Asian Development Bank-Commercialization of Microfinance - Indonesia

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  • This report analyzes the progress towardcommercialization of Indonesias highlydiversified and predominantly formalmicrofinance industry. It also explores theimplications of commercialization and theremaining challenges to expanding outreachthrough commercial microfinance institutions(MFIs) facing various types of stakeholders(including microfinance clients, microfinancepractitioners, the Government, and fundingagencies). In addition, it recommends positiveapproaches to the expansion of commercialmicrofinance while preserving the traditionalsocial objective of MFIs of expanding accessby the poor to demand-driven, sustainablefinancial services.

    METHODOLOGY AND ORGANIZATION

    This study on which this report is basedincludes theoretical considerations drawnfrom the financial systems paradigm

    12 and

    practical field experience for analyzing thecommercialization of microfinance. The mainfindings and recommendations presented hereare the product of extensive consultation throughindividual and group meetings with a widevariety of MFIs and stakeholders includingmicrofinance clients, government officials,state-owned commercial banks, private banks,cooperatives, domestic and internationalnongovernment organizations (NGOs), fundingagencies, and academics. In addition, because ofthe extreme diversity and numbers of MFIsoperating at the village level throughoutIndonesia, this study relies heavily on existingmicrofinance literature.

    Responses to questionnaires elicitingstakeholder views on microfinancecommercialization and their latest institutionaland financial data have been incorporated

    where possible. In addition to collecting such dataand holding a wide variety of stakeholdermeetings in Jakarta, the authors also gathered dataduring field visits to several other provinces.

    13 It

    is important to note that all institutional andfinancial data are based on self-reporting by theMFIs surveyed by the authors, unless otherwisenoted. Readers should be mindful that these self-reported data provided by MFIs and included inthis report are often based on estimates only. Thisis particularly an issue with NGOs providingmicrofinance (microfinance NGOs) that do notseparate microfinance from other social programsor from traditional financial intermediation (aswith many banks and cooperatives).

    The remainder of this chapter elaborates onthe framework for analyzing thecommercialization of microfinance usedthroughout the study and establishes thecountry context as it affects the microfinanceindustry. Chapter 2 examines the historicaldevelopment of the microfinance industry,evaluates major commercial MFIs andmicrofinance programs, and assesses MFIaccess to commercial sources of funds. Chapter3 analyzes the conduciveness of the operatingenvironment to the commercialization ofmicrofinance by focusing on enabling attributesof the policy environment and the legal andregulatory framework, and the existence of keymicrofinance support institutions. Chapter 4explores the implications of commercializationin terms of expected changes in access tomicrofinance by client type, in the mix ofmicrofinance products and services offered, andin access to commercial sources of funds.Empirical evidence of and potential forcompetition and mission drift are also assessedin Chapter 4. Current challenges to microfinancecommercialization are the focus of Chapter 5,which reveals stakeholder perceptions, internalconstraints facing MFIs, and external

  • impediments in the operating environment.Chapter 6 recommends positive approachesto commercialization for the Government,funding agencies, various types of MFIs, andmicrofinance support institutions.

    FRAMEWORK FOR ANALYZINGMICROFINANCE COMMERCIALIZATION

    There is general acceptance of many of theprinciples

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