Enhancing Access to Finance for Migrant Workers in Indonesia:

CONFERENCE EDITION Enhancing Access to Finance for Migrant Workers in Indonesia: Evidence from a Survey of Three Provinces EXECUTIVE SUMMARY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Enhancing Access to Finance for Migrant Workers in Indonesia: Evidence from a Survey of Three Provinces EXECUTIVE SUMMARY Conference Edition 1

THE WORLD BANK OFFICE JAKARTA Indonesia Stock Exchange Building, Tower II/12-13th Fl. Jl. Jend. Sudirman Kav. 52-53 Jakarta 1291 Tel: (6221) 5299-3 Fax: (6221) 5299-3111 THE WORLD BANK The World Bank 1818 H Street N.W. Washington, D.C. 2433 USA Tel: (22) 458-1876 Fax: (22) 522-1557/156 Email : feedback@worldbank.org Website : www.worldbank.org Printed in December 29 Improving Access to Financial Services in Indonesia is a product of staff of the World Bank with the Financial Support from the Dutch Government, The findings, interpretation and conclusion expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the government they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomination and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement of acceptance of such boundaries. This executive summary is for discussion during the conference Enhancing Access to Formal Financial Services in Indonesia, 9-1 December 29 in Jakarta, Indonesia. Do not cite without express permission of the World Bank. 2

Executive Summary The importance of overseas migrant workers (MWs) has caught attention worldwide, from Mexicans in the United States and Turks in Germany, to citizens of former Soviet states in Russia and Indonesians in Malaysia. In 25, migrant workers were estimated to number about 19.6 million worldwide (about 3% of the world population), the vast majority from developing countries. These are large flows of productive human resources who provide valuable low-cost services in host countries and who remit large sums of money to their countries of origin. The top four remitters (India, China, Mexico and the Philippines) each sent home tens of billions of dollars in 27, making them an important factor for poverty alleviation in countries where higher incomes are sorely needed. On a regional basis, most migrants reside in Europe. Asia is second with some 53 million and North America is third with more than 44 million. By value of remittance (Table 1), the East Asia and Pacific region ranks first as remittance receiver and second as sender. Remittances Received Table 1: Remittances, by Region Remittances Sent (US$, bn) (% of GDP) (US$, bn) (% of GDP) East Asia & Pacific 65.2 1.6% Europe & Central Asia 25.9.9% Latin America & Caribbean 63.1 1.8% East Asia & Pacific 12.9.3% South Asia 52.1 3.7% Middle East & North Africa 5.5 1.6% Europe & Central Asia 5.4 1.8% Sub-Saharan Africa 4.4.6% Middle East & North Africa 31.3 4.5% Latin America & Caribbean 3.6.1% Sub-Saharan Africa 18.6 2.6% South Asia 2..1% Source: International Monetary Fund 28. Data are for 27. In the specific case of Indonesia, the number of migrant workers has increased steadily in recent years (Figure 1). Some 7, Indonesians, mainly women, now go abroad each year, excluding large numbers of unrecorded illegal migrant workers, especially into Malaysia. Bank Indonesia estimated a total of about 4.3 million MWs in 27. Balance of payments statistics indicate net remittances of US$6 billion in 28, and the gross inflows would be considerably higher. Nonetheless, among comparators in the East Asia & Pacific region (Figure 2), Indonesia is third by dollar value of remittances received, behind China and the Philippines, and comparable to Vietnam. In relation to GDP, Indonesia is way behind the Philippines, Vietnam and Cambodia. 3

