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.
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