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2013/SFOM11/WKSP/008 Session 3

Regulatory Framework to Promote Financial Eligibility of Poor Households and MSMEs in

Indonesia

Submitted by: Indonesia

Workshop on Financial InclusionManado, Indonesia

23-24 May 2013

Workshop on Financial Inclusion – APEC 2013

Manado, 24 May 2013

RRegulatory Framework to Promote egulatory Framework to Promote

Financial Eligibility of Poor Household Financial Eligibility of Poor Household

and MSMEand MSME in Indonesiain Indonesia

Eni V. Panggabean

Executive Director Department of MSME and Financial Access Development

Bank Indonesia

Access to Finance Condition in Indonesia

Policies to Promote Financial Eligibility in Indonesia

Bank Indonesia Regulation to Promote Financial Eligibility

OUTLINE

1 1

2 2

3 3

2

• More than 13,000 islands

• Population: + 234 million 1) • GDP Growth 2012: 6.23% yoy 2) • GDP per capita Dec 2012: USD 3.660 2)

• Banking industry covers ± 77% of assets in financial sector

1) BPS, 2010 2) BPS, 2012

NUMBER OF FINANCIAL INSTITUTION

Commercial Banks 120

Rural Banks 1.669

Insurance Companies 139

Pension Funds 270

Multifinance Companies 194

Venture Capital 86

Securities Companies 129

Mutual Funds 639

Credit Guarantee Company

4

Pawn Broker 1

Indonesia has a huge economic potential and large market for financial services

FACT ON INDONESIA FACT ON INDONESIA

75.38%

1.15%

9.75%

2.92%

6.01%

0.06%0.88% 3.36%

0.06%

0.42%

Market Share of Indonesian Financial System

by Total Assets, as of Dec 2011

Commercial Banks

Rural Banks

Insurance Companies

Pension Funds

Multifinance Companies

Venture Capital

Securities Companies

Mutual Funds

Credit Guarantee Company

Pawn Broker

Source: Bank Indonesia and Related Ministries, 2011

3

There is a huge gap in poverty level disparity between provinces in Indonesia

(Jakarta = 4%, Papua = 31%, Indonesia = 12 %)

INDONESIAN POVERTY CHARACTERISTIC

BIG GAP

3.7

0

3.9

5

5.0

1

5.3

7

5.7

1

6.1

9

6.3

8

6.8

3

7.6

4

7.9

6

8.0

0

8.0

5

8.0

6

8.2

8

9.8

2

9.8

9

10

.41

11

.66

13

.01

13

.06

13

.08

13

.48

14

.94

14

.98

15

.65

15

.88

17

.22

17

.51

18

.02

18

.58

20

.41

20

.76

27

.04

30

.66

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

(%)

Province Source : BPS, 2012

4

LEVEL OF ACCESS TO FINANCIAL SERVICES 5

• More than 50 per cent of Indonesia household have no access to bank financial services • Less than 20 per cent of Indonesia poor household has access to bank financial services

Source : Improving Access to Financial Services in Indonesia, World Bank, 2010

High income OECD and non-OECD

92%

Central Asia & Eastern Europe

50% East Asia & Pacific

42% South Asia

22%

Middle East & North Africa

42%

Sub-Saharan Africa

12% Latin America and Caribbean

40% Source : Worldbank, Global Financial Inclusion Index 2011

INDONESIA 19.6% MALAYSIA 66.7% PHILIPINA 26.5% THAILAND 77.7% VIETNAM 21.4% INDIA 35.2% CHINA 63.8% RUSIA 48.2% BRAZIL 55.9%

INDONESIA

20%

•• Financial Inclusion Index Financial Inclusion Index Adult has account in formal financial sectorAdult has account in formal financial sector •• In emerging market, unbanked people is large compare to the advanced economy due In emerging market, unbanked people is large compare to the advanced economy due

to many barriersto many barriers

6 ADULTS SAVING PENETRATION AROUND THE WORLDADULTS SAVING PENETRATION AROUND THE WORLD

THE ROLE of MSME in INDONESIAN ECONOMY

The trend of MSME Credit

The Medium Scale Enterprise loan dominates the MSME Credit (47,0%)

The growth of MSME Credit around 14,06% (yoy)

MSME are the back bone of Indonesia’s economy but they get only a small portion of banks’ financing

MSME play a crucial role in Indonesia’s economy:

MSME are dominating the business units with share up to 99,9% of total business units.

MSME absorbs around 97,2% of total labor force.

MSME contributes around 57,9% to the GDP.

