Microfinance as an economic instrument to combat poverty in Indonesia

Posted on 26 October, 2020

Indonesian version, click here

Written by Dinda Amalia Ichsani – AIYA National’s Blog Editor
Translated by Lotte Troost – AIYA National’s Content Translator

In Indonesia, microfinance is one of the potential strategies for poverty reduction. Access to microfinance services enables underprivileged people to increase their income and their assets. It also reduces vulnerability to external shocks and creates jobs. 

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The Asian Development Bank (ADB) defines microfinance as the widest possible provision of financial services. Microfinance includes deposits, loans, payment services, money transfers, and insurance for poor and low-income households and their microenterprises. In relation to the financial institutions in Indonesia, microfinance is usually translated as micro financing or micro credit. Financing activities target low-income customers who lack access to conventional banking.

According to the Financial Services Authority (OJK), Micro Finance Institutions (LKM) aim to increase access to micro-scaled funding for society, to help to improve economic empowerment and productivity in society, and to help to increase income and community welfare, mainly for disadvantaged and low-income society.

The Financial Services Authority also determines the business activities of the Micro Finance Institutions (LKM). These activities include business development services and community empowerment, either through loan or financing in micro-scaled enterprises of members and society, deposit management, as well as through giving consultancy services in business development. These microfinance activities are usually carried out by micro financing institutions such as People’s Credit Bank (Bank Perkreditan Rakyat), savings and loan associations, non-governmental organisations (NGOs) up until various arisan groups.

The microfinance institutions have various general principles in their application. Microfinance product development and services should be tailored to the needs and conditions of micro customers. Also, the services should be open to all levels of society, by means of an easy system approach and procedure, and a strategic location within easy reach. Besides, the organization, operational systems, administration, supervision and information systems should be simple, easy, efficient, effective and transparent. A well-working system also supports the continuation of activities, ensures the sustainability of services and provides benefits for customers and for the development of the service performance itself.

Despite its strategic role in economic development, applying microfinance in Indonesia is certainly not spared from challenges and problems, both internal and external. From an internal perspective, challenges relate to the weak quality of human resources and limited funding sources. Meanwhile from an external perspective, it concerns low public and government awareness towards microfinance institutions.

It is not uncommon in Indonesia that poor communities prefer to meet their financial needs through various forms of financial compliance, which are usually informal. They borrow money from non-formal money lenders (loan sharks) who usually charge very high interest rates. For deposit services, they take advantage of arisan* or Eid savings. Informal services tend to be disorganized and very risky due to unstable protection. Meanwhile, the banking service system is considered to be more difficult for the poor and not many among them can easily access the banking services.

Basically, the microfinance services can be conducted by whichever institution, ranging from government, the private sector, NGOs, formal and informal financial institutions, and even by individuals. But unfortunately, the existence of these microfinance institutions has not yet attained a clear position in the national economy. Therefore, microfinance services tend not to have a major impact in overcoming economic problems within the community.

Microfinance is expected to be implemented effectively and sustainably, so it can reach more people who are in need of help. As individuals and community, we can easily help and get involved in the practice of microfinancing.

Australian Microfinance Institution in Indonesia

Bamboo Micro Credit, commonly referred to as Bamboo, is one of the microfinance institutions from Western Australia that is active in building positive interactions with Indonesia. In Indonesia, Bamboo hires local staff and volunteers to create close interaction between local communities. Bamboo representatives also visit the partnership locations in Indonesia. Bamboo’s loans are managed by partner institutions, and the partner agents subsequently report to Bamboo, by evaluating sustainable business.

Bamboo operates in various places, including Bukittinggi in West Sumatra, through a partnership with Bambu Daya Guna. In Yogyakarta, they operate through the Trisakti Arum Foundation, who specialize in training local communities. In Malang, they provide loans through their partner organisation Daya Pertiwi Foundation. Through examination of potential areas in Indonesia, Bamboo attempts to continue to expand the scope of their partnerships.

A partnership between Bamboo and the Arum Lestari Foundation

Source: documentation Bamboo microcredit

As a microfinance institution, Bamboo differs from other institutions. Bamboo provides interest-free loans, they provide flexible payments and have well-established relationships with local communities. They have low operational costs and they make maximal use of donated funds. They also have many Australian Indonesia connections. After their loans are paid back, the donated money will be reused. Bamboo partners also proactively preserve culture, environment, farming, non-formal education, social, small economy such as MSMEs in the fields of fashion, batik, silver and so on.

Nowadays, anyone can be involved as an economic driver through microfinance institutions such as Bamboo, namely by visiting their website www.bamboomicrocredit.org.au and by donating. Also, by proposing ideas to bring about positive change in the lives of poor people in Indonesia and their communities.

Footnote

*Arisan: arisan is an activity of collecting money or goods that have the same value, which are then raffled among the people who collected these to determine the winner. The lottery is held during regular meetings, such as family or community gatherings, so each person will eventually get a turn to win the collected sum of money and goods.

Reference

OJK. Informasi Umum Lembaga Keuangan Mikro

Saifuddin, Ridwan. (2008). Faktor Penyebab Lemahnya Fungsi Sosial (Baitul Maal) BMT di Lampung. Tesis. Fakultas Ekonomi dan Keuangan Islam, Program Studi Timur Tengah dan Islam, Universitas Indonesia, Jakarta.