Microfinance is a financial service targeted at the poor to give them economic capital so they can elevate themselves by self-empowerment through entrepreneurship. That said, since its inception, microfinance has triggered debate between two extremely polarized views. The pro side holds that microfinance is a key, time-tested tool for poverty eradication. On the contrary side, skeptics take a diametrically opposed position, arguing that lending by microfinance institutions (MFIs) is wasteful, prone to huge targeting errors and leakage, and ineffective for rural poverty reduction.
This essay is based on research on the implementation between 2015 and 2016 of Indonesia’s microcredit program, which was issued under a Presidential Economic Policy package. The objective of the microcredit program is to eradicate poverty and boost economic growth, since it was found that micro businesses and small and medium-sized enterprises (SMEs) were the most durable sector during the Indonesian financial crisis in 1998. The analysis of the research was based on affirmative action theories that focus on the problems of justice within the country’s social, economic and political system. The research methodology used qualitative methods with a retrospective evaluation approach in public policy analysis. The question revealed in the research is whether the microcredit program is effective in reducing poverty and sustainable for long-term implementation.
Sustainable economic growth, poverty reduction and social equality are key factors to achieving inclusive growth. Broadening access to economic and business opportunities for traditionally underserved socioeconomic sectors, including households and SMEs, can improve social welfare and boost national productivity. The effort to promote the structural change of the SME business model requires new financing solutions for SMEs to survive and grow (Asian Development Bank, 2015).
It is estimated there were about 10,000 MFIs globally in 2017, and the global microfinance market is expected to grow by between 10 percent and 15 percent in the next few years. The idea of microcredit has found expression in various forms in diverse country contexts, in both developing and developed countries. In a large range of developing countries, microfinance schemes have received policy attention as a tool for poverty reduction in diverse economic contexts: agrarian/rural as well as non-agricultural/urban, and as a supplementary mode of targeted institutional intervention alongside mainstream economic policies (Cumming et al, 2017). Poor access to finance is one of the critical factors impeding the development of the SME sector, which means that limited access to bank credit is a structural problem (ADB, 2015).
Microfinance in Indonesia
Microfinance in Indonesia emerged at the end of the 19th century at the initiative of the vice regent of Purwokerto, Raden Bei Wiriatmadja, who established a People’s Credit Institution (Lembaga Perkreditan Rakyat) in December 1895. During the Dutch colonial period until 1945, financial systems in Indonesia consisted of seven large commercial banks, but all of them were foreign banks and the three largest were Dutch institutions; there were only a few Indonesian institutions.
After Indonesia’s independence, President Soekarno wanted to develop entrepreneurship in Indonesia through a national program called the Fortress Program (Program Benteng). The program was created to develop indigenous entrepreneurs in post-independence Indonesia vis-a-vis Dutch firms that already operated here, giving and facilitating import licenses and credit for native traders. The program was introduced in April 1950 and officially abandoned in 1957 (Linbald, 2002). It failed because it did not develop indigenous entrepreneurship, but raised a group of licensing brokers and a system of political bribes that were known as the “Ali Baba system” – Ali, the indigenous as a feeder for the license (permit), and the Chinese Baba as the executor (Latief, 2003).
During President Soeharto’s New Order regime, the government issued a banking law that regulated the establishment of new banks, but it lacked attention to financial support for SMEs. Nonetheless, some local governments in Indonesia established MFIs to support the establishment of Bank Pasar. These institutions were not yet known as MFIs, but rather as village credit institutions.
That said, the government introduced many programs to assist SMEs, some involving subsidized credit (whose importance peaked during the oil boom between 1973 and 1982), and others a requirement that banks allocate a certain percentage of their portfolio to SMEs (Hill, 2001). But these programs have been largely ineffective because they lack resources and a clear policy rationale, the subsidized credit programs in particular have been beset by corruption, the programs tend to be supply-driven, drawn up by bureaucrats without a clear incentives framework, and they rarely engage large firms and commercial services to support their objectives.
After the 1997-98 crisis
The political transition after the collapse of the New Order in 1998 brought new challenges to the political and economic milieu in Indonesia. SMEs still received government attention as one of the real sectors able to boost Indonesian economic growth and respond to the slowdown in the global economy. SMEs were perceived as the most successful sector in surviving the crisis (Idris, 2015). The main reason for this is that SMEs are less dependent on formal sources of capital, which makes them more resistant to sudden financial shocks compared to large private firms (Nugroho, 2015).
In 2006, President Susilo Bambang Yudhoyono’s administration launched the People’s Business Credit (KUR) program, which was initially included in the Economic Policy Package, to empower SMEs, create jobs and alleviate poverty.
The 2008 global financial crisis slowed Indonesian economic growth, but through economic policy packages the number of micro, small and medium-sized enterprises (MSMEs) has increased year to year. The MSME sector has underpinned the national economy, constantly increasing its contribution to
gross domestic product. Since Law No 20/2008 on SME development policies and financing, the share of MSME loans of total commercial bank lending turned upward in 2014. MSME outstanding loans totaled Rp 731 trillion at that time, a 20 percent annual increase. In this regulation, Indonesia adopted Basel III for banking supervision, which introduces new rules to strengthen banks’ risk management.