Large Scale 2,8%

MSME 97,2%

Jobs Creation

Large Scale 42,1%

MSME 57,9%

Contribution to GDP

Source: MSME Statistics 2011, Ministry Cooperatives and MSME

Source: Bank Indonesia, March 2013

7

CONSTRAINT of CONSTRAINT of Poor Household and Poor Household and MSMEMSME

SUPPLY SIDE Asymmetric information

Transaction cost vs Profit Gained

Service and Product are not fully fit to the need of people

High Technology for effective the distibution channel

Regulation and Policy for effective access to finance

DEMAND SIDE Limited financial capability, education, experience and psychological factors

Limited skills and capability in doing business

Formal identity problem

Innovation is needed to address the constraint of financial inclusiveness…

8

Access to Finance Condition in Indonesia

Policies to Promote Financial Eligibility in Indonesia

Bank Indonesia Regulation to Promote Financial Eligibility

OUTLINE

1 1

2 2

3 3

9

Financial Institution

(Bank & Non Bank)

Poverty reduction

Financial System Stability

Equitable Income Distribution

Productive and high purchasing power society Easy access to financial system

Main :

Goal

Strategy

Channel

To reach economic welfare through poverty reduction, distribution income, and financial system stability in

Indonesia by creating financial system that can be accessed by whole people in this country

Target

Groups

Government

Intermediary/D

istribution

Facility

Supporting

Regulation/

Policy

Mapping on

Financial

Information

Public

Financial

Facility

6 Pillars of Financial Inclusion

Customer

Protection Financial

Education

Public Financial

• Subsidized

• Fiscal Incentives

• Social welfare

program

• BLT

• Jamkesmas, etc

Financial

Product/Services

• Saving

• Credit

• Insurance

• Remittance

• Pension Fund

• Mutual Fund, dll

Migrant Employee Group and People in Remote Areas

Very Poor

Working

poor/

Productive

Near Poor Non - Poor

Resilience

Intermediation

Efficiency

FINANCIAL INCLUSION FRAMEWORK 10

Balancing Policy for Financial Inclusive and Prudent

Operation 11

1. Simplicity;

2. Customized;

3. Flexible

1. Equal Treatment;

2. Procedural;

3. Standards;

4. Compliance based;

Prudent Inclusive

Bank Indonesia Policy

• Banking mediation • Product transparency

• Multilicensing • Provision of

Credit / Financing by Commercial Bank and Technical Assistance for MSME development

• Branchless banking

• Education (poor household and MSME)

• National Campaign

• Research and diagnostic

• Financial Identity Number (FIN)

•MSME information system

Program

• Gov’t. Credit Programs • G2P channel

• TabunganKu • Branchless banking • “Start-Up” Credit • Land Certification • MSME Rating • Credit Bureau • Micro Insurance

FINANCIAL INCLUSION AND MSME PROGRAMS

Strategy

Intermediary/

Distribution

Facility

Supporting

Regulation/

Policy

Mapping on

Financial

Information

Public

Financial

Facility

6 Pillars of Financial Inclusion

Customer

Protection Financial

Education

12

Access to Finance Condition in Indonesia

Policies to Promote Financial Eligibility in Indonesia

Bank Indonesia Regulation to Promote Financial Eligibility

OUTLINE

1 1

2 2

3 3

13

SUPPORTIVE REGULATION OF BANK INDONESIA FOR

PROMOTING FINANCIAL ELIGIBILITY

•Provision of Credit /Financing by Commercial Bank and Technical Assistance for MSME development

Obligation of commercial banks to disburse their funds in the form of loans to MSME with a share of at least 20% (gradually), followed by the implementation of incentives / disincentives.

Enhancing of the model and recipient of technical assistance.

Technical assistance activities carried out in the form of research, training, information provision and facilitation.

Strengthening coordination and cooperation with other parties in the development of MSME

14

Obligation of commercial banks to disburse their funds in the form of loans to productive business

• Multilicensing

SUPPORTIVE REGULATION OF BANK INDONESIA FOR

PROMOTING FINANCIAL ELIGIBILITY

•Branchless Banking

15

Increase the outreach of banking services

Allowing agent to intermediate account opening, provide cash in, cash out, transfer payment and bill payment services

Allowing agent for credit collection and disbursement (for MSME)

SYNERGY OF GOVERNMENT INSTITUTIONSYNERGY OF GOVERNMENT INSTITUTIONSYNERGY OF GOVERNMENT INSTITUTIONSYNERGY OF GOVERNMENT INSTITUTION

BI – Head

Office

Local Government and

Local Ministries

Other Local Stakeholders (i.e local business association, local

academics, etc)

Other Stakeholders (i.e business association, academics, parliament)

Related Ministries,

OJK & TNP2K *)

COORDINATION

Strategic Partner Strategic Partner

BI – Regional Offices

16

• Enhancing Bank Indonesia’s regional offices in order to accelerate and expand FI programs

• Bank Indonesia signs MOU/agreement with related ministries as a legal framework for coordination

16

*) office of vice president

THANK YOU