MAPPING MICROFINANCE IN INDONESIA

MAPPING MICROFINANCE IN INDONESIA

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: