The need for rural financial development in developing countries has been suggested in recent literature since a large proportion of rural households lack access to sustainable financial services. To this end, financial liberalization (elimination of the repressive policies) is recommended.
This thesis is concerned with the rural financial development in an economically less-developed region of Indonesia, Lombok-NTB province, after financial liberalisation (particularly during 1988-1998). Unlike previous studies on rural financial development in Indonesia, which were heavily reliant on information from successful rural/micro financial institutions, this study comprehensively sought and analysed information from both sides of the market, the supply and demand. More specifically, the study examined the impacts of financial liberalization on the extent and efficiency of the rural financial system at the provincial level (Objective 1), the performance of the rural financial institutions (RFI) at the sub-district level (Objective 2), and the households' demand for and access to financial services from various sources (Objective 3) and the factors associated with them (Objective 4).
In the analyses, the study used quantitative and qualitative data collected from primary and secondary sources, involving two surveys (involving 25 RFIs and 180 households of Lombok), several case studies, and published and unpublished financial and socio-economic statistics from relevant institutions at the provincial level. The data analyses included descriptive statistics, associations, mean differences and correlation, depending on the data measurements and the objectives of the analyses.
The study found the following. In many respects, the financial liberalization brought a substantial improvement in the rural financial market of a less developed economy of Indonesia, NTB province where Lombok is a part. The liberalisation of interest rate shifted the economics of the rural (micro) financial services from unprofitable business to economically promising business while the liberalisation of rural financial institution entry opened the way for the establishment of new rural financial institutions. As a result, five types of RFIs, one upgrade and four new, were brought into the rural financial market during the liberalisation process. All these RFIs were for profit entities. The level of financial intermediation by bank RFIs was generally improved, as their Loan to Deposit Ratio (LDR) moved toward 100 per cent. The bank interest rate was consistently higher than the inflation rate, providing a basis for cost-effective financial intermediation. Although, the relative size of the rural bank group (measured as its share in bank assets, credits, and savings) experienced a sharp decline a few years after the 1988 bank entry liberalisation, the decline was not due to the non-performance of the new rural banks, but due to the conversion of a large private rural bank into a commercial bank in 1991.
Other than the financial policy, market environments such as population, economic condition, and infrastructure also affected the performance of the RFIs. Further, the performance of the individual RFIs varied by type, office network, asset size, service policies and mechanisms.
The structure of the household demand for financial services revealed that the formal financial system was superior to the informal one in terms of the total saving amounts, number of savers and credit amounts but inferior with respect to the number of borrowers. Further, some indications of mismatches between the financial services available to and demanded by the households were found in terms of the amounts, time, requirements and repayment systems. Small borrowers and farmers remained under-served by the formal financial institutions. The households' demand for and access to formal financial services were not only determined by their socio-economic characteristics but also by the features of availed financial services, such as, the interest rate, transaction costs, financial institution type, banking confidence, income, occupation and land assets.
The study has two general conclusions. First, financial services to rural households in less developed economies could be profitable, given the opportunity to charge market rate. Second, the rural financial development appeared to be jointly determined by factors internal and external to the three principal actors — financial institutions, households and government — in the rural financial development process and the functioning of the rural financial market. The study has several implications to the field of rural (micro) finance and rural financial development policies and practice.