Combating Poverty in Agriculture Sector

Through Inclusive Financial System:

Case of Indonesia
Posman Krismanto Sitinjak - MID – 2018280813

Abstract
Around 48 percent of poor population in Indonesia comes from agricultural sector. One of
government program to solve the issue is implementing inclusive financial system which lowering
the barrier for people to access financial services at reasonable cost and broaden financial system
service coverage. At present, distance and cost had become the major constraint for people to
access financial services. However, the program only had a little influence to reduce the distance
to the financial services. Half of the agent employed by the program located only around 2 km to
the nearest bank. The high credit interest rate regime in Indonesia financial system also prevents
the agricultural labor to access credit services from financial institution.
1. Introduction
Indonesia is located in the South East Asian (SEA) Region with population around 230 million in
2015. Its Gross Domestic Product (GDP) had been increased gradually in the last ten years and
become one of 20th largest economic in the world and the number one economic in SEA region
although the GDP per capita is relatively low because its big size of population. Poverty rate,
measured by international poverty line, had also improved since the last fourteen years from 54.3
percent live under poverty in 1990 to 9.1 percent in 2014 (BPS,2015).
Agriculture has a significant role in Indonesia economic and social development. The term
agriculture here is not limited to crop production but also livestock, plantation, and fisheries. It
contributes 13 percent of national GDP and around 35 to 40 percent of the national labor
workforce. Compared to the total number of population, it accounts for around 13% of population.
Moreover, 49% of Indonesia population live in rural area that depend its daily life to agricultural
activity.

Figure 1. Agriculture Contribution to Indonesia GDP Compared to Other Sector

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Despite its significant to the national economic, farmer and peasant lie in the bottom 40% of
population in term of poverty. Indonesia National Statistics Bureau publish yearly index to indicate
the farmer welfare level called Nilai Tukar Petani (NTP). The value above 100 simply means the
price of goods produced by farmer more than the price of goods consumed. The value equal to 100
means both the goods price is relatively same. While value below 100 means the price of goods
consumed are greater than goods produced. Since 2013, the indicator has decreasing to 100 which
means large portion of income only sufficient to satisfy primary need.

Figure 2. NTP Index Since 2013

Inclusive financial system, the opposite of financial exclusion, refers to broad access of appropriate
of financial system (Asli D, Leora K; 2013). Allen et al, define access to the financial system made
through formal institution like banks, credit union, and post office (2015). Sarma argues that easy
access, availability, and usage of formal financial system is for all member of economy (2010).
World Bank report in 2014 measured financial inclusion by counting the proportion of people and
firms use financial services like saving account, credit, and payment. Nevertheless, there is a
possibility that some people decide not to use the service for particular reason although they have
an affordable access to it. The term financial product and service is not only limited to the bank
saving account but also credit, insurance, and payment system. Those services are offered not only
by a conventional bank but also by any legal institution including what we called today as a
financial technology (Fintech).
Since the publication of World Bank Report in Financial Inclusion Index (Findex), Indonesia had
made an improvement in the effort to made its financial system accessible. In 2011, only around
20 percent of Indonesian adult have an account in financial institution. The number doubled to 49
percent in 2017.
Access of affordable financial services to the agriculture industry is very crucial. Economic
Census in 2016 revealed only 15 percent of farmers had access to credit services, 52 percent relied
on self-financing or family loan, and 33 percent depend on government subsidy program. Without
having access to the appropriate financial product such as credit, farmer will not have enough
capacity to expand their production. The challenge for formal financial institution to give credit
for farmer is uncertainty nature of farming business in Indonesia due to risk in pest, price
fluctuation, climate change, etc. Moreover, 90% of agriculture industry in Indonesia is household

