Microfinance is globally acknowledged as an effective instrument in alleviating poverty. Microfinance refers to finance services such as credit, savings, insurance provided for low-income people or widely called economically active poor. And as we know, this year is becoming the International Year of Microcredit (Microfinance) as what the United Nations has mentioned.

In Indonesia micro finance services are implemented by micro finance institutions that can be divided into two categories, i.e., bank and non-bank sectors. BRI (Peoples’ Bank of Indonesia) and BPR (Rural Bank) belong to bank sector, while non-bank sector can be classified into two kinds: non formal and formal.

Formal category includes cooperative, Lembaga Dana dan Kredit Pedesaan (LDKP/rural credit financing institution), pawnshop, and Badan Kredit Desa (BKD/ rural credit association). LDKP gets formal status formal Pemda (local government) while BKD is supervised by BRI on behalf of BI (Central Bank of Indonesia). Classified into non-formal category, micro finance institutions are carried out by NGOs and self-help groups.

The demand driven for micro finance development is so great, considering that 98.5% business entity in Indonesia or 41.8 million of business units are still in micro category, of which less than 10 million of business units get finance services from formal market. The rest are mostly trapped into informal market called money lenders. The interest rates charged by money lenders are so high (ranging from 20%-50% per month).

The Indonesian government indeed does not stay doing nothing to face this situation. To overcome it, government has implemented projects and programs, most of them with micro finance component. These programs have wide scale and great outreach to the people. There are 70 projects of government institutions (supported donors, with  budget almost US $300 millions) which have a micro finance component. Many of them do not follow micro finance best practices (ADB, 2003)

Different from many other countries in which micro finance is developed by NGOs, in Indonesia micro finance development role is hold by government. Unfortunately, the main weakness of government project is that it is not sustainable. Psychologically in encountering such a project, the people consider it as grant so that sometimes it is not repaid. Furthermore, the interest applied is subsidized which results in negative impact or distortion on micro finance (commercialization) industry.

Previously, global movement on micro finance also got its momentum when Microcredit Summit was conducted in Washington in 1997. Further, based on lessons learned from the best practitioners over the world, it was agreed that in developing   micro finance require the following points:

1. reaching the poorest
2. reaching and empowering women
3. building financially sustainable institution
4. measurable positive impact

In Indonesia, micro finance approaches can be categorized into 4 kinds:

1. Saving led microfinance

Financial mobilization is based on capacity of the poor. It is also membership based, of which membership and participation are crucial aspects. Some forms of institutions within the communities are: self-help groups (SHGs), Credit Union (CU), Koperasi Simpan Pinjam/KSP (savings and credit cooperative), etc.

2. Credit led microfinance

The main source of finance is not from saving mobilization of the poor but from other source intended for the poor. Therefore, considerable amount of fund is needed for the poor through credit service, such as Badan Kredit Desa/BKD (rural credit association), Lembaga Dana Kredit Pedesaan/LDKP (rural credit financing institution), Grameen Bank model, ASA model, dll.

3. Micro banking

It refers to banking sector designed to conduct micro finance services. It includes BRI (People’s Bank of Indonesia) and BPR (rural banks). Moreover, BRI is acknowledged as the giant of microfinance institution (Bank) in the world.

4. Lingkage model

It is on the basis of operating the existing institutions, both informal social organization that is often called Kelompok Swadaya Masyarakat/KSM (self-help group) and formal finance institutions (bank). The two different natures of institutions are organized and linked based on mutual symbiosis and benefits. Bank will get greater number of clients  (outreaching), while the poor can get access to financial support. In Indonesia, it is widely recognized as Pola Hubungan Bank dan Kelompok Swadaya Masyarakat/ PHBK (Bank-Self-Help Groups Linkage) in 1988.

Considering various kinds of micro finance in Indonesia, eventually it is often called as micro finance laboratory in the world, and great need of development, a forum to develop micro finance is required. The objective of the forum is to build micro finance as industry to reach the poor widely.

For that reason, Gema PKM (The Indonesian Movement for Microfinance Development) as a forum consisting of 7 stakeholders, i.e., government, finance institutions, NGOs, private sector, academicians/researchers, mass organizations, and funding institutions. Gema PKM was declared before the President of Indonesia in 2000. Gema PKM has main target to serve 10 millions poor families on 2005. And through various efforts, in the year of 2004 Gema PKM nearly reached the target to give financial services for more than 9 millions poor families (look at the table).

Data compiled by Gema PKM, October 2004

As mentioned above, although we will reach our goal, we acknowledged what we have achieved is still far from the demand of micro enterprises. Only less than 25% of micro enterprises can be served through micro finance institutions. Actually, there are some constraints to develop microfinance in Indonesia. If we want to achieve more and to give financial services for the poor, we must overcome the most problems, such as:

1. Legal and regulatory framework
2. Wholesaler of microfinance
3. Capacity and institutional building

With new global paradigm, the flow of change is getting larger, micro finance is becomes burning issue in Indonesia. At High-Level Policy Meeting on Micro finance and Rural Finance in Asia, 26-28 February 2004 in Yogyakarta 13 central banks of Asian countries and related ministries from Afghanistan, Bangladesh, Cambodia, India, Laos, Malaysia, Nepal, Pakistan, Philippine, Sri Lanka, Thailand, Vietnam, and Indonesia formulated strategies and policies to support micro financing sector. Micro finance is believed as effective and strategic instrument to alleviate poverty. In the meeting, Public Statement (Komunike Yogyakarta 2004) that really promoted micro finance was declared.

In view of the recent situation, the struggle for micro finance development that can serve the poor more widely and sustainably in Indonesia has indicated some clear point. Yet, hard effort has not terminated. Although we find challenges, we will keep on our optimism to realize the emerging micro finance industry in Indonesia. Especially, the wave of International Year of Microcredit (Microfinance) as what the United Nations has mentioned will also give strong impact of our environment.***  

Oleh: Drs. Bambang Ismawan, MS -- President of Bina Swadaya and Secretary General of Gema PKM (The Indonesian Movement for Microfinance Development.
Setyo Budiantoro -- Assistant President of  Bina Swadaya & Director of Economic Research in Center of Humanity & Civilization Studies (CHOICES)

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