The World Poverty Day, How Microfinance Can Share
On 17 October 2008 there will be a global event, The International Day for the Eradication of Poverty or World Poverty Day that organized around the world to address and share empathy for people who are struggling in their daily lives in the midst of the massive financial turndown in United States (US). The crisis has been a great concern and worried us as it can be a snowball recession spread out to many regions in particular countries tie closely to the US market. It is easy to understand that recession leads to the slowdown growth and hits the country’s economic health as well as generates severe impacts to businesses sectors. At the end, economic turmoil will turn into miseries and poverty.
The recent global statistic in 2005 shows that the number of poor inhabitant who has daily earning below US$ 1 nearly 879 million and approximately 2.6 billion with income less US$ 2 per day respectively. Referring to the World Bank’s Policy Research Working Paper 2008, to some extent the progress of poverty eradication in the developing world is quite promising. In short, the effort is on the track to achieving the Millennium Development Goal (MDG) of halving the 1990 poverty rate by 2015 and hopefully, the Wall St instability will not pull back this achievement.
Now lets we look closer to Indonesia. Using a study report of the World Bank, Making New Indonesia Work for the Poor as a reference, statistically, post the financial crisis the number of poor inhabitants has consistently declined annually from 23.4% in 1999 to 16.0% in 2005, but surprisingly in the 2006 the poverty rate hefty increase to 17.8% , that equivalent close to 35 million. If the review includes the figure of population with the range of revenue between US$1 – US$2 each day, in turn there are roughly 90 million people categorized near poor living the country. Isn’t it a great deal of issue for the government and the whole nation?
No doubt, the current government has worked hard to deal with poverty by designing a policy framework in line with the grand strategy of the national development direction that is popularly known pro growth, pro job and pro poor. Also some series of interventions have been put in place including cash compensations in order to relief sudden impacts caused by the government policy on eliminating gasoline subsidies. The result, last year the economy enjoyed a grow rate at 6.3% and income per capita US$ 1,947, those has successfully surpassed the figure in 2006. However, the achievement does not deal with the real dynamic of poverty. The case of economic growth without income and wealth distribution is a good example to explain this phenomenon. The World Development Report 2001 suggests that economic growth rate solely, for example in Indonesia does not depict to what extent poor inhabitants lift out from poverty. There is a combination factor simultaneously involves in breaking the viscous circle of poor populations such income distribution, economic sectors, regions where the poor exist, assets ownership and broad access to economic opportunities as well as access to finance.
Empirically, financial system and market play important roles to foster income per capita growth, productivity, business growth, entry level of start up enterprises and poverty. The presence of banking and financial institutions in the societies can be a tool for banishing persistent income inequality since access to over time financial services has determined the speed of poverty reduction.
Many countries adopt and develop financial system policies to eradicate poverty and inequality. One of the prominent approaches is microfinance since this model has been proven in cracking down financial exclusion of poor households.
Broadly speaking, microfinance comprises a range of innovative financial services and products. The contemporary dimension of microfinance has evolved to challenge a reality that poor clients do not only need credit but also saving, insurance, remittance and payment services. Microfinance embraces unique financial methodologies that are accessible for group of people who live under the poverty line and low income households who are not tapped by commercial banks and other formal financial institutions. Apart of financial services, some institutions also provide social interventions such as trainings, healthcares, technical assistance and women empowerment programs. Thus, the availability of financial resources can generate cash income, savings and social supports can improve the socio-economic wellbeing of microfinance clients.
Indonesia is popularly as one of the leader in microfinance sector. The global flag institution is Bank Rakyat Indonesia (BRI Unit). Also there are ample other microfinance institutions presence in the local community across the provinces. Those include private commercial orientations, socio-empowerment motives, socio-religious approaches, self help group initiatives and government projects.
These microfinance institutions should be excellent assets for the government to combat poverty through productive economy activities since they presence very close to villages and slump areas where the poor living. Unfortunately, the efforts of the government to strengthen the microfinance sector are likely minimalist. The most interest of policy emphasize on financial issues particularly access to loans. The most recent policies are credit guarantee scheme through Kredit Usaha Rakyat (KUR) that only involving several leading state owned commercial banks, and revolving funds mainly credit and saving cooperatives. The minimalist strategy, i.e. KUR is effective for the short term perspective especially for financing established micro and small entrepreneurs but empirically such kind of credit is unsuccessfully to broaden financial access to the poorest and peasant farmers who construct the structure of poverty. Yet, the outreach of KUR is also politically questionable since only embraces a small number of government bank. Although BRI-Unit has been involved to channel KUR-Mikro, based on my experience in the field those loans are inadequately to sustain financial needs the poor inhabitants.
Instead of a quick-fix policy, the government should battle for a long term objective of poverty and the financial system approaches are optimally used to get there. The foremost issue is legal provision for existing microfinance institutions that in the grey area of law. The number of these institutions and their existences significantly sustain the live of unfortunate segment in the societies. The need of law is to provide legitimate framework for the organizations to conduct more financial services beyond generic micro credit hence poor people will have more opportunities to engage and maximize their financial matters for building better lives. Equally important that the regulation will force a supervision system to ensure the interest of the stakeholders are protected and the practices of the institutions are legally compliant. Lastly, additional benefit of formalizing the grey area microfinance institutions is to allow commercial banking sectors to extend its financial intermediaries to un-banked segments through strategic alliance model, i.e. linkage program bank and microfinance.
The discussion of Microfinance Law does not start from empty paper since the documents have been submitted to the Parliament (DPR) by the Regional Representative Council (DPD). The role of the government is essential to lean the process of legislation and to mediate some critical issues in the law proposal.
Microfinance Law is a not a silver bullet to solve all the constraint of financial inclusion and poverty alleviation initiatives, but the essence of this article is to remind all stakeholders to use the moment of the World Poverty Day for settling the unfinished job.
Mohamad Iwan Nazirwan, the contributor is a former micro-banker and member expert team of Microfinance Law. Now he is living in Australia, manages Minute Capital for Microbanking and Islamic Microfinance.