Access to financial services

Seminar on Achieving Double Bottom Line: Inclusive Finance and Social Performance Management

Micro and Small Enterprises (MSEs) are an important source of employment and economic output in Indonesia. Almost 99.8 percent of over 57,900,000 firms in Indonesia are considered as micro and small enterprises1. MSEs provide jobs to over 93 percent of the labour force engaged in wage employment. However, in terms of value added MSEs contribute relatively less to GDP (43 percent) compared to medium and large businesses (57 percent).

Background

Micro and Small Enterprises (MSEs) are an important source of employment and economic output in Indonesia. Almost 99.8 percent of over 57,900,000 firms in Indonesia are considered as micro and small enterprises1. MSEs provide jobs to over 93 percent of the labour force engaged in wage employment. However, in terms of value added MSEs contribute relatively less to GDP (43 percent) compared to medium and large businesses (57 percent).

With a concentration of workers in MSEs, productivity in these firms remains quite low compared to large enterprises. According to ILO2, annual labour productivity growth in small and medium sized manufacturing enterprises averaged only 1.1 percent from 2005 to 2013. On the other hand in large manufacturing firms, the average annual labour productivity growth was 4.3 percent.
One of the major constraints faced by MSEs which affects their growth is lack or limited access to financial services.

There are a range of financial (banking and non-banking) institutions offering services in the market. Commercial banks dominate the industry in terms of their assets. There are also more than 1,600 rural banks (BPRs) providing limited banking services to individuals and MSEs. In addition to that, at the downstream level, Bank Rakyat Indonesia has over 4,417 units catering to rural population.

Besides banks it is estimated that there are 36,486 saving and lending cooperatives (USP), and 3,297 pawnshops providing microfinance services3. Despite the rapid growth of the financial sector and presence of several banking and non-banking institutions, access to finance remains a challenge for MSEs, perhaps understandably, in an archipelagic country as large as Indonesia.

While access to finance is limited, several financial institutions in Indonesia are also grappling to strike a balance between their commercial and social objectives. Globally, there is an increasing recognition that clients can no longer be treated simply as means to maximize profit. A long-term view that places a client at the center of the business is not only a responsible way of doing business, it also yields greater returns for the financial institution.

Against the above backdrop, the International Labour Organization (ILO) with funding from the Swiss State Secretariat for Economic Affairs (SECO) and in partnership with the Ministry of Manpower (MoM) has launched a programme, titled PROMISE IMPACT, to support micro and small enterprises to access to quality financial services which can contribute towards productivity, growth, and employment. One of the key interventions of the project is to assist financial service providers (FSPs) in Indonesia to mainstream social performance in their services and thereby deliver greater value to the clients.

As part of PROMISE IMPACT, a seminar is being organized to share experiences and practices in delivering financial and non-financial services by financial institutions to achieve what is often referred as the “double bottom line”. A conventional bottom line is an accounting concept to measure fiscal performance in terms of profit or loss. A double bottom line extends the concept of profit or loss to measuring social impact.

Purpose & Outputs

The purpose of the seminar is to provide a platform for exchanging knowledge in inclusive finance, decent work and social performance management (SPM) as part of a strategy to achieve economic and social development. While access to finance for MSEs is no doubt constrained in Indonesia, an equally challenging task is to ensure that services delivered by financial institutions mirror the needs of MSEs and help to create greater value for the clients, result in improvements in the business, and at the same time enable financial institutions to earn good financial returns for their investments.

The seminar aims to take stock of global experiences in delivery of financial services with an objective to maximize both financial and social returns. Firstly, the evolution of SPM will be discussed as a conceptual and operational framework to mainstream social objectives in financial services. SPM is a structured system that financial institutions are increasingly using to achieve not only their financial objectives, but also their stated social goals.

SPM can help financial institutions to put customers and their businesses at the center of their financial services. With over 3,000 members, the Social Performance Task Force (SPTF) is a non-profit organization that has developed SPM standards and seeks to promote financial services that adhere to these normative standards.

Many commercial businesses including the banking industry is no doubt familiar with terms such as “customer satisfaction” and “customer demand”, but these are often seen in terms of their short-term transactional value. Providing services responsibly and with an explicit aim of creating value for the clients and helping them improve their businesses while ensuring healthy returns helps financial services providers to look beyond short-term profitability.

SPM provides a clear framework for financial institutions to adapt business processes, realize their financial objectives, as well as contribute towards social welfare of their clients.

Secondly, the participants of the seminar will be able to see results from a cross-country action research project which was led by the International Labour Organization. We will be able to see how different financial institutions working in diverse settings from Latin America to Southeast Asia were able to tailor their services and achieve greater financial and social benefits.