A Step Toward Greater Financial Inclusion in Indonesia

A summary and analysis of Indonesia’s national strategy for increasing financial inclusion by Jacob Bochner



In recent years, Indonesia made significant progress toward greater financial inclusion. According to data from the World Bank’s Global Findex database, the percent of people over age 15 with an account at a financial institution increased from 20 percent in 2011 to 36 percent in 2014. Although this does not encompass other dimensions of financial inclusion, it signifies rapid progress in the right direction, and recent political developments suggest this will continue.

The Jakarta Globe reports that President Joko Widodo has introduced a national strategy to provide 75 percent of adults with access to financial services by 2019. In collaboration with the government and local partners, the Bill and Melinda Gates Foundation is designing programs to meet Indonesia’s specific financial inclusion needs. The country faces a unique set of challenges, as banks do not operate in remote areas. This makes bank accounts impractical for many Indonesians, especially some farmers and fishermen. Despite this fact, mobile phones are becoming more common and hold much potential for increasing financial inclusion. The country’s Financial Services Authority sought to tackle this geographical challenge through Laku Pandai, its branchless financial service. By permitting individuals and shops to act as bank agents—outlets contracted by financial institutions to carry out a range of transactions for clients—it would expand a range of simple financial services to excluded areas. The number of agents across the country more than tripled within the last year, reaching close to 276,000, but regulatory barriers currently prevent smaller banks and various non-bank financial services from functioning as them, ultimately impeding progress toward the goals of the national strategy. A well-implemented strategy that leverages the country’s mobile connectivity and expansion of branchless financial services offers an opportunity to capitalize on the benefits of greater financial inclusion. A couple of papers from the academic literature demonstrate how increasing access to banking and financial services can improve economic outcomes.

Academic Evidence on the Effects of Banking and Formal Financial Services

Burgess and Pande examined how the launch of India’s social banking program affected the rural poor’s access to formal credit and savings opportunities. The authors identified that banks were pursuing business in more financially developed regions because of higher profitability potential, leaving other areas unable to benefit from these financial services. In an effort to change this, the Central Bank introduced a new bank licensing policy to incentivize expansion into unbanked areas. While the policy was in place, the share of lending done by rural bank branches was greater in states with lower initial levels of financial development (785). This increase in lending led to a sizable reduction in rural poverty. The authors found that rural poverty declined by 1.52 percentage points per one percentage point increase in the share of credit disbursed by rural branches (790). These results indicate that the policy successfully encouraged banks to expand to areas they otherwise would not have conducted business in. Positive effects of having access to formal financial services have also been observed in the savings literature.

Dupas and Robinson investigated the impact of limited access to formal savings services on business growth. They randomly expanded access to bank accounts to market vendors and bicycle taxi drivers in a town of rural Kenya and found that market vendors increased both savings and investment (163) and also had higher daily expenditures than comparable business owners in the control group (179). The authors estimate that after four to six months, market women who gained access to a bank account increased average daily investment and daily private expenditure by 38-56 percent and roughly 37 percent, respectively (164). Bicycle taxi drivers experienced little to no benefit (163). Altogether, the study’s results demonstrate how providing formal savings services can improve economic outcomes and imply barriers to access existed for market vendors prior to the intervention.

Further Insights into the Details of Financial Inclusion

The empirical evidence also provides lessons for how Indonesia can best capitalize on its digital potential. Increasing access to financial products can facilitate business development, growth, and poverty reduction, provided the right mechanisms are in place to translate take-up—the acceptance of financial services—into real economic benefits. For example, as pointed out in the Burgess and Pande paper, the reduction in rural poverty was at least in part driven by increased deposit mobilization and credit disbursement (781). This is an important finding because it demonstrates that the real economic benefits of financial development and inclusion depend on more than whether or not citizens can access these products and services. In the context of Indonesia, this raises an important issue. There has been much discussion beyond local newspapers on how Indonesia is expanding access via mobile connectivity and increased use of bank agents. For example, a blog from the Brookings Institution noted Indonesia’s potential to leap forward in the financial inclusion space given its high rates of mobile connectivity and plans for meeting consumers’ preferences for accessing financial services via bank agents. However, it failed to mention obstacles to translating access brought about through greater mobile connectivity into real, positive economic benefits.

