Microfinance in Indonesia: Some Perspectives

Microfinance is strongly associated with the group based approach pioneered by the Grameen bank in Bangladesh. An important characteristic of Grameen and other group based models is the use of collateral substitutes such as group guarantees and compulsory savings to ensure good repayment rates.

In Indonesia, however, services that classify as microfinance because of the small sizes of loans and deposits, have primarily followed the individual banking model with loans often guaranteed by physical collaterals. Thus there is a significant departure within the microfinance sector as it has evolved in Indonesia, when compared with the popular models in other developing economies such as Bangladesh, Bolivia and India.

The ability of microfinance clients in Indonesia to offer physical collaterals suggests that they are comparatively less poor than their counterparts in Bangladesh and India. However, as the UNDP Human Development Report for Indonesia mentions, a substantial proportion of Indonesia’s population (estimated between 33% and 50%) is vulnerable to poverty and keeps moving in and out of the poverty line. Thus, many of them may not qualify as poor at a given point in time. Most of them earn their living from the non-formal economy and may be called micro-entrepreneurs. Thus, the clientele for the microfinance sector in Indonesia comes from a section that has small asset holding but at the same time is also exposed to income shocks.

The central bank in Indonesia, Bank Indonesia (BI), classifies BRI units, BPRs, and other small financial institutions (BKD and LDKP) as microfinance institutions (MFIs). The basis for such a classification is the fact that the average loan and deposit sizes in these institutions are typically small and also the fact that these institutions come under its regulatory purview. (Bank Indonesia (BI) defines a micro-sized loan as one under Rp 50 million which is equivalent to about USD5,500). The ADB on its part also includes the state owned pawning company Perum Pegadaian (PP) in its definition of microfinance in addition to the BRI units, BPRs and other smaller financial institutions.