Effectiveness of microcredit for poverty alleviation: evidence from Indonesia

Arp, Frithjof; Ardisa, Alvin

Abstract

Debate persists about the effectiveness of microcredit for poverty alleviation. We argue that much of this debate is due to discipline-specific research approaches and methodological complexities obscuring fundamental issues. Microfinance organisations do not operate in a vacuum: other forms of collateral-free lending must be taken into account. We illustrate our argument with a study of formal and informal collateral-free lending in the Yogyakarta region of Indonesia. Focused on the fundamental issue of competitive impact, we examine both forms of microcredit through triangulation from multiple perspectives, grounded in the experience of market participants. Importantly, our study includes current and previous borrowing across both formal and informal microcredit. We find two distinct informal schemes used by microbusinesses, both of which successfully compete with formal microfinance, one being perceived as significantly more effective. We also find a mismatch of incentives and strategic objectives in the formal microcredit scheme, compromising its effectiveness. We conceptualise borrower needs and microcredit schemes along financial and operational dimensions, and develop a framework of business and profit logics that helps identify how shifts therein influence the competition scenario. We discuss implications for microfinance policy and practice, and provide suggestions for further research.

Citation

Arp, F., & Ardisa, A. Effectiveness of microcredit for poverty alleviation: evidence from Indonesia. Presented at Workshop on Human Security in the Global South

• Conference Name: Workshop on Human Security in the Global South
• End Date: Feb 25, 2016
• Acceptance Date: Jan 17, 2016
• Publication Date: Feb 24, 2016
• Deposit Date: Jan 19, 2017
• Publicly Available Date: Jan 19, 2017
• Peer Reviewed: Peer Reviewed
• Keywords: Microcredit, Poverty, Alleviation, Collateral, Indonesia
• Public URL: https://nottingham-repository.worktribe.com/output/775378
• Publisher URL: https://doi.org/10.5281/zenodo.48216
• Additional Information: Institute of Asia and Pacific Studies (IAPS) and Nottingham University's Sustainable Development Research Priority Area (RPA)