Government can do more to boost microcredit, says expert

In the fight against poverty, microcredits to empower micro- enterprises play a very important role. The United Nations, which recently launched the International Year of Microcredits 2005, has recognized Indonesia for its success in channeling microcredits. However, the latest data shows that only 15 percent of some 30 million micro-entrepreneurs in the country receive any financing from banks. Yoseph Folla, former director of Bina Swadaya, a non-governmental organization that works to improve social and economic conditions by promoting the active participation of people in the economy, spoke with The Jakarta Post's Leony Aurora about the issue of microcredits.

Question: What is the actual situation of microcredit funding in Indonesia?

Answer: There are about 38 million people currently living below the poverty line in the country. Many people above this line are also very vulnerable. If economic trouble hits, they will plunge into poverty.

However, only a limited number of people have been touched by microcredits. Bank Rakyat Indonesia (BRI)'s village units, regional banks and village unit cooperatives are only available in district capitals. They don't penetrate deep into the villages.

People who live far from district capitals cannot get the credits because the don't have access.

Who channels microcredits and how?

Mostly it is the banks: the village units of Bank Rakyat Indonesia, rural banks and regional development banks, which are supported by local administrations. The second are cooperatives and the third are non-governmental organizations.

Banks demand collateral, as they are required to do by Bank Indonesia as part of prudential banking rules. At BRI, for example, an individual needs to have a savings account that can be used as collateral.

Sometimes loans can be channeled for a group of people. Let's say there are 20 people in a group. If five of them want to get loans, the rest will be the guarantors.

Cooperatives sometimes don't require collateral as they know their members.

NGOs give loans without collateral. In turn, they provide supervisors to give technical assistance and guidance to the businesses. Therefore, unpaid loans can be kept to a minimum.

NGOs get funds from donors, mostly foreign donors. However, the amount of funds channeled through NGOs is very limited, therefore the reach of the funds is limited as well.

Can we say that microfinancing in Indonesia is a success?

As a best practice, it is quite successful. At least it succeeds in alleviating poverty for a number of people, and other people can learn from their success and hopefully replicate it.

However, I cannot say that it is very successful. There are many things that we still need to improve.

What are the reasons behind the successes of the program?

One reason is that the funds channeled to individuals are very small -- between Rp 100,000 (US$11) and Rp 1 million. Although BI defines microcredits to be below Rp 50 million, in reality individual loans do not exceed Rp 1 million.

The winner of this year's microcredit award, Titik Winarti, for example, started her business by borrowing Rp 500,000.

Microcredits are also successful because the little people are innocent. When they borrow money, they try their best to return it.

Based on my experience, the loan recovery rate is above 97 percent. The other 3 percent are rare cases -- the business doesn't work out or there's a natural disaster. Even then, they will try to repay the money.

What can be done to boost microcredits and to make them more accessible?

The government needs to empower social organizations and NGOs that are ready to channel the credits. They cannot rely solely on banks.

In 1989, there was a movement sponsored by the central bank to connect banks with NGOs. Banks provided credits with a certain interest rate and NGOs channeled the credits with a slightly higher interest rate to cover operational costs -- including hiring supervisors -- with the margin.

This cooperation started in five provinces and was quite successful. It developed further until the economy crisis hit Indonesia in 1997. Banks were severely hit by crisis and the program vanished.

The government needs to rejuvenate this program. The more social organizations step in to reach poor people, the more will be reached -- not only in district centers but deep into the villages.

What else needs to be done?

The government also needs to regulate microfinancing by NGOs and other social organizations. Currently such schemes are not allowed by law. The law only allows banks and cooperatives to provide financing.

There were talks (in 1990s) about making regulations to legalize credit provisions by NGOs. The talks died when the monetary crisis hit.