Female clients meet with a Mercy Corps microfinance officer in Jakarta, Indonesia. Mercy Corps has disbursed over $1.23 million in small loans in Indonesia since 1999. Photo: Diella for Mercy Corps Photo:
Microfinance is considered to be one of the most effective tools to combat poverty, but the question that one needs to ask is: "Do poor people get access to financial services through microfinance?"
We will explore this issue in the context of Mercy Corps's experience in Indonesia. Indonesia has a long tradition of microfinance and thousands of microfinance institutions exist in the country. So when Mercy Corps began operations in Indonesia in 1999, we had to decide if there was a role for us in this sector. Our entry into microfinance was prompted by two main factors: 1) a gap in access to financial services among very small micro-enterprises, especially those that are run by women who, for the most, were underserved and 2) an increase in poverty as a result of the Asian economic crisis.
Indonesia's history in microfinance goes back to 1886, when village councils were set up on Java Island to provide credit to poor farmers. Later, in the 1970s the government embarked on a series of ambitious programs to provide microfinance services to the poor, which were part of a rural development initiative to channel income from oil exports into rural areas, especially on Java. State owned village banks made credit available to farmers. The government complemented these initiatives by making significant investments to develop village infrastructure. Over time these programs played an important role in transforming the lives of thousands of farmers in the villages. However, the monetary crisis in 1997 was a major setback to the economy. It is estimated that more than 25 percent of Indonesians are now living below the poverty line.
The political transition that coincided with the economic crisis also prompted the entry of non-governmental organizations (NGOs) into microfinance. In most cases, these NGOs work through registered or unregistered saving and credit cooperatives. A few years ago many in Indonesia thought that these types of institutions were unlikely to play a major role in microfinance. But our experience showed that, provided these organizations are trusted by their constituency and they have a basic financial and administrative system in place, they are able to reach very poor clients while managing risks more effectively than large microfinance institutions (MFIs) such as secondary banks. Recently, there has been an increasing recognition that with their simple mechanisms and lean management structure, small- scale microfinance NGOs are better suited to serve very poor clients.
other countries around the world, in Indonesia the popularity of microfinance has increased due to its financial profitability, which is used as an indicator of its success. Understandably, there is a focus on expansion of financial services, but sometimes without due consideration of who has access to these services. A few programs have tried to reach "real" micro-enterprises. But many of these programs targeting very low-income clients were poorly designed or heavily subsidized, and as such the programs had a very short life.
Mercy Corps considers itself as a wholesale service provider for MFIs in Indonesia. Our aim is to improve financial service delivery to clients who own micro-businesses and are unlikely to have access to services from large MFIs like the secondary banks. The commitment to serve the poor is reflected in the size of loans that our partner organizations offer to their clients. Almost 95 percent of first-time borrowers receive loans in the range of $20 to $50. Almost 70 percent of these clients are women.
Being a wholesale service provider allows us to work with a variety of organizations using diverse saving and lending methodologies. This has enriched our experience, and has also made us appreciate the value of diversity. The types of organizations supported by Mercy Corps include cooperatives, local development NGOs (LSMs), cooperatives (BMTs) using the Islamic banking system, and credit unions. Thus far, Mercy Corps has disbursed $1.23 million to over 100 MFIs in Java, southern provinces of Sumatra Island, Maluku and Central Sulawesi, which has enabled them to serve an additional 17,000 clients.
Our experience has shown that poor should not be treated as a homogenous group who can be served by homogenous financial institutions. Different clients have different financial needs, and it is important to have different financial institutions available that can cater to different sub-groups who live below the poverty line. While large commercial banks may serve large businesses, a small credit union is perhaps better placed to serve a street-side trader who earns less than $2 a day. It is unwise to change a credit cooperative into a bank and vice versa. Small microfinance NGOs are different than regular commercial banks, and the difference is rooted in the target clients that they serve, rather than financial procedures.
While the microfinance NGOs have good outreach to target poor, they still need to improve their operations before they can turn into financially viable institutions. Mercy Corps believes that they may not be that far from achieving financial sustainability, and with the right of support, these small MFIs have the potential to provide quality services to the very poor, accountably and transparently.
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