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Searching for sustainable microfinance : a review of five Indonesian initiatives


  • Ravicz, R. Marisol


Expanding the microfinance market can promote economic growth and reduce poverty in many countries. But expanding this market is advantageous only if the increased activity is sustainable. The author draws lessons from five Indonesian microfinance initiatives in rural areas and proposes ways for governments and donors to support the microfinance sector. Those programs demonstrate that microfinance initiatives can provide a valuable service to low-income people at a temporary, affordable cost to governments of donors. Incentives for customers and staff are key features of successful microfinance operations that enable them to operate with low subsidies or on a self-sustaining basis. Programs should also charge adequate real interest rates, aggressively pursue repayment, and achieve a significant volume of business. To accelerate progress toward self-sustainability, programs can track the subsidies they receive, and their supporters can impose hard budget constraints and declining subvention support. Government-owned microfinance initiatives are vulnerable to political pressures that undermine their commitment to sound banking practices. Granting these institutions autonomous status, imposing hard budget constraints, and privatizing them when they are financially sustainable, can reduce their susceptibility to political influences. Alternatively, governments and donors could support the sector through temporary subsidies to private sector initiatives to help them defray start-up costs. Supervision can be improved if a country's microfinance industry, assisted by its central bank, establishes industrywide standards. Microfinance institutions could contract for supervision services from commercial banks. The central bank could monitor supervisors to ensure that they exercise due diligence. This study finds that institutions can efficiently reach clients in remote areas through subdistrict-based units and field staff. They need not rely on group lending techniques, savings requirements, or intermediary organizations between banks and borrowers to boost efficiency. Initiatives can serve female borrowers without targeted marketing if loan products meet women's needs and are accessible to them. Governments could increase the usefulness of microfinance to agriculture by encouraging state-owned microfinance institutions to develop and pilot-test loan products that meet smallholders'needs.

Suggested Citation

  • Ravicz, R. Marisol, 1998. "Searching for sustainable microfinance : a review of five Indonesian initiatives," Policy Research Working Paper Series 1878, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1878

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    References listed on IDEAS

    1. Khandker, S.R. & Khalily, B. & Khan, Z., 1995. "Grameen Bank: Performance and Sustainability," World Bank - Discussion Papers 306, World Bank.
    2. Pitt, M.M. & Khandker, S.R., 1996. "Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh," World Bank - Discussion Papers 320, World Bank.
    3. Yaron, Jacob, 1994. "What Makes Rural Finance Institutions Successful?," World Bank Research Observer, World Bank Group, vol. 9(1), pages 49-70, January.
    4. Braverman, Avishay & Guasch, J. Luis, 1986. "Rural credit markets and institutions in developing countries: Lessons for policy analysis from practice and modern theory," World Development, Elsevier, vol. 14(10-11), pages 1253-1267.
    5. Adams, Dale W & Von Pischke, J. D., 1992. "Microenterprise credit programs: Deja vu," World Development, Elsevier, vol. 20(10), pages 1463-1470, October.
    6. Yaron, J., 1992. "Assessing Development Finance Institutions; A Public Interest Analysis," World Bank - Discussion Papers 174, World Bank.
    7. Riedinger, Jeffrey M., 1994. "Innovation in rural finance: Indonesia's Badan Kredit Kecamatan program," World Development, Elsevier, vol. 22(3), pages 301-313, March.
    8. Yaron, J., 1992. "Successful Rural Finance Institutions," World Bank - Discussion Papers 150, World Bank.
    9. Adams, Dale W. & Vogel, Robert C., 1986. "Rural financial markets in low-income countries: Recent controversies and lessons," World Development, Elsevier, vol. 14(4), pages 477-487, April.
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    Cited by:

    1. Delfiner, Miguel & Peron, Silvana, 2007. "Commercial Banks and Microfinance," MPRA Paper 10229, University Library of Munich, Germany.
    2. Yaron, Jacob & Benjamin, McDonald & Charitonenko, Stephanie, 1998. "Promoting Efficient Rural Financial Intermediation," World Bank Research Observer, World Bank Group, vol. 13(2), pages 147-170, August.
    3. DeLoach, Stephen B. & Lamanna, Erika, 2011. "Measuring the Impact of Microfinance on Child Health Outcomes in Indonesia," World Development, Elsevier, vol. 39(10), pages 1808-1819.


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