Figure 1: Migrant Worker Placement, by Gender 8, 6, 4, 2, 1997 1998 1999 2 21 22 23 24 25 26 27 MALE FEMALE Source: National Authority for the Placement and Protection of Indonesian Overseas Workers (BNP2TKI) Figure 2: Remittances Received, East Asia-Pacific Region (in millions of US$) 35, 3, 25, 2, 15, 1, 5, China Philippines Indonesia Vietnam Malaysia Thailand Source: International Monetary Fund, Balance of Payments Yearbook, 28 (data for 27). This report pursues these issues as a follow-up to an earlier World Bank study that examined nationally representative households access to financial services in Indonesia. That earlier study which was not nationally representative as regards MWs singled out households of overseas migrant workers (MWs) for further study, owing to their unique needs for access to financial services and their pivotal role in poverty alleviation. This report s primary, higher-level Goal is to identify areas for policy intervention that will help MWs by improving their access to financial services in cost effective ways. Its more immediate, primary Purpose is to inform policy-makers as to who does (and does not) have access to financial services, including the constraining factors for broader access. The key analytical tools of this study are two surveys conducted in three provinces of Indonesia (East Java, Nusa Tenggara Barat (NTB) and Nusa Tenggara Timur (NTT)) that are sources of large numbers of migrant workers. The first Survey is an extensive (5-page) survey of MWs households (HHs), including: demographics and socio-economic indicators; use of various 4

financial services; MW remittances; financial literacy; and household expenditures. The respondents of this survey were representative of MWs households in the three provinces surveyed. The second Survey, of village heads, is much shorter (8 pages) and covers characteristics of financial services available in the villages. This report will present the findings from these surveys, recognizing that the features on access to finance in the surveyed MW HHs may not be nationally representative of all migrant workers in Indonesia. Nonetheless, the findings are worthy of close attention because of the ample evidence of the challenges that MWs and their HHs face in accessing various financial services, particularly from formal service providers. The broad issues facing the MW HHs in these three provinces are likely to be a good indicator of the kinds of issues that face MW HHs throughout Indonesia. The choice of surveyed provinces in this study was made based upon practical considerations, including the special interests of one of the financing partners. Another especially notable point is that this study takes a broad perspective on MWs needs for financial services (including savings, remittances, credit and insurance). As conclusions, the report suggests policy reforms to improve services in each of these specific areas, as well as in certain broader policy areas that are important for improving MWs interests. Profile of Indonesia s Migrant Workers and Their Households in Three Surveyed Provinces Most Indonesian MWs from the three surveyed provinces are females from rural regions with lower educational backgrounds; the majority are middle-aged, the average being around 3 (Figure 3). The most popular destinations are in the Asia-Pacific region, especially Malaysia, followed by the Middle East, mainly Saudi Arabia. For the most part, females work with legal status in the informal sector as domestic helpers, with roughly half on their first contract. Male MWs of surveyed HHs tend to have a job in the formal sector (such as factories, plantations and construction) and many are working abroad without legal status. Repeat work terms abroad are more common among men and in the Middle East for surveyed households. A more appropriate strategy would be to increase the reach of financial service providers that offer relatively low-cost credit (e.g., banks versus MFIs and MFIs versus private money lenders). It is also notable that just over half of Survey respondents are Muslims (Figure 3). This is well below representative national levels, owing to the choice of NTT and NTB for the Survey. 5

Figure 3: Key Characteristics of Surveyed Households of Migrant Workers (in %) by Province by Regional Area by Age 1 17. 8 2.9 >55 18.4 32.5 49.1 83. 6 4 32.7 4 <55 25 <4 17 <25 25 5 75 1 2 36.9 <17 East Java West Nusa Tenggara East Nusa Tenggara 8.8 Urban Rural.7 1 by Education Level 1.7 14.8 University by Gender 1 by Religion 8 6 4 2 15.6 35.3 2.8 11.7 Senior high school/eq. Junior high school/eq. Primary school/eq. Did not complete primary school Never go to school 57.7 Male 42.3 Female 75 5 25 54.4 21.5 21.3 2.8 Moslem Catholic Protestant Marapu 6

