Presented at the 1st International Islamic Financial Inclusion Summit Solo, July 17th, 2012

P.S. Srinivas, Lead Financial EconomistFinancial and Private Sector Development Unit

World Bank Jakarta Office

1

Creating Inclusive Financial Services for Economic Growth and Poverty

Reduction in Indonesia

Outline of Presentation:

2

1. Financial Inclusion contributes to poverty reduction

2. Indonesia’s relative position on Financial Inclusion

3. World Bank’s engagements related to Financial Inclusion in Indonesia

4. How Islamic Finance links to Financial Inclusion

3

What is Financial Inclusion ? How does it contribute to economic growth and poverty

reduction?

How does Financial Inclusion relate to poverty reduction?

4

Poverty Reduction

Financial inclusion (Access

to Finance)

Expand the financial capacity of

the poor

Social inclusion(Access to Basic

Services )Promote

empowerment among the poor

(e.g., Health & Education, Social

mobilization)

Economic inclusion

Increase access to the income generating

opportunities for the poor (e.g., MSME

development)

Without inclusive financial systems, poor individuals and small enterprises will have to rely on their personal wealth or internal resources to invest in their education, become entrepreneurs or take advantage of promising growing

opportunities

5

Importance of Financial Inclusion for Poverty Reduction

Poorest(Cluster 1) with limited assets

Economic Inclusion

Social

Inclusion

Financi

al

Incl

usi

on

Poorer(Cluster

2)with sources

of income

Financi

al

Incl

usi

on

Economic

Inclusion

Social

Inclusion

Poor(Cluster

3)almost

graduate (still vulnerable)

Financi

al

Incl

usi

on

Economic

Inclusion

Social

Inclusion

i.e. PNPM Program:• Mandiri Rural-Urban,

Revolving Loan Fund (RLF)• PISEW (regional

infrastructure development)

• P2DTK (enhancing the development of underdeveloped region)

• KUR Program (partial guaranteed credit)

• KUBE program (joint business group program for productive poor)

NEEDS:• Asset Building• Entry point for

Formal Financial Services (saving)

• Asset Building & business start up

• Start Accessing Broader Formal Financial Services ( Saving, Credit, remittance etc)

• Financial management & Planning Skills

Escape from

poverty

• Asset & income expansion

• Regular Access to Formal Services

• Asset/life protection (insurance)

• PKH (CCT program)• Scholarship & school

operational assistance

• Jamkesmas (health assistance)

• Raskin (rice assistance)

Financial Inclusion goes beyond credit / microcredit

Financial Inclusion

Asset Building

Saving

Deposit

Mutual Fund/Stock

Income generating activities

Credit

Payment System

Leasing

Bonds

Risk mitigation

Insurance

Pension

Financi

al Educa

tion/E

ntr

epre

neurs

hip

Transa

ctio

ns

& T

ech

nolo

gic

al Supp

ort

7

Financial inclusion is four dimensional

• Meet the needs of consumer

• Stability & improvement to family, business, & economy

• Regularity & duration of use

• Increase in Financial Penetration

1.Access

2.Usage

3.Quality

4.Welfare

7

8

Financial Inclusion in Indonesia: Where are we? What is happening?

16

21

49

27

29

28

94

106

Mexico

Pakistan

Russia

Indonesia

Brazil

Philippines

Malaysia

Singapore

21

30

35

36

48

53

117

143

15

9

6

8

14

8

10

10

6

12

0

8

2

16

6

613

47

4

128

13

121

15

56

59

19

6

9

12

20

30

33

3,493

Indonesia’s access to finance is behind other emerging economies

9

Bank Deposit Value (% of GDP)

Bank Loan Value (% of GDP)

Bank Branches per 100,000 adults

ATM per 100,000 adults

ATM per 1,000 sq km

Source: IMF FAS 2011, data as 2010

Bank Branches per 1000 sq km

Formal financial sector is dominated by banks, and the poor segment is excluded from access to finance

10

Source: World Bank Study, Improving Access to Financial Services in Indonesia 2010

