B litar, where Mitra Karya East Java (MKEJ) has three branches, is a remote, agricultural district in eastern Java. A number of commentators on Indonesia’s financial crisis have speculated that the rural poor in farming districts should be somewhat insulated from the worst of the economic fallout. But that is not the case in Blitar. Many of MKEJ’s 35,000 poor women clients are petty traders. They are being hit from two sides—by a drastic rise in the cost of basic foodstuff on one hand and disappearing customers on the other.  Six of the women interviewed by Project Director, Dr. Djyamilah Zain and her staff, have been forced to abandon their businesses altogether. The 24 women who are still holding on, are having to work longer hours, extend more credit to their customers and still watch their incomes drop by 50% to 60%.    Painful Adjustments “We used to eat eggs and fish regularly, and tempe (fermented soybean cake) or soybean curd every day. Now, we can’t afford them at all. As long as there is rice and chillies, that is a meal,” Sailah, a widow who joined MKEJ two years ago, said.

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For all of these families, protein has almost disappeared from their diet as a result. The women stretch to buy sufficient rice, make it tasty with chilies and vegetables, and can rarely afford fish, eggs of even soybean, which were staples before. So far, none of the women have had to pull their own children out of school. But they say that they are now often late with the school fees and tend to pay them at the end of the month instead of at the beginning. 
 

Despite their difficulties, however, most of MKEJ’s clients are still repaying their loans. In two of the three branches repayment rates are still holding at 98% and 97%. Only in the oldest branch, Wingi, has repayment dropped to 80%. 

Microfinance institutions already face a trade-off between safeguarding the health of their institution and focusing on the survival of their borrowers. Some have reduced risk by cutting back on new loans, scrapping expansion plans and raising interest rates in response to inflation. 

A survey by the Brisbane based Banking With the Poor Network of some leading MFIs in Indonesia and the Philippines, shows that rural banks and some MFIs have restricted new lending and raised interest rates in response to the economic crisis. Dr Djumilah reports that in the Blitar area, formal lenders, like rural banks and Unit Desa, have almost stopped lending. Informal moneylenders are also less active and their interest rates have risen by an additional 5-10%. This shrinking of credit for small customers at a time when the numbers of poor are rapidly increasing means that most Indonesians will drop out of financial services. It seems certain therefore that the need for MFIs working with the poor will vastly increase as a result of the economic crisis. 

The Banking With the Poor Network survey shows that programs focussed exclusively on the poor have survived the Indonesian crisis better, than those with mixed clientele, like the rural banks. Programs linked to commercial banks, in particular, seem to have been shunted aside in the struggle of the formal sector to stay afloat. But all MFIs in Indonesia face a difficult future. MKEJ’s strategy to protect the plunging real value of its assets by enlarging its number of borrowers can only be successful if it can access on-lending funds. With the commercial banks restricting lending and raising interest rates, it will probably fall to government or to foreign donors to provide the funding required.