Microfinance Institutions Study

Transcription

ProFI
Promotion of Small Financial Institutions
ProFI
Microfinance Institutions Study
Central Bank, Head Office
Paddy Bank, Sumbawa
Dr. Detlev Holloh
Denpasar, March 2001
ProFI Microfinance Institutions Study i
ProFI Microfinance Institutions Study
Dr. Detlev Holloh
CONTENTS
Introduction
1
1.
The Microfinance Sector in Indonesia
6
1.1
Economic, Social and Political Framework Conditions
7
1.1.1 The Economic Crisis and Policy Response since 1997
7
1.2
1.3
2.
1.1.2 Poverty Incidence and Policy Response since 1997
11
Microfinance Sector and Poverty Alleviation Programs
15
1.2.1 Microfinance Systems Development Projects
15
1.2.2 Microfinance-focused Poverty Alleviation Programs
18
1.2.3 Crisis-related Programs with Microfinance Components
25
1.2.4 Non-Government Organizations and Microfinance
28
Structure of the Microfinance Sector: Institutional vs. Program Microfinance
31
1.3.1 Institutional Microfinance
32
1.3.2 Program Microfinance
35
1.3.3 Institutional and Program Microfinance Compared
37
The Commercial Banking Sector and BRI’s Unit System
38
2.1
Past and Current Development of the Commercial Banking Sector
39
2.1.1 The Commercial Banking Sector prior to the Financial Crisis in 1997/1998
39
2.1.2 Policy Response to the Financial and Banking Crisis
41
2.1.3 Development of the Commercial Banking Sector 1997 – 2000
43
2.1.4 Regional Distribution and Outreach of Commercial Banks
45
Bank Rakyat Indonesia (BRI) and its Unit Banking System
47
2.2.1 Overview of Bank Rakyat Indonesia
47
2.2.2 Inception and Transformation of the Unit System
48
2.2.3 Institutional Set-up and Framework
48
2.2
ProFI Microfinance Institutions Study ii
3.
4.
2.2.4 Products and Services
50
2.2.5 Development Trends 1997 – 2000
51
2.2.6 Regional Distribution and Outreach
53
2.2.7 Current Financial Situation and Loan Portfolio Quality
55
2.2.8 Assessment and Conclusions
57
Bank Perkreditan Rakyat (BPR) – The People’s Credit Banks in Indonesia
60
3.1
“BPR”: Definition and Clarification
61
3.2
History, Number and Types of BPR
62
3.3
Regulation and Supervision
65
3.3.1 Evolution of the regulatory framework
65
3.3.2 Supervision
68
3.4
Regional Distribution and Outreach
69
3.5
Current Financial Situation and Performance
72
3.6
Development Trends 1995 – 2000
74
3.7
The ProFI BPR Baseline Survey in East Java, Bali and West Nusa Tenggara
75
3.8
Assessment and Conclusions
78
Lembaga Dana Kredit Pedesaan (LDKP) – The Rural Credit Fund Institutions
84
4.1
General Description
85
4.2
Evolution of the Regulatory Framework
88
4.3
Lembaga Perkreditan Desa (LPD) in Bali
90
4.3.1 History, Ownership and Socio-cultural Environment
90
4.3.2 Regulation, Supervision and Support System
91
4.3.3 Organization and Management
94
4.3.4 Products, Outreach, Market and Image
95
4.3.5 Current Financial Situation and Performance
97
4.4
4.5
101
102
Lumbung Pitih Nagari (LPN) in West Sumatra
105
4.4.1 Historical background
105
4.4.2 Regulation, Supervision and Organization
105
105
105
Badan Kredit Kecamatan (BKK) in Central Java
107
4.5.1 Historical Background and Development
107
109
4.5.3 Ownership, Legal Form and Organization
110
4.5.4 Products and Outreach
110
112
113
ProFI Microfinance Institutions Study iii
4.6
4.7
4.8
4.9
Lembaga Perkreditan Kecamatan (LPK) in West Java
115
115
4.6.2 Regulation, Supervision, Support System and Organization
115
116
117
Badan Usaha Kredit Pedesaan (BUKP) in Yogyakarta
118
4.7.1 Historical Background
118
118
4.7.3 Current State of Development and Performance
118
121
Lembaga Kredit Usaha Rakyat Kecil (LKURK) in East Java
122
122
4.8.2 Regulation, Supervision and Ownership
122
122
123
Badan Kredit Kecamatan (BKK) and Lembaga Pembiayaan Usaha Kecil (LPUK)
in South Kalimantan
124
124
4.9.2 Ownership, Regulation, Supervision and Organization
124
125
125
125
4.10 Lembaga Kredit Pedesaan (LKP) in West Nusa Tenggara
5.
127
4.10.1 Background
127
127
128
4.11 Other Lembaga Dana Kredit Pedesaan (LDKP) in Indonesia
129
The Badan Kredit Desa (BKD) in Java & the UED-SP Village Credit Institutions
130
5.1
The Badan Kredit Desa (BKD) in Java
131
5.1.1 History and the Political Economy of BKD Development
131
5.1.2 Evolution of the Regulatory and Supervisory Framework
134
137
5.1.4 Savings and Credit Products
138
5.1.5 Number and Outreach
139
141
145
147
Unit Ekonomi Desa – Simpam Pinjam (UED-SP)
150
5.2.1 UED-SP Promotion by the Ministry of Home Affairs
150
5.2.2 Guidelines and Regulations
151
5.2
ProFI Microfinance Institutions Study iv
6.
7.
8.
5.2.3 Statistics and Findings
153
155
The Cooperative Sector and its Microfinance Windows
156
6.1
The Political Economy of Cooperative Development in Indonesia
157
6.2
The Current Regulatory and Supervisory Framework
159
6.2.1 Regulation
159
6.2.2 Supervision
160
6.3
Number of Cooperatives and Structure of the Cooperative Sector
162
6.4
Bank Bukopin and its Swamitra Model of Microfinance
167
6.4.1 Overview of Bank Bukopin
167
6.4.2 The Swamitra Program
168
6.4.3 Swamitra Outreach and Financial Situation
169
6.5
The Credit Union Movement
171
6.6
Tempat Pelayanan Simpan Pinjam (TPSP)
173
6.7
176
Banking and Microfinance based on Syariah Principles
179
7.1
Promotion and Development of Syariah Banking in Indonesia
180
7.2
Bank Muamalat Indonesia (BMI)
182
7.3
Yayasan/Pusat Inkubasi Bisnis Usaha Kecil (YINBUK/PINBUK)
183
7.4
Baitul Maal wat Tamwil (BMT)
183
7.4.1 General Description
183
7.4.2 Organization and Supervision
184
7.4.3 Number, Outreach and Financial Situation
185
7.4.4 BMT in South Sulawesi
188
7.5
The Dakabalarea Program of the Government of West Java
189
7.6
190
Towards a Microfinance Sector Strategy: Major Issues and Elements
192
8.1
Major Microfinance Sector Issues
193
8.1.1 Demand for Microfinance Services
193
8.1.2 Supply of Institutional Microfinance
194
8.1.3 General Issues of Microfinance Supply
196
8.1.4 Legal, Regulatory and Supervisory Frameworks
200
Essentials and Major Elements of a Microfinance Sector Strategy
203
8.2
ProFI Microfinance Institutions Study v
CURRENCY EQUIVALENTS
Note: The report provides information in Rupiah only, as the exhange rate has been
extremely volatile during the last years and the US Dollar does not reflect local financial
intermediation exclusively done in Rupiah.