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industry which have land less than 2 hectares. As consequences, interest rate for is relatively high
compared to other sector.
Therefore, this study would like to answer the two following question: (1) Do financial inclusion
program in Indonesia work effectively? (2) What is the challenge in achieving an inclusive
financial system for agricultural sector in Indonesia;
2. SDGs & Financial Inclusion
Financial inclusion can assist poor and marginalized community out of their poverty by providing
a mean to develop their economic (Asli D, Leora K; 2013). It also open opportunity to reduce
income inequality among society (Kempson et al; 2000) particularly for women and older one. For
example, by having an access to financial services like micro finance and saving accounts, people
can have opportunity to start their business, have access to a wider market for their product, or to
save their money for education purposes. Sarma asserted based on cross country data analysis,
level of financial inclusion positively correlated with human development index (2010). In
macroscale, financial inclusion, financial development more generally, spur sustainable economic
growth and poverty reduction (Burgess, Pande; 2005, Levin; 2005). Furthermore, study funded by
Asian Development Bank in 2015 provide evidence that in developing Asian economic, financial
inclusion play a significant role in reducing poverty and inequality (Park, Mercado; 2015). Hence,
although SDGs is not emphasizing financial inclusion as its goals, the role of financial inclusion
in poverty alleviation, combating inequality, promoting sustainable economic growth, which are
the key objectives of SDGs, can’t be deniable.
CGAP and UNSGSA joint research had studied and analyzed evidence of financial inclusion
contribution to the SDGs both direct and indirect. Through evaluating several study cases, it
concluded that inclusive financial system significantly impacting poverty, health, education, and
gender equality and indirectly impacting inequality reduction, growth, and peace.
Field study in Kenya and India revealed the link between inclusive financial system and SDG 1.
Kenya’s mobile money program M-Pesa had enabled its user to maintain their standard of live
during the financial crisis. It also enhanced government subsidy program by preventing corruption
and assuring the effectivity of fund delivery. Another case study is India state bank rural expansion
which successfully reduced the poverty level in rural area by around 15 percent.
Ghana and India agricultural insurance, Malawi saving account program, and Zambia credit
program for farmers gave positive evidence of financial inclusion’s impact on achieving zero
hunger goal by securing food supply. The insurance had affected peasant behavior in investment.
They are more likely to invest in the riskier corps but provide more profit. Then, the saving account
had increased farmer investment to 13 percent and crop production by 21 percent in Malawi. While
in Zambia, short term credit had improved crop output around 10 percent.
Access to health insurance have a strong relationship with good health and well-being. People will
not burden by health spending, whether planned or unplanned, if they are covered by proper
insurance. Research in Jordan show insurance assistance in avoiding loss of income by health
expenditure. Education saving plan help family to secure learning funding for their children. In
Nepal, household had shifted their behavior in managing expenditure when they open bank

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account. Evidence shown that 20% of their expenditure went to the education expense (Prina,
2015).
Global Findex Database 2017 found that 56 percent unbanked adult is women. However, more
women work in informal sector than men. The condition make women is harder than men to get
credit from the bank because they do not have income history in order for bank to verify. Financial
access to women also serve the achievement of other SDGs. FAO research find that if women
could have similar opportunity with man in financial access, they can raise the farm output by 30
percent.
3. Achieving Inclusive Financial System
Government of Indonesia, through Central Bank, had develop program to implement financial
inclusion. Mission of the program are achieving well-literate society and expanding financial
services and institution access. Community based approach is developed to fulfill the specific
financial services demand by particular group which facing barriers to access those services.
The program comprises of three main measures: improve financial knowledge of targeted group,
develop national database system, and facilitate intermediation. Improving financial literacy will
increase financial management capacity and awareness among the targeted group in order for them
to the financial range of services and its associate risk and can select the services based on their
needs. Then, national database system was created to eliminate asymmetric information between
the group and other actors in related sector. At last, government facilitate a linkage between
financial institution and targeted group to seek possible alternative method in providing efficient
financial services.
For agriculture sector, government initiate farmer information system which contain information
related to the sector such as price of fertilizer and pesticide, weather information, distribution
network, and commodity price. Those data could be utilized by government to set the proper
assistance program depend on the farmer condition. For example, if the price of fertilizer is
increasing to certain level, government could provide subsidy for farmer to buy the thing.
Government aid will be channeled through digital financial service which linked to the farmer
cellphone number and financial identity number. Government could also profile the farmer
information related to the financial activity in order to generate rating for credit application
purposes.

