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A politicized industry: Challenges of Indonesian microfinance

by on Aug 29, 2011  |  posted in Microfinance  |  0 Comments
[caption id="attachment_176" align="alignleft" width="300" caption="Image by zsoolt"][/caption] Over forty years ago, Indonesia was home to the world’s first commercial microfinance venture; today, the vast majority of its businesses are considered microenterprises. But although it ranks as the world’s fourth most populous country, Indonesia has fewer than 300,000 active borrowers for its microfinance sector, according to the MIX in 2009. This number looks especially paltry considering the country’s huge, unmet need: 40 million people, or more than 25 percent of Indonesia’s adult population, have no access to formal financial services. A number of complications have put the growth of Indonesia’s microfinance industry on ice, many stemming from the government’s involvement in the sector. While in many countries NGOs are the main actors in developing microfinance, in Indonesia, the government assumes this role. As a result, the industry is highly politicized, with MFIs that come and go with the election cycle. A tangle of other problems result from the government’s grip on the industry. For example, although the centralized Bank Indonesia and the Ministry of Finance are both involved in microfinance, they do not cooperate. Drafts of laws that would regulate the industry have been in limbo for the past decade. Perhaps worst for MFIs is that market distortion by the government has historically limited donors’ desire to get involved in the sector. MFIs borrowing from the state’s banks must submit to a 120-140% interest rate, exacerbating the funding challenge.
The Indonesia Microfinance Association (IMA) faces these obstacles constantly. Founded in 2008, IMA serves over 200 members including MFIs, cooperatives, and Sharia microfinance banks. The association is loosely-structured, relying on volunteer staff and board members as well as membership fees, income from trainings, and in-kind donations from its board to operate. Although finding partners has been among its biggest challenges, IMA has successfully leveraged its existing contacts to move the industry forward. IMA collaborated with the Grameen Foundation on the development of the Poverty Performance Index, which measures the impact of loans and whether or not they increase customers’ welfare, and with Making Cents and the MasterCard Foundation to promote financial services for young people. Currently, the association is working with the Asian Development Bank to explore the potential of a loan guarantee fund or wholesale fund, which would increase MFIs' access to financing for their loan portfolios. Progress in this vein, coupled with recent news of Indonesian MFIs attracting multimillion-dollar funding, gives hope for greater growth and investment in the country's microfinance sector.                                                                                                                                   Based on a presentation by Frans Purnama, Chairman of the Indonesia Microfinance Association, at the Asia Network Summit in Manila, July 2011.

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