More research needed to understand micro finances that work

Micro finance has been widely recognized to be able to play a greater role in tackling the great challenges in Indonesia's aspiration toward poverty alleviation and reducing inequality. However, Although Indonesia has been a global leader in microfinance outreach and innovation for the past 25 years, access to microfinance services is now declining and nearly 50% of Indonesian households continue to lack effective access to micro credit.

To contribute to the effort of understanding the determinants and impacts of micro finance institution, CEDS contributed a session in a national seminar on "Inclusive Microfinance: Its Contribution to the New Paradigm of Integrated Microfinance Management for Poverty Reduction in Indonesia" held in Bandung, on Friday, March 8, 2013. This national seminar was organized by Magister Management Program, Faculty of Economics and Business, Universitas Padjadjaran and Universiteit Leiden.

The topic of the CEDS session in the seminar is "Determinants and impact of micro finance institutions in Indonesia: Micro data evidences". In this sessions, CEDS presented three papers from its Small Research Grant (SRG) and Young Researchers Program. In the first paper authored by CEDS researcher, Mr. Heriyaldi, it was found that micro finances contributed to the welfare improvement only in rural areas. Among 5 micro finance institutions analyzed, only BRI and BPR is found to have impact on the local economy, whereas in urban areas, no evidences have found on their impact on people's livelihood.

In the second paper, Ms. Sinta Wulansari, a participant from CEDS' Young Researcher Program (YRP) found that the presences of micro finance institutions in the community do not have a significant impact on the profitability of household farm business. Prof. Ian Slikkerveer from Leiden universities supported this finding suggesting presence of traditional micro finances alone that only focus on the finance aspect in their operation will not be adequate to improve farm profitability. Micro finance management need to work beyond finances by including such aspect as education, health, and even preserving local wisdoms. This is where the integrated micro finance management can play a greater role, Prof. Slikkerveer said.

Ms Alfiah Hasanah with her paper on the determinants of the establishment of Islamic micro finance insitutions found that Islamic values can be strong determinants of the establishment of Baitul Mal wa Tamwil (BMT), one of the rapidly growing syariah-based micro finance institutions. However, Islamic values are not only the strong determinants. Accessibility to market and the presence of complementary existing financial institutions are also important. Ms Hasanah's finding also indicates that the influence of Islamic values on the establishment of BMT is weaker in the cities.

This session conclude that more research are needed to improve our understanding of what works and what don't works in the management and regulation of micro finances. However, all agree that all stake holders including universities, banking sectors, businesses, and government need to work together in the spirit of poverty alleviation in Indonesia.

*) Papers from this seminar can be downloaded here:

  1. Does Micro Finance Institution Improve Welfare? A Double Difference Analysis of Indonesian Community-level Data
  2. Determinants of the Establishment of Islamic Micro Finance Institutions: The Case of Baitul Maal wa Tamwil (BMT) in Indonesia

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Center for Economics and Development Studies is a research center under the Department of Economics, Padjadjaran University, Indonesia. A leading research institute in Indonesia in the area of economics and development studies.
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