MWs Needs for Financial Services As stylized in Figure 4, the financial needs of Indonesian MWs going abroad generally fall into threee broad categories. First, their pre-departure needs, most notably, financing for their up-front third, their post- costs. Second, their needs during their time abroad, mainly to send money home. And migration needs (savings, credit and investment), which are not covered separately in this report. The material is rolled into MWs households needs, because the issues are so similar. Figure 4: Migrant Workers Needs for Financial Services Pre Departure Credits Savings Insurance During Migration Remittance Channel Savings Insurance Post Migration Savings Credits Pre-Departure Needs for Credit. Surveyed HHs indicate that their MWs have sizable up- is front costs, about 8% of which is financed by borrowing. The most popular source of financing personal savings, especially among repeat MWs, which is encouraging because it implies savings during the first contract. The second most common source of financing, especially among females and first-time MWs, is borrowing from the recruiting agency (the PPTKIS; see immediately below). Banks are at the very bottom of the list. Financing from the PPTKIS. This source of financing (typically in the form of a salary advance) for MWs of surveyed HHs is controversial, because some researchers have found very high effective rates of interest (1-2% per month). Analysis here indicates that effective interest rates are indeed high, but the costs are much more complicated than simply usuriouss rates of interest. Still, if these various costs could be reduced, it would markedly benefit MWs (see Policy Suggestions, below). Services While Abroad: Remittances. While MWs are abroad, a very important financial service is a channel for sending money back to the village, survey respondents indicating that the remittance is usually sent home on special occasions, in small amounts (US$2 or so). Among other key characteristics (Figure 5), the MW makes the choice of remittance channel, usually based upon convenience, with convenience of the receiver more important than that of the sender. Bank transfers are by far the most popular remittance channel and the least troublesome. Carrying money by hand (either by the MW or a third party) is the most problematic. 7

Figure 5: Characteristics of Remittances (in %, unless indicated) Ever remitt money? Freq. of Remittance Who decides remittance channel? 68.4 31.6 Only on special occasions Once every 3 4 months Only once Every month Every 2 months Every 6 months Other Once in one year Carried on return trips Not applied The migrant him/herself Employer Family in Indonesia Sponsor Others Hiring company (PJTKI) 4.3.3.3.1 17.7 77.4 No Yes 15 3 45 6 2 4 6 8 4,, 3,, 2,, 1,, Avg. Remittance Value by Gender 1,5, 2,7, 4,, 3,, 2,, 1,, Avg. Remittance Value by Regional Destination 4,, 1,5, 4,, 3,, 2,, 1,, Avg. Remittance Value by Legal Status 1,, 3,, Male Female Asia Pacific Middle east Illegal Legal Method of Money Transfer Bank wire transfer Through relatives or friends Carry own on return trips Western Union Bank cheque through air mail Post office Informal money transfer agent Other 15 3 45 6 75 Criteria for Choosing Method of Transfer Recipient convenience Speed Security Sender convenience Cost Reliability Flexibility other 15 3 45 6 Problems in Remitting by Type of Transfer Method Through relatives/friends Carry own on return trips Other Informal MTA Western Union Bank wire transfer Post office Mailed bank cheque 14 28 42 56 7 8

Bank services for remittances are relatively expensive, but they are very popular and appear to work reasonably well, subject to two important qualifications. First, it may not be easy for the MWs to visit banks, for example in some Middle Eastern countries. And second, the recipient needs to live reasonably close to a bank branch. Absent these conditions, the MWs rely upon the employer to remit the money, or they use money transfer agencies or a trusted third party to deliver the money by hand. The cost of remittances to Indonesia looks about middle of the road relative to available comparators, and there is a range of services available to meet different needs (speed, convenience, security, low cost, etc.). Evidence indicates that MWs can save 5% of more on the value of a remittance just by shopping around, if they are aware of the options offered by the various service providers. In this situation, there may not be much room for policies to reduce costs other than explicit subsidies (see Policy Suggestions, below) Use of Remittances. Once back in the village (Figure 6), the head of household usually makes decisions regarding use of the money. According to the surveyed households, the main use of the remittance is to meet daily needs, reflecting the high incidence of poverty in these villages. Other notable uses are loan repayment and various forms of real asset accumulation, like housing. Emergencies, like a health care expense, don t rank high on this list, and business investment is very low. These uses of remittances together with their other characteristics, noted above, suggest some tentative insights into the choice of transmission mechanisms. Namely, the occasional nature of most remittances, combined with their use for daily consumption back in the village, causes MWs to value the security and convenience of bank transfers more than the relatively high cost of those transfers. Still, it s surprising that there isn t more use of low-cost Post Office transfers for routine uses and money transfer agents for emergencies. This suggests a role for financial literacy training to ensure that MWs are aware of their options for remitting. MWs Households Needs for Financial Services; Evidence from the Surveyed HHs. Savings Accounts. The single, most important financial service for MWs households is a savings account, which provides a safe, convenient means of remitting money as well as a repository for personal savings. Ownership of a savings account is low relative to national comparators. However, the use of a savings account is much more common, because households of MWs often receive their remittances via a trusted third party. This difference is indicative of the potential for greater use of financial services if MWs concerns can be overcome, again suggesting a role for financial literacy training. Use of savings accounts and exclusions from savings are summarized in Figure 6. Some 27% of surveyed MW households are excluded, substantially higher than representative national averages, even for rural areas. Of those who are included, banks are by far the most important service provider, because of their access to the clearing system for remittances. Other sources are relatively unimportant and there is limited overlap among multiple service providers. 9