End of
Year
1983
Currency Unit:
US Dollar
$1=
Currency Unit:
Indonesian Rupiah (Rp.)
Rp. 994
1984
$1=
Rp. 1,074
1985
$1=
Rp. 1,125
1986
$1=
Rp. 1,641
1987
$1=
Rp. 1,650
1988
$1=
Rp. 1,731
1989
$1=
Rp. 1,797
1990
$1=
Rp. 1,901
1991
$1=
Rp. 1,992
1992
$1=
Rp. 2,062
1993
$1=
Rp. 2,110
1994
$1=
Rp. 2,200
1995
$1=
Rp. 2,308
1996
$1=
Rp. 2,383
1997
$1=
Rp. 4,650
1997
$1=
Rp. 8,025
1999
$1=
Rp. 7,100
2000
$1=
Rp. 9,675
FISCAL YEARS
Until March 31, 2000: April 1 to March 31
Until December 31, 2000: April 1 to December 31
From January 1, 2001: January 1 to December 31
ProFI Microfinance Institutions Study vi
ABBREVIATIONS AND ACRONYMS
ADB
AVB
ALTRABAKU
BAPPENAS
BI
BKD
BK3I
BK3D
BKK
BKKBN
BKPD
BMI
BMT
BNI
BPD
BPR
BPR-LDKP
BPS
BRI
BUKP
BUMD
CAR
CGI
CRP
CRS
CU
CUCO
Dakabalarea
GDP
Gema PKM
GTZ
GTZ-PNT
IBRA
ICMI
IDT
IMF
INKOPDIT
JPS
KCK
KPKU
KSP
KUD
KUKESRA
KUT
LDKP
LKK
LKMD
Asian Development Bank
Algemeene Volkscredietbank: colonial predecessor of BRI
Asosiasi LPSM – Mitra Lembaga Keuangan Mikro dan Pengembangan Usaha
Mikro: Association of Self-help Promotion Institutions - Partner for
Microfinance Institutions and Microenterprise Development
National Development Planning Agency
Bank Indonesia: Central Bank of Indonesia
Badan Kredit Desa: Village Credit Board
Badan Koordinasi Koperasi Kredit Indonesia: National Credit Union
Coordination Board
Badan Koordinasi Koperasi Kredit Daerah: Regional Credit Union
Coordination Board
Badan Kredit Kecamatan: Sub-district Credit Board, LDKP in Central Java,
Bengkulu, Riau, South Kalimantan
Badan Koordinasi Keluarga Berencana Nasional: National Family Planning
Board
Bank Karya Produksi Desa: old-style BPR in West Java
Bank Muamalat Indonesia, Syariah commercial bank
Baitul Maal wat Tamwil: non-bank microfinance institution, YINBUK/PINBUK
Bank Negara Indonesia: commercial state bank
Bank Pembangunan Daerah: Regional Development Bank
Bank Perkreditan Rakyat: People’s Credit Bank
LDKP converted to BPR status
Central Bureau of Statistics
Bank Rakyat Indonesia: People’s Bank of Indonesia, commercial state bank
Badan Usaha Kredit Pedesaan: Rural Credit Board, LDKP in Yogyakarta
Badan Usaha Milik Daerah: Regional Government-owned Enterprise
Capital Adequacy Ratio
Consultative Group on Indonesia
Community Recovery Program
Catholic Relief Services
Credit Union
Credit Union Coordination Board
Microfinance program of the Government of West Java
Gross Domestic Product
Gerakan Bersama Pengembangan Keuangan Mikro Indonesia: Indonesian
Movement for Microfinance Development
German Agency for Technical Cooperation
GTZ - Project Nusa Tenggara
Indonesian Bank Restructuring Agency
Association of Indonesian Muslim Intellectuals
Inpres Desa Tertinggal: Presidential Instruction on Backward Villages
International Monetary Fund
Induk Koperasi Kredit: national secondary cooperative of Credit Unions/BK3I
Jaringan Pengaman Sosial: Social Safety Net
Kredit Candak Kulak: petty trader credit program
Kredit Pengembangan Kemitraan Usaha: credit scheme of UPPKS project
Koperasi Simpan Pinjam: Savings and Credit Cooperative
Koperasi Unit Desa: Multi-purpose cooperative at sub-district level
Kredit Usaha Keluarga Sejahtera: credit scheme of UPPKS project
Kredit Usaha Tani: farmer credit program
Lembaga Dana Kredit Pedesaan: Rural Fund & Credit Institution
Lembaga Kredit Kecamatan: Sub-district Credit Institution, LDKP in Aceh
Lembaga Ketahanan Masyarakat Desa: village administrative body
ProFI Microfinance Institutions Study vii
LKP
LKURK
LPD
LPN
LP2SD
LPK
LPUK
MAI
MCP
MFI
MUI
NGO
NTAADP
P2KP
P4K
PDM-DKE
PHBK
PINBUK
PLPDK
PMD
PNM
PPK
ProFI
PUSKOPDIT
RIGP/P4K
Rp.
