Microcredit aims at lofty goal

Microcredit aims at lofty goal

With more than two decades of experience in the development of
microfinance as a core component of its poverty-alleviation
program, Indonesia can contribute to the International Year of
Microcredit 2005 program United Nations Secretary General Kofi
Annan is launching on Thursday.

The UN-initiated program aims at underscoring to the global
community the importance of microfinance to eradicate poverty and
hunger, which tops the Millennium Development Goals.

Microcredit development started in Indonesia in early 1980
when the government assigned state Bank Rakyat Indonesia (BRI) to
develop a microcredit program as a component of poverty
alleviation programs, which were launched after its growth-led
development strategy, with its trickle-down concept, turned out
to be ineffective in its goal of benefiting a large number of
poor people in the rural areas.

However, Indonesian experiences have been a wide mixture of
successes and failures. Since many ministries subsequently ran
poverty-alleviation programs of their own, microcredit financing
in the country took on different forms and various organizational
or institutional setups, depending on the implementing agencies
and the funding sources, which included many foreign donors.

The BRI microcredit scheme involving more than 4,000 village
units has been quite successful, performing much better than
other microcredit programs implemented under the government's
subsidized targeted credit schemes. Even during the 1997 economic
crisis, while most major corporate credit portfolios failed, loan
repayment among BRI's over 25 million microclients barely
declined though they were charged much higher interest rates than
corporate loans.

Microfinance nevertheless has fulfilled only a small fraction
of the huge demand for financial services from poor households in
the country, especially after the 1997 economic crisis raised the
number of people in absolute poverty to almost 40 million.

To most poor people in the rural areas access to credit is
much more important than the cost (interest rate). However, most
of them are not qualified to obtain loans from mainstream banks
as their fixed assets (houses or land) have no legal titles and
thus cannot be used as collateral. Many poor farmers therefore
often fall prey to loan sharks who offer easy access and
convenience (no paperwork).

Indonesian experiences have shown that poor families need and
use a variety of financial services, including deposits and
loans, to buy farm equipment, finance off-farm businesses,
improve houses, pay school entrance fees and other large
emergency expenses. Therefore, microcredit can produce
improvements in a wide range of welfare measures such as income
stability and growth, school attendance, nutrition and health
and, especially in so far as the Indonesian experience is
concerned, empower women by increasing their contribution to
household income.

This is surely the rationale of the UN campaign to increase
the public's awareness of microcredit. Microfinance institutions
in developing countries can share their experiences since there
are certainly many universal characteristics of successful
microcredit programs.

Microcredit programs in many countries, for example, have
shown that savings mobilization is vital for the sound and
sustainable growth of microcredit portfolios and subsidized
credit schemes should be separated from microfinance development.

Savings accounts also serve as an important means of
monitoring borrowers' behavior and their creditworthiness and
compiling their credit history, which are all important for
developing creative new loan delivery channels and information
technology to reduce cost and risks.

All these are important requirements for a microfinance
institution to become a fully integrated part of the mainstream
financial system in a country. Without such integration,
microfinance will never achieve its full potential.

Microcredits are quite tiny in terms of amount per unit but
they have a big mission to lift hundreds of millions of people
out of absolute poverty. However, like the mainstream financial
service industry, microfinance is sustainable and able to expand
its outreach only if it is demand-driven and savings-driven and
adheres to the principles of prudential banking.

______