Eye on Asia | How to bring Indonesia’s great unbanked masses into the fold of financial inclusion

When getting to the nearest bank branch can be a perilous journey, and where more people have smartphones than bank accounts, digital banking is clearly the solution. But rural customers also want the human touch. Enter agent banking

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A book vendor in Jakarta uses her mobile phone while waiting for customers. Indonesia has one of the fastest growing internet penetration rates in the region. Photo: AFP

Published: 5:00pm, 5 Jan 2020Updated: 8:08pm, 5 Jan 2020

The Indonesian archipelago, made up of more than 17,000 islands, is notoriously difficult to wrestle into modernity, leaving many rural residents with painfully limited access to banking and financial services. But following the lightning quick rise in internet penetration and mobile phone adoption in recent years, banks have been able to bring previously unbanked people into their fold using creative, hi-tech methods, such as agent banking.

The concept is simple. Banks and microfinance institutions arm individuals with training and mobile technology to become the informal bankers of their villages. It is a means of reaching rural, remote and underbanked populations far away from a physical bank branch.

It allows, for example, a fish farmer in remote Madura, an island off the northeastern coast of Java, who wants to apply for a loan, to avoid a treacherous journey by motorbike 50km to to the closest bank, and instead, visit his neighbour, a registered bank agent. The agent could make the loan application in minutes using a smartphone.

In 2018, 63.1 per cent of Indonesia’s rural residents were aware of banking agents in their region, a staggering increase from 19.4 per cent in 2016, official data show. These agents are key access points for unbanked residents in hard-to-reach spots and are far more valuable to rural residents than to urban ones.

The model has seen success in other parts of the world. In Kenya, nine out of 10 people are banked – financially included – largely thanks to Vodafone’s M-Pesa agent banking service, which is estimated to be worth as much as US$1.5 billion. In the emerging market banking industry, M-Pesa is a shining beacon of proof that financial inclusion via agents is a profitable venture that benefits banks, small and medium enterprises, and the population at large.

An M-Pesa shop in downtown Nairobi, Kenya. M-Pesa allows phone users who do not have bank accounts to send each other money. Photo: Reuters

In Indonesia, where nearly two-thirds of the 264 million people own at least a mobile phone, there are more Indonesians with smartphones than bank accounts. This creates a gap ready to be filled by digital banking solutions. But for now, in Southeast Asia, the human touch is still required.

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