SHG
SHPI
SMERU
SSN
SUSENAS
TAKESRA
TPSP
UBPR
UED-SP
UNDP
UPK
UPKD
UPPKS
USAID
USD
USP
YBS
YDBP
YINBUK
Lembaga Kredit Pedesaan: Rural Credit Institution, LDKP in West Nusa
Tenggara
Lembaga Kredit Usaha Rakyat Kecil: Small Business Credit Institution, LDKP
in East Java
Lembaga Perkreditan Desa: Village Credit Institution, LDKP in Bali
Lumbung Pitih Nagari: Village Credit Institution, LPKP in West Sumatra
Lembaga Penelitian dan Pengembangan Sumber Daya: NGO in Lombok
Lembaga Perkreditan Kecamatan: Sub-district Credit Institution, LDKP in
West Java
Lembaga Pembiayaan Usaha Kecil: Small Business Finance Institution, LDKP
in South Kalimantan
Maskapai Andil Indonesia: type of shareholder company (BPR)
Microcredit Project
Microfinance Institution
Indonesian Council of Ulamas
Non-Government Organization
Nusa Tenggara Agricultural Area Development Project
Proyek Penanggulangan Kemiskinan di Perkotaan: Poverty Alleviation Project
in Urban Areas
Proyek Peningkatan Pendapatan Petani-Nelayan Kecil: Small Farmers'
Income Generating Project
Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi: Local
Empowerment by Overcoming the Impact of the Economic Crisis
Proyek Hubungan Bank dengan Kelompok Swadaya Masyarakat: Project
Linking Banks and Self-help Groups, also: linkage project
Pusat Inkubasi Bisnis Usaha Kecil: Center for the Incubation of Small
Businesses, regional chapter of YINBUK
Pusat LPD Kecamatan: Sub-district LPD Centers
Pemberdayaan Masyarakat Desa: Empowerment of Village Communities
(organizational unit of the Ministry of Home Affairs)
Permodalan Nasional Madani: state-owned finance company in charge of
liquidity credit programs
Program Pengembangan Kecamatan: Sub-district Development Program
Promotion of Small Financial Institutions
Pusat Koperasi Kredit: regional secondary cooperative of Credit Unions/BK3D
Rural Income Generation Project, 3rd phase of P4K
Indonesian Rupiah
Self-help Group
Self-help Promotion Institution
Social Monitoring & Early Response Unit
Social Safety Net
National Socio-economic Surveys
Tabungan Keluarga Sejahtera: savings product of UPPKS project
Tempat Pelayanan Simpan Pinjam: Savings and Credit Service Posts
Urusan Pengawasan Bank Perkreditan Rakyat: BPR supervision department
of Bank Indonesia
Unit Ekonomi Desa-Simpan Pinjam: Village Economic Unit-Savings and Credit
United Nations Development Programme
Unit Pengelola Keuangan: Financial Management Unit of PPK project
Unit Pengelola Keuangan Desa: Village Fund Management Units
Usaha Peningkatan Pendapatan Keluarga Sejahtera: Family Welfare Income
Generation Project
United States Agency for International Development
US Dollar
Unit Simpan Pinjam: Savings and Credit Unit (of multi-purpose cooperative)
Yayasan Bina Swadaya: NGO
Yayasan Dharma Bhakti Parasahabat : NGO in West Java
Yayasan Inkubasi Bisnis Usaha Kecil: Foundation for the Incubation of Small
Businesses, NGO
ProFI Microfinance Institutions Study viii
TABLES
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Key Economic Indicators (1996 – 2000)
Poverty Lines and Incidence (1996 – 1999)
Project Linking Banks and Self-help Groups (1997 – 2000)
Microcredit Project (1997 – 2000)
Rural Income Generation project (RIGP/P4K) as of May 2000
Family Welfare Income Generation Project (UPPKS) as of July 2000
Participants of the Microfinance Sector in Indonesia
Institutional Microfinance in Indonesia
Perum Pegadaian – State-owned Pawnshop Company
Program Microfinance Funds
Growth of Commercial Banks and Bank Offices by Ownership (1988 – 2000)
Commercial Banks’ Financial Development (1996 – 2000, in Trillion Rupiah)
Banking Indicators 2000 (in Trillion Rupiah)
Change in Banking Structure (1996 – 2000)
Regional Distribution of Commercial Banks, Outstanding Credit and Deposits
Development Trends of BRI Units (December 1994 – June 2000, in Billion
Rupiah)
Regional Distribution of BRI Units (June 2000)
Outreach of BRI Units by Region (June 2000)
Assets and Balance Sheet Structure of BRI Units by Region (June 2000)
Loan Portfolio Quality of BRI Units by Region (June 2000)
Number of BPR 1988 – 2000
BPR Types and Legal Forms by Region (March 2000)
BPR Regional Distribution (March 2000)
BPR Outreach (March 2000)
BPR Assets and Balance Sheet Structure (March 2000)
BPR Assets and Loan Portfolio Quality (March 2000)
BPR CAMEL Rating (March 2000)
BPR Development Trends December 1994 – March 2000 (in Rp. Million)
Number of LDKP by Province
LDKP Indicators by Province (June 2000)
Number of LPD 1988 – 2000
LPD Outreach (March 2000)
LPD Consolidated Balance Sheet (March 2000)
LPD Consolidated Income Statement (March 2000)
LPD Assets & Loan Portfolio Quality (March 2000)
LPD Financial Sustainability (March 2000)
LPD CAMEL Rating (December 1999)
LPD Development December 1993 – March 2000 (in Rp. Million)
LPD Loan Portfolio Quality and Soundness December 1995 – March 2000
LPN Consolidated Balance Sheet (June 2000)
LPN Performance Indicators (June 2000)
Number of BKK 1972 – 2000
BKK Outreach (June 2000)
10
12
16
17
19
21
31
33
35
36
40
43
44
45
46
52
53
54
55
56
63
64
69
70
72
73
74
75
86
87
90
96
97
98
99
100
100
101
102
106
106
108
111
ProFI Microfinance Institutions Study ix
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
7.1
7.2
7.3
BKK Consolidated Balance Sheet (June 2000)
BKK Assets & Loan Portfolio Quality (June 2000)
LPK Consolidated Balance Sheet (June 2000)
LPK Performance Indicators (June 2000)
BUKP Outreach (June 2000)
BUKP Consolidated Balance Sheet (June 2000)
BUKP Assets & Loan Portfolio Quality (June 2000)
LKURK Consolidated Balance Sheet (June 2000)
LKURK Performance Indicators (June 2000)
BKK/LPUK Outreach (June 2000)
BKK/LPUK Consolidated Balance Sheet (June 2000)
BKK/LPUK Performance Indicators (June 2000)
LKP Consolidated Balance Sheet (June 2000)
LKP Performance Indicators (June 2000)
Number of BKD 1905 – 1987
BKD Outreach by Province (June 2000)
BKD Consolidated Balance Sheet (June 2000, in Million Rupiah)
BKD Consolidated Income Statement (June 2000, in Million Rupiah)
BKD Loan Portfolio and Assets Quality (June 2000, in Million Rupiah)
BKD Financial Sustainability (June 2000, in Million Rupiah)
BKD Development December 1996 – June 2000 (in Rp. Million)
Unit Ekonomi Desa – Simpan Pinjam (UED-SP) as of March 1999
Cooperative Sector by Type of Cooperative (December 1998, in Trillion Rupiah)
Multipurpose and Savings & Credit Cooperatives by Region (December 1998)
Multipurpose and Savings & Credit Cooperatives in West Nusa Tenggara (May
2000)
Number and Outreach of Swamitra by Region (October 2000)
Assets and Balance Sheet Structure of Swamitra by Region (October 2000)
Credit Union Development 1998-1999
Credit Union Indicators by Region (December 1999)
TPSP Outreach (April 2000)
TPSP Consolidated Balance Sheet (April 2000)
TPSP Loan Portfolio Quality (April 2000)
Number and Outreach of BMT (November 2000)
Assets and Balance Sheet Structure of BMT (November 2000)
BMT in South Sulawesi (June 2000)
112
113
116
117
119
119
120
123
123
125
125
126
127
128
131
139
141
142
143
145
146
154
164
165
166
169
170
172
173
174
174
175
186
187
188
Introduction
Introduction
ProFI Microfinance Institutions Study 2
Introduction
The international microfinance debate knows various microfinance definitions and
strategies, which give different emphasis to the providers of microfinance (financial
institutions, non-government organizations, government programs, informal lenders),
the services provided (savings and/or credit), or the clientele of these services (the
poor, low-income households, microentrepreneurs). Microfinance is commonly defined
as the provision of financial services to low-income groups. A point of controversy,
however, is how sustainable financial services can be provided to an increasing
number of low-income households. Should microfinance strategies focus on directly
targeting and benefiting the poor irrespective of who provides microfinance services or
should they focus on the development of viable microfinance institutions that are able
to sustain and expand services to low-income households and microentrepreneurs?
