Government can do more to boost microcredit, says expert

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.