Indonesia’s Informal Economy 
Indonesia’s informal economy has been a significant contributor to its economic growth and is also an important source of employment for many of its poorest citizens. It is estimated that around 57% of the Indonesian workforce works in the informal sector and that it accounts for roughly one-quarter of the country’s GDP. However, low wages, poor working conditions and a lack of social protections often characterize the informal economy, making it difficult for workers to escape poverty.

Microfinance in Indonesia

One of the key challenges facing Indonesia’s informal economy is a lack of access to finance and other forms of support. Many of the country’s informal businesses are unable to access traditional sources of finance (such as bank loans) due to a lack of collateral or credit history. This inhibits these businesses’ growth and makes it harder for their workers to escape poverty. Furthermore, “only around 22% of Indonesian citizens are connected to formal financial institutions,” according to the Financial Services Authority (OJK).

To address this, the Indonesian government has implemented several initiatives aimed at supporting informal businesses and workers. For example, the government has established Microfinance Institutions (MFIs) that provide access to finance for informal businesses. These MFIs play a crucial role in promoting economic development, providing small loans, savings accounts and other financial services to low-income individuals and small businesses that may not have access to traditional banking services.

MFIs bridge the financial inclusion gap by providing access to credit and other financial tools that can help individuals and businesses to grow and thrive. By supporting entrepreneurship and economic activity, MFIs help to create jobs and stimulate local economies, which can in turn reduce poverty and increase prosperity. In Indonesia, the OJK regulates MFIs and requires them to adhere to strict standards to protect clients’ interests.

Upgrading Skills

The government has also implemented various schemes to upgrade the knowledge and skills of workers to improve their employability and competitiveness in the job market.

One such initiative is the Manpower Competence Development program, which provides funding for workers to participate in training and education programs. The program targets workers in the informal sector, as well as those in small and medium-sized enterprises (SMEs), aiming to help them improve their productivity and performance.

The government also supports the development of vocational training centers and polytechnics, which provide practical, hands-on education in a variety of technical and professional fields. By investing in the education and training of its workforce, Indonesia’s government is helping to build a more skilled and capable labor force, which will contribute to the overall development and prosperity of the country.

Hazardous Working Conditions

Due to the lack of regulations and protections in this sector, workers in Indonesia’s informal economy often face hazardous conditions. Many are employed in dangerous industries such as construction, mining and manufacturing, where they are exposed to risks such as accidents, injuries and occupational diseases.

Informal workers are also more vulnerable to exploitation and abuse by employers, who may not provide adequate safety equipment or training and may ignore safety standards to cut costs. In addition, informal workers often lack access to health care and other social protections, making it difficult for them to seek treatment or compensation when they experience injuries on the job.

One approach to remedying this situation is for the government to increase regulation and oversight of working conditions in this sector. This can include establishing and enforcing safety standards, as well as providing resources and support to help informal businesses comply with these standards. Alternatively, the Indonesian government could attempt to increase the availability of affordable safety training and equipment for informal workers. This would help workers to protect themselves and their colleagues from potential hazards on the job.

In addition, ongoing U.S. Department of Labour efforts to educate informal workers about their rights and how to advocate for better working conditions could be bolstered. This can include providing information about available resources and support, as well as helping workers to organize and speak out for change.


While Indonesia’s informal economy plays an important role in the country’s economic growth, it is also a source of low-wage, unsafe, insecure employment that traps workers in a cycle of poverty. To truly address poverty in Indonesia, the government must support informal businesses and workers, ensuring that they can participate in and benefit from Indonesia’s economic growth as well as the country’s elites.

– Thomas Everill
Photo: Unsplash

MicrofinanceIn 2006, MIT Professor Muhammad Yunus was awarded the Nobel Prize for his work in the creation of the Grameen Bank. The Bank was created primarily to microfinance, or provide small loans, to the impoverished in Bangladesh. Today, over 97 percent of Bangladesh’s villages have a Grameen Bank presence, a whopping 7.5 million people have borrowed from the Grameen Bank and 65 percent of the borrowers “clearly improved their socio-economic conditions.” Yunus has even advocated for credit to be considered a human right because of the extent to which it can help people deal with their financial situations.

Prior to the emergence of this practice, the term “finance” largely carried the connotation of large banks, governments and corporations, and their respective handling of money or value. Liabilities, assets, savings, loans and other banking concepts can all be categorized under finance. So then, what exactly is microfinance?

Microfinance is the practice of bringing financial systems that are commonly used in the developed world, and applying these concepts on a much more personal and micro-scale. While we typically think of finance as a system that deals with large sums of money and organizations, microfinance is quite different because it deals with much smaller denominations of money and groups or individuals.