Microfinance programs directly targeting the poor are able to reach clients who are not
yet served by financial institutions, and they are also important for upgrading target
groups to more sustainable microfinance providers, thus increasing the outreach depth
of financial institutions. At the same time, it is necessary to develop and strengthen
microfinance institutions in order to sustain the provision of financial services to a
growing number of low-income households. Both approaches may have their place
within an overall microfinance strategy as long as poverty-oriented microfinance
interventions do not undermine the growth and viability of microfinance institutions. The
crucial problem is that both approaches are usually not coordinated within an overall
microfinance strategy.
The high emphasis on easy and cheap credit of microfinance interventions in Indonesia
has become a major constraint for the development of viable microfinance institutions.
This study does not intend to continue the theoretical microfinance debate. But, taking
into account the Indonesian context, the study was conducted based on the following
points of view:
•
Strengthening microfinance institutions aims at providing an increasing
number of low-income households with sustained access to financial
services. Poverty-oriented microfinance interventions play an effective role
in the development of sustainable microfinance services, if they reach
clients without access to microfinance institutions, aim at upgrading their
clients to microfinance institutions, and do not undermine the growth and
viability of microfinance institutions through the provision of easy and cheap
credit.
•
Sustainable microfinance has to comprise both savings and credit. Savings
instruments are important for low-income households to manage their
liquidity and accumulate resources for special expenditures. They are
important for microfinance institutions for sustaining and expanding their
credit outreach.
•
The provision of sustainable microfinance services to a growing number of
low-income households requires viable and sound financial institutions that
effectively intermediate between savings and credit customers. These
Introduction
microfinance institutions aim at reaching low-income groups, but they do
not necessarily exclusively serve people living below narrowly defined
poverty lines.
•
The development of viable and sound financial institutions requires
enabling legal, regulatory and supervisory frameworks, on the one hand,
and institutionalized support systems in field such as deposit protection,
training, and technical assistance. This includes also the self-organization
of microfinance institutions in the form of associations.
This institutional and systems approach to microfinance corresponds to the objectives
of the Promotion of Small Financial Institutions (ProFI) program. ProFI is a program
of technical cooperation between the Republic of Indonesia and the Federal Republic
of Germany. The German Agency for Technical Cooperation (GTZ) and Bank
Indonesia as the implementing agencies have been carrying out the program in the
three pilot provinces East Java, Bali and West Nusa Tenggara since 1999. ProFI aims
at increasing the access of the population, including low-income groups and the poor,
to sustainable financial services through viable microfinance institutions and the
strengthening of systems and frameworks necessary to develop a sound and growing
microfinance industry. To achieve its objectives the program comprises the following
components and fields of intervention:
•
Strengthening BPR regulation and supervision;
•
Developing a Deposit Protection System for BPR;
•
Strengthening BPR associations;
•
Strengthening LPD regulation and supervision;
•
Developing a support structure/association for LPD;
•
Developing training systems for small financial institutions;
•
Developing software and hardware systems for small financial institutions;
•
Improving the (re)financing of small financial institutions;
•
Developing a legal and regulatory framework for non-bank MFI;
•
Strengthening and upgrading of non-bank MFI.
The microfinance sector in Indonesia is made up of a high variety of institutions,
programs, services, and legal, regulatory and supervisory frameworks. Considering the
ProFI objectives and fields of intervention as well as its underlying institutional and
systems approach to microfinance, it is useful to distinguish institutional microfinance
from program microfinance. Institutional microfinance in Indonesia comprises
commercial banks and people’s credit banks that are subject to the banking act and
regulated by Bank Indonesia, local non-bank financial institutions that are regulated by
the Ministry of Home Affairs and provincial governments, cooperatives that are subject
to the cooperative law, pawnshops that are regulated by the Ministry of Finance, and
non-regulated local organizations such as savings and credit associations. Program
microfinance includes poverty alleviation projects that have established mechanisms
of extending microcredit to poor target groups, social safety net programs that have
been used for channeling funds to their target groups, subsidized credit schemes that
target small farmers and entrepreneurs, and microfinance programs of non-government
Introduction
organizations. Individual lenders such as moneylenders, shopkeepers and traders
provide informal microcredit outside of these microfinance sub-sectors.
The ProFI Microfinance Institutions Study focuses on institutional microfinance.
The study aims at providing a general overview of microfinance institutions in Indonesia
and to assess their strengths, weaknesses, significance and viability. The objective to
cover the microfinance sector in both breadth and depth was not an easy task to
achieve within the given time and personnel limits. Compromises had to be made
because of the unsatisfactory data situation. Information available at the national level
is often not up-to-date, complete, consistent and reliable, on the one hand, and usually
too aggregated to allow for a comprehensive assessment of financial institutions, on
the other hand.
The study relied on information obtained from a) organizations at the national level, b)
Bank Indonesia and Regional Development Banks at the provincial level, and c) related
ProFI studies1. Depending on the source of information the description and analysis of
microfinance institutions varies in quality and quantity. The ProFI baseline surveys
provide an in-depth view of small financial institutions in East Java, Bali and West Nusa
Tenggara. The reliable information systems of Bank Rakyat Indonesia provide a good
overview of its own unit system and the Badan Kredit Desa in Java, though additional
studies at the local and institutional level would be required for a more comprehensive
assessment. The assessment of other financial institutions suffered considerably from
their weak information systems. This is especially true for the cooperative sector. The
information available makes it even impossible to accurately identify and quantify
cooperatives with savings and credit activities, not to mention to analyze their financial
situation and institutional viability.
Institutional and program microfinance are sometimes not clearly separated. Banks are
also involved in channeling funds of governmental microcredit programs. This study
considers only banks with own microfinance products as microfinance institutions.
Contrary to other countries, non-government organizations in Indonesia do not play a
significant role as independent microfinance institutions. Some NGOs established small
banks, which are covered by chapters dealing with either commercial or people’s credit
banks. Many NGOs provide financial services with funds obtained from either donors or
governmental credit programs. These forms of microfinance are regarded as program
rather than institutional microfinance in this study. The Indonesian Credit Union
movement started as a non-governmental and informal form of microfinance. As Credit
Unions and their secondary structures have been increasingly converted to formal
cooperatives, they will be dealt with under the chapter of cooperatives.
1
Detlev Holloh, Small Financial Institutions in East Java, Bali and West Nusa Tenggara,
ProFI Baseline Survey Summary Report, Bank Indonesia and GTZ, Denpasar, June 2000;
Detlev Holloh: Bank Perkreditan Rakyat (BPR) in East Java, Bali and West Nusa Tenggara,
ProFI Baseline Survey, Bank Indonesia and GTZ, Denpasar, June 2000, Detlev Holloh,
Lembaga Perkreditan Desa (LPD) in Bali, ProFI Baseline Survey, Bank Indonesia and GTZ,
Denpasar, June 2000; Flora Giassemi, Wolfram Hiemann and Detlev Holloh, Appraisal of
the Proposal “Development and Upgrading of Microfinance Institutions in Indonesia”, Project
Promotion of Small Financial Institutions, Denpasar, September 2000.
