Microfinance takes root in Indonesia

When Muhammad Yunus from Bangladesh was named the Nobel Peace Prize winner in October for his pioneering work with the Grameen Bank, it threw a global spotlight on the benefits of microfinance in reducing poverty.

Microfinance is a practice that is already bearing fruit in many other parts of Asia, including Aceh, one of the areas of Indonesia hardest hit by the Asian tsunami disaster of December 2004.

There are several initiatives taking place in Aceh to introduce the microfinance method Yunus employed at the Grameen Bank, and one of the most prominent is initiated through ADB’s Earthquake and Tsunami Emergency Support Project (ETESP) grant.

Last May, the ADB and the Rehabilitation and Reconstruction Agency (BRR) established the $8.5-million Microfinance Innovation Fund (MIF). A major portion of this fund would be used to capitalize licensed financial institutions to enable them to extend microfinance to the poor in Aceh and Nias.

"Through MIF, BRR hopes to expand the micro and small enterprises in Aceh and provide the poor with better access to formal financing," Said Faisal, BRR’s Deputy for Economic Development, said of the MIF.

Financial institutions that receive financing from the MIF are required to undergo a program of extensive training and management upgrading, separately financed by ADB.

They must also meet financial and operational benchmarks and achieve outreach targets.

The Grameen approach has seen many successes in Java but Elfi, SE, CEO of Bank Baiturrahman, a rural bank that operates in Ajun, Banda Aceh, was at first skeptical that it would succeed in Aceh.

"Javanese and Acehnese cultures are different," he said. "I really thought it wouldn’t be a success here."

His mind changed after a study visit to BPRs in Semarang, Central Java and Yogyakarta.

"By strengthening the group, risks are mitigated. And the fact that the groups consist of women, I thought risks are mitigated even more. I became an enthusiast."

Banks have been advised to take a phased approach. Thus, each group consisting of eight women borrows Rp.4 million in the first stage. The group pays this loan back in 17 weekly installments at an average interest rate of two percent per month. The loan allows recipients to enhance their inventory or supply of raw materials.

"My capital was limited, so I could not stock supplies," Siti Affah, 47, a mother of seven, narrated. "So, when there was a special order, I often had to say no. (There was) not enough fuel and not enough rice flour. This loan allows me to (keep) stock. Also, since you have to stay in line for quite a bit of time to buy subsidized fuel needed to cook, I used to lose precious time. By stocking, I save on such wasted time and can produce more."

Siti produces karah, a traditional Aceh cake that she sells in the market in Lambaro, Aceh Besar. Before borrowing from Bank Baiturrahman, she believes her income has increased by one fifth.

"After paying off this first loan, I hope to borrow more to increase my capacity to produce," she said.

Pieter Smidt, head of ADB’s office in Medan, sees a future for microfinance in Aceh. He points out that there are 342 outlets in East Java alone, whereas Aceh only has 20, including 12 units owned by the provincial government that are in weak financial condition.

ADB has reached agreement with the provincial government of Aceh and BRR to strengthen these 12 banks. Elfi, however, also sees big challenges in the near term.

"There are too many grants floating around," he says. "Some grants give more than Rp.50 million to a single recipient. This is not sustainable. We believe we are the sustainable alternative but we can only take off after the grants are phased out."