Microcredit programs are not always what the poor need: Analyst

Microcredit programs are not always what the poor need: Analyst

The role of microfinance in the economy is gaining international
recognition with the United Nations Secretary-General Kofi Annan
officially declaring last November that 2005 is the International
Year of Microcredit. In Indonesia, meanwhile, President Susilo
Bambang Yudhoyono officially launched The Year of Microfinance
last February and allocated US$5.4 billion to be spent over five
years on helping to strengthen micro, and small and medium
enterprises nationwide. In this regard, the Consultative Group to
Assist the Poor (CGAP) -- a 28 donor-member body hosted by the
World Bank -- presented a "pink booklet" titled Building
Inclusive Financial Systems: Donor Guidelines on Good Practice in
Microfinance to its members in Indonesia. The Jakarta Post's
Sally Piri talked with CGAP microfinance analyst Natasa Goronja
during her brief visit here last week. The following are excerpts
from the interview:

Question: Could you explain briefly about the CGAP?
Answer: The CGAP consists of both multilateral and bilateral
donors such as the IFC, ADB, UNDP, JBIC, EU, Ausaid, and the
Italian and Swedish governments. We have been working on best
principles in microfinance since 1995. We've been concentrating
on finding out and disseminating messages about best practice in
microfinance for the practitioners in dealing directly with their
clients.

Would you give some examples?
We have developed training courses and technical tools such as
how to make business plans in microfinance, how to conduct
external audits and internal control, how to do product costing,
accounting, financial analysis, delinquency prevention and
interest rate setting. And for the last couple of years, we have
been putting the emphasis on aid effectiveness.

What is your aim?
We expect that the invested money can reach its full potential
and reach large numbers of clients. The donors and practitioners
have to do their job well and make good investment decisions.
That is why we have presented the "pink booklet" titled Building
Inclusive Financial Systems: Donor Guidelines on Good Practice in
Microfinance.

What message are you delivering via the booklet?
The booklet contains some investment and operational guidelines
to help donors spend their funds most effectively in
microfinance. The booklet is still in draft form. We would like to
receive feedback until September from donors and practitioners
who implement the guidelines in developing countries so that we
can come up with a consensus document for all donors, and will
publish the final version at the end of this year.

Each developing country has its own culture and specific
circumstances. Will the booklet be effective for all developing
countries?
Yes, of course. These guidelines are for donors and agencies who
donate the money in developing countries. Obviously, each
developing country will have a different context. This means that
each practitioner will need to conceptualize it because the
environment and level of market maturity are different. But, the
basic principles are effective for all developing countries.

The booklet points out that microcredits are not always the
answer. Could you explain this?
Absolutely! I don't think microcredits are always the answer.
But there are other solutions such as saving, insurance and other
types of financial services. In a situation where people are
below the poverty line, they may not be economically active. It
does not make any sense to give credit because it is actually
making them worst off.

For example, in a post-disaster situation we might want to
consider other financial services that are different from just a
loan.

The wrong targets in microcredits may be simply driving people
further into debt. Sometimes, providing a grant is much better as
a mechanism of intervention. Some situations, such as post-
disaster or post-conflict situations, you probably would provide
grants before offering loans as people would not be able to
generate the income to repay the loans.

What's the difference between the terms "microcredit" and
"microfinance"?
Microcredit simply involves the giving out of loans with interest
and having people repay them. On the other hand, microfinance
has a broader meaning.

Microfinance includes life savings, insurance, remittances,
transfers, payments such as Western Union, etc. The poor need
access to broader financial services, not just credit.
Just like you and me, people deserve and have the right to access
a broader set of financial products.

They need a safe place to save, they need to get money from
relatives. Microfinance is for all people who don't have access
to financial services in the formal sector. If anybody is
excluded, we want them to be included.

In terms of practical mechanisms to reduce poverty in Indonesia,
is there any specific approach that would best serve the
Indonesian community?
I'm afraid that I'm not very familiar with the Indonesian
context.

But I think what was very positive about the meeting here with
CGAP members and NGOs was the desire to achieve the best level of
coordination among the donors.

That way, they can come up with better ways of reducing
poverty in Indonesia. The first step is that all those in the
donor community talk to each other.