49 3 31 17

0% 20% 40% 60% 80% 100%

Access to Financial Services in Indonesia(All sample)

Bank Formal Other Informal & Semi-formal Underserved

Using Formal - 52 %

Financially Served - 83 %

Underserved

19 2 40 39

0% 20% 40% 60% 80% 100%

Access to Financial Services in Indonesia(Poor Households)

Bank Formal Other Informal & Semi-formal Underserved

Using Formal - 21 %

Financially Served - 61 %

Underserved

The poor have much less access to formal financial services (Savings slightly better than credit but still limited)

11Source: World Bank Study, Improving Access to Financial Services in Indonesia 2010

Nationwide Access to FinanceOverlap Usages of Saving Instruments

No Saving31.9 %

Banks

Informal

16.6%

20%

1.9%

1.2%2.6%

7.5%

18.2%

Formal Non-Bank

41 3 18 6 32

0% 20% 40% 60% 80% 100%

Access to Savings in Indonesia(All sample)

Bank Formal others Informal Other's accounts Underserved

Using Formal - 44 %

Financially Served - 68 %

Underserved

12 2 21 5 60

0% 20% 40% 60% 80% 100%

The Poor's Access to Savings(Represents 13% of total HHs)

Bank Formal others Informal Other's accounts Underserved

Using Formal - 14 %

Financially Served - 40 %

Underserved

Informal sector has larger share than banks in credit

12

17 9 34 40

0% 20% 40% 60% 80% 100%

Access to Credit in Indonesia(All sample)

Bank Semi-formal Informal Underserved

Using Formal - 26 %

Financially Served - 60 %

Underserved

6 5 35 54

0% 20% 40% 60% 80% 100%

The Poor's Access to Credit(Represents 13% of total HHs)

Bank Semi-formal Informal Underserved

Using Formal - 11 %

Financially Served - 46 %

Underserved

Semi-formal

Informal

Nationwide Access to FinanceOverlap Usage of Credit Instruments

No Credit40.2%

33.6%

4.2%

4.6%

1.5%

2.5%

5.5%

7.9%

Banks

1. Do not have money

Series1 4%

9%

79%

Reasons for financial exclusion

13

Saving (Bank

account)

Credit

Insurance

2. Do not have a job

3. Do not see advantages of having a bank account

Series1 4%

20%

60% 1. Not creditworthy

2. Do not want to borrow

3. No collateral

1. Do not have money

2. Know nothing about insurance

3. Do not need insuranceSeries1 17%

29%

45%

Source: World Bank Study, Improving Access to Financial Services in Indonesia 2010

World Bank’s engagements in Financial Inclusion

in Indonesia

14

Who does the World Bank work with?

Government /Central Bank

Vice President’s Office

Bank Indonesia

Coordinating Min. of Economic Affairs

Bappenas

Min. of Finance, Bapepam -LK

Min. of Home Affairs

Coordinating Min. of People’s Welfare

Min. of Public Works

Min. of Cooperatives & SMEs

BNP2TKI

Min. of Manpower & Transmigration

Local Government

Civil Society

Research Institutes

Local community

based organizations

Private Sector

Commercial Banks

BPRs (Rural Banks)

Associations of Insurance

Companies

Credit Guarantee Companies

PPTKIS (Migrant Workers Recruitment

Companies)

15

The Range of Financial Inclusion Engagements in Indonesia

20072008

20092010 2011

16

2012

Pilot Project (Research on Fin. Literacy Assessment on MWs)

Diagnostic Stage

Individual Projects

Macro / National Strategy

Two Diagnostics Studies

Fin Literacy ToT for GoI

NSFI development

Microinsurance Regulatory Framework

Microinsurance Marketplace

Evaluation of TabunganKu (Basic

bank account)

Review on MW Microinsurance

Reform on GoI funded PNPM Mandiri RLFs Scheme

Branchless Banking regulatory review

Assessment on KUR (GoI Credit Guarantee

Program)