Figure 3. Financial Inclusion Program for Agricultural Sector

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Government decision to utilize digital technology in providing financial services due to the fact
that more than 310 million mobile subscribers in Indonesia surpassing the total population and
around 13 million poor household have a mobile phone. Those condition can give opportunity for
a wider program coverage. Use-case of digital financial service could be differentiated in two
mechanisms that is direct and indirect. Direct method links the user to the financial institution
through mobile or web application. While indirect method using agent as liaison between user and
financial institution.
4. Evaluation of Indonesia Financial Inclusion Program
World Bank Findex Report 2017 highlighted, in general, the reason of exclusive financial systems
around the world. Lack of money become the most dominant reason for people not access financial
services. Among the respondent, around 20 percent claimed it as the only reason and around 70
percent claimed it as one of the reasons for them to not have a financial account. Many respondents
also said that they did not need financial account. However, only 3 percent claimed it as the only
reason. The report argues those type of respondent might open financial account if it reachable to
them.

Figure 4. Reason for Not Having an Account Worldwide

Reason for Not Having Account in Indonesia

Money
Distance
Cost
Family Account
Administrative
Trust
Religion
0 20 40 60 80

Figure 5. Reason Indonesia Adult for Not Having Account

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The condition almost similar in Indonesia. In general, lack of money was the main reason for
someone excluded in financial system. 72 percent claimed it as the barrier for having an account
in financial institution. The condition clearly implied that Indonesian people spent their money for
daily needs and left nothing for saving. National Economic Census in 2015, people in Indonesia
spend 19 percent of their monthly income on housing, another 19 percent for goods and services,
12 percent for food, 6 percent for tobacco, and any other expenditure account from 1 to 3 percent.
Distance become the second major constraint for financial inclusion in Indonesia, compared to the
fifth in the the world average. It was hypothetically correct because Indonesia consist of many
archipelagos with not well-developed infrastructure particularly in rural area. Improving
infrastructure condition in rural area has been set as a government agenda in current government
regime. Perusahaan Listrik Negara (PLN), a state own enterprise, who mandated by the
government to expand electricity network set a 100 percent of coverage in rural population by
2019. It utilizes renewable energy resources such as biomass and wind to deliver efficient
electricity delivery in the remote area. The achievement is relatively on track with 95,35%
coverage in 2018. Government with collaboration with private enterprise also building
communication infrastructure paralleled with electricity in 5000 remote villages throughout the
country.
Cost constraint significantly occurred when people obtain credit from the bank particularly for
poor people. Indonesia interest rate is one of the highest among SEA region. Central Bank of
Indonesia maintain its interest rate at 6 percent compared to Brunei (5.5%), Filipina (4.75%),
Malaysia (3.25%), Singapore (1.75%), and Thailand (1.5 %). Bank efficiency in Indonesia were
also low compared to any SEA countries. The need to cover operational cost range from 2.5 to 4
percent of asset while Malaysia (2%) and Singapore (1%). On the contrary, Indonesian Bank also
the most profitable among G-20 countries with return on equity around 23 percent compared to
China (21%) and United States (9%). The issue of high interest rate would not be severe if farmer
and peasant have adequate asset as collateral and good saving pattern. However, based on
agriculture national census in 2013, 53.33 percent of farmer household only own less than 0.5
hectares. In fact, the average land ownership was only 0.89 hectares per households. Latest
economic census in 2012 also showed 48.8 percent of poverty are agricultural household. Labor
in agriculture sector only paid 40,302 rupiah (around US$ 4) compared to 65,148 rupiah (around
US$ 6.2) in construction sector. Therefore, those high interest rate will reduce the ability and
capability of poor people to get loan from the bank.
Since the launching of digital financial services (DFS) in 2015, the customer was significantly
increased around 1000 percent from 2015 to 2017 and the number of mobile money circulation
was rose 29 times until 2017. However, from this achievement, only 28% of user comes from the
population which never have formal financial account. Statistics implied that the program had little
significant to improve financial inclusion in Indonesia. Chaikal research in 2018 found that the
main constrain for not having digital financial services through the platform was non-price barrier.
The work found awareness issues become the major reason account for 80%. Related to the
distance barrier, the research also found out half of DFS agent located only 2.31 km from the

