011, only 20 percent of Indonesians had a bank account. By 2014, this had risen to 26 percent. Indonesia’s goal is to exceed this average by 2019, reaching 75 percent. This ambitious goal has already fueled the efforts that led to the current achievements in financial inclusion in Indonesia.

Notably, slightly more Indonesian women than men have bank accounts. In 2017, 51 percent of women and only 46 percent of men had an account. Additionally, 42 percent of account owners also have an account for savings, which exceeds the average for developing countries by 10 percent.

There is still a wealth gap in bank account ownership, with 57 percent of adults among the richest 60 percent of households having an account, in contrast to 37 percent in the poorest 40 percent of households; however, the increase in financial inclusion in Indonesia has been made possible by new innovations that are helping the poor access the formal financial sector.

Solutions to Difficulties Blocking Financial Inclusion

Almost one-third of Indonesians without bank accounts explained that not having a bank branch located close to where they live was one of the main reasons for not opening an account. However, 60 percent of Indonesians without accounts use mobile phones, which provides opportunities for new methods of account ownership and payment.

According to the Bill and Melinda Gates Foundation, the Financial Inclusion Secretariat recognized the potential for digital banking to increase financial inclusion in Indonesia. This is one of the primary reasons for the significant increases in account ownership since 71 percent of account owners make and/or receive digital payments, indicating the popularity of digital financial services. By 2022, smartphone ownership in Indonesia is expected to exceed 60 percent, which will offer opportunities for more advanced digital banking.

Another key innovation that had a large impact on financial inclusion was connecting Indonesia’s national biometric ID to the banking system. In Indonesia, 90 percent of the adult population has a digital ID, and using this form of identification, as opposed to a paper ID, has several benefits. Not only does it increase security but it can also reduce the cost and time required to open a bank account. With a paper ID, particularly in more rural areas, it can take up to five days to authenticate a potential account owner’s identity; in contrast, it only takes five minutes with the digital ID.

India and China as Models for Financial Inclusion

It remains to be seen whether this progress will continue or if financial inclusion in Indonesia will eventually stagnate. However, the Bill and Melinda Gates Foundation has compared Indonesia’s situation to that of India and China, both of which have made significant improvements to financial inclusion in recent years. India’s financial inclusion rate was just under 40 percent in 2011; however, that rate had risen to 80 percent in 2017. China began at a rate of just above 60 percent in 2011, but by 2017, had also increased its rate to 80 percent.

The strategies and technologies that made these improvements possible in China and India are very similar to those that have been adopted by Indonesia, suggesting hope for the continued growth of financial inclusion rates. By providing digital banking to rural areas, account-seekers no longer have to worry about having a branch close to home. Furthermore, the use of Digital IDs reduces the difficulties and wait times it can take in opening accounts, making them easier and more desirable to the population.

Sara Olk

Photo: Flickr


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