Introduction
There are various other types of non-regulated financial self-help organizations in
Indonesia that may be regarded as self-organized forms of institutional microfinance.2
Rotating savings and credit associations (Arisan) are widespread in Java but much less
prominent microfinance providers outside of Java. They are not included in this study
as reliable data are not available and empirical studies are scarce. There are not many
other independent and self-reliant savings and credit associations in Indonesia. Most of
the many groups involved in microfinance activities were established and have been
assisted in the framework of governmental and non-governmental microfinance
programs. They are considered in this study insofar as they are recorded in statistics of
these programs.
This report on the ProFi microfinance institutions study consists of 8 chapters, of which
6 chapters deal with different types of institutional microfinance.
The first chapter provides a general overview of framework conditions for the
microfinance sector, a description of major microfinance and poverty alleviation
programs, and an overview of the structure of the microfinance sector in Indonesia.
The second chapter describes the commercial banking sector and focuses on the
largest microfinance network in Indonesia, the unit system of Bank Rakyat Indonesia.
The third chapter deals with Bank Perkreditan Rakyat, secondary banks that are also
subject to the banking act and Bank Indonesia regulation and supervision.
The fourth chapter covers Lembaga Dana Kredit Pedesaan, a variety of non-bank
microfinance institutions that are regulated and supervised by provincial governments.
The fifth chapter focuses on Badan Kredit Desa, village credit institutions that were
recognized by the banking act but are not regulated and supervised as banks. The
chapter also includes a description of Unit Ekonomi Desa – Simpan Pinjam, village
savings and credit units that are promoted by the Ministry of Home Affairs to expand
the BKD model throughout Indonesia.
The sixth chapter deals with the cooperative sector and its microfinance windows. The
chapter also includes descriptions of the Credit Union movement and Bank Bukopin, a
commercial bank that provides microfinance services though and in cooperation with
cooperatives.
The seventh chapter provides an overview of microfinance services provided on the
basis of Syariah principles. It includes descriptions of Bank Muamalat Indonesia, the
first Islamic commercial bank established in Indonesia, Baitul Maal wat Tamwil, local
financial institutions established by a national Islamic non-government organization,
and the Dakabalarea microfinance program of the Government of West Java.
The eights chapter summarizes major issues identified for the microfinance sector in
Indonesia and concludes with suggesting essentials and elements of a future
microfinance sector strategy.
2
See: Detlev Holloh, Microfinance In Indonesia between State, Market and Self-Organization,
LIT-Verlag and Transaction Publishers, Hamburg-New Brunswick 1998.
Chapter 1:
The Microfinance Sector
in Indonesia
1. The Microfinance Sector in Indonesia
The first part of this chapter provides a brief overview of economic, social and political
conditions relevant for the current and future development of the microfinance sector in
Indonesia. The second part provides an overview of major microfinance, poverty
alleviation and crisis-related programs that are relevant for the development of the
microfinance sector. The third part describes the structure of the microfinance sector
and distinguishes microfinance institutions from microfinance sector programs.
1.1 Economic, Social and Political Framework Conditions
1.1.1 The Economic Crisis and Policy Response since 19973
After phases of sustained economic growth, trickle-down effects and successful
poverty alleviation until the first half of 1997, Indonesia was classified as a lower
middle-income economy, with the per capita GDP exceeding USD 1,100 in 1996/97.
The Asian currency crises revealed the structural weaknesses of this development and
developed into a full-blown political, economic and social crisis within a few months.
When the Asian currency crisis spilled into Indonesia in July 1997, the Rupiah
underwent strong fluctuations and depreciated from about Rp. 2,500 to Rp. 5,000 per
US Dollar until the end of the year. Factors such as the withdrawal of foreign
investments, the rising demand for the US Dollar due to huge foreign liabilities falling
due, the increasing speculation on the Rupiah, the decreasing confidence in the ability
of the government to deal with the financial crisis and the starting political crisis,
resulted in a free fall of the Rupiah to Rp. 16,000 per US Dollar in January 1998. The
government’s tight money policy and other measures succeeded to stabilize the
exchange rate at Rp. 7,000 to Rp. 8,500 in February and March 1998 but, after the
riots and the resignation of President Soeharto in May 1998, the exchange rate
plunged again to Rp. 16,500 in June 1998.
As a consequence of the currency devaluation, the sharp increase in interest rates (the
Jakarta inter-bank offered rate increased from 1% in July 1997 to 44% in June 1998)
and the prolonged draught that led to disruptions in food supply, the inflation rate
(consumer price index) soared from 5.2% during the financial year 1996/97 to 34.2% in
1997/98 and to 77.6% in 1998, the highest inflation rates since 1974/75. The gross
domestic investment contracted by one third in 1998, compared to growth rates of
12.9% in 1996 and 8.6% in 1997. While the Gross Domestic Product grew by 7.8% in
1996 and by 7.6% in the first half of 1997, the economy contracted by more than 13%
in 1998. The per capita GDP dropped from Rp. 2.2 million or USD 1,018 in 1997 to Rp.
1.9 million or USD 491 in 1998.
During the 1990s, Indonesia’s debt structure experienced a profound change. In
1993/94 the public sector still accounted for two thirds of Indonesia’s external debts
(USD 83.3 billion). In 1997/98 total external debts had increased to USD 131.5 billion,
of which 59% were made by the private sector. The debt service ratio of the private
sector, mainly large investment companies and business conglomerates, had
increased from 12.8% to 29.4%. The foreign debts of the private and public sectors
3
The following description is based on Bank Indonesia and World Bank reports.
increased further to USD 151 billion in 1998. The ratio of foreign debts to GDP
increased from 57% in 1996 to 153% in 1998. The currency mismatch in foreign
borrowings (private sector loans were often used for investments not generating foreign
currency) combined with the widespread corruption and collusion in the corporate
sector rapidly transformed the exchange rate crisis into an external debt crisis.
In the course of the crisis the intermediation function of the banking industry virtually
came to a hold. The pressure on the Rupiah and the massive withdrawals of deposits
from private banks after the government had revoked the business licenses of 16
insolvent banks in November 1997 plunged the banking industry into a severe liquidity
crisis. The tightening of liquidity propelled the inter-bank interest rate to 350% in
January 1998, or an average 64% for the entire year, and made the banking industry
dependent on massive liquidity support from the central bank. This support increased
from Rp. 62.8 trillion in December 1997 to Rp. 177.1 trillion in July 1998. The rapid
expansion of money supply gave further rise to the already high level of inflation. To
prevent the breakdown of the banking system the government was also forced to
declare a blanket guarantee for deposits in January 1998. The guarantee scheme
includes an additional guarantee on the claims of creditors. Guarantee bonds
amounted to Rp. 164.5 trillion in 1998.
On the asset side, the loan portfolio quality of the banking industry worsened
drastically. The share of non-performing loans increased from 9% in March 1996 to
59% in February 1999. The halt of financial intermediation and the transfer of bad
debts to the Indonesian Bank Restructuring Agency (IBRA) contracted the industry’s
loan portfolio by more than 50% in 1999. The huge loan losses and the negative
interest spread decapitalized the industry. At the end of 1998, the industry had a
negative capital of Rp. 100 trillion and the capital adequacy ratio had plunged to minus
25%. Until October 2000, the government had to liquidate 68 commercial banks and
had to issue recapitalization bonds amounting to Rp. 430 trillion.