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nearest bank and 2.28 km from the nearest ATM machine. The information show the program still
not effectively reached out the unbanked population particularly in rural area.
5. Conclusion
Although inclusive financial system not solely solved poverty issues in agricultural sector, it assists
the marginalized and poor to step on the ladder of economic through delivery of affordable saving
account and low interest credit. Cost and distance become the major barrier for unbanked people
to access financial services. While distance barrier impacting farmer to have a saving account, cost
barrier impacting farmer to get credit access from financial institution. Although Indonesia
Financial Inclusion Program aim to serve the unbanked population, its implementation still lagged
from their main objective. Most of customer registered to the program already have financial
account. The program also failed to deal with distance problem faced from the unbanked
population because its service point just located near bank or ATM services. Central Bank of
Indonesia should also emphasize their effort to raise the efficiency of financial institution operation
and competition in order to expand the coverage of credit delivery to the poor. At last, Government
also need to literate the citizen the importance of having a deposit account and saving pattern in
their expenditure composition.
6. Reference
Allen, F., A. Demirgüç-Kunt, L. Klapper, and M. S. Martinez Peria. 2012. “The Foundations of
Financial Inclusion: Understanding Ownership and Use of Financial Accounts.” Policy
Research Working Paper no. 6290. Washington: World Bank.
Asli Demirgüç-Kunt, Leora Klapper. 2013. “Measuring Financial Inclusion: Explanation
Variation in Use of Financial Services across and within Countries”. Brookings Institution
Press
Badan Pusat Statistik (BPS). 2013. “Sensus Pertanian Tahun 2013”. BPS.
Badan Pusat Statistik (BPS). 2012. “Sensus Eknomi Tahun 2012”. BPS
Burgess, R and R Pande. 2005. “Can rural banks reduce poverty? Evidence from the Indian social
banking experiment”, American Economic Review, vol 95(3), pp 780–95.
FAO (Food and Agriculture Organization). 2011. “Women in Agriculture: Closing the Gender Gap
for Development.” The State of Food and Agriculture 2010-11. Rome: FAO.
Kempson E, Jones T. 2000. “Banking Without Branches”. British Bankers Association.
Levine, R (2005): “Finance and growth: theory and evidence”, in P Aghion and S Durlauf (eds),
Handbook of Economic Growth, Elsevier.
Nuryakin, Chaikal. 2018. “Toward Higher Financial Inclusion Rate: Service Quality, Cost of
Access, and Awareness”. LPEM-FEB UI Working Paper 021. Jakarta.
Nuryakin, Chaikal. 2017. “Financial Inclusion through Digital Financial Services and Branchless
Banking: Inclusiveness, Challenge, and Opportunities”. LPEM-FEB UI Working Paper
008.

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Prina, S. 2015. “Banking the Poor via Savings Accounts: Evidence from a Field Experiment.”
Journal of Development Economics, Vol. 115: 16-31.
Sarma, Mandira. 2011. “Financial Inclusion and Development”. Journal of International
Development. 23, 613-628.
Suku Bunga Negara di Asia (2018, Oktober). Retrieved from https://id.tradingeconomics.com/
country-list/interest-rate?continent=asia.
World Bank. 2014. “Global Financial Development Report 2014: Financial Inclusion”.
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World Bank. 2017. “Global Findex Database 2017”. Washington, DC.

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