Difficulties Of Building Microfinance


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Setyo Budiantoro


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.

Capacity Building

There seems to be an enthusiasm among the NGOs in Indonesia to become MFIs, as they want to serve the poor by providing a more sustainable mean to alleviate poverty. They do not want to depend on donors for a long run, so they run microfinance. Like NGOs in other countries, which transform from NGO to MFI, we experience the same problems.

Transforming NGO to professional MFI is a matter of paradigm and cultural shifting. Running MFI needs most completely different attitudes and skills. To run finance, an institution needs discipline and prudential attitude. If MFIs do not have the culture, they most likely will loss their money.

Running financial services for the poor is not easy and shifting culture from NGO to MFI is also another problem. Dealing with such a complicated situation, it makes NGO-MFI very difficult to grow. This is why the capacity of retailing microfinance in Indonesia through NGO-MFIs remains low.

Quality training at reasonable prices for MFI staffs to promote management and retailing capabilities in microfinance is virtually nonexistent in Indonesia. The absence of a strong commercially oriented microfinance training center is a major reason why NGO-MFIs is still lack of capabilities to run financial services for the poor.


Based on statistic, nearly 99.85% of enterprises in Indonesia are considered microenterprises. Their roles are very strategic for absorbing unemployment, alleviating poverty, and supporting economic growth. To provide them with financial services is a strategic way to make a broad based development. Democratization of capital is a conditio sine quanon of economic democracy.

The momentum of International Year of Microfinance (TKMI) must be used for accelerating progress of microfinance. Government of Indonesia has established the team of TKMI. We do hope that this team will give contribution to solve the major difficulties to develop microfinance. We do not want this team just following the trend, and then gone with the wind.

Oleh: Setyo Budiantoro -- Assistant President of Bina Swadaya & Director of Economic Research in Center for Humanity and Civilization Studies (CHOICES)