National Seminar on Micro Small Medium Enterprises Development through Responsible and Sustainable Financial Inclusion

The rapid economic growth in many emerging markets in Asia Pacific has not been matched by a proportionate distribution of wealth, with an estimated 1.5 billion people in the region still unbanked and therefore economically disempowered. Increasing access to basic financial products and services is moving up the agenda of many international organisations.

Background

The rapid economic growth in many emerging markets in Asia Pacific has not been matched by a proportionate distribution of wealth, with an estimated 1.5 billion people in the region still unbanked and therefore economically disempowered. Increasing access to basic financial products and services is moving up the agenda of many international organisations.

The gap between demand and supply of microfinance remains large. According to the World Bank Study in 2010, less than 50 per cent of population in Indonesia is using formal financial services (banks) as an option to save, and only 20 per cent of poor households have access to formal financial services. Working towards financial inclusion is thus imperative for achieving sustainable individual and social well being.

At the ILO, social finance is about supporting the efforts to extend financial services to excluded persons by addressing two main goals: the promotion of better employment; and a reduction in the vulnerability of the working poor. Social finance encompasses methods that contribute in a positive way to our society. Some of the products that are used in these methods include credit, savings, and insurance that help the poor cope better with risk, take advantage of income-generating opportunities, organize and have a voice.

Social finance is not only for the poor but for all the people excluded from formal financial transactions. Ultimate beneficiaries may vary from families with working children, youth, vulnerable workers, to micro and small business owners.

Microfinance institutions (MFIs) in Indonesia have significant potential to create jobs and reduce poverty by providing access to a range of financial services. The sector is gearing up for exponential growth and expected to reach more people in urban and rural areas with their microfinance products. With more than 20,000 microfinance institutions (more or less 1,810 People Credit Bank/BPR) in the country, the sector will need to improve the performance of their institutions’ often challenging environment as well as accommodate for the increased outreach to small enterprises and people who are self-employed.

Reaching out to the poorest of the poor is still a question and a big challenge for most MFIs in Indonesia, whether it is a BPR or cooperatives. Poor people generally do not have access to commercial banks and the amount of money they want to borrow is too small to make it worthwhile for a bank. Also, poor people tend to have no collateral to back up their loans; if they were unable to pay off their loan, the bank would have nothing to take from them to recover its losses. In addition, there is also a question whether microfinance can really help poor people get out of poverty. Further questions would be whether microfinance helps to create jobs, manage and reduce risk and protect the poor and lead them out of informality.

To date, in Indonesia, the measures of success of an MFI are only based on their financial performance but not their social performance or its contribution to the social development of the community.

Objectives

  • To raise awareness of national stakeholders and policy makers on the importance of social performance measures in monitoring the performance of MFIs;
  • To disseminate the results of the impact study with Bank Indonesia and the results of the Inception phase of the Promise Impacts Project;
  • To gather input on the implementation activities of the Promise Impacts Project; and
  • To link with other institutions with similar programmes and activities.

Topics Discussed

Microfinance for Decent Work (MF4DW)

How can microfinance institutions (MFIs) help improve working conditions? How can they contribute to job creation? And how can MFIs help reduce child labour? Should MFIs have an interest in addressing these and other decent work deficits? Could this even be done cost effectively and to the benefit of the institution as well as its clients?

Social Impact Assessment of MFI’s innovation

Considering that the measurement of social impact of an MFI has never been done in Indonesia, in 2011, Bank Indonesia (BI) has decided to conduct the assessment study, with the technical support of the ILO through its Social Finance Programme. The assessment applied the ILO’s Microfinance for Decent Work (MF4DW) methodology. The social impact that was measured in the application of the MF4DW methodology in Indonesia was the impact of financial education on the over-indebtedness status of MFI clients (in collaboration with BPR NBP2). The results of this study would also be shared in the seminar

Inception Phase of the Promise Impacts Project

With the support of the Swiss State Secretariat for Economic Affairs (SECO), the ILO together with Bank Indonesia is currently implementing the inception phase of the “Promoting Micro and Small Enterprises through Improved Entrepreneurs’ Access to Financial Services” (PROMISE IMPACTS) Project, in line with the government of Indonesia strategy on Financial Inclusion and the Master Plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3EI).

Universal Standards of Social Performance Management

The ILO through the Social Finance Programme has been heavily involved in the drafting of the Universal Standards of Social Performance Management (launched in June 2012) and currently is supporting drafting the indicators for measuring compliance with the standards. The Seminar will help to introduce these standards to the national stakeholders and to explore possible partnership with the stakeholders on the implementation of the standards.