The Asian exchange rate crisis hit an already fragile banking industry and uncovered
its inherent weaknesses. Bank Indonesia attributed its vulnerability to external shocks
to five factors4: a) the implicit government guarantee leading to moral hazard, b) noncompliance with prudential principles, ineffective bank supervision and lack of
enforcement, c) unsound risk exposure through connected lending by private national
banks in the ownership of few business conglomerates, d) low managerial skills and
lack of internal control, and e) lack of transparency. The weaknesses of the legal,
regulatory and supervisory systems contributed to the banking crisis. However, the
roots of the banking crisis as well as of the financial crisis in general can be traced
back to the incomplete and inconsistent market reforms since the 1980s. These
reforms did not include a comprehensive reform of the corporate sector, in which most
state enterprises were deemed financially unsound and large business conglomerates
remained politically protected. The banking industry was not freed from political
intervention and the interest of these business conglomerates.
In March 1998, the Indonesian Government embarked on a reform and stabilization
program with substantial support from international institutions and partner countries
4
See: Bank Indonesia, Annual Report 1997/1998.
coordinated by the International Monetary Fund. Fiscal policies such as improvements
of the tax system, the gradual reduction of subsidies (fuel and electricity), and the
cancellation of large infrastructure projects aimed at strengthening government
revenues and budget discipline. Monetary policies aimed at stabilizing the Rupiah by
controlling liquidity and interest rates. The financial sector reform strategy consisted of
five major components, the bank restructuring and recapitalization program, the credit
restructuring and recovery program, a program aiming at creating good governance,
the improvement of the legal and regulatory framework, and the strengthening of bank
supervision. Real sector reforms included the reduction of tariffs or the removal of
restrictions on foreign trade products, the removal of restrictions on foreign investment
as well as deregulation and privatization measures. Additionally, the government
initiated a range of social safety net and small-scale credit programs in order to cushion
the impact of the crisis and alleviate poverty.
Major efforts were made to improve public governance by combating corruption,
improving decision-making and administrative structures, and strengthening public
institutions. The Clean Government Law was passed in 1999 and requires public
officials to declare their assets and to open their assets to official audit. The Eradication
of Criminal Acts of Corruption Law established the basis for legal prosecution and
criminal charges, and provides for the establishment of an independent anticorruption
commission.
The Laws on Local Government Autonomy and on Fiscal Balances, which were also
approved by the parliament in 1999, aim at improving the accountability of
governmental decision-making and strengthening local development. Giving decisionmaking and budgetary powers to districts and villages, the decentralization law will also
provide a new framework for the development of local financial institutions and
microfinance programs.
On August 29, 2000 the government implemented a major cabinet restructuring that
aims at ensuring greater coordination of economic policies. The new economic team
announced a 10 Point Economic Recovery Program that became part of the new Letter
of Intent signed with the IMF on September 7, 2000. The 10 program components aim
at:
•
•
•
•
•
•
•
•
•
•
Maintaining macroeconomic stability;
Reducing unemployment;
Improving agricultural productivity and farmer welfare;
Increasing non-oil export revenues;
Promoting domestic and foreign equity investment;
Expediting banking and corporate restructuring;
Accelerating privatization of state-owned enterprises;
Initiating small and medium scale enterprises development programs;
Ensuring sustainable development of natural resources;
Implementing economic decentralization.
Despite the continued political
turmoil and the slow progress in
implementing the reform and
stabilization program Indonesia’s
macro-economic
performance
showed a tentative recovery in
1999 and some encouraging
trends in 2000.
Table 1.1
Key Economic Indicators (1996 – 2000)
Indicator
1996 1997 1998 1999 2000
GDP growth
7.8
GDP per capita (USD)
4.7 -13.1
1,177 1,018
CPI inflation (%)
6.5
USD exchange rate (Rp.)
1
11.1
0.8
4.8
491
703
783
77.6
2.0
9.4
2,383 4,650 8.025 7,100 9,675
2
12.9
8.6 -33.0 -19.4 17.9
The Gross Domestic Product Gross dom. investment
3
recorded a 0.8% increase in Foreign debt (Billion USD) 128.9 136.2 150.9 147.4 139.5
As % of GDP
56.7 63.3 152.7 97.5
1999 and grew by 4.8% in 2000.
: Bank Indonesia, World Bank.
GDP per capita, which had fallen Source
1
End of year rate.
to only USD 491 in 1998, 2 Pecentage growth.
3
End of year and October 2000.
increased to USD 783 at the end
of 2000 but has by far not yet reached the level prior to the crisis. While the low growth
in 1999 was mainly due to consumption, the recovery had a broader base in 2000. All
sectors but agriculture showed a positive growth. The gross domestic investment grew
by 18% compared to a contraction of 33% in 1998 and 19% in 1999. Exports returned
to positive growth in 1999 and increased by 23% in the first half of 2000.
With falling food prices, especially of rice, and the appreciation of the Rupiah, inflation
(consumer price index) came under control and cumulated to only 2% in 1999. Price
increases for fuel, electricity, transportation as well as the renewed depreciation of the
Rupiah, especially in the second half of 2000, boosted the inflation rate to 9.4% in
2000, well above Bank Indonesia’s target of 5% to 7%. As of the end of 1999, the
Rupiah exchange rate had strengthened to Rp. 7,100 per US Dollar. However,
during 2000 the Rupiah depreciated continuously and had fallen to almost Rp.
10,000 per US Dollar at the end of the year. As the Rupiah recovered and new
disbursements remained modest, foreign debt as a share of GDP declined in 1999 and
2000 but is still close to the total GDP volume.
The recovery of the Indonesian economy has been slow and far behind that of other
East Asian crisis countries. Indonesia’s GDP is some 30 percent below what it would
have been if pre-crisis trend growth had prevailed. At the current pace of growth it will
take several years to return to the pre-crisis level. The corporate sector is still deeply in
debt. In the mid of 2000 almost three quarters of corporate debt (USD 120 billion) was
denominated in foreign currencies. This leaves the corporate sector highly vulnerable
to further devaluations of the Rupiah.
Based on the finalization of the bank recapitalization program, recovering interest
margins, and renewed profits, the banking industry started to recover at a modest
pace. The aggregated loan portfolio of commercial banks grew by 41% in 2000, while
the non-performing loan ratio decreased to 24% mainly because the industry had
resumed lending. With the loan portfolio to assets ratio remaining at a low level (31%),
however, the intermediation function of the industry was revived to a very limited extent
only (see chapter 2).
Weak corporate and public governance as well as weak law enforcement continue to
impede corporate restructuring. With the top ten families owning more than 60 percent
of corporate assets, pervasive state ownership of economic assets, close relationships
between business conglomerates, banks and government, and poor oversight by the
regulators, still act against the fundamental changes necessary for sustainable growth
and social development. The new Government has not yet been able to create new
market and investment confidence, and faces severe constraints in cleaning the
economy from rent-seeking behavior, enforcing the superiority of law, and solving
political, social and ethnic problems.
