How a pioneering microfinance initiative is boosting Indonesia's women entrepreneurs

Suryani, a typical Indonesian housewife, lives in a slum community nestled in the heart of West Sulawesi. Her husband, Wahyudi, constantly moved from odd job to odd job and never held steady employment. Financially struggling, Suryani started a business utilizing her skills in crafting clothing accessories. With little savings and no other financial options, she did what most in rural Indonesia would do: turned to loan sharks, known locally as "rentenir", despite the exorbitant interest rates. Immediately, she was caught in a downward debt spiral.

Like many at this income level, Suryani had become enslaved to the debt she accrued and unable to accumulate capital to grow her business. She stands as one among millions of underprivileged Indonesian women desperately in need of affordable financing and empowerment to escape the pervasive poverty trap.

Around the world, we have accepted the long-standing idea of closing the gender gap in economic participation. Governments are introducing various policies to drive gender equality and create more inclusive economic growth, from developing vocational schools to promoting more women in the labour force.

In the case of Indonesia, women's economic participation has remained flat, regrettably, for too many years. A recent study found that female labour force participation has stood at around 53% for over two decades, significantly lower than the 85% observed among men, with marriage and childbearing becoming the factors that drive women to exit the workforce.

Worse still, those women in the labour force, for a myriad of gender-related reasons, are mainly pushed to engage in low-productivity sectors or businesses, making it statistically more difficult for the likes of Suryani to break the poverty ceiling. Women accounted for about 60% of Indonesia's MSMEs, but were over-represented among micro- and ultra-micro enterprises. Lower access to credit and markets compared to male-owned businesses hindered their growth aspirations.

Access to financial services is crucial to the underprivileged and underserved population. Reasonably priced financing can serve as a catalyst to scale up their businesses and increase the odds of climbing the elusive economic class ladder. Sadly, most formal financial institutions overlook this segment due to the perceived elevated risks stemming from insufficient business expertise, income instability, cost to serve, lack of credit history, predominantly cash-based transactions, and lack of collateral.

Introduced in 2015, the microfinance initiative Mekaar, which stands in Indonesian for Fostering a Prosperous Family Economy, was created as a solution for these challenges. Modelled after Bangladesh’s microfinance Grameen Bank, Mekaar incorporates an idiosyncratic approach to women's group lending, providing loans, savings and empowerment programmes. Operated under the state-run microfinance institution PT Permodalan Nasional Madani (PNM), Mekaar is solely dedicated to female borrowers, who statistically exhibit higher repayment rates and greater financial responsibility, focusing primarily on the family's needs and children's future.

Despite trivial shortcomings, the group lending model remains the most prevalent and arguably the most successful method for disbursing financing to underprivileged women in rural communities. The primary characteristic of the group-lending model is to build upon social capital and rely on social collateral from the members' shared responsibility, a methodology that has proven to be successful in delivering loans to underserved borrowers and alleviating poverty in developing countries.

The social-cultural fabric of Indonesian society, marked by tightly knit communities engaging in a plethora of communal activities, creates a conducive environment for this model to prevail. A study on Mekaar substantiates its positive impact on group members across various dimensions. Mekaar improved the members' ability to generate revenue and profit, giving better financial stability, less vulnerability to external shock, and better expectations of business longevity.

Based on a recent survey (BRI Research Institute, 2023), 60.85% of Mekaar borrowers are able to increase their revenue and 48.35% of them experience increase in assets after receiving financing. Subsequently, they can improve family's well-being by fulfilling basic household necessities, including better children's sustenance and education, access to electricity, and asset ownership. Mekaar also facilitates better access to raw materials, broadens distribution channels and introduces members to the digital platform through empowerment initiatives. Additionally, the programme instills momentum among members to enhance confidence and decision-making capacities.

While these achievements are not to be under-estimated, challenges still remain. The programme's historical structure, utilizing a traditional cash-based business model and the geographical intricacies of Indonesia's archipelago, has rendered it particularly susceptible to a familiar microfinancing challenge: elevated operational costs and risks.

Following the establishment of the Ultra-Micro Holding in 2021, a transformative milestone that potentially redefined the financial landscape for underserved Indonesians, Mekaar experienced a rejuvenation. Collaborating with BRI, one of the world's most successful micro-banking institutions, as the parent company, PNM built on Grameen’s business model by improving efficiency and capacity to amplify the Mekaar programme's impact, extending its reach by around 50% to nearly 15 million customers within two years.

Leveraging BRI's digital resources, PNM provides Mekaar members access to comprehensive financial products and builds the groundwork for digital financial inclusion by developing a cashless ecosystem, starting with the cashless disbursement of loans into newly established savings accounts. The program has amassed 10 million new savings accounts within only two years, improving group members' economic resilience and allowing them to have financial data that would provide pathways to more sizeable financing as their business grows.

The initiative has led Mekaar to contribute to financial inclusion and turning the tables on financial literacy. For the first time in history, Indonesian women have surpassed their male counterparts in scoring higher financial literacy.

Thanks to Mekaar, Suryani's business has grown and is contributing more to her family's future, showing the benefits of financial inclusion and digitalization. However, Mekaar still has much ground to cover. The latest Indonesian Coordinating Ministry for Human Development and Cultural Affairs data indicates there are 27.1 million underprivileged women of productive age in Indonesia. A study conducted by McKinsey & Company has projected that the promotion of gender equality in Indonesia has the potential to contribute an estimated $135 billion to the country's GDP by the year 2030; a substantial incentive for Indonesia to escape the middle-income trap as millions of its women aspire to definitively close the financial inclusion, income and gender gaps.