Protecting consumers via financial inclusion Mohammad Nuryazidi   ;    An Analyst in the Bank Indonesia (BI) Banten Representative Office

JAKARTA POST,  23 Januari 2014

                                                                                                                        

                                                                                         

Financial inclusion has become a very important issue in Indonesia because access to financial institutions is still low, as indicated by a World Bank survey that concluded only 20 percent of the adult population has bank accounts.  The Bank Indonesia (BI) Household Balance Sheet Survey also produced a similar finding, saying that households with savings accounts in banks or non-bank financial institutions were still at 48 percent in 2011.  A national strategy is needed to develop and coordinate a financial inclusion program with six pillars, including financial education, public finance facility, the mapping of financial information, supporting regulations, intermediary facilities and consumer protection.  The last pillar, consumer protection, is very significant since without adequate consumer protection, the benefits of financial inclusion can be lost. Unchecked market forces and policies that relax regulation in an effort to open financial markets to serve the bottom of the pyramid can result in consumers being harmed.  Harm can range from over-indebtedness due to excessively high prices and predatory lending, to a loss of savings or pledged assets when unscrupulous actors enter the market for short-term gain.  India might be one obvious example of the importance of increasing attention on the protection of consumers in the midst of strengthening efforts to increase financial inclusion. The financial inclusion program in India has been followed by aggressive micro-lending policies.  However, this program was not supported with policies to improve supervision and education to consumers. As a result, consumers have been trapped in the short term over indebtedness and it has even not been uncommon for them to commit suicide.  Consumer protection seeks to level the playing field between suppliers and consumers of financial services. When buyers and sellers come together in a transaction, information is power. Consumers of financial services, especially new customers, lack information about the financial system and financial transactions.  On the other hand, the financial service providers serving these customers try to access a great deal of information about the customer and the market, including credit histories, market assessments and analysis to inform their decisions.  Appropriate regulations should correct the balance and encourage market expansion by apportioning information disclosure at the right time. Relevant information has to be disclosed during the different stages of contractual engagement (pre-contract, during contract and post-contract). The disclosure of information in manageable portions is necessary to avoid overloading the consumer, who can then better understand his rights and obligations. The Financial Service Authority (OJK) and BI as regulators need to understand the consumer perspective to establish effective regulation and supervision regimes. Naturally, professional bank supervisors tend to hear only from the industry since they are trained to look at business problems from the perspective of financial institutions and markets.  It is important to ensure a level playing field between consumers of financial services and the institutions that provide those services. A regulatory approach should be based on an evenhanded philosophy in order to maintain a balance between protecting consumers of financial products and services with improving and ensuring the creation of fair competition.  A good competition can result in practices that go some distance to reducing the information imbalance, if the market is disciplined and provides sufficient information to customers.  Peru is a good example for reducing the information imbalance. Peruvian consumers can access cost information about financial services published daily in newspapers. When this information was first published, interest rates dropped as much as 15 percent in six months. This market discipline also facilitates financial market expansion. Consumers who demand information play an important role in ensuring transparency among financial institutions. Transparency in the market encourages institutions to compete on the basis of better products and services and lower costs. Ultimately, the availability of quality retail financial services will draw in new customers and expand the market. Last but not least, consumer education is needed to balance information between consumers and providers of financial services. New entrants to the market, with less experience using financial services, are especially in need of education about their rights and responsibilities.  Consumer education may be conducted by government agencies, consumer associations, or the industry, but most often consumer education programs are provided through public campaigns. Campaigns use the Internet, print, radio and television media, advertising, publications and training. ●