J-PAL launches new Inclusive Financial Innovation Initiative in Southeast Asia

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digital finance
Micro and small enterprises in the city of Sibolga, Sumatra have adopted digital payments to help facilitate social transfer purchases.
Photo: Ivan Mahardika | J-PAL

Read this post in Indonesian.

Indonesia’s digital economy has quadrupled since 2015—reaching an approximate value of USD$40 billion in 2019. Much of this growth is driven by the country’s e-commerce sector, which recorded 88 percent growth from $1.7 billion in 2015 to $21 billion in 2019.

The digital financial services (DFS) sector is among the fastest-growing: the number of financial technology (“fintech”) companies in Indonesia more than doubled from 130 in 2017 to more than 320 in 2019. In addition to this rapid growth in the private sector, the Indonesian government is increasingly moving towards digital delivery of social assistance programs in the public sector.

J-PAL Southeast Asia, based at the Faculty of Business and Management at the University of Indonesia, is launching the Inclusive Financial Innovation Initiative to answer important policy questions now at the forefront of the region’s economic growth. With the support of the Bill and Melinda Gates Foundation, the three-year initiative aims to ensure that digital financial services can drive economic development while lifting up women, low-income groups, and marginalized communities.

While growth in e-commerce and DFS represents a promising opportunity to advance financial inclusion, use of DFS is currently concentrated among young, urban, and higher-income populations. As digital technologies continue to improve and costs of service provision decline, there is a growing opportunity to expand the reach of DFS and leverage it as a tool for broad-based financial inclusion.

The Inclusive Financial Innovation Initiative will build on existing global evidence to understand how DFS can be used to accelerate financial inclusion and broad-based economic development within Indonesia and beyond.

The Initiative will include three intersecting workstreams to provide actionable evidence to members of Indonesia’s DFS ecosystem, including policymakers, practitioners, and non-profit organizations:

  1. Policy research and analysis: Under the Initiative, J-PAL staff and researchers will review the existing global evidence base to offer evidence-based policy recommendations for how to leverage DFS to improve government anti-poverty programs and benefit marginalized groups, and to identify knowledge gaps where new research is needed to answer important questions.
  2. Creation of a Learning Collaborative: To encourage collaboration, the Initiative will facilitate a learning and communication platform where relevant stakeholders in the financial inclusion and digital finance sector can connect, share knowledge and best practices, and formulate strategies to answer priority research and policy questions.
  3. Research collaboration: The Initiative will develop innovative pilot studies and randomized evaluations to answer policy-relevant questions. It will build partnerships to ensure that the evidence produced by these studies can directly contribute to policy decisions.

Why focus on financial inclusion?

Financial products and services are designed to help individuals build resilience to unexpected events and take advantage of opportunities, and are often viewed as key tools for improving families’ welfare and economic mobility.

Existing evidence suggests that improving access to savings accounts can have positive effects on household welfare, and that digital financial tools like mobile money may offer users significant benefits. For example, studies in Chile and Kenya have found that access to basic bank accounts allowed households to better manage fluctuations in income, increase business investment, and increase private expenditure levels. Meanwhile, offering mobile phone-based savings accounts to parents in Kenya whose children were about to enter high school increased enrollment by 5 to 6 percentage points.

Digital financial services can also be a tool for boosting women’s economic engagement and empowerment.

For example, a study in India found that linking earnings from a government workfare program to women’s bank accounts (rather than household-level accounts), coupled with a basic account training, led to increased female employment both within the workfare program and the private sector, especially for those women whose husbands expressed the most opposition to women working.

In Niger, disbursing cash transfers via mobile money improved diet diversity during the 2009-2010 food crisis relative to cash-in-hand transfers. Women who received mobile transfers were more likely to travel to weekly markets, be involved in selling household grains, and spend more on children’s clothing than those in the other groups.

Why focus on Indonesia?

Indonesia’s DFS providers are developing tech-based innovations to increase financial inclusion among households that are currently underbanked or unbanked altogether. For example, micro, small, and medium enterprises (MSME) now have access to digital payment services designed to boost transactions, improve bookkeeping, and build better credit scores.

Women’s savings collectives, called arisan, also have opportunities to go digital through MAPAN arisan. Digitized arisan groups can collectively purchase goods online without disrupting their household cash flow.

Finally, online peer-to-peer lending such as Amartha and TaniFund offer access to credit for farmers, fishermen, and micro-merchants who have been largely ignored by formal banking institutions. While these and other innovations are promising, we know little about their real causal impacts on the lives of the poor.

To push the frontier further, we need more evidence on what types of DFS work within the context of Indonesia’s regulatory and business environment, infrastructure, and demographics; why they work; and how they can be deployed to maximize impact.

Working alongside a diverse set of collaborators, the Inclusive Financial Innovation Initiative aims to contribute to an inclusive, impact-driven digital finance ecosystem in Indonesia.

For more information, contact Aliyyah Rusdinar.

Posted by Caroline Tangoren, Simone Schaner, Aliyyah Rusdinar, and Samantha Carter.