What does financial inclusion really mean? Dewi Meisari Haryanti  ;  A lecturer at the School of Economics at the University of Indonesia, A deputy director of the school’s UKM Center

                                                JAKARTA POST,  12 Februari 2014                

                                                                                                                        

                                                                                         

                                                      

It is delightful to see that there are more institutions paying attention to the issue of financial inclusion nowadays. The importance of financial inclusion to a more equal and prosperous world is now a part of conventional wisdom worldwide. In the G20 Toronto Summit held in June 2010, global leaders pledged to support financial inclusion to empower about one-third of the world’s population still living in poverty. Financial inclusion has also been included in the ASEAN Economic Community 2015 blueprint. Here in Indonesia, Bank Indonesia (BI) also launched its National Strategy of Financial Inclusion in December 2010.   Several high-level discussions held by the government or authorities, such as BI and the Financial Services Authority (OJK) on financial inclusion, have tended to focus on how to provide better access to banking services. The dynamic of discussions acknowledge that the challenge lies in asymmetric information between the supply (banks) and demand side (people at the bottom of pyramid).  Also, the depth of the asymmetrical information is seen as so severe that the banking industry should work to design a product that properly fits the needs and wants of the people at the bottom of the pyramid, specifically the economically active poor and micro entrepreneurs.  However, there are already some alternatives discussed as potential solutions in providing better access to finance, namely mobile money and branchless banking. Unfortunately, the success rate of mobile money programs around the world is only about 10 percent. Still, success stories have occurred in countries that are less developed than Indonesia, such as Kenya, Bangladesh, and the Philippines.  BI, in a June 2011 newsletter, defined financial inclusion as comprehensive activities aiming to abolish any form of barriers — including price and non-price barriers — that might deter people from obtaining financial services.  This puts the emphasis on access to finance. While in practice, financial inclusion is generally defined as activities that provide savings, loan and financial education and other financial services that enable people at the bottom of pyramid to start or expand their productive activities, to save and accumulate assets, to smooth their consumption and to mitigate the risk of dealing with bad coping strategies due to external shocks, that altogether will increase their well-being.  This is similar to what Muhammad Yunus has taught regarding microfinance as a way to help the poor help themselves. So the practical definition does not only put emphasis on the access to finance per se, but also on the access to financial education and the empowerment process. Note that the financial education here is not merely about product knowledge, but more about financial literacy in general, also on household or business basic financial management.  The explanation above shows that there is a gap in the financial education concept on the policy and practical level. At the policy level, the emphasis is on the means, namely access to finance. Meanwhile, at the practical level, the emphasis is on the end, namely to provide opportunities to start or expand productive activities, and to increase people’s well-being; thus, access to finance is seen as a necessary condition and, at the same time, financial education is seen as the sufficient condition.  The question is, should that access to finance be provided only through the banking sector? Indonesia launched the Microfinance Institution (MFI) Act in 2013. Before the enactment of the law, many MFIs had operated in Indonesia in a distinctive way, not like banks but also not like savings and loan cooperatives.  Some of those MFIs already had a formal legal entity such as a limited-liability company status (PT) or a cooperative, and also had legal operating license as non-bank financial institutions. Nonetheless, they were still regarded as semi-formal entities.  BI Governor Agus Martowardojo, the former finance minister, once said that there were about 600,000 microfinance institutions in Indonesia, but the exact number is still being ascertained by the OJK, which is now fully in charge of licensing and supervising all financial service institutions. Nevertheless, those MFIs have proven to be effective in providing financial services to the so-called excluded or un-banked segment, such as peasants, micro entrepreneurs, women and other economically active poor who mostly work in the informal sector, do not have assets that are valuable enough to act as collateral or probably have valuable assets but do not have legal documents protecting their assets.  Those MFIs have offered many innovative approaches — including nourishing social capital and local wisdom to make social sanctions work effectively in replacing the function of physical collateral. The MFIs have passionate human resources that are ready to work hard serving their communities, but may have limited capacity in managing their funds efficiently and organizing the institution, if compared to bankers. Nevertheless, they might be better skilled and have more experience in approaching, communicating and building trust with the people at the bottom of pyramid. To conclude, just as there are many roads to reach Rome, there are also many ways to realize financial inclusion. Expanding banking services via mobile money and branchless banking is one way. Promoting linkage between banks and MFIs via improving the MFI database, rating system and capacity building for the management is another way.  Which is the better approach for us to focus on? Do we really have to choose?  Maybe we can take both ways. But for a shorter term goal, promoting linkage between banks and MFIs is more relevant and effective. Meanwhile, branchless banking or mobile money can be promoted as part of a longer term agenda. At least for now, we should provide a more balanced opportunity for both alternatives, especially because we have millions of micro entrepreneurs waiting for us to save them from loan sharks — who can charge up to 10 percent interest per day. ●