Islamic Finance for MSMEs

Strengthening Savings & Loans Cooperatives

Collaborative partnership

Results of collaborative partnership

20072008

2009 2010

2011

17

2012

Broader Awareness of Importance of Fin Incl among policy makers and regulators

National Strategy of Fin Inc ideveloped

Bappepam-LK Master Plan 2010-2014Facilitation of Microinsurance Development

No frills account (TabunganKu) introduced in Feb 2010 has reached more than 2.5 million

accounts

Awareness of Importance of Sustainability of GoI funded Fin Inc Program

- Reform of GoI funded PNPM Mandiri RLFs Scheme- Improving KUR scheme

KUR introduced and offered to previously unbanked MSMEs & TKIs

ASEAN Financial Inclusion Seminar

GoI Mid-Term Dev Plan (2010-2014): Improving Access to Finance for MWs

Commitment at G20 Mexico

Islamic Finance and Financial Inclusion for MSMEs in Indonesia

18

Islamic Finance in Indonesia: A fast growing industry with strong potential

The World Bank commissioned a study to look at access of Islamic finance for SMEs which include the following activities:

1. Reviewed current Indonesian Islamic finance industry (products, clients, etc.)

2. Conducted surveys: demand- supply side, covering 1,100 MSMEs and 100 Islamic Financial Institutions (IFIs)

3. Developing strategy to enhance access SMEs to Islamic finance

What the World Bank has done

2006 2007 2008 2009 2010 2011

20.45 27.94 38.20 46.8968.18

102.66

20.67 28.0136.85

52.2776.04

115.42

26.7236.54

49.5666.09

97.52

145.47

Assets, Financing and Deposits of Islamic Banks and Business Units (trillion Rp)

Financing Depositor Funds Assets

2006 2007 2008 2009 20100.00%

0.50%

1.00%

1.50%

2.00%

2.50%

0.99%1.15%

1.36%

1.71%

2.05%

Proportion of Sharia Insurance Assets

Source: BI, Bapepam LK, WB estimates

15%

81%

3% 1%

Proportion of Shares Bonds in local Bond Market

Corporate Bonds Goverment Bonds Government Sukuk

Corporate Sukuk

Sharia banks have been providing higher access to financing for SMEs - at 70%, compared to convential banks – at around 50%

Safer

Simple process

Reasonable transaction costs

Low admin fee

Attractive profit sharing rate

It suits MSME needs

Other

47.80%

67.20%

14.90%

4.50%

19.40%

53.70%

7.50%

The Reasons Why MSME Used Sharia Financing:

Sharia financing to MSMEs has been mostly used for productive uses – additional working capital for current business or expanding the business

15%

5%

7%

61%

11% Purchase new ve-hiclesPurchase goldPurchase new landIncrease business scaleOpen a new place/branch

Sharia Banks and MSMEs: Key Messages from the Study (1)

Sharia bank believe their products better serve the needs of MSMEs and their simple process for granting financing provides competitive advantage over conventional banks

Mar

gin

(cost

s, .

..

Cov

era

ge

Sim

plic

ity

Pro

du

ct v

aria

...

Bra

nd

Pro

moti

on

/Gift

Pro

cess

ing

tim

e

Ser

vic

e

Oth

er0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

85.10%

35.80%

82.10%

41.80%49.30%37.30%68.70%77.60%

7.50%

Important Factors in Choosing between Sharia and Con-ventional Financing

Cost (margin/interest), simple process and quality of services are the main considerations for choosing Sharia financing over conventional. Not much different factors seen in conventional.

Source: WB estimates

Source: WB estimates

2011 409400%

20%

40%

60%

80%

100%

120%

70% 71%

30% 29%

Non-SMEs

SMEs

Lack of understanding of Sharia products appears to be a significant hindrance for higher access of Sharia products by MSMEs

39%

22%3%

29%

3%4%

Why MSMEs do not use Sharia banks’ products?

Do not understand the products

No offers

Difficult to be reached/inac-cessable

No interest

Closely related to one particular re-ligion

OtherYes

No

57.50%

42.50%

If you understand the products, would you use Sharia products?

More than half of MSMEs surveyed said that they would use Sharia banks’ products, if they have enough understanding. Awareness can play a significant role in increasing the usage of Sharia financing

6%

67%

26%

1%

MSME's awareness about IFIs

Know it very well

Somewhat know

Have heard about it

No idea at all

Only a small share of MSMEs surveyed claimed to know Sharia banks and their products well

mudharaba1.34%

musharaka2.48%

murabahah

73.79%

istishna0.43%

ijara5.03%

Qardh16.94%

Most MSMEs use murabahah for Akad (73.79%) – there is a room for product diversification

Sharia Banks and MSMEs: Key Messages from the Study (2)

Source: WB estimates

A significant portion of MSMEs respondents (30%) indicated that do not have access to financial institutions. A more prevalent for Micro enterprises

Co

mm

erc

ial B

an

ks

Sh

ari

a B

an

ks

Sh

ari

a C

oo

pe

rati

ve

s (B

MT

)

Co

op

era

tiv

e

BP

R

Ind

ivid

ua

l le

nd

er/

loa

n s

...

Re

gio

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Sh

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PR

Co

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Sh

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en

ture

Ca

pit

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Bu

sin

ess

su

pp

lier

Pa

wn

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ap

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eg

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(S

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er0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

39.7%

29.6%

8.4%5.7%

3.5%2.3%2.2%1.8%1.5%1.3%1.0%1.0%0.6%0.6%0.3%0.3%0.1%0.1%There are around 4,000 BMTs in Indonesia. With their current presence in rural areas, these institutions have the potential to serve more productive poor at grass root level.

Empowering Micro Sharia financial institution such as the BMT is an effective strategy in enhancing financial inclusion (access to finance) for the productive poor and help them escape poverty.

MSMEs’ source of financing by type of institutions

Micro-Sharia financial institutions such as the BMT seems to be very popular source of financing by MSMEs, much higher than conventional cooperatives and rural banks.

Sharia Banks and MSMEs: Key Messages from the Study (3)

Source: WB estimates

70%

30%

Have access to any Financial Institution?

Yes No

CONCLUSION

23

Conclusion Financial inclusion is means to achieve poverty reduction

and local economic growth

A more “inclusive” Indonesia is an overall policy goal for the country

Financial sector should be inclusive as well Less than 50% of Indonesians have access to the formal

financial sector Less than a fifth have ever borrowed from a bank Much lower for poor

Enhancing Access to Islamic Financing for SMEs in Indonesia

The Islamic finance industry has been growing strongly in Indonesia, but it is still relatively small. Like its conventional peers, sharia banks dominate the industry.

Currently Sharia banks are already more inclined to served MSMEs. Building awareness can play a significant role in increasing the use

of Sharia financing by MSMEs. Empowering the micro sharia financial institutions can potentially

increase financing for productive poor who run micro enterprises.

ANNEX:World Bank Engagement on Financial Inclusion in Indonesia

25

Financial Services for Migrant Workers (PPP)Partners: BI, Commercial bank, PPTKIS

26

What we are doing

MWs have specific financial needsNumber of MWs is significant

Steady growth in the number of legal MW: around 520,000 in 2011 (drop in recent years was due to GoI moratorium policy)

Remittance growing: 6.9 USD billion in 2010 (about 1% as share of GDP)

• MWs have financial needs along the stages of migration, but lack of knowledge in financial literacy and financial credibility hinder their access.

• Credits• Saving

s• Insura

nce

Pre-Departure

• Remittance Channel

• Savings

• Insurance

During Migration

• Savings

• Credits

Post Migration

Assist BI to develop a business model that integrate a financial scheme covering each stage of migration process and providing MWs (and their families) with a wide range of financial services and products including credit, savings, remittances and financial literacy training to both MWs and their family

WB with BI +

Private Sector

0

2

4

6

8

10

0

200,000

400,000

600,000

800,000

People USD Billion

Total Legal MWs Total Remittance

Supporting

Government

Initiatives

Regulatory review on Branchless BankingPartners: IFC, BI, Banking Association, Telco Association

27

•Comparing cell phone penetration with access to finance, Indonesia has the highest potential for branchless banking implementation, (reaching 83 million individuals).

