Indonesia: Microcredit in Indonesia


David Reeve

Microcredit has been gaining a higher public profile. The year 2005 was designated by the United Nations as the 'International Year of Microcredit'. In October 2006, the Nobel Peace Prize was awarded jointly to Professor Muhammad Yunus of Bangladesh and to the Grameen Bank for their work since 1976 in providing 'micro' loans to poor people without collateral.

There is some keen enthusiasm for microcredit and the Grameen model in Indonesia, where the problems seem so similar. Some 98.5 per cent of all Indonesian businesses are classed as micro-enterprises. (See Jawa Pos, 28 October 2006, for a front-page interview with the Governor of Bank Indonesia, Burhanuddin Abdullah, on the prospects and problems for Indonesia in imitating the Bangladesh model).

In line with the United Nation's lead, Indonesia's President Susilo Bambang Yudhoyono announced 2005 as Indonesia's Year of Microcredit, with the aims of decreasing unemployment and poverty, increasing the performance of Indonesia's micro-enterprise sector and drawing attention to its vast array of microfinance providers. One part of this array is a web of Indonesian providers using the Grameen Bank Replica (GBR) model.

The concept of microcredit has a long history in Indonesia, traced back to Bank Rakyat Indonesia (BRI), the Indonesian People's Bank, established by Raden Wiriamaadya in Central Java in 1895 as the Priyayi Bank of Purwokerto. BRI is now a major microfinance institution (MFI) in Indonesia, reaching 3.5 million borrowers throughout the archipelago. It represents one of many types of microfinance institutions operating in Indonesia. In 2006 the Indonesian microfinance sector includes informal moneylenders, rotating savings/credit associations (arisan), pawnshops (pegadaian), NGO-operated MFIs and cooperatives, and government-implemented projects at the formal end of the scale.

With all this potential, there is also - unsurprisingly - a host of problems, according to the microcredit lobby group Gema PKM, (Gerakan Bersama Pengembangan Keuangan Mikro), The Indonesian Movement for Microfinance Development. Formed in 2000, Gema PKM consists of representatives from the government, banking, NGO and private sectors working together to address the problems. Gema PKM's Second National Meeting held in September 2005 launched their National Strategy.

Despite the 111-year history, the words 'keuangan mikro' sounded strange to Indonesian ears up to the start of this century. One of the first main tasks of the Gema PKM has been to familiarise people with the concept. There is a problem of definition. While the banks define microcredit as any loan less than 50 million rupiah (approx A$7245), in practice Gema PKM is more used to loans up to a maximum of five million rupiah. Commonly loans are between Rp100,000 and Rp500,000, so more usually about A$15 to A$70 dollars.

A major problem is the lack of a coherent legal framework and protection for MFIs, which leaves NGO organisations open to being charged with conducting illegal banking. Draft legislation was prepared by September 2002, but it languished in the Finance Department. The parliament discussed microcredit for the first time in 2004. The Gema PKM is lobbying for either microcredit legislation or policy to be firmly placed on the parliamentary agenda by the end of 2006.

Other problems include access to capital, micro-insurance, effective supervisory bodies, benchmarks and performance monitoring tools. Weak and poorly trained management is a problem, so too is the inefficient implementation of the group lending system, leading to persistent late repayments and continuing disciplinary issues. These major problems combine to reveal a vulnerable microfinance sector, such that less than 20 per cent of all Indonesian micro-enterprises currently receive microfinance services.

These efforts seem to work best in densely populated communities where distances are small, or where people may have minimal economic capital but high 'social capital' through the groups they belong to. The greatest impact so far has naturally been in Java, and in a small number of regional centres. So much remains to be done, but Gema PKM is a highly committed lobby. Small sums of money can have a big impact; in Gema PKM's terms: a hand-up rather than a hand-out.

WATCHPOINT: Can Gema PKM lobbying get these issues on the parliamentary agenda by the end of 2006?


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