Association for Public Policy Analysis & Management

An inclusive financial system is substantial for development. As mentioned in the United Nations’ Sustainable Development Goals, increasing access to financial services for all communities promotes development and alleviates poverty. Indonesia, an archipelagic country with a population of over 250 million, still strives with the problem of both persistent poverty and relatively exclusive financial system. In the last ten years, the percentage of the country’s poor population has not been lower than 10 percent (or more than 25 million people) and only 36% of the adult population has a proper access to formal financial services.

This study has two aims. First, it intends to discover the factors determining access to financial services among Indonesian population. Second, it aims to find the association between financial inclusion with poverty reduction. In meeting the objectives, the study employs quantitative method, analyzing the financial sector module of the National Socio-Economic Survey (Susenas) of 2015. Susenas module is nationally representative, which covers about 71 thousand household observations, chosen through a clustered, stratified random sampling approach.

The study uses logistic regression technique to predict the determinants of access to financial services. Several household level characteristics are hypothesized as the financial sector access predictors, including the household head’s age, gender, education attainment, and employment status, as well as the household’s welfare status, housing condition, access to technology, and participation in government programs. To examine the association between financial inclusion and poverty alleviation, this research compares the economic well-being of households with and without access to financial services. Because financial inclusion is not random, a Propensity Score Matching (PSM) approach is employed to create comparable intervention and comparison groups. The determinants of financial sector access are then used as the matching variables.

The analysis on the financial inclusion determinants suggests significant associations between some household characteristics and access to financial sector. Education is particularly important. Household heads with a college degree have 10 times higher probability to access financial sector, when compared to those without any education degree. Households with access to technology are also more likely to utilize financial services. While having a job increases access to financial sector, those who work in agricultural and informal sectors are less likely to have any connection with financial sector. Finally, households with female heads and living in less developed areas have relatively lower access to financial services.

The poverty reduction analysis implies a positive association between accessing financial services and escaping poverty. Households with access to financial services have a higher per capita consumption expenditure, when matched up against the comparable households without any access to financial products. Additionally, households which have a proper linkage to financial sector are significantly less likely to fall into poverty.

The study seeks to provide some policy suggestions to the Indonesian government. Knowing the promising findings, the study especially advocates for more expansive financial inclusion programs to help accelerate poverty eradication in the country.