In Financial Inclusion, Indonesian Policies and Banks Found Wanting
(JG Illustration)
The direct relationship between financial inclusion and economic growth and development is well accepted globally. But when it comes to financial inclusion in Indonesia, there is quite a long way to go.
The concept of financial inclusion not only embraces access to credit and loans for all, it also means access to bank accounts, insurance products and, equally importantly, financial education.
Financial exclusion has a major impact on the lives of the poor. In the absence of proper storage facilities like a savings deposit bank account, whatever little savings they are able to gather become vulnerable to theft and natural disasters, like floods for instance. A lack of access to bank accounts means poor Indonesians end up paying extra charges, resulting in an unnecessary extra financial burden on them. The poverty-financial exclusion cycle is a vicious one and needs to be broken.
Financial education would provide a big boost to people with scarce funds, enabling them to better utilize their money. Access to formal banking infrastructure would also save people from exorbitant and unreasonable interest rates, ranging up to 50 percent and more, that must be paid to informal lenders.
In addition to being a burden for the most deprived members of society, the existing state of financial exclusion has numerous disadvantages for banking and financial institutions and the government.
On the government's part, given the shift toward efficiency and a move toward direct, targeted and even cash subsidies, it would make a great deal of sense for more people to have access to formal banking and for bank accounts to receive these subsidies.
In terms of the socioeconomic impact, the opportunities are huge and the room for improvement colossal. According to World Bank statistics, in the year 2011 only 3 percent of Indonesia's population above 15 years of age used a formal bank account for receiving government payments. With financial inclusiveness and formal bank accounts for more people, it would not only make the subsidy transfer easier and smoother, but also more effective and efficient.
Besides the substantial advantage of better monitoring of government subsidy spending, access to more precise data from the banking institutions would assist in the process of poverty-targeted policy making.
Banks themselves need to start viewing the push for financial inclusion as an opportunity and not an obligation. The success of the micro-lending and micro-credit institutions in Indonesia, as evident from the decently high loan repayment rates, has provided us with sufficient proof regarding the credit worthiness of those neglected by established banking institutions. It has also reinforced the scope for profitability for the banks.
It is high time for the banks to move beyond just lending and see the financially excluded as their next big wave of customers.
In addition to a dismal rate of banking penetration and financial inclusion, inefficiency is a major cause of concern for financial intermediaries in Indonesia.
It is extremely ironic that although based on average return on equity Indonesian banks constantly rank as the most profitable in the world, they are amongst the least efficient.
As a result of the highest net interest margin (NIM) in Southeast Asia, the difference between the lending interest rate and the deposit interest rate, which stands at an average of 12 percent for all the Indonesian banks and 7 percent for the big five, banks are able to make huge profits at the expense of their customers.
At the same time, Indonesian banks are the least efficient in the region, with the ratio of operating expenses to assets standing at 2.5-4 percent, according to the Boston Consulting Group. This figure stands at 2 percent and 1 percent for Malaysia and Singapore respectively. Once Indonesia's low banking penetration rate of 20 percent, as measured by the percentage of the population with formal bank accounts, is factored in, it becomes self-evident where the real problem lies.
If the banks can get their act together and manage to improve their efficiency, they can make a push for improving banking infrastructure in the rural and remote areas and still maintain their profitability. Simultaneously, bringing their NIM in line with other regional economies might not be such a bad thing and would definitely be a big help in the push for financial inclusiveness.
The gains to be made from greater financial inclusion and losses from the existing financial exclusion are clear. The role of the government and banking institutions in providing an impetus for financial inclusiveness is also very clear cut. What is missing is the will.
The banks need to become more efficient and competitive, which would help them bring down the interest rates on loans and capitalize on this exceptional opportunity to profitably tap into a large base of people with deposits to offer. The government and the central bank need to provide suitable legal and institutional frameworks for the banks to work in and also provide enough safeguards to protect the vulnerable against fraud. Government agencies should also bear the responsibility for collecting demographic information and data regarding potential customers to facilitate the banks in their work.
The drive for financial inclusiveness and banking reforms can be a complete game changer for the poor in Indonesia. But it won't succeed without political will.
Mukul Raheja (mukul@strategic-asia.com) is a researcher at consultancy Strategic Asia.
| Reply via web post | Reply to sender | Reply to group | Start a New Topic | Messages in this topic (1) |
to Subscribe via email :
batavia-news-subscribe@yahoogroups.com
----------------------------------------
VISIT Batavia News Blog
http://batavia-news-networks.blogspot.com/
----------------------------
You could be Earning Instant Cash Deposits
in the Next 30 Minutes
No harm to try - Please Click
http://tinyurl.com/bimagroup
--------------
No comments:
Post a Comment