• Assisting BI in assessing the regulatory environment for branchless banking development in Indonesia which consisted of 3 components: Industry assessment Legal and regulatory review Oversight framework

Indo

nesia

Paki

stan

Bangl

ades

h

Niger

iaIn

dia

Phili

ppin

es

Afgha

nist

an

Mor

occo

Ugand

a

Cote

d'Iv

oire

0

10

20

30

40

50

60

70

80

90Top 10 countries by potential im-

pact (millions of individuals)

What we are doing

WB Initiativ

es

Improving microcredit scheme under PNPM MandiriPartners: Menko Kesra, Bappenas, MoHA, Min. Public Works

28

What we are doing

Project Title: PNPM Mandiri Revolving Loan Fund Capacity-Building and Sustainability Project Project Area : 4 provinces (Central Java, Yogyakarta, NTT and West Sumatra) Activities:

Restructure and improve performance of RLF operations (through needs assessment & technical trainings & capacity building )

Determine the legal structure of RLFs Establish linkage with commercial banks and other formal financial providers Develop a long term strategy for revitalizing PNPM Mandiri RLFs

Supporting

Government

Initiatives

29

• This pilot is a randomized research. The main objective is to evaluate the impact of financial literacy training for migrant workers and their families and to explore the effective ways to improve their knowledge in managing their remittances

• Development of financial literacy training modules for migrant workers and migrant workers’ families, and development of training supporting tools

• Providing financial literacy training: trainings are conducted for migrant workers who have registered to recruitment agencies (PPTKIS) to work overseas and/or their families.

• Phone and face to face monitoring were carried out to assess how the training affected the household’s financial behavior.

Activities Output and Outcome• Modules: Training Guidelines, Trainer’s Guide for

Migrant Workers, Trainer’s Guide for Migrant Workers’ Family; and supporting training tools: poster, comic book, financial book, and brochure

• Overall, 432 migrant workers and/or their families from Greater Malang area have been trained

• Currently, the pilot is analyzing all the data collected from the monitoring stage. Report on the results are expected to be published in mid June 2012.

• Preliminary analysis of the monitoring data shows that there is a positive correlation between financial literacy training and opening savings account.

Pilot Project on Financial Literacy Training for Indonesian Overseas Migrant Workers and Their FamiliesPartners: CMEA, BNP2TKI, Disnakertrans Malang, PPTKIS

WB Initiativ

es

30

• ToT on financial literacy for staffs of BNP2TKI, BP3TKI (regional office of BNP2TKI, in 19 provinces across Indonesia) & Govt-owned banks; 2 batches in 2011 & 1 batch in 2012

• Mentoring and monitoring during BNP2TKI – BP3TKI financial literacy trainings to MWs and MWs families: 17 provinces in 2011 (April – November 2011) and 9 provinces in 2012 (March – July 2012)

Activities• ToT implementation: March 29 – April 8, 2011, 58 staffs from 19 BP3TKIs, Bank BRI, Bank BNI, Bank Mandiri, TIFA Foundation, and Sahabat Wanita Foundation participated in the training. March 5 – 8, 2012, 37 staffs from 19 BP3TKIs, Bank BNI and Bank Mandiri participated in the training.

• Monitoring tools formulated: checklist, pre test/post test questionnaire, time keeping form, mentoring & monitoring form

• Overall, 1,287 people were trained in 2011 (542 MWs, 723 MW’s families, 22 ex MWs)

• Mailing list established (for BNP2TKI & BP3TKI staff) as a media to discuss, learn, and share experience in conducting FL training

• FL advocacy video produced, and FL training tutorial video in production process

• Website on MWs financial education is under construction

TA to Support GOI’s Financial Literacy Initiatives for Indonesian Overseas Migrant Workers and their FamiliesPartners: CMEA, BNP2TKI, BP3TKI, Disnakertrans, Government-owned Banks

Outcome• BNP2TKI staff gained competency as mentor & Master Trainer during ToT in 2012

• Banks (BRI, BNI and Mandiri )committed to provide support to BNP2TKI by involving their trainers in the ToT

• Bank Mandiri committed to expand FL training as part of its CSR activities

Output

Supporting Government Initiatives

Promoting Micro-insurancePartners: BNP2TKI, Bapepam-LK, Min. of Manpower & Transmigration

Despite of its mandatory features critical problems still exist : its effectiveness to provide protection for MWs has been increasingly questionable.

