The Effect of Financial Inclusion and Financial Technology on Effectiveness of the Indonesian Monetary Policy

Abstract

The existence of non-inclusive households significantly reduces the effect of the interest rate change policy on households inter-temporal consumption decisions. Further, financial inclusion is closely related to fintech. On the one hand, fintech helps overcome the financial inclusion problem because fintech manages to reach those who were previously inaccessible by banks. On the other hand, fintech will change the payment system structure in an economy that will eventually affect the effectiveness of monetary policy. Using the Vector Error Correction Model (VECM) with the observation period of 2009–2018, this study aims to analyze the effects of financial inclusion and fintech on effectiveness of the Indonesian monetary policy within the framework of the transmission mechanism of monetary policy through interest rate channel with both the cost of capital effect and the substitution effect. The results demonstrate that financial inclusion level affects inflation rate as a proxy of effectiveness of the Indonesian monetary policy, both in the short run and long run. However, the effect of shocks in financial inclusion on inflation is not permanent. Meanwhile, fintech only affects inflation rate in the short run. However, shocks in fintech affect the volatility of inflation rate is permanent both through the substitution effect and the cost of capital effect.

Assessing the Impact of Financial Inclusion on Inflation Rate in Developing Countries

“…In other words, whenever financial inclusion increases by 1 unit, the inflation rate will decrease by 4.66 units. The findings are in line with Mbutor and Uba (2013); Mehrotra and Yetman (2014); Lenka and Bairwa (2016); El Sherif, (2019); Saraswati et al (2020), who show that financial inclusion has a significant negative impact on the inflation rate. In other words, financial inclusion positively affects the effectiveness of the monetary policy, as reflected by the inflation rate.…”

Analysis of determining the financial inclusion index of composite, conventional and sharia banking in Indonesia

“…However, there is also much discussion about the meaning of financial inclusion. According to Bank Indonesia (2014) in Saraswati et al (2020), financial inclusion is defined as all efforts to promote public access to financial services by removing price and non-price obstacles.…”

Areas and activities influenced by the fintech industry

“…Therefore, the fintech industry offers a solution for banking the unbanked in economies with different levels of development. Fintech companies promote financial inclusion for individuals and SMEs neglected by the traditional providers of financial services due to profitability and cost issues [18]. The digital technology utilized by fintech companies enables unbanked, low-income households and SMEs to transfer money, save, invest, lend, borrow, or buy insurance using mobile apps and other online channels [12] [19].…”