Understanding the Role of Microfinance (Microcredit) in Business Performance, Economic Empowerment and Subjective Wellbeing: A Case Study of Indonesia

Abstract

Poverty eradication has been a long-established and key challenge for governments, the international community, multilateral organisations and donor agencies in the world, especially in developing economies. Combined international, multilateral and donor efforts have resulted in significant reduction in poverty levels across countries. Aside from this remarkable achievement, the most current data show that in 2012, hundreds of millions of people in less developed economies still lived in extremely poor conditions, and the incidence of poverty remained uneven across regions, countries and genders. More work is required to more effectively accomplish poverty reduction targets around the world. Recent and expanding research and empirical evidence suggest that a strategy of financial sector deepening through microfinance might be a useful channel. For decades, microfinance has gained popularity in many developing countries, including Indonesia, as one of the key instruments for their poverty alleviation programmes. The Indonesian government, for instance, has emphasised increasing access to financial services as a priority component of its poverty and financial sector reform agenda, since significant barriers in accessing loan and saving instruments remain for households and enterprises of all sizes. The development of the country’s microfinance industry has been going well, and becoming one of the most commercialised in the world.