31

The insurance industry in Indonesia is relatively small compared to the overall financial sector

Bapepam-LK’s master plan for 2010-2014 includes the development of micro insurance in Indonesia:

a) expansion of the overall insurance market, particularly given the low levels of penetration; and

b) as a tool for social protection/safety net

31

Conduct a review on the existing MWs insurance product and mechanism

Gather information on type of data collected by any institution related to MWs

Support microinsurance marketplace More details in the following page

T.A. for Insurance Bureau of BapepamLK: to develop regulation for microinsurance to support enabling environment in Indonesia

What the we are doing

What we are doing

Review of Mandatory TKI InsuranceSupport on Micro-insurance Development

Background Background

Supporting

Government

Initiatives

Informal insurance

Insurable, without access

Uninsurable through market

mechanisms

Formal insurance industry

WEA

LTH

POPULATION

Promoting Micro-insurancePartners: Bapepam-LK, the Indonesia Insurance Council, Institute of Risk Management and Insurance (STIMRA), IFC, Global Index Insurance Facility (GIIF)

3232

• Two days event consisting of plenary session and exhibition of existing micro insurance product

• Plenary session was used to share international and local best practices

• Exhibition was used to promote micro insurance product and services

• Around 370 people participated in the event coming from both insurance and non-insurance sector

What we are doing

Microinsurance Marketplace Event (October 2011)

WB w/ Private

Sector + GoI

Basic no frills accounts: TabungankuPartners: BI, Commercial Banks, BPR

33

Basic bank account initiative led by Bank Indonesia along with 70 commercial banks and more than 1,000 BPRs/Sharia with main features: free monthly administration fee, low minimum account balance & low opening balance.

Overview of TabunganKu

What we are doingAssist Bank Indonesia to evaluate

TabunganKu: Has it met costumer’s demand? Has it enhance access to formal

savings? Is it commercially sustainable?

Supporting

Government

Initiatives

Credit Guarantee Scheme for MSMEs: KURPartners: CMEA, BI, State Owned Bank, Credit Guarantee Companies

In 2007, the GoI launched KUR program to give access to credit for unbanked MSMEs by providing partial credit guarantees to selected state owned banks

In a few years KUR has grown into one of the largest credit guarantee programs in the World. As of April 2012, total disbursements were IDR 72 trillions with 6.3 million borrowers

Due to the size of KUR, the GoI decided to review the KUR’s effectiveness in order to maintain performances and prepare its scaling up in the coming years

34

The World Bank assists CMEA to evaluate the KUR program’s achievements to date and develop recommendations on how to strengthen the program

Main findings: There was evidenced that KUR has helped to increase access to credit

to MSMEs KUR has encouraged banks to lend to small enterprises and especially

to microenterprises However further changes to improve the KUR scheme’s effectiveness

are still needed

Background

What we have done

Supporting

Government

Initiatives

35

Support to KUR’s Policy Committee (CMEA) to develop KUR’s Monitoring & Evaluation (M&E) Framework Partners: KUR Policy Committee (CMEA)

KUR program has been expanding strongly in respects of disbursement, number of participating banks and debtors. The Government has indicated continued supports on KUR and it has increased the target of disbursement of KUR.

There is absent of an integrated M&E framework of KUR which is important if GoI wants to review/assess impacts of the KUR program.

M&E is required by KUR related regulations (KUR’s MOU, Inpres No. 5/2008, PP No. 39/2006).

Background

Organized discussions with related stakeholder (BPKP, BI, Guarantee Company, Banks) to understand existing monitoring systems in each institutions.

Identified the gap/areas for improvements and currently on the process of drafting a proposed framework of M & E.

Expected completion by December 2012.

