Financial Inclusion and Inclusive Development in Indonesia

Abstract

AbstractFinancial inclusion, defined as the proportion of individuals and firms making use of formal financial services, has become a central theme in discussions about how to achieve so-called inclusive development. Inclusive development refers to striving for equal development of all individuals, particularly including marginalized (that is the very poor) groups. According to many, financial inclusion plays an important role in achieving inclusive development. Unequal access to financial services can exclude people from the process of economic growth. This chapter studies the role of financial inclusion in the development process, taking a cross-country perspective in South East Asia as well as an interregional perspective using data from Indonesia. We first develop a conceptual model, linking financial inclusion operationalized as bank branch access, to economic growth. Based on this conceptual model, the empirical part of our analysis consists of three sections. First, we use an Asian cross-country comparison to enrich our understanding of the main patterns of financial inclusion and inclusive growth. Second, turning to the case of Indonesia, we first discuss the processes of restructuring and regionalization of the banking sector. These processes have led to substantial changes in access to banking services, particularly in nonurban areas. Third, we provide econometric evidence on the relationship between regional access to bank branches and regional economic development, demonstrating that financial inclusion is associated with per capita economic output at the provincial level. The Indonesian regional analysis relies on a panel regression of 33 provinces over 5 years (2011–2015). We find that financial access is significantly and positively associated with the regional economic level of development in Indonesia, controlling for the general economic circumstances and development level of the region. These results suggest there is a definite challenge for the government to shift the development approach toward inclusive growth through financial inclusion. This finding may help developing targeted interventions aimed at increasing the regional bank branch coverage in Indonesia.KeywordsFinancial inclusionInclusive growthPanel analysisIndonesiaSouth East Asia