The trickle-up effect: How micro-finance helps people change their own lives

The trickle-up effect: How micro-finance helps people change their own lives

Harriet Richards, Contributor, Jakarta

Ibu Ngarofah seems an unlikely entrepreneur. Her shanty-house leans precariously and her front door opens to a railway line. When Indonesia's economic crisis hit, she could not feed her family. Yet this 39-year-old has just sold a flourishing business. She wants to concentrate on her fourth child, plan a new business empire, and manage a group of fellow-entrepreneurs.

Ibu Ngarofah knew how to beat the crisis: "I had to sell more cakes -- to develop my business." But she needed funds for raw materials. Banks, "we don't serve your kind", and loan sharks with 30 percent to 50 percent monthly interest rates were not realistic options. Then, people came to her house offering business loans with just 2.5 percent interest monthly. "I needed capital, and they came to me. I will never forget that." Ibu Ngarofah was able to make her business grow and changed her community. She eventually employed six push-cart sellers in the food trade. Another 36 push-cart businesses sprang up as neighbors realized the extent of demand on their doorstep -- industrial Tangerang.

The eye avoidance of poor people is long gone in this area. I am dressed to the max in city-slicker clothes but Ibu Ngarofah faces me woman-to-woman as she discusses distribution channels, sourcing of raw materials and employment generation. I feel we should do a clothes-swap.

Throughout the kampong the story is the same. Ibu Mispani, a widow with seven children, used to make tofu in her garden but now owns a small factory and employs three people. Ibu Darsini owns a small goods store which she runs with her husband. Ibu Sutrisna, who sold cassava chips from home, now owns a warehouse and employs seven workers. Ibu Supri employs six workers in the production of tofu-based oncom. Ibu Endang supplies handcrafted soap to the duty-free shops at Soekarno-Hatta International Airport.

These women have bank accounts, make deposits, repay their loans, and hold management meetings to practice good corporate governance. Lessons in abundance for the nation's elite. What explains this hive of entrepreneurial Ibu-power?

The answer is micro-finance. In rural and urban areas across Indonesia, and in communities across the world, micro-finance is helping people break the poverty cycle and change their own lives.

Two of micro-finance's pioneers, an Australian and an American, founded Opportunity International in the 70s after a first loan to an Indonesian farmer. It now operates in 26 countries through a multitude of local partner organizations. These it mentors through micro-finance training, corporate team- building with OI partners, and in some cases funding. The OI partner for Ibu Ngarofah's kampong is Dian Mandiri, or DIMAN.

Tucked away in one of those giant, under-occupied monuments to krismon (financial crisis), the DIMAN office in Tangerang is a cell of energy. Buzzwords like self-reliance and empowerment crop up frequently in conversation. In four years DIMAN has developed a 79-strong army of field-workers who have brought micro-finance to 4,797 recipients.

This NGO takes its professionalism seriously. It comes complete with a board of business professionals, strategic plans, and international auditing. Chairman and Founder Frank Hadi is determined to hold DIMAN to its values of transparency, accountability, sustainability, and integrity. "This is not negotiable. We must set an example for organizations all over Indonesia."

The mission is bold: To enable the transformation of individuals, their families, and communities. DIMAN wants to bring micro-finance to 120,000 Indonesians by 2007.

A micro-finance branch is born when a field worker enters a neighborhood to gauge possibilities for credit provision. Locals who want credit must present a business plan. Typically two months' work with a neighborhood precedes a first loan to a "client". Minimum loans of Rp 500,000 can be repaid weekly (principal plus interest) in just over six months. Creditworthy clients can receive further loans up to a maximum of Rp 2,000,000.

Micro-finance depends for its success on traditional community dynamics. Up to 25 clients form a group which meets weekly to share experiences, receive training, and source new business. At this time they make loan repayments and pool savings into a joint bank account. Failure to repay loans, a major loss of face, means the default rate, late payments, not no payments, is just 2.19 percent.

DIMAN's prime target group -- women -- forms 82.3 percent of its clientele. This acknowledges women's development needs but also makes sound commercial sense. "Just look at their economic profile", explains project development director Frans Purnama, "they are savers in the household".

Micro-finance programs reflect highly localized community needs. The products of Ibu Ngarofah's kampong transcend the urban-rural dichotomy: fish-farming, tempeh, cassava chips, chicken-rice porridge, fried rice, small shops, key-ring chains, silverware, handcrafted soap, packaging baskets. For this reason, micro-finance is mushrooming across rural as well as urban areas.

This in turn triggers corporate interest. DIMAN has business and government partners. OI works with major Australian corporations. But such forging of capabilities lags behind global needs. OI members argue the time is overdue to harness the power of strategic partnership between business, government, and NGOs to overcome inequality between nations.

The capital of the wealthy is a powerful match with micro- finance. After initial seed money, the rolling fund grows with its clients and beyond the need for external assistance. DIMAN is now 81 percent sustainable, meaning loan repayments cover operational cost. Thus, a drop of wealth creates a powerful ripple effect.

While local pressures can force companies into a community development paradigm which often implies "we" develop "you", micro-finance lets people manage their own destinies. It hereby builds optimism in the neighborhood.

This new outlook results from the change in economic fortunes. Ibu Ngarofah's monthly income grew a typical 20 percent to 30 percent, to Rp 250,000 during her first loan. Meanwhile, the World Bank estimates that for every person assisted with micro- finance another six directly benefit. Ibu Ngarofah's kampong fits this pattern.

Other results are thought provoking. If DIMAN can secure 120,000 clients, then by World Bank estimates nearly a million people will benefit. DIMAN's 312 Trust Banks deposit about Rp 48.6 million (US$5,400) in the bank monthly, or $65,000 yearly into the formal economy. Given Indonesia's trickle-down effect of mixed success and a trickle-out effect of vast excess, surely the trickle-up effect warrants attention.

Ibu Ngarofah once watched her hope -- to see her children in good schools -- seemingly evaporate. As she fights poverty, her resort to micro-finance obeys the entrepreneur's ultimate mantra, "grow or die". Ibu Ngarofah has kept her children in private schools. The oldest has just graduated and -- the smile of a mother's pride -- "is a computer expert". A younger son takes off to school on a shiny new bike. The latest family addition, a girl, sits on mother's hip and looks me square in the eye. (The writer has worked for several years in Indonesian resource sector including in community development. She now works as a freelance corporate relation consultant.)