How microfinance can build bridges to growth

Indonesia’s economy has enormous potential, yet rising inequality across the archipelago of more than 17,000 islands disconnects half of the population from the nation’s growing prosperity. Economic development has left a huge gap in terms of equality and growth has not affected everyone.

For example, in a rural village in Bogor, less than two hours drive from glittering Jakarta, families have no access to financial systems or an ability to participate in the economy. My experience in running microfinance institutions (MFI) has shown that providing capital and working with multiple stakeholders can provide a bridge to inclusive growth.

Microfinancing became popular when Muhammad Yunus, the founder of Grameen Bank, was awarded the Nobel Peace Prize in 2006 for his work to “create economic and social development from below”. He claims that poverty means being deprived of all human rights.

He regards micro-credit as one of these rights and as an effective means of emerging from poverty; lend the poor money in amounts that are manageable for them, teach them a few basic financial principles and they generally manage on their own. This model has reversed the myth that low-income families are not bankable and cannot repay loans. It has been replicated in various countries including India, the Philippines, Cambodia and Mexico.

Success in rural areas

The three reasons this model has been so successful are: minimum entry requirements, manageable risk with joint-liability models, and non-performing loans that are close to 0%.

The model has been a success for low-income female entrepreneurs in rural areas. It is not possible to conduct credit analysis and to examine cash flows because they cannot do book-keeping so do not have existing accounts. Instead, aspects such as friendship history and recommendations are taken into account.

Second, a joint-liability principle, or shared responsibility principle, is applied to the loan. This principle establishes that if there is default by any member,the Majlis – or councils – have an obligation to cover the unpaid instalment. This mechanism provides social pressure for the community to invite trusted friends to join the microfinance institution.

Third, in addition to disciplined models of social pressure, every member has access to quality services.

In Indonesia, microfinance helps us to reach the unbanked population and serve them in a spirit of partnership rather than charity. Microfinance provides assistance at the grassroots and a commitment to serve low-income communities.

In Amartha Microfinance, we serve families living at the very bottom of the socio-economic ladder. We combined the Grameen Bank group lending system with Indonesia’s local context and, in some cases, with Islamic sharia law. Coupled with our financial services and education, the business model empowers the livelihood of low-income families by building a business based on accountability and participation.

Here is one good example. Nyai Sugiharti, a 44-year-old mother of two, had to start again from nothing when her husband passed away. At the time, she received her first financial assistance from Amartha, which amounted to 500,000 Indonesian rupiah (about $47) in 2011. After three years, and receiving the third financing of 2,500,000 rupiah, Sugiharti’s sickle workshop business now employs six people and has increased revenue by 620%.

Collaborative ties

The story of Amartha Microfinance started with a limited network and limited capital. In 2010, we reached 190 low-income families and it has grown exponentially every year since. By December 2014, nearly 10,000 low income families’ lives had been impacted. Since its inauguration, Amartha has disbursed average loans that average 1 million rupiah but go up to 20 billion rupiah.

Learning from experience, collaborative ties with NGOs, social enterprises and multinational companies are necessary to extending services beyond financing. There are several sectors that help make more of an impact on the grassroots communities, such as agriculture, sanitation, education and healthcare.

The success of microfinance does not necessarily come from the capital that is disbursed. It comes from the development of networks that share the same core values and principles to provide lasting change for low-income families.

Joint empowerment programmes will be the next innovation. A multistakeholder approach is needed to create greater impact and to provide happiness to millions of poor in Indonesia.

Author: Andi Taufan Garuda Putra is Founder and CEO of Amartha Microfinance, and a Global Shaper

Image: A woman holds Indonesian rupiah banknotes in front of a Bank Indonesia mobile bank in Jakarta July 15, 2013. REUTERS/Beawiharta