ABSTRACT
Dissatisfaction with the results of many formal credit programs has stimulated searches for new ways to provide more financial services to poor people. Because Indonesia is a large country with about 180 million inhabitants, there are a large number—possibly as many as 30 million—small enterprises in the country, including farmers. In early 1988 the Central Bank organized a task force with the responsibility of developing a pilot program that would link self-help groups (SHGs) with the formal financial system. Most SHGs participating in the pilot program mobilized additional funds in order to make deposits associated with their loans. SHG members will have more attractive investment opportunities and incentives to borrow, greater abilities to deposit, and more capacity to repay loans if the overall economy is expanding. The multitude of SHGs in Indonesia persists because they provide group goods or economies in transaction costs that cannot be realized by individuals alone.
