The Short‐term Poverty Impact of Small‐scale, Collateral‐free Microcredit in Indonesia: A Matching Estimator Approach

Indonesian microfinance is primarily operated by for‐profit commercial banks, characterized by large‐scale loans that require collateral. In 2003, the largest nongovernmental organization in the country introduced much smaller‐scale loans without a collateral requirement. This scheme is commercialized but potentially more suited to the credit demands of the poor. Applying propensity score matching with the difference‐in‐difference method, this paper examines whether the emerging microcredit scheme has been successful in targeting and improving the welfare of the poor in the one year following loan disbursement. The results show that although collateral ownership is not an important determinant of participation, relatively wealthier families gain access to microcredit. The impact of microcredit on various household outcomes is generally statistically insignificant, except for sales of nonfarm enterprises for the nonpoor and schooling expenditures for the poor. This implies that the microcredit scheme under study might not have an immediate impact on poverty alleviation.