In the last decade, financial literacy has become one of the policy focuses of government agencies and financial institutions. There is a great concern that consumers tend to lack of financial concepts and do not have the tools they need to make financial decisions. The improvement of financial literacy is expected to contribute to a more stable financial system and reduce financial fragility.

The evidence reveals that the level of access to finance in Indonesia is still quite low. This can be observed in terms of the level of access of Indonesian households to savings and debts at the banks. The result of Bank Indonesia’s Household Balance Sheet Survey (HBSS) 2011 shows that the number of Indonesian households that possess saving accounts at the banks in 2011 was only 43.57 percent, whereas the number of households that can access debts from the banks in 2011 was only 19.58 percent. As alternatives, a high number of Indonesian households borrow from the non-bank financial institutions (such as cooperatives and micro finances) and non-financial institutions (such as rotating savings and credit association (RoSCA), families, friends, and neighbors, money lenders, etc).

A number of countries and organizations have been regularly conducting financial literacy surveys and developing financial literacy indices. These data have been useful in designing appropriate policies for improving financial literacy. To keep in line with the current development, the policymakers in Indonesia have been paying increasing attention to the improvement of financial literacy in the form of financial education programs as a part of the strategy to improve financial inclusion in Indonesia. “Developing Indonesian Financial Literacy Index” was a collaboration study of DEFINIT, SEADI (The Support for Economic Analysis Development in Indonesia), and Otoritas Jasa Keuangan (OJK) to develop a robust methodology to measure the level of financial literacy index in Indonesia. The pilot survey of the study already implemented in three highly developed cities, i.e. Medan in North Sumatera, South Jakarta in DKI Jakarta, and Surabaya in East Java. The pilot survey in each city was conducted in three sub-districts (Kecamatan), each representing low, medium, and highly developed sub-district. In each sub-district, the pilot survey was conducted in the village (Kelurahan) where the capital of the sub-district or the sub-district office (kantor Kecamatan) was located, with total number of respondents was 450 respondents.

The survey not only measure respondent’s financial literacy, but also assessed whether financial literacy matters in their financial decision-making. Furthermore the survey covered basic information of respondents, financial information, basic financial knowledge, and advance financial knowledge.

In constructing the financial literacy index DEFINIT applied a prudent and rigorous method in calculating the index. The results of the survey highlight a modest financial knowledge among sample respondents and show several important policy implications. This pilot project suggests that there is a large room for improvement in influencing the financial behavior and financial knowledge of the Indonesian population, which is expected to further improve their financial literacy.In this survey, we analyzed the result by grouping basic financial literacy index, advanced financial literacy index, and overall financial literacy based on factor analysis method.

The results from the previous studies indicate that Indonesian has  good financial literacy. However, the result of this survey shows the opposite. Average of overall Indonesian Financial Literacy Index (FLI) is 42.51 (on a scale of 0 -100). The respondents who have higher education, higher income, and male respondents, have a higher scores in basic financial literacy. The respondents who have lower education and lower income have lower score of basic financial literacy.

Some results indicate that the level of financial literacy is positively correlated with the level of income. Most of low income households have low level of basic financial literacy. Meanwhile, most of high income households have high level of basic financial literacy. This is, however, not the case for the advanced financial literacy index where the level of financial literacy is weakly correlated with the level of income. Moreover, the result of this survey suggests very low advanced financial literacy and it is consistent with the very limited possession of the respondents of those complex financial products.

Therefore, the policy in developing the Indonesian financial inclusion should focus not only on financial education programs on high income level. But also on middle income levels such as the secondary and senior high school.

The full report of this study, can be downloaded at the following link: Developing_Indonesian_Financial_Literacy_Index_2013