The Impact of Informal Credit towards Poverty: Evidence from Indonesia

Poverty has been a recurring problem in Indonesia, where credit access is one of the determinants that could affect poverty alleviation. However, for most of the poor, the only available credit for them are informal credit, which charges them with a high interest rate. By using Ordered Logit Regression, utilizing data from IFLS 3 & IFLS 4 to evaluate the short-term effect of informal credit towards poverty, and utilizing IFLS 3 & IFLS 5 to see the long-term effect. It is found that credit access decreases poverty incidence in both the short-term and the long-term. However, informal credit in Indonesia increases poverty incidence in both the short-term and the long-term. From these findings, it can be concluded that informal credit in Indonesia is not yet able to make the poor get out from poverty, due to the practice of loan sharks. Should informal credit in Indonesia be regulated to be like Vietnam's for example, then informal credit may be able to help Indonesians to live a better life.