Financial inclusion and savings in Indonesia

Abstract

This chapter discusses the status of financial inclusion in Indonesia and examines the impact of increased availability of bank branches on household outcomes. Analysis of the World Bank’s Financial Inclusion Survey data shows how Indonesia has made some progress on expanding financial inclusion, with the share of individuals with bank accounts having risen from less than 20% in 2011 to under 50% in 2017. Interestingly, while the gains between 2011 and 2014 were greater for individuals in the upper 60th percentile of income, those between 2014 and 2017 have been more pro-poor due to a concerted government effort to expand financial inclusion. In our empirical analysis, we study how financial inclusion enables households with income turn gains into savings for assets and earnings. Using the Indonesian Family Life Survey data, we find that living in areas with a high density of bank branches helps poor households accumulate savings. The marginal effect of financial inclusion on savings is the highest amongst households in the bottom quintile of per capita consumption distribution. Thus, access to formal financial institutions can lead to improvement in household welfare.