When the winner of the 2006 Nobel Peace Prize was announced last year, a few expressed surprise that a bank – Bangladesh’s Grameen Bank – and its founder Muhammad Yunus could really be the most suitable recipient of such an accolade. But banks come in many shapes and sizes and microfinance can be an important tool for creating economic and social development.
Indonesia provides an interesting case in point. Straddling three different time zones, and comprising an estimated 13,000 islands, the country is regarded as a microfinance flagship that coped with the financial crisis of the 1990s and has continued to develop favourably in its aftermath.
There are two broad conglomerates of microfinance in the country: the state-owned Bank Rakyat Indonesia (BRI) and a large number of people’s credit banks, generically known as bank perkreditan rakyats (BPRs). “BRI is estimated to be the world’s largest microfinance institution and the third largest microcredit provider, with 32 million savers and more than 3.5 million borrowers,” says Xavier Reille, lead microfinance specialist with the Consultative Group to Assist the Poor, at the World Bank.
Financial defence
Although microfinance is estimated to represent less than 1% of total banking assets in the country, its impact on the quality of life of many Indonesians should not be underestimated. “BRI’s microfinance operations reach approximately one third of Indonesian households and its impact has been quite strong in reducing the poor’s vulnerability to economic shock,” says Dr Klaus Maurer, an independent consultant on financial systems development and microfinance.
“The effect of the 1998 Asian financial crisis on the bank’s microfinance operations was minimal. Surprisingly, throughout the crisis, 98% of loans were repaid on time. Because the private sector suffered so much, many small savers moved over to BRI (the country’s fourth largest bank at the end of 2005) to put their savings into a state-owned bank, so the crisis had a neutral or even positive impact on that bank. And even during the crisis, BRI gave new loans, which is important for organisations acting in these uncertain operational environments.
Furthermore, by providing savings deposits that are easily accessible, safe and can be withdrawn at any time, banks can reduce the vulnerability of poor households to economic shock.”
Cultural fit
Most microfinance activity is focused on the islands of Java, southern Sumatra, Bali and Lombok. It is strongest in densely populated areas of Java, but Bali also has a healthy sector, driven by its strong cultural and religious traditions as well as adat (customary law) which “makes providing credit an absolutely safe thing to do”, says Dr Maurer.
Mr Reille agrees: “Bali fits well into the microfinance model, with three microfinance providers dominating: BRI, BPR and the semi-informal village bank, known as lembaga perdreditan desa (LDP), based on traditional Balinese village structures. There are about 900 LDPs in Bali, serving more than 500,000 clients. These institutions, owned by the traditional village, have performed impressively. This is because traditional Balinese society focuses on village life and coerces and encourages individuals to do their duties, and promotes solidarity.
“There are also low transaction costs because the costs of operating the institution are low. And, because everything is organised by the village, they can attract a lot of savings.”
However, Bali’s community structure also presents challenges for organising and controlling LDPs. “These LDPs follow basic customary law, rather than official state law,” says Dr Maurer. “This means there can be a bit of a problem fitting the organisation into formal banking laws because there is a customary village head as well as an official village head. The German government, among others, has been assisting the Indonesian authorities to create specific legislation for these community-based institutions that follows the customary law.”
Other business models
In the outer islands with low population densities, other business models are being developed to meet the geographical challenges associated with rolling out low-cost financial products to remote villages. “In the outer islands, it’s not really possible to have a central structure that reaches out and down to every village,” says Dr Maurer.
“Instead you need a bottom-up structure, such as a rotating savings and credit association. This is already happening with small savings clubs known as arisan, which are popular informal microfinance arrangements for the poor.”
As Indonesia’s economy continues to improve, BRI is facing more competitions. “Banks are still reluctant to go into micro-enterprise lending in the lower bracket, but this will come with increased competition,” says Dr Maurer.
Deployments of technology to broaden access to financial services from villages in the outer islands are also continuing, with ‘banking in the box’ (mobile branches) and mobile phone banking seen as the most relevant options for reaching the most remote communities.
