Presented at the 1 st International Islamic Financial Inclusion Summit Solo, July 18th, 2012 Yoko Doi, Financial Sector Specialist Financial and Private Sector Development Unit World Bank Jakarta Office 1 Consumer Protection and Financial Literacy: The principle of Product Development in Financial Services Sector

Outline of Presentation: 2 1.Importance of Consumer Protection and Financial Literacy (CPFL) for Financial Inclusion 2.The Principles of Product Development: Financial Inclusion & Consumer Protections: Good Practices from other countries 3.World Bank’s engagements on CPFL Globally and in Indonesia

3 Importance of Consumer Protection and Financial Literacy (CPFL) for Financial Inclusion

4 Financial inclusion is a four dimensional aspects Meet the needs of consumer Stability & improvement to family, business, & economy Regularity & duration of use Increase in Financial Penetration 1.Access2.Usage 3.Quality4.Welfare 4

CPFL is Important for Financial Inclusion 5  Benefits of increased financial inclusion may be undermined (or lost) by weak financial consumer protection  Weak regulation of consumer finance leaves consumers vulnerable to abuse  reduced consumer trust in financial sector  reduced use of formal financial services  Weak financial literacy means that consumers cannot protect themselves  CPFL one of 9 principles of innovative financial inclusion

Many Stakeholders … but Financial Supervisors Play the Key Role 6 Government Ministries (e.g. Finance, Economy, Education) Public agencies (e.g. consumer protection, data protection, competition) Councils (e.g. consumer protection, education) Financial Supervisors Financial supervisory agencies Central bank Financial consumer protection agency Compensation schemes Financial Industry Industry associations Training centers Financial institutions (incl. distributors) Financial infrastructure (e.g. credit bureaus) Civil Society Consumer associations Debt counseling Foundations Academia Media Redress mechanisms Ombudsman Arbitration Mediation, conciliation Courts International Community Donors Regional organizations Standard setters International associations

Roles of Financial Supervisors in CPFL Programs 7 1) Issue regulations on minimum standards of financial consumer protection  Require clear consumer disclosure & easy access to comparable quotes, prohibit unfair/deceptive/misleading practices 2) Review consumer complaint files to identify trends of consumer abuses. 3) Encourage industry associations to develop conduct codes, standard formats on disclosure, redress mechanisms. 4) Research consumer behavior in use of financial products. 5) Monitor financial markets for new risks to consumers. 6) Promote financial education of consumers.

8 The Principles of Product Development: Financial Inclusion & Consumer Protections: Good Practices from other countries

What Can Go Wrong? 9 Product transparency Deceptive ad, excessive small print - -consumer don’t understand total cost Overcharging Non-authorized or proper extra charge & commissions on consumer Sales practices Aggressive sales technique Inadequate documentations Copies of contracts or receipts are not given to customers Privacy, security, permission to share with third parties Unsure whether consumer personal data will be treated appropriately Recourse Unaware about the right to complain or errors resolve (how, where, or fail to receive appropriate redress) Deposit products Savings are eroded by hidden fees Deposits are lost to fraud Credit products Don’t understand terms and conditions of loan agreement Pay high price Take on to much debt Exposed to loan officers ask for ‘gift’ to complete loan process Subject to intimidation, abuse, or humiliation by collection staff/agents Payment services Transfer money to the wrong person & don’t know how to correct it Lose their personal identification number or have it intercepted electronically by a fraudster Insurance Don’t understand, or fail to receive policy benefits Don’t realize that the loan price includes credit life insurance (paying more than expected & failing to benefit from the insurance Cross-cutting consumer protection concerns Product-specific concerns

World Bank’s Good Practices for Financial Consumer Protection support G20 High Level Principles Focus on 4 areas: 1) Consumer Disclosure 2) Business Practices 3) Complaints & Dispute Resolution 4) Financial Literacy Banking Securities Non-Bank Credit, Incl. MFI Credit ReportingPrivate PensionsInsurance 10

11 Consumer Disclosure Business Practices Consumer Redress Financial Literacy Simple Easy to understand Accessible Comparable How do you know if it is working? Try consumer testing

12 Helping Consumers Shop Around Makes a BIG Difference Credit Card Loans Average Interest Rates in Peru Source: Superintendence of Banking, Insurance and Private Pension Funds of Peru

13 Business Practices Consumer Disclosure Business Practices Consumer Redress Financial Literacy Free choice of financial products Prohibition of unfair, abusive, misleading practices Retail sales officers trained and qualified

14 Consumer Redress Consumer Disclosure Business Practices Consumer Redress Financial Literacy Financial ombudsman Complaints department in every financial institution