The volatility of economic and social recovery has its origin in structural weaknesses
and impediments, which were summarized in the World Bank’s new country assistance
strategy5 as follows:
•
•
•
•
•
•
•
Poor governance and corruption in the public sector;
The uncertainties surrounding the forthcoming decentralization process;
The absence of an effective court system and the longstanding need for
legal and judicial reform;
Poor corporate governance, particularly lack of information disclosure or
enforcement against offenders;
The need for effective rules and institutions to implement competition
policy;
A less than welcoming climate for foreign direct investment; and
The extended role of the state and its crowding out of private sector activity.
1.1.2 Poverty Incidence and Policy Response since 1997
There are different poverty lines and head count results depending on the methodology
applied and the results of different surveys. In Indonesia, the national poverty line is
calculated by the Central Bureau of Statistics (BPS) as the expenditure necessary for a
fixed food basket that allows an intake of 2,100 calories per person. While the basket is
fixed, the fixing of the basket is a matter of social choice and the resulting poverty line
is highly sensitive to prices varying over time and between regions. Poverty estimates
of the BPS were recently published in a paper presented by the National Planning
Board to the tenth meeting of the Consultative Group on Indonesia (CGI).6
The National Socio-economic Surveys (Susenas) are the main sources of information
on poverty in Indonesia. Since the outbreak of the crisis there have been a number of
poverty estimates using different household surveys. These estimates use different
bases as the "pre-crisis" poverty rate and different methods of updating the poverty
line, so that they are not directly comparable. Using Susenas data and other household
surveys, the Social Monitoring & Early Response Unit (SMERU), which is supported by
the World Bank and other international institutions, recently tried to produce consistent
5
6
Memorandum of the President of the International Bank for Reconstruction and
Development, the International Development Association and the International Finance
Corporation to the Executive Directors on a Country Assistance Strategy of the World Bank
Group for Indonesia. World Bank Report No. 21580-IND, February, 2001.
Poverty Reduction Strategy in Indonesia. Prepared for Consultative Groups for Indonesia,
Tokyo, National Planning Board, October 2000.
series of poverty estimates and proposed an alternative iterative method to reflect
regional and urban-rural price differentials more adequately than the BPS method.7
Table 1.2
Poverty Lines and Incidence (1996 – 1999)
Year/Source
Poverty Line
Poverty Incidence
(Rp./capita/month)
(million people)
Urban
Rural
Urban
Rural
Poverty Incidence
(%)
Total
Urban
Rural
Total
February 1996 – (1)
38,246
27,413
7.2
15.3
22.5
9.7
12.3
11.3
36,887
31,645
5.1
25.7
30.8
7.2
20.5
15.7
96,959
72,780
17.6
31.9
49.5
21.9
25.7
24.2
December 1998 – (4)
92,409
74,272
15.7
32.7
48.4
19.5
26.1
23.5
93,869
73,898
-
-
-
20.0
25.9
23.6
90,490
81,184
13.2
42.6
55.8
16.3
34.1
27.1
August 1999 – (7)
89,845
69,420
12.4
25.1
37.5
15.1
20.2
18.2
Sources : Poverty Reduction Strategy in Indonesia. Prepared for Consultative Groups for Indonesia, Tokyo, October
2000 (presented by the National Planning Board) ; Menno Pradhan, Arsep Suryahadi, Sudarno Sumarto, Lant
Pritchett : Measurement of Poverty in Indonesia : 1996, 1999, and Beyond, Smeru Working Papers, June 2000.
(1) Central Bureau of Statistics, Social and Economic National Survey (Susenas) 1996.
(2) Social Monitoring & Early Response Unit (Smeru), calculation based on alternative iterative method.
(3) Central Bureau of Statistics, based on Susenas of February 1998.
(4) Central Bureau of Statistics, based on Susenas of December 1998.
(5) Social Monitoring & Early Response Unit (Smeru), calculation based on method of Central Bureau of Statistics.
(6) Social Monitoring & Early Response Unit (Smeru), calculation based on alternative iterative method.
(7) Central Bureau of Statistics, based on Susenas of August 1999.
In the twenty years between 1976 and 1996, Indonesia’s rapid economic growth was
accompanied by considerable improvements in living standards and social indicators.
According to BPS statistics the population living in poverty decreased from 54.2 million
or 40.1% in 1976 to 22.5 million or 11.3% in 1996. The crisis since 1997, however,
showed that more than double as many Indonesians remained highly vulnerable and
may at least temporarily fall below the poverty line under the condition of surging
inflation and decreasing real income. According to BPS estimates the incidence of
poverty increased by more than two times between February 1996 and February 1998
(49.5 million people or 24.2%).
The SMERU estimates reflect lower differentials in urban and rural poverty lines and,
therefore, arrive at higher poverty rates for both 1996 (15.7%) and early 1999 (27.1%)
than the BPS method. Based on a poverty index of 100 for the lowest poverty rate
before the crisis, SMERU estimated that the poverty incidence in the second half of
1998 was more than two and a half times the estimated pre-crisis low in mid 1997. This
explosion in the poverty index coincides with the worsening of the economic crisis, the
rapid inflation with lagging nominal wages and incomes, and the rapid increase in the
price of rice in 1998.
7
See: Arsep Suryahadi, Sudarno Sumarto, Yusuf Suharso, Lant Pritchett: The Evolution of
Poverty during the Crisis in Indonesia, 1996 and 1999 (Using Full Susenas Sample),
SMERU Working Paper, March, Social Monitoring & Early Response Unit, Jakarta, SMERU
Working Papers, Jakarta, March 2000; Menno Pradhan, Arsep Suryahadi, Sudarno
Sumarto, Lant Pritchett: Measurement of Poverty in Indonesia : 1996, 1999, and Beyond,
SMERU Working Papers, Jakarta, June 2000.
A major factor responsible for the increase in the poverty rate was the huge increase in
the relative price of rice, which rose by 180% between February 1996 and February
1999. After February 1999, the sharp decline in food prices, especially rice, and
increasing real wages appear to have led to a reduction in poverty. The poverty
estimate of the Central Bureau of Statistics in August 1999 points into this direction.
However, two years after the crisis started, the poverty incidence was still higher than
prior to the crisis.
Though it can be assumed that the poverty rate has approached the pre-crisis level
during 2000, poverty continues to be a central issue because most people crossing the
poverty line are still highly vulnerable to expenditure poverty, on the one hand, and
poverty includes dimensions other than expenditure poverty, on the other hand. A
World Bank report8 argued that over a three-years period between 30% and 60% of all
Indonesians face a greater than 50:50 chance of periodically falling into poverty.
Poverty takes many forms in addition to expenditure poverty such as the lack of access
to basic education, medical services, infrastructure (safe water, adequate sanitation,
transport and roads, electricity), or participation in community life. The World Bank
concludes in its new country assistance strategy9: “Once the multi-dimensional breadth
and dynamics of poverty are acknowledged, poverty is a reality that, in one form or
another, confronts more than half of all Indonesians.”
