Access to Microloan Programs in Rural and Slum Areas in Indonesia

Background and Purpose:  Microfinance is considered one of the important poverty alleviation strategies for people in poverty globally. While many studies focus on the efficacy of the microfinance programs, relatively less has examined the access and entry stage to those programs. Particularly, whether these programs are approachable, conceptually and physically, by disadvantaged populations is an underexamined question despite its critical implications for evaluating whether these programs actually meet the needs of the poor. The main purpose of this research is thus to understand critical factors that are associated with initial access to institutional loans.

Methods:  This study uses the fourth wave of the Indonesia Family Life Survey (IFLS4) that was collected in late 2007 and early 2008 by the RAND Corporation based on interviews of 13,535 households across Indonesia. The sample is representative of about 83% of the Indonesian population. Logistic regression models (N=3,528) were estimated to examine what critical factors affect households’ attempt to borrow money or goods from a source other than their family or friends over the past 12 months. More specifically, this study examined households’ loan seeking tendency in rural and slum areas controlling for household characteristics such as female-headedness, information on borrowing, average health condition of household members, farm land ownership, non-farm business ownership, and assistance for cash or non-cash items as well as village-level characteristics such as travel time to nearest financial institutions and the level of trust in the village.

Results:Households located in villages in which people look out for each other are less likely to seek borrowing opportunities. Travel time to nearest financial institutions, farm land ownership, and cash assistance were not associated with loan seeking behavior with statistical significance. Non-farm business ownership, good health condition, information on borrowing, and non-cash assistance are associated with increased attempts to borrow money or goods from a source other than family or friends. Female-headed households and households that live in rural or slum areas were associated with fewer attempts to seek borrowing opportunities despite the controls imposed for other variables.

Conclusions and Implications: Given that 97% of households in the sample that tried to borrow from institutions succeeded in securing a loan, high motivation and chance to apply for loans could mean increased funding sources for these households. This study, however, suggests that disadvantaged and the poorest populations still lack motivation and/or chance to apply for institutional loans in Indonesia. The findings particularly revealed that female-headed households and households that live in rural or slum areas may have better access to microfinance programs when provided with more information about the programs and holistic support to access them, such as non-cash assistance, health care, banking or insurance services, and actual business opportunities. Future research can focus on the existing financial assistance options and some barriers to these programs in rural and slum areas.