The Emerging Microfinance Industry in Indonesia

Mr. Bambang Ismawan

President of Bina Swadaya Foundation,

Secretary General of the Indonesian Movement for Microfinance Development,

and the Indonesian Farmers’ Association

The Emerging Microfinance Industry in Indonesia 

Micro finance is globally acknowledged as an effective instrument in alleviating poverty. Micro finance refers to finance services such as credit, savings, insurance provided for low-income people or widely called economically active poor.

In Indonesia micro finance services are implemented by micro finance institutions that can be divided into two categories, i.e., bank and non bank sectors. BRI (Peoples’ Bank of Indonesia) and BPR (Rural Bank) belong to bank sector, while non bank sector can be classified into two kinds: non formal and formal.

Formal category includes cooperative, Lembaga Dana dan Kredit Pedesaan (LDKP/rural credit financing institution), pawnshop, and Badan Kredit Desa (BKD/ rural credit association). LDKP gets formal status formal Pemda (local government) while BKD is supervised by BRI on behalf of BI (Central Bank of Indonesia). Classified into non formal category, micro finance institutions are carried out by NGOs and self-help groups.

The demand driven for micro finance development is so great, considering that 98% business entity in Indonesia or 39 million of business units are still in micro category, of which less than 10 million of business units get finance services from formal market. The rest are mostly trapped into informal market called money lenders. The interest rates charged by money lenders are so high, ranging from 20%-50% per month.

The Indonesian government indeed does not stay doing nothing to face this situation. To overcome it, government has implemented projects and programs, most of them with micro finance component. These programs have wide scale and great outreach to the people.

Different from many other countries in which micro finance is developed by NGOs, in Indonesia micro finance development role is hold by government. Unfortunately, the main weakness of government project is that it is not sustainable. Psychologically in encountering such a project, the people consider it as grant so that sometimes it is not repaid. Furthermore, the interest applied is subsidized which results in negative impact or distortion on micro finance industry.

Meanwhile, global movement on micro finace got its momentum when Microcredit Summit was conducted in Washington in 1997. Further, based on lessons learned from the best practitioners over the world, it was agreed that in developing   micro finance require the following points:

  1. reaching the poorest

  2. reaching and empowering women

  3. building financially sustainable institution

  4. measurable positive impact

Micro finance approaches in Indonesia can be categorized into 4 kinds:

  1. Saving led microfinance

Financial mobilization is based on capacity of the poor. It is also membership based, of which membership and participation are crucial aspects. Some forms of institutions within the communities are: self-help groups (SHGs), Credit Union (CU), Koperasi Simpan Pinjam/KSP (savings and credit cooperative), etc.

  1. Credit led microfinance

The main source of finance is not from saving mobilization of the poor but from other source intended for the poor. Therefore, considerable amount of fund is needed for the poor through credit service, such as Badan Kredit Desa/BKD (rural credit association), Lembaga Dana Kredit Pedesaan/LDKP (rural credit financing institution), Grameen Bank model, ASA model, dll.

  1. Micro banking

It refers to banking sector designed to conduct micro finance services. It includes BRI (People’s Bank of Indoonesia) and BPR (rural banks). Moreover, BRI is acknowledged as the giant of microfinance institution (Bank) in the world.

  1. Lingkage model

It is on the basis of operating the existing institutions, both informal social organization that is often called Kelompok Swadaya Masyarakat/KSM (self-help group) and formal finance institutions (bank). The two different natures of institutions are organized and linked based on mutual symbiosis and benefits. Bank will get greater number of clients  (outreaching), while the poor can get access to financial support. In Indonesia, it is widely recognized as Pola Hubungan Bank dan Kelompok Swadaya Masyarakat/ PHBK (Bank-Self-Help Groups Linkage) in 1988.

Considering various kinds of micro finance in Indonesia, eventually it is often called as micro finance laboratory in the world, and great need of development, a forum to develop micro finance is required. The objective of the forum is to build micro finance as industry to reach the poor widely.

For that reason, Gema PKM (The Indonesian Movement for Micro finance Development) as a forum consisting of 7 stakeholders, i.e., government, finance institutions, NGOs, private sector, academicians/researchers, mass organizations, and funding institutions. Gema PKM was declared before the President of Indonesia in 2000.

In 2002 more than 600 persons all over Indonesia attended National Meeting on Micro Finance. In the meeting, strategic infrastructures to support micro finance development were expressed, including:

  1. Legal and regulatory framework

  2. Capacity and institutional building

  3. Apex institution to back up capacity, institution and financial aspect.

With new global paradigm, the flow of change is getting larger, micro finance is becomes burning issue in Indonesia. At High-Level Policy Meeting on Micro finance and Rural Finance in Asia, 26-28 February 2004 in Yogyakarta 13 central banks of Asian countries and related ministries from Afghanistan, Bangladesh, Cambodia, India, Laos, Malaysia, Nepal, Pakistan, Philippine, Sri Lanka, Thailand, Vietnam, and Indonesia formulated strategies and policies to support micro financing sector. Micro finance is believed as effective and strategic instrument to alleviate poverty. In the meeting, Public Statement (Komunike Yogyakarta 2004) that really promoted micro finance was declared.

The flow of change does not come to an end. Participating in Asia Pacific Regional Microcredit Summit (APRMS) in Bangladesh 16 –19 February 2004 (47 Indonesian participants of varied institutions (all of them were organized by Gema PKM), generated enlightenment on micro finance development. Of the meeting in Bangladesh, two strategic points that will be the focus of Gema PKM are consented:

  1. Designing National Strategy on Micro Finance that can be the common basis of micro finance development in Indonesia.

  2. Designing apex institutions that will serve micro finance institution development.

In view of the recent situation, the struggle for micro finance development that can serve the poor more widely and sustainably in Indonesia has indicated clear point. Yet, hard effort has not terminated. Although we find challenges, we will keep on our optimism to realize the emerging micro finance industry in Indonesia.   

Dear respectable participants, we all have great responsibilities, that is, giving right to development including in the field of economy for our respective community welfare. You are experts in micro finance. You gather here to formulate policy and capacity building for micro finance development. We are highly expecting the result of your meeting to foster the emerging of micro finance in all part of the world including Indonesia. By that way we are responding positively to the millenium development goal, that is poverty alleviation. Finally, I wish you success in your work.