The Unbanked: Evidence from Indonesia

Abstract

To analyze the prospects for expanding financial access to the poor, bank professionals assessed 1,438 households in six provinces in Indonesia to judge their creditworthiness. About 40 percent of poor households were judged creditworthy according to the criteria of Indonesia's largest microfinance bank, but fewer than 10 percent had recently borrowed from a microbank or formal lender. Possessing collateral appeared as a minor determinant of creditworthiness, in keeping with microfinance innovations. Although these households were judged able to service loans reliably, most desired small loans. Calculations show that the bank, given its current fee structure and banking practices, would lose money when lending at the scales desired. So, while innovations have helped to extend financial access, it remains difficult to lend in small amounts and cover costs. JEL codes: G21, O16 Microfinance is built on a compelling logic: hundreds of millions of poor and very poor households seek capital to build small businesses, but their lack of collateral restricts access to loans. Innovative "microbanks" meet the demand with more flexible collateral requirements and thus unleash untapped productive power. 1 The narrative, highlighted by the Nobel Peace Prize committee in awarding the 2006 prize to Muhammad Yunus and the Grameen Bank of Bangladesh, has driven the global expansion of microfinance (Counts 2008).

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions

“…Consequently, MFIs may have greater incentives to raise the cost of borrowing so as to compensate for such increased information asymmetry. In addition, the interest yields of the small amounts of loans granted to the very poor customers by MFIs are more difficult to cover the costs associated with administration and monitoring under stronger competition, given the current business models and fee structures of most MFIs (Johnston & Morduch, 2008, Mersland & Strøm, 2010.…”

Local Financial Development and Household Welfare: Microevidence from Thai Households

“…If the household actually uses credit, the consumption level is about 15% larger. Households who do borrow, use their credit to increase their consumption level as it is observed by Johnston and Morduch (2008). The overall effect is somewhat unclear.…”

Correction of the Claim for Microfinance Market of 1.5 Billion Clients

“…In the study from Indonesia, focused on microfinance provided to extremely poor, 40 % of the households were deemed creditworthy (Johnston and Morduch 2007). MFIs rarely serve very poor people at the bottom of the poverty scale.…”

“…In 2002, microlending officers from Bank Rakyat Indonesia interviewed 1.438 households chosen at random in 72 villages throughout six provinces, and less than 25 % had borrowed from any formal microlender in the past 3.5 years, despite proximity to such a provider (Johnston and Morduch, 2007). A survey of 17,000 microenterprises in Ecuador found that only about a half did apply for credit because they either did not want to be indebted (37 %) or did not need a loan (14 %), in spite of major expansion in microfinance loans in the country (Magill and Meyer 2005).…”