The Case for Branchless Banking in Thousand Islands, Indonesia

North of Jakarta’s coast lies the Thousand Islands, Kepulauan Seribu, a strip of over 500 Indonesian islands stretching far into the Java Sea. The only way to reach Kepulauan Seribu is by boat, leaving many of the 25,000+ residents relatively disconnected from formal financial services. Until now, the boat ride across the sea has separated the islands’ residents from acquiring and accessing personal bank accounts.

The introduction of branchless banking currently under consideration by Bank Indonesia (Indonesia’s central bank) could bridge this gap by allowing banks to use local agents on the islands and residents' mobile phones as access points for financial services and cash.

In mid-December, researchers with e-MITRA, a local project funded by USAID’s Global Broadband and Innovations Program to support and accelerate the offering of mobile financial services in Indonesia, traveled to three of the islands to profile the residents’ financial practices and the availability of banking services. In the entire cluster of islands there is only one bank branch and three ATMs.


A bank in the Indonesian Islands A bank in the Indonesian Islands

The solitary bank branch is on Pulau Pramuka and is housed next to the district government’s administrative headquarters. The island itself is described as a “cyber-island,” with WiFi connectivity and a broadband learning center. Local school children visit the branch quarterly with their passbooks to record receipt of school stipends. Despite the presence of the bank branch, only half the residents have a bank account, the rest choose to store their cash at home or with Arisans (a form of rotating savings and credit associations in Indonesian culture). This practice isn’t without consequences. Local residents who wish to get business loans are often deemed ineligible because they have no bank account and no credit history.

For schoolchildren on the other islands without bank branches, accessing school stipends is much more complicated. In fact, their only option is find one of three ATMs in the region, which probably means traveling several hours by boat. This is inconvenient and unreliable, especially in the face of bad weather when the boats don't run.

Even on some islands where ATMs are present, access is tricky. For example, the largest island, Pulau Tidung, currently has a solitary ATM housed in the district office. Cash is only replenished with the arrival of the cash-carrying boat, which comes once per week. At peak demand time, like the holidays, the ATMs can quickly become cashless, sometimes in less than just three days. 

Within sight of the ATM is a bicycle shop where a tour guide, Firman, repairs bikes in his spare time. Dependent on the predominant economic activity for the island, tourism, Firman has four bank accounts to receive deposits and tour fees. He uses online banking to transfer money between accounts but has to travel the six-hour round trip boat ride to Jakarta to reach a branch once or twice a month. Women shopkeepers four doors down from the bike shop don’t have bank accounts or care to use the ATM and instead rely on a local money collector to hold their cash. The local money collector makes daily rounds to collect cash from over 100 business owners, records the amount in a notebook and then makes a lump sum deposit into her own personal bank account. Her fee for this service is the interest earned on the deposits.


A woman with her financial passbook A woman with her financial passbook

Untung Jawa is the closest of the islands to Jakarta but has no formal financial services. Shops on the tourism-dependent island only take cash. There is no bank or ATM for visitors to withdraw Indonesian Rupiah. As a result, tourists must limit their purchases and handicrafts remain unsold. In addition, there is a continuous loop of cash traveling to and from Jakarta. For example, Fahrula, a local government leader, receives his salary in cash delivered by boat from Jakarta to the island. Once he has the cash, he then boards a boat back to Jakarta to deposit a percentage of it in his savings account. Given this experience, Fahrula works to improve conditions for residents on the island and says lack of access to financial services is one of the top concerns of residents.


Women selling coconout

While financial access is virtually absent, mobile phone usage on the islands and across Indonesia is notably high with unique mobile connections (registered SIMs) at over 100%. Most of the islands’ residents own a mobile phone, ranging from basic phones to smartphones with Internet access, which holds promise for the delivery of banking services through mobile phone and branchless banking agents. With branchless banking, salary payments could make a one-way trip to the islands electronically and be cashed out locally. Tourists could withdraw cash from agents to pay local shop owners and hosts for homestays. Schoolchildren could use their phones to receive school stipends, withdrawing only what is necessary and saving the rest. Local businesses and entrepreneurs could get a loan to start or grow their businesses. With the introduction of branchless banking, residents of Kepulauan Seribu could finally save.

While branchless banking has the potential to increase financial inclusion for the islands’ residents, building financial capability among residents is an important first step. Fortunately, the local government leaders see the promise branchless banking can offer island residents and recognize the need for financial training and education. Such leadership and commitment will be essential in introducing new financial behaviors across the islands. With its proximity to Jakarta yet remote financial access, Kepuluaun Seribu could provide a great example for increasing financial inclusion with branchless banking throughout Indonesia.

Shelley Spencer is the Project Director for NetHope's Payment Innovations Team; Hilman Palaon is a Project Director for e-MITRA and is based in Jakarta, Indonesia. E-MITRA’s work focuses on providing technical advisory services to essential participants in Indonesia’s Mobile Financial Services (MFS) / Branchless Banking sector, including Mobile Network Operators, financial institutions, payment platform providers, etc. The program is designed to assist in the development of strategies that lead to the growth and scale of MFS platforms in Indonesia, provide concrete tools to create MFS strategies and, ultimately, help drive momentum for private sector offerings of economically viable MFS products that reach the poor and unbanked.

Sub-topics: Payments


30 January 2014 Submitted by Shelley Spencer (not verified)

Thanks Mindi. With its large population and sophisticated banking and mobile telecommunications infrastructure Indonesia is poised to be a leader in branchless banking in the next few years. The recent branchless banking pilots were a success and providers are lining up to address this market which we hope will reach the underserved like those on Thousand Islands.

05 February 2014 Submitted by Sakshi (not verified)

Great Work Shelley Spencer & Hilman Palaon. I always feel Liquidity management of the Agent in inaccessible/remote locations can get tricky; Look forward to know how that can be tackled.

05 February 2014 Submitted by Shelley Spencer (not verified)

Thanks Sakshi. You are absolutely right about the challenge of agent liquidity. We have seen the providers in Indonesia thinking seriously about how to tackle this issue as they await final regulations. Like other countries, providers are looking at agent network managers or using retail chains with cash volumes but regulatory clarity is needed to permit liquidity management by third parties. Also we are seeing a lot of interest in using advanced agent management tools to track transaction flows and float and help re-balance and supply sufficient liquidity in peak and off peak times. We are not there yet as evidenced by the article in the Jakarta this week describing one bank's approach of putting ATMs on boats to reach islands once a month in another region of Indonesia. It does seem there is a better solution with branchless banking using agents on the land of the islands. We look forward to providing future updates. 

04 September 2014 Submitted by Ryan (not verified)

Interesting piece thanks for sharing. Is there an example of something like M-PESA existing in Indonesia? Looking forward to hearing about any developments (if there have been some already could you share a link?).


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