Indonesia’s Microfinance Industry Faces Overwhelming Demand

JakartaGlobe, Janice Winata, July 23, 2013

Many roadside stall operators in Indonesia have to resort to loans from mobile
 banks (bank keliling) as they are unable to obtain formal banking services.
(JG Photo/Fajrin Raharjo)

A tattooed man briefly interrupted Wastiri as he ducked into her roadside stall, taking a seat alongside the slow-moving traffic that crawled down the narrow Tanjung Priok street. She flashed him a smile as he greeted her, beaming wide and toothless from her perch atop a worn wooden bench.

Colorful bags of instant noodles and potato chips lined the walls of Wastiri’s stall — a tiny plastic-covered shop sandwiched between a ramshackle noodle stand and a large commercial bank in North Jakarta’s roughhewn portside neighborhood.

For some 40 years this stall has been the source of Wastiri’s livelihood, she explained. In that time the woman, now more than 80, has become something of an institution. Customers call her “Emak” (Mother) as they stop by to ask what she has in stock, peering into her small store as they walk down the street.

The bank next door hasn’t been as reliable, she said.

“I would like to borrow from banks, as it is cheaper to do so, but their requirements are complicated,” she complained. “They ask me for an identification card [which I have], but I do not have a family card or the deed to my home for collateral. I don’t own the place.”

For Wastiri, and millions of other low-income Indonesians, the nation’s commercial banking system is a closed door. While lenders like Bank Rakyat Indonesia offer low-cost microloans, lending regulations — which require customers to have proof of a permanent job, income and collateral — shut out the majority of Indonesia’s laborers.

It’s a large segment of the domestic market. Despite Indonesia’s rising middle class, nearly half of the country’s households live at, or close to, the government’s $22-a-month poverty line, according to World Bank statistics. Some 92 percent of Indonesia’s workforce is employed in the informal sector. Most hold semi-permanent jobs but lack an employment contract.

Commercial lenders and microfinance cooperatives have tried to meet the demand, but a combination of strict regulations and too-high thresholds have hampered efforts and given rise to a murky black-market of motorcycle-riding lenders and unscrupulous loan sharks.

The lenders offer loans at high interest rates — nearly 20 percent higher than bank rates — and often collect daily payments from customers. The requirements are loose and the lenders are eager to approach customers, said Wastiri.

“Bank keliling [mobile banks] are more suitable for us,” she said. “Thought they ask for daily or weekly payments, it is easier for us to borrow money from them — I personally don’t even have to give them my identification card.”

Experts have struggled to estimate the real size of the informal market, but from their best estimates it appears to be growing.

“We can expect to see an increase in the number of non-bank microfinance institutions because the non-bankable segment is huge and it is very difficult for the poor to access banks,” said Dewi Meisari, an expert in micro-, small- and medium- sized enterprises at the University of Indonesia (UI).

The Ministry of Micro, Small and Middle Enterprises recorded 55 million MSMEs in 2011 and reported a loan-to-GDP ratio of 33.1 percent in a survey a year later. Some two-thirds of the MSMEs in Indonesia have no access to formal banking services, the ministry found, warning that the lack of access was a threat to Indonesia’s economic growth.

“The lower income population has little or no options when they borrow money,” Dewi said.

Growth potential

Indonesia’s microfinance market can be lucrative if properly tapped, experts believe. MSMEs account for  57 percent of the nation’s gross domestic product, Bank Indonesia (BI) Deputy Governor Halim Alamsyah said during a seminar last June. While MSMEs have historically borrowed outside the formal market, the number of micro business owners receiving commercial loans has grown in the last year, Firman Moeis, head of commercial linkage at CIMB Niaga, added.

“The micro finance market in Indonesia has great potential for growth,” he said. Out of the 56 million MSME owners in Indonesia, only 37 percent of them receive micro banking services. [But] as of February 2013, the MSME industry had an outstanding loan value of Rp. 514.5 trillion — a 14.6 percent jump from last year’s numbers.”

Firman believes the nation’s economic growth is anchored by micro businesses like Wastiri’s food stall. During the Asian economic crisis, the owners of small and mirco businesses emerged unscathed, he said.

“The 1998 crisis negatively impacted big companies, but small-medium businesses thrived,” Firman explained. Today, the economic downturn isn’t as drastic; furthermore, the small-medium businesses are fundamentally sound, so I am certain this situation will leave little or no impact on the microfinance industry.”

While large companies saw their balance sheets reverse into the red, the nation’s informal sector — cigarette sellers, stall owners and street food cart operators — continued to earn a living, said Leonardus Kamilius, founder of Koperasi Kasih Indonesia, a microfinance institution operating in Cilincing, North Jakarta.

“In the 1998 crisis, the companies that were battered by the crisis were the big companies who owed US dollars. For small enterprises, their economies are not as related to the global economy and hence, they are more resilient,” he told the Jakarta Globe.

Financial literacy still a problem

For Said Hendro, access to microloans has been both a blessing and a curse. It’s tempting to borrow too much, he said, adding that many of his friends found themselves neck-deep in debt after taking money from both microfinance cooperatives and mobile banks.

“Many of my friends around here have gone back to their villages as their businesses have gone bankrupt,” Said shared. “They borrow from all these mobile banks and they can’t repay their debt.

“I understand their predicament completely because these people come by everyday offering loans and it is hard to say no. Even though I have loans from both official cooperatives and the mobile banks, I am still tempted to borrow more.”

Experts warn that the lack of financial literacy among low-income residents could undermine out any gains made by offering poor people access to financial services. Borrowers need access to both commercial loans and education for Indonesia’s microcredit industry to make a positive impact, experts said.

“Most people in the low-income population cannot comprehend the whole notion of interest rates — the way the process of borrowing is explained to them is by telling them how much they need to pay in installments per week,” Dewi explained.

Leonardus echoed Dewi’s sentiment.

“People who can afford loans of 5 million rupiah and above, they generally already know how to manage their money and do not require further financial education,” he said. “However, for smaller loans like 500,000 rupiah loans for a banana fritter [pisang goreng] seller, he does not know how to manage his money and will benefit greatly from financial education.”