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Microcredit vs. Microsaving: Evidence from Indonesia. Don Johnston Jonathan Morduch March, 2007. The microcredit narrative. A compelling picture: millions of poor and very poor households seek capital to build small businesses But their lack of collateral restricts access to loans.
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Microcredit vs. Microsaving:Evidence from Indonesia Don Johnston Jonathan Morduch March, 2007
The microcredit narrative A compelling picture: • 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 • They thus unleash untapped productive power. • This narrative has driven the global expansion of microfinance and was highlighted by the 2006 Nobel Peace Prize committee.
The micro-saving narrative Two divergent views: • Credit as a human right (suggests universal access to the very poor) • Many very poor households have income that is low and uncertain or in other ways they are not creditworthy (suggests seeking other solutions for them). • Saving can serve very poor households and help them self-finance and better manage income. • The best way to serve the very poor with finance is via savings and other non-credit services
Indonesian evidence • We examine data from Indonesia, another important early site for microfinance. • Goals: • understand how low-income households use finance • Identify potential for spreading commercial microfinance to poorer households
Questions Questions • Uses of credit? Does the microcredit narrative fit? • Role of collateral as a deterrent to access • Who are savers? • Many savers do not borrow. Are they poor and not creditworthy?
Figure 1: Bank Rakyat Indonesia. Numbers of borrowers and depositors, 1984 – 2000. 2005: 32.3 million Poor and very poor? 2005: 3.2 million
MASS 2002 Survey • The survey covers a randomized sample of 1438 Indonesian households in six provinces, completed by Bank Rakyat Indonesia in July/August 2002. • Coverage of six provinces: West Java, East Java, West Kalimantan, East Kalimantan, North Sulawesi, and Papua. • Provinces included 20.6 million households and 85 million people. • Enumerators were BRI loan officers and other professionals, offering the chance to assess thecreditworthiness of both customers and non-customers using the standard procedures applied by the bank. • The study uses the household survey to revisit claims made largely on the basis of administrative data and anecdote.
A different story: beyond microcredit for micro-enterprise • The story that emerges differs in important ways from the narrative that dominates microfinance rhetoric. • Most important, loans for small business are important, but low-income households in the survey use loans for household needs about 30 percent of the time. • Despite the privileging of “microcredit for micro-enterprise” by donors, consumption credit appears as an important need, not as a minor concern.
Loan uses Business: • working capital of existing venture, • Diversify income, • Starting a new business, • Purchasing new equipment, • New business infrastructure (e.g., store or warehouse), • Business infrastructure improvement. Household: • Home improvement, • Non-business land or building purchase, • School tuition, • Medical treatment, • Loan repayment, • Meeting daily needs or retirement needs, • Vehicle purchase, • Buying household goods, • Ceremony or social expenditure, • Holiday needs • Jewelry purchase.
Uses of loans (percent) within income groups. Borrowers from any source
Uses of loans (percent) within income groups. Borrowers from any source
Loan sources “BRI Unit Borrowers” have taken loans from the microfinance arm of Bank Rakyat Indonesia. “Other formal bank borrowers” have taken loans from other “formal” sources including the BRI branch offices, Bank Central Asia (BCA), Bank BNI, a local development bank, Bank Danamon, Bank Mandiri, Bank Bukopin, a Sharia commercial bank, other private commercial bank, Bank Perkreditan Rakyat (BPR), or a Sharia rural bank. “Microbank” borrowers have borrowed from a rural credit agency (BKD/TPSP/LDKP), credit union/cooperative, rural unit cooperative (KUD), BMT/BMM Islamic institution, “market bank,” local financing institution, or government bureau. “Informal” sources include pawnshop service, joint venture, a self-managed institution, professional moneylender, family/relative/friends, or other informal source.
Creditworthiness • All households in the survey, whether or not they were borrowing, were scored by staff of Bank Rakyat Indonesia according to their feasibility for taking BRI loans. • Creditworthiness increases with income. • Nearly 40 percent of poor and very poor households were deemed creditworthy by professional examiners (in the sense that the borrowers are likely to be able to repay loans and maintain good standing). • At all income levels, more borrowers were judged to be creditworthy than are currently saving or borrowing.
Table 5: Creditworthiness Enumerator’s assessment of whether household would be appropriate for a loan from a BRI unit
Figure 3: Likelihood of being judged creditworthy, being a borrower, and using a savings account or device
Legal title • While much has been written on the potentially catalytic impact of giving legal title to assets (notably De Soto, 2000), the picture here suggests that the strongest claims are over-played. • The lack of collateral was cited as a deterrent by only about 10 percent of the households that are not borrowing from banks, and the professional assessments of the enumerators concur. • The insight of Bank Rakyat Indonesia, as with most microlenders, has been to find better ways to lend against household income, not against assets. Collateral thus plays a much smaller role in determining creditworthiness relative to traditional banking approaches.
Saving and debt aversion • By the end of 2005, Bank Rakyat Indonesia served 3.3 million low-income borrowers and over 32.3 million low-income savers. • Given the mountain of success stories of borrowers who have grown their businesses through micro-loans, it is tempting to assume that the 29 million households that opt not to borrow are not creditworthy.
“Some households start extremely poor and gain employment. They may then open small savings accounts. Some households with savings accounts then add small loans…Some clients are able to expand and diversify their enterprises and to qualify for larger loans.” (Robinson, 2001) • The depiction might suggest that: • savers are not borrowing because they are not yet in a position to do so. • households who save but do not borrow are likely to be poorer than those who borrow • it is on the saving side that BRI achieves its greatest social outreach.
Distribution of borrowers and savers BRI Savers BRI Borrowers
1 .9 .28 .21 0 .1 .5 1 2 5 10 15 25 Income per capita as fraction of poverty line BRI unit borrower BRI unit saver only BRI unit non customer Income cumulative distribution as a fraction of poverty line
Among the households that save but that do not borrow, most are in fact creditworthy and most are not poor. • Why then don’t they borrow? • Among poor households, one quarter of savers (about half of the creditworthy non-borrowing savers) are creditworthy but report that they do not borrow because they are averse to debt.
Debt aversion • The incidence of debt aversion is relatively stable across income groups and poses a further challenge to the notion that microcredit alone is a leading solution to poverty. • The limit to credit is not only given by the lack of creditworthiness among parts of the population; the limit is also given by the fact that many worthy households simply don’t want to borrow.
Conclusions Indonesia survey shows: • Consumption credit matters • Collateral is less of a constraint that De Soto and others argue • Many creditworthy households can be found below the poverty line • Many opt out of credit due to debt aversion • Potential market opportunities?
