A promising new pathway for Indonesia’s underbanked businesses
While most understand that Indonesia is vast, few have a clear sense of its sheer expanse. Spanning over 18,000 islands and a distance east to west of 5,120 kilometres, this large archipelago, amidst one of the world’s major trading routes and with abundant natural resources, also represents a nation rich in untapped potential.
This is especially so when one considers that of its adult population of 181 million, an estimated 51 per cent are currently without basic access to financial servicesi. Back in 2003, this was a challenge that Indonesian microfinancing pioneer Mitra Bisnis Keluarga Ventura (MBK) set out to tackle.
Two decades ago, the country’s banking and non-bank institutions would not provide tiny loans of five hundred thousand to one million Rupiah (USD32 to USD64 at today’s rates) to self-employed micro business owners.
In those days, to borrow small yet critical amounts for a family food cart or to sell necessities in their kiosk, would mean approaching a money lender, who might charge interest rates of up to 40 per cent per month. And while other local banks did provide loans to farmers and fishermen, these were typically for much larger amounts.
A powerful demographic
A microfinance institution regulated by the Indonesian Financial Services Authority, MBK chose to ply a new path – seeking to fill Indonesia’s microfinance gap by providing very small loans solely to self-employed women, with these loans strictly aimed at productive purposes only.
Unlike traditional banking, MBK followed the Grameen Bank methodology, first pioneered in the 1970s by Professor Muhammad Yunus of the University of Chittagong as a means of bringing affordable loans to the poorii.
Under this methodology, borrowers need not open a bank account, or visit a bank branch office. Instead, an account officer will come to the borrower’s house or place of business.
Borrowers do not have to provide security to obtain a loan, as collateral is typically unaffordable for them. They pay back their instalment to MBK on a regular basis, with the relationship based on mutual trust, with no debt collectors involved.
MBK’s business model sees it providing loans to groups of low-income female entrepreneurs. These groups comprise friends and neighbours and number between 15 and 20 members. MBK’s account officers disburse and collect repayments on a weekly basis, at the premises of a borrower trusted by the group. A joint liability group system means the group helps borrowers who are temporarily unable to pay their instalment, making peer support critical to the system.
“Most low-income female borrowers are afraid to go, or unable to reach a bank branch, and many of them are financially illiterate,” says MBK founder Shafiq Dhanani. “Money lenders charge anywhere between 20 per cent and 40 per cent flat interest rate per month. As we charge between 20 per cent and 25 per cent per year, there’s a huge difference.”
As Pak Shafiq observes, the uniqueness of the model is reinforced by the MBK workforce. “We employ 6,500 staff, and 99 per cent of these are women. In the field, we only employ women – from the account officer who visits our clients, right through to the regional manager,” he explains.
Experience shows that female clients feel more comfortable dealing with other women, he noted. “Thus we started this system, and it has worked very well for us,” he notes. Globally, 95 per cent of Grameen Bank borrowers are women.iii
According to an independent surveyiv by California State University, Northridge in the USv, MBK’s low-interest micro-loans model is enabling an improvement in circumstances. “We found that the percentage of members above the poverty line rose from 19 to 61 per cent by their fifth year of joining the programme,”vi the researchers noted.
MBK is supporting self-employed women in Indonesia with USD 18.6 million worth of micro loans provided by Standard Chartered to help build a better future for their families.
Empowering partnerships
According to Pak Shafiq, the biggest challenge when it comes to raising money for microfinance companies is that traditionally, local banks are less familiar with the Grameen Bank methodology used by microlenders and seem particularly surprised that collateral is not required from borrowers. Yet globally, microfinance institutions claim that the methodology in fact produces a rate of non-performing loans in the range of one to five per centvii.
In 2009, Standard Chartered became the first Indonesian bank to provide a microfinance loan to MBK. The Bank has extensive experience in microfinance, not only in Indonesia, but also in India, Bangladesh, Pakistan and Africaviii. As such, Standard Chartered has developed a deep understanding of the financing needs of microfinance institutions such as MBK. The current loan deal of IDR280 billion (USD18.6 million) was executed in April 2022, which MBK estimates will benefit over 55,000 households in Indonesia.
Globally more than 1.7 billion people around the world remain unbanked, with the majority in Asia and Africaix. The global microfinance market plays a valuable role and is expected to exceed USD300 billion by 2026.x”
“Microfinancing institutions like MBK are making a positive impact for small businesses with productive ambitions, and Standard Chartered is pleased to help it spread its footprint,” says Andrew Chia, Standard Chartered Cluster CEO, Indonesia and ASEAN markets (Australia, Brunei and the Philippines).
Poverty eradication remains a challenge. MBK estimates that currently 75 per cent of its 1.5 million clients still live below the official poverty line. According to Pak Shafiq, 70 per cent of MBK’s current borrowers are small traders with the remainder in farming, crafts, livestock and services.
A key party in the partnership between Standard Chartered and MBK is the Asian Development Bank (ADB). ADB closely partners microfinance institutions and banks to increase access to local financing and address financial needs for millions.
Expanding reach
As the industry grows, so too do the potential risks of over-indebtedness. Pak Shafiq says that while MBK has checks and balances in place, it cannot necessarily control whether clients are taking low-interest loans from other companies too. “I think this is our most serious challenge now,” he says.
He suggests that the microfinance industry could work towards restricting the number of loans available per family to a maximum of three or four. “This is the standard in other countries with a risk of over-indebtedness,” he notes.
While the microfinancing space becomes more competitive in Indonesia, the country and its business opportunities remain huge. MBK first opened branches in Sumatra in 2019 and now has 844 branches throughout Indonesia, including 149 in Sumatra and 14 in Bali.
“We will explore other places like eastern Indonesia, perhaps Maluku, Sulawesi, and Kalimantan,” says Pak Shafiq. “But all that will require a lot of resources, expertise and funding. And this is where partners like Standard Chartered play a critical role.”
ii https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/848/Grameen_Bank_v04.pdf
iii “Grameen Bank: Taking Capitalism to the Poor’, Columbia Business School, Page 1
iv Mahony, Makosov, Montgomery, Shahverdian, ‘Making a Difference: An Analysis of MBK Ventura’s Impact on Members’ California State University, August 2009, PDF Report
vi Mahony, Makosov, Montgomery, Shahverdian, ‘Making a Difference: An Analysis of MBK Ventura’s Impact on Members’ California State University, August 2009, Page 16, PDF Report
vii “Grameen Bank: Taking Capitalism to the Poor’, Columbia Business School, Page 25