According to a recent report done across Indonesia regarding microfinance (MFI) tools, clients of MFIs in Indonesia are particularly vulnerable to cross-borrowing and this in many cases result in over-indebtedness because of their socio-economic backgrounds. Hence MFIs can be found to be pushing them into a worse position, specifically with respect to the multiple borrowing. There are many reasons that are found to cause vicious debt cycles and perpetual defaults of micro loans:
“1. Other Members Defaulted: Respondents defaulted if the group leader of a share loan recipient defaulted.
2. Health Issues: The key bread winner falling ill also led to defaults. Members of the community undergo liquidity shocks whenever there is a health issue. As majority of them do not have insurance, they scamper to get funds to address health emergencies.
3. Influenced by the Community to Default: Some respondents defaulted because other members of the group encouraged them to do so. Local influencers, NGOs play a key rally against MFIs and encourage community members to default MFI loans. This is because some of them feel that it is against Islamic principles to offer or avail interest bearing loans”( “Indonesia Over-Indebtedness Study “Why Microfinance Clients Take Multiple Loans”.” Pakindo, 2016, www.pakindo.org)
The most sustainable and robust way to overcome such pitfalls of widening financial tools is education in order to improve levels of financial literacy. As such. the Indonesian government had declared 2008 as “the year of financial education”, in parallel to many other global examples of financial reform pushes that have been trending heavily since more than a decade. Such interest in improving the financial literacy levels of the population is rooted in many reasons, one of which is many compelling household survey evidences, as such data points out to a positive correlation between improved financial literacy, welfare and demand for financial services.
Also, in a survey that was done in Indonesia during 2011, it was proved that increased literacy in financial instruments has a negative impact on demand for informal credit and savings options. Regarding the current situation in Indonesia, around 85% of the adult population is illiterate in digital financial products and around 15% lack basic financial literacy: The reason behind these low penetration levels of digital resources can be inferred as having no wide understanding of their use.
In light of such figures, indeed there has been a robust governmental drive to increase the financial literacy levels through education that addresses every faction of the population beginning with the youth. It is imperative to note that the detailed results and impact levels of such projects and the way they are measured (for example the OJK financial literacy index mentioned earlier) is not clear and available.
Looking forward: Banking in the Future
As financial inclusion is currently the hot topic in Indonesia, it would be an apt time to ask — is having a bank account or not a viable measure in determining someone is financially included or not? Where do we draw the line in this case? The notion of what exactly is a bank account must be revisited, as in the current emerging context, it is not clear whether or not we count mobile wallets (based on mobile applications) as bank accounts.
Indeed, through the emergence of financial technologies within the last decade, the ‘notion’ of who and what a bank is have been evolving. Today, any business can issue cards, IBANs, send/receive/collect/convert money all the while offering credit and debit accounts to their customer base. Through companies such as Railsbank, all companies — whether regulated and un-regulated — can access to global banking with 5 lines of code. Through the Railsbank platform, which can be considered ‘Fintech-as-a-Service’ (FaaS), any business can access a complete range of wholesale banking services: Global Ledgers (mapped to real bank accounts); issue unique IBANs for end users; receive money; send money; convert money (FX); collect money (direct debit, acquiring); issue/manage cards; build blockchains; manage credit (lending); and eventually promote insurance products too. Railsbank achieves the above through our platform being directly connected to a global banking network, including that of Indonesia and by being an aggregator to payment schemes (e.g. SEPA and Swift).
Ultimately such developments in fintech and hence increased technological capabilities widen the access of businesses and their customers to banking services, driving financial inclusion across Southeast Asia further.