Data cited by a piece of analysis from The Jakarta Post indicates that slow deposit growth, one such challenge that has emerged in Indonesia, came in at 3.2 percent in September 2016, its lowest growth rate ever. This could constrain banks and bank agents from effectively serving businesses, as low deposit mobilization prevents efficient lending. Furthermore, even if all Indonesian adults had either mobile access to financial services or lived near a bank branch, low deposit mobilization could prevent a bank from lending to individuals and businesses, thereby stymying progress toward business development, growth, and poverty reduction. This highlights the importance of looking more thoroughly into what is required to translate financial inclusion into positive economic outcomes.


Based on this evidence, it is reasonable to expect positive effects from Indonesia’s financial inclusion efforts, provided regulation, technology, and financial services work in harmony. Expanding the number of eligible individuals and shops that can serve as bank agents will ensure businesses in remote areas can access financial services as a part of the new national strategy. Furthermore, designing policy that takes advantage of the country’s mobile connectivity will similarly expand opportunities for citizens to access financial products and services. But fully reaping the economic benefits of financial inclusion will require more than overcoming challenges posed by remote geography and regulation. Evidence indicates that simultaneously ensuring the financial system can facilitate economic development through efficient lending to newly included individuals and businesses is critical to reducing poverty.

Works Cited

Burgess, Robin and Pande, Rohini. “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment.” American Economic Review, vol. 95, no. 3, June 2005, pp.780-795.

Dupas, Pascaline and Robinson, Jonathan. “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya.” American Economic Journal: Applied Economics, vol 5, no. 1, January 2013, pp. 163-192.

“Indonesia on Track to Greater Financial Inclusion.” Jakarta Globe, 16 April 2017. Web. 31 March 2017.

Lewis et al. “Advancing Financial Inclusion in Southeast Asia, Central Asia, and the Middle East.” TechTank, The Brookings Institution, 22 April 2017, Web. 16 September 2015.

Parlina, Ina. “Indonesia Promotes Financial Inclusion with New Strategy.” The Jakarta Post, 24 April 2017. Web. 18 November 2016.

The World Bank. “World Bank DataBank.” The World Bank, 2017.

Wisnubroto, Arya Rully. “Analysis: Banking Industry Remains Challenging in 2017.” The Jakarta Post, 21 April 2016. Web. 7 December 2016.*

* Please note that the full text of this article is available here.

The top image is from the The Jakarta Post.

Author: Econ 416 Student

Entries are contributed by undergraduate students enrolled in Economics 416: Theory of Economic Development at the University of Maryland.

3 thoughts on “A Step Toward Greater Financial Inclusion in Indonesia”

  1. This provides interesting insight into the financial inclusion efforts of the Indonesian government. Although Venmo is not a bank or a formal financial service, I wonder what would happen if more Indonesians had access to a mobile payment service like it? Given the high mobile connectivity of the country, I could see it being extremely beneficial in facilitating economic growth.


  2. The concept of expanding access to formal financial institutions is directly linked to business prosperity, and personal savings/well-being. In our Theories of Economic Development class, we analyzed a model where for every bank that was opened in a populated area, three branches were required to open in rural areas. The results were very similar to those discussed in this article, saying that the rural areas greatly prospered from the access to formal financial institutions. It is an interesting theory that technology expansion could indirectly have the same positive impact on rural finances in Indonesia, because mobile banking allows access to formal services without physical branches needing to be opened. This could be particularly helpful for individuals and business owners who may not have easy geographical access to the nearest bank branch, but are still interested in savings for future consumption and business development. The technology advancements (mobile banking, cash exchange services, direct transfers, etc.) will continue to improve banking in rural areas as it becomes more affordable and widely available.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s