Searching for Sustainable Microfinance: A Review of Five Indonesian Initiatives

This report reviews five Indonesian microfinance initiatives that operate in rural areas, on parameters such as loan characteristics, program outreach and sustainability.

This report:

• Examines five Indonesian microfinance programs that currently serve low-income clients in low-density areas and require reasonable and/or declining subsidies:
  • Badan Kredit Kecamatan (BKK);
  • Lumbung Kredit Pedesaan (LKP);
  • Program Hubungan Bank dan KSM (PHBK);
  • Pembinaan Peningkatan Pendapatan Petani-nelayan Kecil (P4K);
  • Badan Kredit Desa (BKD).
• Reviews the legal and regulatory issues that affect the microfinance market in Indonesia;
• Discusses how additional microfinance programs that provide very large subsidies compete unfairly with private sector and more market-based government programs.

Finally, the review of the programs shows that microfinance initiatives can:

• Provide low-income people with a valuable service at an initial, affordable cost to governments or donors;
• Obtain strong financial performance through the use of incentives for staff and clients;
• Reduce, and even eliminate, the need for subsidies by charging high real interest rates, aggressively pursuing repayments, and achieving a significant volume of business;
• Face political pressures that undermine their commitment to sound banking practices;
• Be weakened by poorly-designed supervision systems;
• Reach clients in remote areas through sub-district based units and field staff;
• Serve female borrowers without targeting them in marketing efforts if loan products meet women's needs and are accessible to them.