Microfinance the First Step in Poverty Eradication

Jakarta Globe, Shoeb K. Zainuddin, Sep 15, 2014

Muhammad Yunus. (Antara
Photo/Andika Wahyu)

Jakarta. Financial inclusion has long been viewed as one of the key drivers of poverty reduction. The argument is that if the unbankable segments of society had access to capital, they would be able to pull themselves out of poverty.

At the heart of this argument is the role and critical importance of microfinance; the system of issuing small loans to micro-enterprises to help them expand. Making credit available to the millions of micro-enterprises, it has been thought, would fix the problem. Not so, said Muliaman Hadad, the chairman of the Indonesian Financial Services Authority (OJK), on Sunday.

Speaking at a Leaders’ Breakfast dialogue with professor Muhammad Yunus, the Nobel laureate, on the topic “Building Business for a Better Society,” Muliaman explained that microfinance must expand beyond just providing access to capital.

“From our experience, micro-finance is the starting point of financial inclusion,” he told the audience. “Microfinance over the past 30 years has not achieved its objective,” he added, which is reducing poverty and closing the income gap.

As such, the OJK is now studying changes to the industry and is seriously looking at amending the regulatory environment to ensure that the system works for the poor. He noted that banks were not the right institutions to drive microfinance because of their restrictions and that the government was studying the possibility of getting finance companies to play a bigger role in microfinance.

“The current [avenue of] thinking is that we will divide the regulations between banks and microfinance institutions,” he said. “Maybe regulations should cap interest rates so that we protect the consumer from companies that only seek to exploit the poor.”

Under the plan, which is still in its initial stages, starting a finance company will be made easier if the shareholders are committed to lending to productive sectors and not just financing consumption.

“We want finance companies to provide loans to farmers, fishermen and other micro-entrepreneurs,” he said.

Rather than accepting deposits as the main channel for raising capital, finance companies will be able to issue bonds and other debt paper to raise funds.

“This system will be more flexible than using the banking system, which is restricted by strict regulations.”

In his comments, Muhammad Yunus noted that microfinance is “serious” banking and it would be a serious mistake to consider microfinance institutions as charitable organizations.

“You cannot use regulations designed for the rich and apply them to the poor.”

He added that microfinance institutions should not be funded by the government as often politics gets in the way of rationale decision making.

“It should be a self-reliant system but the regulatory framework is critical and it should be clearly defined.”

That definition should include the point that microfinance institutions should not demand collateral for issuing loans and he agreed with Muliaman that there should be a cap on the interest rates charged.

“[Everyone] is bankable,” he said. “The question is, whether banks and financial institutions are people-oriented or profit oriented.”

The Bangladeshi social entrepreneur, banker, economist and civil society leader was awarded the Nobel Peace price for founding the Grameen Bank and pioneering concepts of micro-finance and micro-credit. He was in Indonesia to speak at the Indonesian Music and Mission Festival, attended by some 10,000 Indonesian youths. The event was co-organized by Sinergi Indonesia and the Goodwater Company.

“We live in two different economies; one for the rich and one for the poor. We therefore need a conceptual framework for measuring growth which is not purely defined by gross domestic product,” Yunus said.

The world will be a completely different place 25 years from now and Indonesia will be a completely different country, he noted, saying: “Change is guaranteed but we have a choice to make sure that the changes benefit all members of society.”

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