Presented at the 1st International Islamic Financial Inclusion Summit Solo, July 18th, 2012

Yoko Doi, Financial Sector SpecialistFinancial and Private Sector Development Unit

World Bank Jakarta Office

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Consumer Protection and Financial Literacy:

The principle of Product Development in Financial Services Sector

Outline of Presentation:

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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

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

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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.Access

2.Usage

3.Quality

4.Welfare

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CPFL is Important for Financial Inclusion

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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

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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

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1) Issue regulations on minimum standards of financial consumer protectionRequire 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.

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The Principles of Product Development: Financial Inclusion & Consumer Protections: Good Practices

from other countries

What Can Go Wrong?

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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/agentsPayment 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 Disclosure2) Business Practices3) Complaints & Dispute Resolution4) Financial Literacy

Banking

Securities

Non-Bank Credit, Incl. MFI

Credit Reporting

Private Pensions

Insurance

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Consumer Disclosure

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

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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

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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

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Consumer Redress

Consumer

Disclosure

Business Practices

Consumer Redress

Financial Literacy

• Financial ombudsman

• Complaints department in every financial institution

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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

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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

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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

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www.worldbank.org/consumerprotection

The Range of Financial Inclusion Engagements in Indonesia

20072008

2009 2010

2011

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2012

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

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• 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 2012.

• 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 FamiliesPartners: CMEA, BNP2TKI, Disnakertrans Malang, PPTKIS

WB Initiativ

es

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• 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 FamiliesPartners: 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

Terima Kasih

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