What we have been doing:

Supporting

Government

Initiatives

Supporting

Government

Initiatives

Enhancing Access to Islamic Financing for SMEs in Indonesia: Partners: BI, Bapepam LK and Ministry of SMEs & Cooperative

The Islamic finance institutions (banking and NBFI) - have been growing strongly In Indonesia. The Sharia banking assets has increased by around 40% annually but it only accounts 5% of total banks’ asset. It suggest the potential for further growth is strong.

On the other hand, MSME also shows strong growth of number of entities and business volume However, access to financing is still known as one constraint.

There is a growing interest in the World Bank to work on supporting Islamic finance to complement the MSME finance works but its knowledge on level of access of MSMEs to Islamic financing is limited hence it commissioned this project.

The results also expected to Indonesia has the potential to have a vibrant Islamic finance industry.

Background

The project had a number of activities: Conducted an review of current Indonesian Islamic finance industry (products,

clients, etc) Conducted demand and supply –side surveys Develop an assessment tools on how to assess level of access to Islamic finance Prepare a concept of financing facility for the World Bank to consider supporting

in Indonesia.

What we have done

Supporting

Government

Initiatives

Supporting

Government

Initiatives

WB Initiativ

es

Enhancing Access to Islamic Financing forSMEs in Indonesia: Partners: BI, Bapepam LK and Ministry of SMEs & Cooperative

• The survey results suggest the perception of Micro-SMEs toward Islamic Financial Institutions (IFI) is positive and Sharia finance is well received by the Micro-SMEs.

• A majority of Micro-SMEs surveyed indicated the simple process of Sharia financing is an important factor for their decision to use Sharia financing and Sharia finance products do serve their needs.

• The lack of understanding of Sharia products appears to be a significant hindrance for higher access of Islamic finance for Micro-SMEs in Indonesia.

Supporting

Government

Initiatives

Supporting

Government

Initiatives

Safer

Simple process

Reasonable price of selling-buying

Low administration fee

Interesting sharing rate

Suitable for the MSME need

Others

47.80%

67.20%

14.90%

4.50%

19.40%

53.70%

7.50%

The Reasons why MSME used Sharia Financing: Perception of IFIs

What we have found:

39%

22%3%

29%

3% 4%

The main reason MSME not used IFIs Product

Not understanding the products

No offering

Inaccessible locations

No interest

Identical to particular religion

Others

WB Initiativ

es

Financial Stability

Economic Growth

Poverty Reductio

n

Strategy designed with a mutually reinforcing fit between these three

components:

Targeting the poor

Promoting Local

Economic Developme

nt

Promoting Enabling

Regulation & Consumer Protection

National Strategy of Financial InclusionPartners: TNP2K, Bank Indonesia, Bappepam-LK

Supporting

Government

Initiatives

Supporting

Government

Initiatives

What we are doing•Assisting the Vice President office to develop the National Strategy for Financial Inclusion•Accomodate socialization / discussion between the VP office with Bank Indonesia (regulator of banks) and Bappepam-LK (regulator of NBFI)•Assisting VP office in providing a better understanding to the other ministries on their role & involvement in the strategy

a “People-Centered” strategy approach with the mission “to Achieve a Financial System that is Accessible by all Layers of the Community to Promote Economic Growth, Poverty Reduction and Income Equality in Indonesia”

Strengthening and Empowering the Saving and Loan Cooperative Sector : Increasing Access to Finance for Micro-SMEsPartners: Bappenas, Ministry of SMEs & Cooperative

KSP /USP shows strong growth of business and plays important roles in providing financing for Micro and Small enterprises.

GoI’s policy to strengthen and empower KSP/USP to increase the above roles whilst maintaining the value of Cooperatives.

Need to have a through analysis of issues, challenges and prospects of the KSP/USP before formulating policies.

Background

The activities will be divided into two components: Component 1: Conduct a KSP/USP study:

Phase 1 designing and preparing the study (literature review, write case studies, prepare research tools. (March – June 2012)Phase II Complete the study, will include surveys/interviews (July 2012 – June 2013)

Component 2: Follow up of Study: Technical Assistant & Capacity Building

What we will do

Supporting

Government

Initiatives

Supporting

Government

Initiatives