East Nusa Tenggara (NTT) is one of the provinces in Indonesia with a relatively high poverty rate. For this reason, many poverty reduction programs have been implemented in this region, including microfinance services. This study aims to look at the dynamics of the supply of, and demand for, microfinance services in connection with poverty reduction in NTT. A qualitative approach was adopted to understand these dynamics by collecting primary and secondary data on microfinance regulations and services, especially in Kabupaten Kupang and Kabupaten Manggarai. The effectiveness of these regulations and services was determined through interviews with both individuals who use microfinance services and those who do not.

Microfinance services are limited by policies, funding and personnel, whereas the needs of the poor for financial services vary. Their needs vary because of the types of businesses peopleown, their socioeconomic conditions and the geographical locations of villages. In relation to loans, for example, businesses owned by the poor do not always need additional capital. The poor often need loans to cover various unexpected non-business related expenses. For poor groups, loans for these purposes are required so that these expenses do not disrupt asset ownership and business sustainability.

Banking institutions are one type of financial service provider. These institutions are strictly commercially-oriented. Banks in NTT, for example, do not have special financial service schemes for the poor. Thus, it is difficult for poor groups in NTT to access banking services because their needs and socioeconomic conditions are generally incompatible with the prevailing policies in the banking sector. The access of poor groups who live in rural areas is even more limited because banking services are located far away in urban areas.

Outside of the formal banking sector, poor groups can obtain financial services from nonbanking institutions, non-formal institutions and microfinance enterprise units established as a component of government development programs. Small-scale loans are the main services provided by these institutions. The problem is, except for pawnshops, there is a tendency for only poor groups who own non-agricultural enterprises to have easy access to these loans, because non-agricultural enterprises are considered to have better credit ratings.

The majority of services from these institutions are channeled through community groups, both groups established through a community’s own initiative as well as those formed to meet program requirements. One problem faced by these community groups is sustainability. Often groups, especially those formed specifically for programs, eventually disband after funds have rotated to other groups or the program finishes. Groups can survive and develop if adequate technical assistance is provided for group management and the members’ businesses. Groups like these usually develop savings activities which support the long-term sustainability of finance services.

Apart from that, the poor traditionally met their own needs for financial services through arisan (rotating savings) activities or, in urgent situations, by borrowing money from neighbors or moneylenders for daily necessities or business purposes. There are a lot of arisan activities in areas where there are a limited number of financial institutions. Various arisan groups develop savings activities as a way of providing small-scale loans for their members. There is a real need for savings, loans and insurance in poor communities. Cattle ranching businesses and storing harvest produce in barns, for example, are two means of savings money which simultaneously provide insurance. Food storage barns will provide them with security during famines and the dry season, whereas livestock are a source of funds for pressing needs.