After seven years of implementation, from 2007 to 2014, President Joko Widodo’s administration is continuing the KUR program by issuing Presidential Economic Policy packages. The program was continued in 2015 with some amendments to improve its quality, especially in terms of its targeting accuracy, and based on the findings of the Audit Board of Indonesia. These amendments include the improvement of underlying regulations and the KUR scheme. The third focus of the presidential policy packages is to develop cooperatives and SMEs by making access to KUR easier and wider.
The purpose of KUR is to drive job creation and poverty reduction. It is clear this is an affirmative action policy, the type of policy aimed at disadvantaged groups via publicly funded opportunities (Mukherjee and Adamolekun, 2005). The theoretical foundation of affirmative action can be traced to the late American philosopher John Rawls’ views on political liberalism, who raised affirmative action discourse through his ideas on the theory of justice (Nagel, 2003, p 82). The discourse is based on the concept of “justice as fairness” (Päivänsalo, 2007).
Rawls involves two principles of justice and attempts to justify them with the aid of a construct he called the “original position.” This idea represents a state of being, where citizens are kept in a so-called veil of ignorance, which means they are hypothetically completely unaware of who they are in regard to their gender, nationality, color, religion and other possible characteristics and preferences (Lederer, 2013). In such a “veil of ignorance,” people have to use objective reasoning to achieve a mutually agreeable concept of justice. Rawls posits that nobody under the veil would take the risk to establish discriminatory principles that would be unjust to certain groups, because everyone under the veil might belong to a group affected by discrimination, which could only be discovered after revealing their true identities (Rawls, 1999). They would be interested in some sort of legal remedy to balance the detrimental effects of past discrimination against the historically discriminated group (Lederer, 2013).
Rawls’ two principles are applied to the basic structure of a democratic society and would guarantee for all citizens extensive liberties and sufficient means to enjoy them (Päivänsalo, 2007). Rawls formulated these two principles as follows: each person has the same indefeasible claim to a fully adequate scheme of equal basic liberties; and social and economic inequalities should satisfy two conditions. First, they are to be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least-advantaged members of society (the difference principle).
Based on the political liberalism argument of affirmative action, Michel Rosenfeld, a professor of law at Yeshiva University in New York, constructed an integrated philosophical and constitutional concept on the justice of affirmative action based on an understanding of the dynamic relationship between identity and difference, and on the implementation of a dialogical concept of justice. It is a complex dynamic relationship between equality as identity and equality as difference based, on American psychologist Lawrence Kohlberg’s concept of justice as reversibility, and Jürgen Habermas’s theory of communicative ethics. It is called “justice as reversible reciprocity” as the best means to achieve the integration of various relevant perspectives, and to provide a comprehensive philosophical and constitutional justification of affirmative action.
It’s clear KUR is an affirmative action policy, the type of policy aimed at disadvantaged groups via publicly funded opportunities.
The equal protection clause constitutes the norm of equality that is the nexus between affirmative action, the concept of justice and constitutional requirements (Rosenfeld, 2013). The further question is how to determine which equalities and inequalities are, and ought to be, promoted by constitutional equality, and how to assess the coherence of constitutional arguments for and against affirmative action. As Rosenfeld proposed an affirmative action policy must be based in the constitutional interpretation of equality under the equal protection clause, Indonesian microcredit policies intended to provide financial access for the poor must be re-evaluated to construct a better affirmative action policy framework that fits the conditions here.
The equal protection clause in the 1945 Indonesian Constitution highlights Article 33 as a basic rule of the economy, and is supposed to be interpreted in terms of an affirmative action framework. The first paragraph of Article 33 states that the economy is structured as a joint effort based on the principle of kinship. It contains three important words or phrases: structured, joint effort and familial principles (Firmansyah, 2012).
Joint effort (usaha bersama) on the basis of kinship can be seen from three aspects: micro-understanding, macro-understanding and joint effort as a principle. In a micro and narrow sense, the notion of collective effort can certainly be associated with cooperatives as a form of joint venture. In a macro and wider sense, the notion of collective effort can certainly be associated with a national economic system as a joint effort of all elements of the people of Indonesia. The sense of togetherness is not only related to the concept of business, but also the concept of economic actors that are not run by a company or venture.
Indonesian microcredit policies intended to provide financial access for the poor must be re-evaluated to construct a better affirmative action policy framework.
Familial principles (asas kekeluargaan) refer to the understanding of the spirit of togetherness, the spirit of mutual cooperation and cooperation in practice. Friendly competition should also occur.
Affirmative action stems from economic efficiency in the interests of society. It is implemented in the form of cooperatives, a form of economic activity that originates from Indonesian tradition and culture in the principle of kinship in Indonesia, balancing between individual and societal interests. The problem of how to manifest the principle of equality relates to the question of the best way to realize the concept of affirmative action. The question is whether it is better to use bank credit to serve financial access for MSMEs, or to empower cooperatives as the source of capital for the SMEs.