15 Financial Literacy Consumer Disclosure Business Practices Consumer Redress Financial Literacy Household Surveys of Financial Literacy & Consumer Behavior Financial education targeted on: Risks/rewards Rights/obligations Impact Measurement Studies

World Bank’s engagements on CPFL Globally and in Indonesia 16

World Bank Strategy for Country CPFL Programs Baseline Household Survey of Financial Literacy & Consumer Behavior Action Plan to Implement Recommendations Diagnostic Review of Legal & Regulatory Framework Implementation Program 17 Follow-up Household Survey Feedback Loop Input

Implementation Programs Action Plans -In pipeline Household Surveys -In pipeline Diagnostic Reviews -In pipeline World Bank CPFL Programs

World Bank Engagement and Contribution to Global Dialogues  Methodology for assessing country financial consumer protection regimes: “Good Practices for Financial Consumer Protection”  “Consumer Protection and Financial Literacy: lesions from Nine Country Studies”  18 Country Diagnostic Reviews  18 Country Household Surveys  3 Country Action Plans + 2 Implementation Program  Member of Financial Stability Board Consultative Group on Financial Consumer Protection  Member of OECD Task Force for High Level Principles on Financial Consumer Protection 19

The Range of Financial Inclusion Engagements in Indonesia Pilot Project (Research on Fin. Literacy Assessment on MWs) Diagnostic Stage Individual Projects (TA to GoI etc.) Macro / National Strategy Two Diagnostics Studies Fin Literacy ToT for GoI NSFI development Microinsurance Regulatory Framework Microinsurance Marketplace Evaluation of TabunganKu (Basic bank account) Review on MW Microinsurance Reform on GoI funded PNPM Mandiri RLFs Scheme Branchless Banking regulatory review Assessment on KUR (GoI Credit Guarantee Program) Islamic Finance for MSMEs Strengthening Savings & Loans Cooperatives

21 This pilot is a randomized research. The main objective is to evaluate the impact of financial literacy training for migrant workers and their families and to explore the effective ways to improve their knowledge in managing their remittances Development of financial literacy training modules for migrant workers and migrant workers’ families, and development of training supporting tools Providing financial literacy training: trainings are conducted for migrant workers who have registered to recruitment agencies (PPTKIS) to work overseas and/or their families. Phone and face to face monitoring were carried out to assess how the training affected the household’s financial behavior. Activities Output and Outcome Modules: Training Guidelines, Trainer’s Guide for Migrant Workers, Trainer’s Guide for Migrant Workers’ Family; and supporting training tools: poster, comic book, financial book, and brochure Overall, 432 migrant workers and/or their families from Greater Malang area have been trained Currently, the pilot is analyzing all the data collected from the monitoring stage. Report on the results are expected to be published in mid June Preliminary analysis of the monitoring data shows that there is a positive correlation between financial literacy training and opening savings account. Pilot Project on Financial Literacy Training for Indonesian Overseas Migrant Workers and Their Families Partners: CMEA, BNP2TKI, Disnakertrans Malang, PPTKIS WB Initiatives

22 ToT on financial literacy for staffs of BNP2TKI, BP3TKI (regional office of BNP2TKI, in 19 provinces across Indonesia) & Govt-owned banks; 2 batches in 2011 & 1 batch in 2012 Mentoring and monitoring during BNP2TKI – BP3TKI financial literacy trainings to MWs and MWs families: 17 provinces in 2011 (April – November 2011) and 9 provinces in 2012 (March – July 2012) Activities ToT implementation: March 29 – April 8, 2011, 58 staffs from 19 BP3TKIs, Bank BRI, Bank BNI, Bank Mandiri, TIFA Foundation, and Sahabat Wanita Foundation participated in the training. March 5 – 8, 2012, 37 staffs from 19 BP3TKIs, Bank BNI and Bank Mandiri participated in the training. Monitoring tools formulated: checklist, pre test/post test questionnaire, time keeping form, mentoring & monitoring form Overall, 1,287 people were trained in 2011 (542 MWs, 723 MW’s families, 22 ex MWs) Mailing list established (for BNP2TKI & BP3TKI staff) as a media to discuss, learn, and share experience in conducting FL training FL advocacy video produced, and FL training tutorial video in production process Website on MWs financial education is under construction TA to Support GOI’s Financial Literacy Initiatives for Indonesian Overseas Migrant Workers and their Families Partners: CMEA, BNP2TKI, BP3TKI, Disnakertrans, Government-owned Banks Outcome BNP2TKI staff gained competency as mentor & Master Trainer during ToT in 2012 Banks (BRI, BNI and Mandiri )committed to provide support to BNP2TKI by involving their trainers in the ToT Bank Mandiri committed to expand FL training as part of its CSR activities Output Supporting Government Initiatives

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