Making it possible for more people to have access to the financial services they need is the ultimate goal of financial inclusion. In a country grappling with poverty and income inequality such as Indonesia, inclusive economic growth has become imperative to progress. Thus, the government has launched a national strategy that would effectively create a financial system accessible to all sectors of society.


The first in the series, this article gives a timeline and background on the socio-political and economic conditions that breed financial exclusion. It puts a face to the country’s unbanked and underbanked; and identifies the challenges and initiatives to achieving financial inclusion, including the crucial role that alternative data plays.


What is financial inclusion? 


Globally, 1.7 billion adults remain unbanked, or without an account at a financial institution or through a mobile money provider, based on 2017 World Bank data. And Indonesia made up 6% of the world’s unbanked population.


Financial inclusion is seen by experts as a way to lift vulnerable sectors out of poverty and give them the capacity to invest in their livelihood, health, or education through access to credit and other financial services.


Bank Indonesia, Indonesia’s central bank, defines financial inclusion as a state wherein people have effective and convenient access to credit, savings, insurance, and payment services from formal financial service providers. Not only that, these services should also be delivered at a cost that is fair and affordable to disadvantaged groups.


In contrast, those who are financially excluded have little to no access to formal financial services, which makes them vulnerable to external shocks and are, therefore, unable to achieve a better quality of life. 


In 2012, Indonesia’s government introduced policy measures in the form of a National Strategy for Financial Inclusion that will give the poor access to credit lending, savings accounts, as well as insurance, leasing, and payment services. 


At the time, the World Bank reported that only 19.6% of Indonesians above the age of 15 had a bank account in 2011.


Who are the unbanked or underbanked?


Solving the lack of access to financial services in developing countries is crucial in alleviating poverty and achieving inclusive economic growth.


Think of a farmer who has few opportunities to save for his children’s higher education because day-to-day expenses dominate their household spending. Or a stay-at-home mother with a small handicrafts business who will likely refuse an order because she cannot accept an online bank transfer.


Perhaps a food vendor who will wipe out his savings, which he keeps in the form of cash under his bed, because he suddenly gets sick and has to pay for medical bills. And then there are those who cannot get out of the debt cycle with loan sharks who likely charge them higher interest rates than would a formal lender. 


These are some examples of the plight many in the unbanked and underbanked markets experience. According to a 2016 report from the Asian Development Bank (ADB), 81.5% of the population or 203 million Indonesians earn less than $4.50 a day and most of them do not have access to formal banks.   


Hence, Indonesia’s national strategy targeted groups with the biggest need for financial services: low-income poor; the working poor; domestic and international migrant workers; people in remote areas; and women. 


On a macro level, increasing access to financing can create multiplier effects to the Indonesian economy, based on a 2019 PwC report. The report says that one of the elements that could boost economic growth is the utilisation of credit to boost spending and accelerate production capacity.


What are the challenges to financial inclusion?


However, there are many barriers to gaining access to financial services, particularly in developing countries.


Lack of money is the most commonly cited roadblock to account ownership, which is not surprising since owning a bank account in high-income economies is nearly universal. 


The ADB notes how only 11% of women have access to a formal credit lending process compared to 15% of men. The report also points to lack of knowledge as a barrier for using mobile money by women in Indonesia. Some do not know what mobile money is, how to open an account, or what can be done with this kind of service.  


Other difficulties highlighted by the ADB include:

  • The limited range of financial products and services available to these markets
  • Geographical, cultural and linguistic diversity
  • The lack of consumer protection systems for micro-business owners
  • Over-borrowing leading to high credit risk

The lack of Internet connectivity in rural areas also impedes the use of digital financial services, not to mention the preference of customers to interact with human bankers instead of going online.


In addition, lenders struggle to cater to individuals less integrated in the traditional financial system. The lack of customer data prohibits them from assessing the creditworthiness of these borrowers.


How is Indonesia achieving financial inclusion?


After the Indonesian government first introduced the National Strategy for Financial Inclusion in 2012, it launched a new plan in 2016 to continue, develop, and coordinate financial inclusion programs by key stakeholders, the ADB notes.


The new strategy included five pillars: Financial education; public property rights; financial intermediary facilities and distribution channels; financial services in the government sector; and consumer protection. It was formulated to reach 75% of the adult population in Indonesia by 2019, a jump from the previous target of 36% under the old plan.


By the end of 2019, the Financial Services Authority (OKJ) announced that the government’s target for the inclusion index has been reached at 76.1%. 


The private sector is also taking a more active role in helping communities achieve financial inclusion. Experian, for instance, engages with its stakeholders in the form of community investment with a strong focus on initiatives that support financial education and management.


Many of Experian’s core products help improve the lives of vulnerable sectors, according to the company’s 2020 Sustainable Business Report


How can alternative data facilitate financial inclusion?


Still, much remains to be done in achieving financial inclusion not only in Indonesia, but the rest of the developing world.


Barriers, such as lack of formal income, identification, and credit history, prevent lenders from offering credit to the underserved because they are unable to assess the risk profiles of these markets.


Here is where alternative data or scoring can help. Many lenders and fintech (financial technology) companies are harnessing the power of alternative data to reach many unbanked or underbanked sectors.


Experian PowerScore, for example, is an innovative alternative scoring system that combines 'ready-to-use' alternative data, such as telco data, with adaptive learning to generate an alternative score.


In its goal to dismantle barriers between the unbanked and access to credit, Experian has achieved the following results, which will be discussed in detail in in upcoming blogs:

  • Experian PowerScore enabled one of the fastest growing digital credit card providers in Southeast Asia to increase their loan approval rates by reliably scoring the ‘unbankable’ consumers.
  • Experian PowerScore helped one of the fastest growing banks in Indonesia to offer credit to new consumers in smaller cities
  • Experian PowerScore is empowering a leading peer-to-peer lending platform in Indonesia to approve those who are creditworthy despite not having a bank account or collateral.

By steadily gaining access to financial services, the disadvantaged are given a fighting chance to benefit from the country’s economic growth.


This article is part of a special blog series on financial inclusion in Indonesia.