Abstract:

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. This study utilizes data from IFLS 3 (year 2000) & the IFLS 5 (year 2014) to evaluate the long-term effect of informal credit towards poverty. It is found that while securing loan increase the likelihood of households to be not-poor of around 2.7%, a loan from informal sector would reduce the likelihood of households to be not-poor of around 4.65%. Thus, it is crucial to provide poor household to a formal credit institution. 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.