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.