DIFFICULTIES OF BUILDING MICROFINANCE

The progress of microfinance in serving microenterprises in Indonesia remains low. Although the
activity is backed up by some banks such as BRI (people’s bank) and BPR (rural bank), there is
still a huge gap between demand and supply. Based on data of Gema PKM (The Indonesian
Movement for Microfinance Development), not more than 10 millions of 41.8 millions
microenterprises have been served by microfinance. It means less than 25% of the total
microenterprises in Indonesia.

In the global level, microfinance is now accepted as a strategic tool for poverty alleviation. It is not
very surprising when the United Nations has named this year as International Year of Microcredit
(microfinance). Actually, this event is related with the Millenium Development Goals, which has
an ambitious target for reducing half of the poverty rate until 2015.

As it has been accepted in Microcredit Summit 1997 in Washington, there are 4 principles for
running microfinance institution. These principles are reaching the poorest, reaching and
empowering women, building financially sustainable institution, and ensuring measurable impact.
With all of our respect to BRI and BPR for their concern to people’s economy, unfortunately they
have not been able to reach most of the targeted poor.

This article focuses to microfinance institutions (MFIs) run by NGOs who serve the poor.
Indonesia is very different with other country such as Bangladesh. Over 75% poor families in
Bangladesh are served by microfinance institutions. The main players of microfinance services in
Bangladesh are NGOs.

Actually in Indonesia there are thousands of NGOs, which play in microfinance, they have
potential contributions to serve the poor even more. However, their performances so far are far
from what is expected. There are some major constraints which add to this situation.

Unclear Government Policies

In Indonesia, there is still no clear policy regarding microfinance issue. Most practitioners are
uncertain where microfinance is positioned in national financial system. There is no clear
direction, which can be used among the stakeholders to develop microfinance. The development
of microfinance so far is influenced and shaped by different or often competing or even conflicting
policies in other areas. These comprise of poverty alleviation, subsidized credit, and financial
sector development.

For example, there are 70 projects of government institutions (supported by donors, with budget
almost $US300 millions), which have a microfinance component. In reality many of them do not
follow microfinance best practices (ADB, 2003), thus they do not sustainable. These projects
contribute difficulties for MFIs with commercial and professional approach to develop.

To serve the poor with financial services through effective and sustainable way, financial reform is
urgently needed. One of the financial reforms is to make a national policy of microfinance. This
policy is needed as philosophical platform for legal and regulatory framework of microfinance.
Without a legal basis, MFIs work in gray area between legal and extra legal. Moreover, MFIs can
be accused as operating illegal banking. The draft law of microfinance is still unclear, when it will
be finished and legalized. Since it was drafted in 2001, there is not enough attention from the
government and parliament.

Wholesaler of Microfinance

Running MFI means that “there is no point to return”. After taking credits, microenterprises will
grow bigger. Then, microenterprises will need more and more credits. If MFIs cannot provide
credits for microenterprises, they will get a big problem in repayment rate.

Capital, based on data of statistic bureau, is the most significant problem of microenterprises. If
they do not get more credits from MFI, they will be reluctant to pay the installments as they need
to keep it for running their businesses. Credits for microenterprises are mostly without collaterals,
so it will be difficult to force them to repay the credits.

According to the Indonesian law, an institution allowed to mobilize saving from public is only
bank. It means that running MFI in Indonesia needs to be supported by a sufficient capital
otherwise it will face problems. Moreover, without microfinance regulations MFIs (run by NGOs)
do not have legal entity. It makes them difficult to cooperate with other (financial) institutions to
access capital.

To solve the problem of lack of capital, some countries have built wholesaler of microfinance.
This institution is a key success of microfinance in Bangladesh. This is like a “central bank
alternative” for the poor (MFIs run by NGOs). Based on survey of Gema PKM on MFIs in
Indonesia, most of them agreed that they need such kind of institution.