In practice, microfinance institutions or programs can differ in their specific models of operation. For example, Kiva is a microlending institution. It operates on donations, and any donor can personally become involved by browsing through testimonials and deciding whom to fund. On the other hand, the Grameen Bank no longer takes donations, and the Bank itself is actually 94 percent owned by the borrowers themselves. The majority of microfinance institutions deal primarily with microcredit, with most extending credit to women. About 97 percent of Grameen Bank’s loans are offered to women.

One point of criticism is the very high interest rates sometimes charged by various microfinance institutions; in some cases, the rate is over 50 percent. However, many argue that this is necessary to cover administrative and risk-taking costs. Defendants of the interest rates contend that participating in the loan program does not proportionately diminish the received benefits based on interest rate.

The benefits of providing financial services – often taken for granted – are unmistakably significant. The first benefit, as told by Mr. Yunus himself, is the mental and psychological stimulus a loan can give a person. The recipient of the loan becomes more independent and less inclined to feelings of marginalization. The second benefit is an increase in small businesses and economic activity in the villages. For some, small loans serve as the building blocks for small businesses. For others, the loans help pay for large goods or services like schooling, or healthcare costs, among other things. Providing small loans at affordable rates allows people to have more purchasing power than they might have otherwise, and to make purchases once considered not within their means.

An MIT study titled, “The miracle of microfinance? Evidence from a randomized evaluation,” was highly critical of the actual effects of microfinance versus the observed perceived effects before the study. Those conducting the study found that microfinance had some benefits for helping businesses increase profitability, and in increasing household income. They also found that household spending increased on durable goods, meaning goods that can be used more than once like cooking pots and mosquito nets. However, the MIT study found no significant changes in women’s empowerment, education or health. Finally, the study found that the adoption rate for microfinance was around 38 percent, indicating that many people still preferred to take out informal loans from other parties or family members.

Despite the critiques, microfinance has emerged as an innovative tool within the largely unchanging financial sector. By giving the impoverished access to financial services, the affected begin to have more opportunities and resources to turn to when dealing with personal or small business finances.

There are 2.5 billion people worldwide who are “unbanked” according to the World Bank. High costs, bureaucratic barriers and physical distance from banks facilitate this huge gap in the number of people with access to financial services and the total population. Microfinance has the potential to help bridge this gap by empowering the poor and providing them with more tools to help themselves. Although it may not be a miracle, it’s certainly better than nothing at all.

– Martin Yim

Sources: PBS, Kiva, Grameen Bank, MIT, World Bank
Photo: Flickr

Asia Microfinance Forum
For two days, 500 delegates from 36 countries attended the 2014 Asia Microfinance Forum in Shanghai to discuss financial inclusiveness and the future of microfinance in Asia. Themed “Financial inclusion in Asia: Creating dynamic financial ecosystems for the poor,” the event showcased speakers from national organizations, non-profits, governments and individual innovators to speak on the role of microfinance in helping the poor.

The event began on August 5 when Chairman of the Banking with the Poor Network, Chandula Abeywickrema, began the event with his remarks at the opening session. Then, Duan Yingbi, President of the China Foundation for Poverty Alleviation, spoke on the status of microfinance institutions in China.

Yingbi noted there are over 300 MFIs in China, most of which started seeing significant growth after 2005. Currently, Yingbi says, commercial banks are very active in China, but the MFI industry is not well defined (thus the impetus for inviting professionals to help define the future of MFIs in China and Asia).

Additional speakers went on to talk about the role of microfinance in China and elsewhere in the continent, and emphasized serving the poor and innovating as two clear goals.

On the last day of the forum, Eric Duflos, Regional Representative for East Asia and the Pacific at the Consultative Group to Assist the Poor; Vijayalakshmi Das, CEO of Ananya Finance for Inclusive Growth & Friends of Women’s World Banking, India; Arjuna Costa, Investment Partner at the Omidyar Network; Dennis White, President at the MetLife Foundation; Chuchi G. Fonacier, Managing Director of Bangko Sentral ng Pilipinas and Mr. Bai Chengyu, Secretary General of the China Association of Microfinance, all spoke on the unique position of microfinance institutions in Asia.

Speakers commented on the importance of inclusion amongst MFIs, digital finance and risk-management. “I am sure if we have a partnership between all the stakeholders, we will be able to achieve all we wish to achieve,” Das said.

All in all, the event sponsored speakers who offered insights into the role of MFIs in countries like India, China, Indonesia and Bangladesh. It was an important stepping-stone for many MFIs, as China expressed interest in creating a national framework for MFI activity.

Increasing microfinance options for the poor, particularly those in rural communities, can help increase opportunities for social mobility and poverty reduction. Asia has a large share of the world’s rural poor, so increasing the quality and quantity of MFI services will undoubtedly help the poor connect with the financial resources they need to advance their human development.

– Joseph McAdams

Sources: Microfinance Focus 1, Microfiance Forum 2, Microfinance Forum 3, The Australian
Photo: Microfinance Focus