Figure 6: Use of Remittance (%) Who decides on use of remittance? Main Use of Remittance 6 45 3 15 57.7 Head of the household 37. Sender 5.2 Other family member.1 Non family member Daily needs Loan Repayment Built/buy/renovate house Payment of school fee Buying asset Covering health expense Special occasions Businesss investment Buying motorbike Other 15 3 45 6 Do you save the remittance? Where do you save the remittance? Why don't you save the remittance? 74.8 Yes 25..2 No 1 8 6 4 2 78.9 Bank 15.6 3.4 2.2 At home Other Coop. All spent on consumption Don't know how to save Don't know how to use fin. Inst. Don't want others to borrow Other 5.9 2.7 1.2.5 25 5 75 98.4 1 1

As a special matter in this area, Government regulations currently require all legal MWs to open a bank account before they leave the country. This account looks like it ought to overcome the limited ownership of bank accounts, noted above. However, the great majority of these accounts are inactive, indicating that MWs do not find them useful. There looks to be a great deal of room to make this financial service more appropriate to the needs of MWs and their families (see Policy Suggestions, below). Credit. Credit is also important to the surveyed households, but it tends to be spread among a wide variety of service providers, banks being the least popular choice. Many MWs of surveyed HHs especially females on their first work contract often borrow from high cost sources (see Financing from the PPTKIS, above). As for the banks, discussions with bank officials indicate that banks even those that specialize in small scale lending believe that MWs are high risk, unless there is a local guarantor. Overall credit services are summarized in Figure 8. Two features are striking. First, banks are a very small source of credit to the surveyed households, servicing less than 4% of the total. This is striking evidence that MWs needs are not being net by the formal the credit market. Second, almost 6% of surveyed households are financially excluded from credit, which is very high. Figure 8: Overlap Among Credit Providers Bank Semi-Formal 1.8%.6%.8%.2% 6% 3.5% 28.6% Informal Financially Excluded 58.6% Insurance. Take-up rates for insurance are generally low in Indonesia, and it is mainly a financial product for the higher-income urban households. By contrast, legal MWs (who are required to have MWs insurance before going abroad) come from poor, rural areas. Not surprisingly, the 11

current, compulsory system is not providing much by way of benefits to the MWs. Requirements under the current claim process look too complicated, time-consuming and costly for the MWs and their HHs, owing in large part to their lower education background. There is room to improve the current insurance system to the benefit of MWs as well as improve the financial literacy of MW and their HHs as regards insurance.(see Policy Suggestions, below). Who Are Financially Excluded? And Why? As just mentioned, financial exclusion is high among the surveyed MW s households (27% for savings and 59% for credit) and it is considerably higher in rural areas. Survey evidence from the three provinces indicates striking similarities among the financially excluded, independent of the type of financial service (savings, credit, both savings and credit, or insurance). The excluded tend to be at the lower end of the income distribution, at the extremes of the age distribution and living in rural areas. The truly excluded (that is, those with no savings and no credit; see Figure 9) represent a bit more than 18% of the total surveyed, which is only slightly above the national average of 17%. This probably reflects MWs origins in predominantly poor regions of the country, which roughly offsets their need for a remittance channel. Physical accessibility is not perceived as a significant problem by Survey respondents, although the implicit costs (of travel and waiting) do look substantial. Gender differences in accessibility tend to be relatively small or even non-existent among surveyed respondents. This said, there is some indirect evidence from the Survey that supports the view that women s saving rates from MW earnings are higher than men s. The data suggest a strong element of voluntary exclusion with economic reasons dominating that choice among surveyed respondents. For example, more than 3/4 of excluded savers believe that they lack sufficient money or a job to justify opening a bank account. Other reasons (like physical accessibility or high fees) are relatively unimportant. As for excluded borrowers, roughly 75% see no perceived need to borrow. Voluntary exclusion is clearly at the prevailing price of the financial services hence these numbers are likely to change if the prices changed especially relating to credit. Another important point concerns the relationship between income and access to credit. Namely, access to credit does not increase in a pronounced way as incomes increase. However, the source of credit does change markedly; as incomes rise, there is greater use of banks and less use of micro-finance institutions (by urban households) and community welfare schemes (by rural households). Indicative interest rates are generally in the range of 15 to 45% per annum with banks and shop credit at the lower end; friends, neighbors and family are at the upper end. 12

