NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, October 9, 2013

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.