Figure 9: The 'Truly Financially Excluded' (in %) 3 2 1 15.5 East Java by Province 9. West Nusa Tenggara 25.4 East Nusa Tenggara Weighted Means.1.2.3.4.5 The Truly Financially Excluded By Monthly Per Capita Expenditure Urban Rural 5 1 5 1 Monthly Per Capita Expenditure Deciles Note: Vertical line corresponds to poverty line. 2 15 1 5 by Gender 18.3 18.3 Male Female 2 15 1 5 by Rural urban 13.4 19.3 Never go to school Inc. primary school Primary school Junior high school Senior high school University by Education >55 4 <55 25 <4 17 <25 <17 by Age Urban Rural 5 1 15 2 25 7 14 21 28 35 by Type of Work Unpaid Family Worker Freelance/Casual Worker Employer Self Employee Private Employee Government Employee Unemployed 7 14 21 28 35 25 2 15 1 5 by Selected Categories 19.7 Agri. sector worker 11.5 Salaried Employee 2.9 Don't have nonfarm Ent..45.36.27.18.9. by Financial Literacy Score.4.43 'The Excluded' 'The Included' 13

The Way Ahead: Policy Suggestions Broader Policies The Government of Indonesia has placed high importance on increasing access to financial services for a greater segment of the population including MWs - acknowledging this as a key constraint to development. The evidence of this report indicates that it s important for policymakers to maintain certain broad, strategic objectives when addressing issues of access to financial services. Among the most important is broad-based policies to raise economic growth and incomes higher incomes are the single biggest determinant of access to financial services. Likewise, it s vital to maintain financial sector stability in order to ensure confidence in the system for the population at large. Likewise, the provision of better rural infrastructure and improved public services, like basic education and health would also assist the lower-income populations. Policies aimed at increasing access to financial services are likely to be much more effective if based on the foundation of policies aimed at sustainable growth and financial sector stability. Continuing at the broad policy level, certain institutional reforms look like they would be a powerful solution. In particular, policies for licensing and supervision of MWs recruitment agencies (PPTKIS) need reform. This could begin with revoking the licenses of known, under-performing PPTKIS. As follow-up, the current licensing process under the line Ministry should be the function of a Licensing Board that would include the Office of the Coordinating Minister for Economy. To improve supervision, there could be greater use of independent external stakeholders, including NGOs and the industry associations (to encourage better self-regulation). The Government might also consider joint-venture PPTKIS where one role of the foreign partner would be to safeguard interests of the MWs while they are overseas. Also at a broad level, Memoranda of Understanding (MoUs) with host countries concerning MWs could be re-negotiated to address specific matters, for example, during regional free-trade negotiations. The main objective would be to better balance protection of the MWs with the commercial interests of the employer and the recruiting agency. Specifics include matters like: acceptable forms of identification for MWs to access financial services abroad; and exemptions to Know Your Customer regulations for small remittances. Savings Turning to narrower policies, the most important financial service required by MWs and MWs households is a savings accounts. Any of the regulatory reforms mentioned below (under Credit) for extending the reach of banks and MFIs would be helpful, as would be public programs to meet minimum standards of access to financial services. Other possibilities include: Introduce No Frills Bank Savings Accounts. Bank Indonesia is encouraging banks to offer very basic, low-cost savings services to all customers, including MWs and their households. However, many banks already offer such a service, and it will be important not to disrupt 14

this service and to minimize the cost of regulatory compliance. In refining its approach, Bank Indonesia could set minimum acceptable standards, letting the banks decide the details of meeting those standards. Also, explicit exemptions could be permitted for banks with limited branching networks. Review the Compulsory Bank Account for MWs. The current system of requiring MWs to open a bank account looks like an ineffective means for meeting the MWs needs. The Government could consider: allowing wider access to the account (e.g., a joint account that includes family members who will rely on the MW s remittances), and/or replacing the current, compulsory system by a voluntary system, bolstered by upgraded financial literacy training. Credit A strategy would be to increase access to relatively low-cost sources of finance, that is, by enabling the substitution of banks for MFIs and MFIs for informal lenders. Specifics include: More Credit Providers and a Broader Range of Providers. Almost any of the many policies advocated in the earlier World Bank study for improving access to financial services would benefit migrant workers and their households. To cite just a few examples detailed in that study, regulatory changes for commercial banks to increase their branching and ATM networks and reduce reporting burdens. For rural banks (BPRs), broadening ownership of those BPRs that need capital to include foreign investors and NGOs; a lower tier of capital for small BPRs in isolated regions; and restructuring reporting requirements for small BPRs in remote areas. For pawnshops, opening up the state monopoly to private competition. For MFIs, resolving certain legal issues concerning the status of some institutions (the former LDKPs) and implementing the Joint decree on microfinance institutions while restoring momentum to drafting a new Microfinance Law. Co-signers for TKI Credits. One simple, effective way to improve access to cheaper credit is for NGOs and development partners with special interests in this area to act as co-signers for commercial bank loans directly to MWs (not to the PPTKIS). Relatively small amounts of funding could go a long way in this regard, and the initiative could be undertaken on a pilot basis, to demonstrate to commercial banks that MWs are low risk borrowers. Remittances Wider bank branching (and ATM) networks would make it easier for MW households to receive their remittances. Likewise, re-negotiations of MoUs on MWs with more host countries could help with MWs remittances, even for illegal MWs. Beyond this: Mobile Banking. Advances in mobile banking hold considerable promise for facilitating remittances. On the side of banks, it s a low-cost option to wider branching networks; for the MWs, the transactions costs are very low and there is already wide access to mobile phones, even among the poor in remote areas. But significant regulatory hurdles need to be overcome, for example to allow service providers to use networks of non-bank agents to 15

offer and maintain their products and to sign-up new customers. Progress looks likely to be slow, despite good international examples of best practice. Remittances as a Public Service Obligation. GoI could explicitly subsidize remittances by asking Indonesian banks abroad to make remittances at no cost to the remitter. The government would then reimburse the bank for its costs plus a small fee. The subsidy scheme could be justified as a poverty alleviation program or on the basis of the positive externalities of remittances. Insurance It would be helpful for MWs to simplify application and claim procedures, as well as the insurance product itself, while improving pre-departure financial literacy training. Other helpful steps would include: the publication of providers financial statements (including claim settlement rates and time to settlement); and strengthened oversight by Bapepam-LK, the insurance regulator. Other Policy Suggestions A recurring theme in this study is the potential for financial literacy training. In general, the objective would be to better inform MWs and their households of the available options for services like remittances and cheaper sources of credit. The World Bank, with the support of the Dutch Government, is currently piloting an initiative along these lines. Finally, it would be helpful to offer better counseling services for MWs through GoI s embassies, possibly beginning in the most popular MW destination countries, Malaysia and Saudi Arabia. GoI might also consider encouraging third parties (such as NGOs) to provide such services; recruiting expatriate Indonesians on a volunteer basis; or out-sourcing this service to the private sector through a competitive bidding process. Another option, mentioned above, is joint-venture PPTKIS where contractual obligations of the foreign partner would include counseling services in the host country as well as local financial literacy training. 16