Profile of Indonesia’s Poor and Vulnerable in 1999
Characteristics of those in expenditure poverty and where they live…
•
•
•
•
•
87 percent of the poor live in households in which the head of household has only a
primary education or less— only five percent of the poor have a secondary education or
better.
For almost 60 percent of the poor, agriculture provides the main source of income
whether from labor or land).
More than 75 percent of the poor live in rural areas.
Most of the poor (61 percent) live on Java.
The poorest regions, all rural, are scattered and include parts of the eastern islands
(Irian Jaya, East Nusa Tenggara, Maluku and West Nusa Tenggara), but also other
areas (Southeast Sulawesi, East Java, Lampung, West Kalimantan, and Central Java).
Other ways in which poverty is experienced…
•
•
•
Expenditure poor households are also much more likely to be “human investment” poor,
but a significant share of the non-expenditure poor households also lag in human
investment: 22 percent of poor children between 6 and 18 years who have yet to
complete basic education are not enrolled in school, while for non-poor households the
share is 9 percent.
78 percent of the poor, and 51 percent of non-poor, lack access to “improved” water
sources. Access to sanitation is even more limited.
When people are asked to define who are “the poor” in open-ended terms, the breadth
and variety of responses is striking; from the common idea of not having enough to eat,
to not having enough participation in community life, to being despondent or “having lost
faith in God” (from Consultations with the Poor in Indonesia, 1999)
Source: World Bank, Indonesia Country Assistance Strategy, Box 1.2 (see footnote No. 5)
8
9
World Bank, Poverty Reduction in Indonesia: Constructing a New Strategy, October 2000
(Draft).
See footnote No. 5.
Poverty alleviation was a top priority of the political agenda also before the crisis as
disparities between regions and population groups tended to increase despite the
reduction of absolute poverty. In this context the government embarked upon large
national poverty alleviation programs such as the development program for backward
villages (IDT), the family welfare income generation program, and the small farmer
income generation project (P4K). Other programs such as the sub-district development
and urban poverty alleviation programs were added in the second half of the 1990s and
partly replaced the IDT program. In response to the ongoing economic, social and
political crisis since 1997, the government, with support from the World Bank and other
donors, launched several Social Safety Net (JPS) programs in the fields of food
security, social protection in education and health, employment generation, and
community empowerment. Some of these programs were set up to rapidly and directly
channel funds and credit to the village level. Poverty alleviation programs with
microfinance components are further described in the following chapter.
In October 2000, the new government presented its poverty reduction strategy to the
tenth Consultative Group for Indonesia (CGI) meeting.10 The strategy focuses on
alleviating poverty over the next five years and aims at reducing the incidence of
poverty by 4% to 5%. The statement emphasizes the necessity of good governance,
transparency and accountability in implementing the strategy. The coordination
responsibility is given into the hands of the Vice President who will be supported by a
task force made up of government and non-government members. A special
stakeholder forum will be set up to monitor poverty reduction efforts. The new poverty
reduction strategy is based on three pillars:
Promoting economic opportunities for the poor through 1) rapid, sustainable
growth, 2) strengthening local governance and autonomy, 3) effective provision of core
public services, and 4) building community infrastructure. Improved local governance
and community participation, transparency and accountability are seen as key factors
in empowering the poor.
Facilitating the empowerment of the poor by 1) strengthening community
organizations and encouraging their network building to accumulate social capital
within the community, 2) promoting sustainable rural development through rural
industrialization and agribusiness, encouraging capital accumulation and self-financing
within the local communities; and 3) revitalizing small-scale and medium enterprises by
creating a conducive business environment, strengthening institutional support,
improving access to credit and financial services on commercial terms, strengthening
community-based financing institutions, and improving the environment for the
expansion of micro-credit institutions.
10
A Poverty Reduction Strategy for Indonesia, Statement of Dr. Djunaedi Hadisumarto,
Chairman National Development Planning Agency/Bappenas, Tokyo, October 2000;
Poverty Reduction Strategy in Indonesia. Prepared for Consultative Groups for Indonesia,
Tokyo, National Planning Board, October 2000.
Enhancing social security by 1) supporting community- and family-based safety nets
and improving social safety net programs to protect the poor against shocks, and 2)
accelerating development in remote areas through special programs.
1.2 Microfinance Sector and Poverty Alleviation Programs
“It is the era of microfinance” was the answer when the author asked an official of the
Ministry of Home Affairs why the ministry sees its role in carrying out microfinance
programs. Since the 1990s, there are many ministries and government institutions
carrying out programs with microfinance components. Microfinance has become a
standard element of governmental poverty alleviation programs as well as of programs
of many non-government organizations. The following description focuses on larger
programs with some national relevance. In the context of this study it is useful to
distinguish four types of programs working in the microfinance sector: 1) programs that
aim at building microfinance institutions and systems rather than directly providing
microfinance services, 2) poverty alleviation programs that focus on providing
microfinance services and were usually initiated prior to the crisis, 3) social safety net
and similar programs with microfinance components, which were launched in response
to the crisis, and 4) microfinance initiatives of non-government organizations.
1.2.1 Microfinance Systems Development Projects
There are several initiatives aiming at strengthening institutional microfinance, mainly
through small financial institutions such as the People’s Credit Banks (BPR). These
initiatives intend to improve access to microfinance services indirectly rather than
directly. Initiatives such as the ProFI program of Bank Indonesia/GTZ, and UKABIMA,
a private non-bank finance company sponsored by USAID and executed by CRS,
focus on improving framework conditions and technical capacities of small financial
institutions. The two major microfinance programs aiming at developing sustainable
microfinance systems in cooperation with banks, non-government organizations and
self-help groups have been carried out by Bank Indonesia in cooperation with GTZ
(Project Linking Banks and Self-help Groups Project) and ADB (Microcredit Project).
Project Linking Banks and Self-Help Groups
Indonesia was the first country that translated the linking banks and self-help groups
concept into practice. In 1989, Bank Indonesia in cooperation with GTZ launched the
linkage project to make financial services available to self-help groups of small farmers
and entrepreneurs by facilitating either direct or indirect financial transactions between
banks and self-help groups. An essential feature of the Indonesian linkage project has
been to support autonomous and sustainable linkages between banks, self-help
promotion institutions (SHPI) and self-help groups (SHG). Emphasis was given to
savings mobilization by banks and within SHG, market-based and cost-covering
interest rates, respecting SHG as autonomous informal financial intermediaries, and
cooperating with existing and eligible SHG. These principles distinguished the project
from conventional credit and group lending programs, and implied an inseparable
connection between the objectives of providing access to bank services and
strengthening self-help groups as informal financial institutions.
In the mid 1990s, when the limited number of eligible savings and credit groups,
qualified SHPI and commercial banks as well as the high training and technical
assistance costs involved in this approach became a constraint for project expansion,
the project strategy was modified in three respects: a) people’s credit banks (BPR), the
number of which was rapidly increasing, were encouraged to establish their own direct
linkages with self-help groups; b) SHPI were discouraged from acting as financial
intermediaries and encouraged to focus on their training and guidance functions; c) the
group lending concept was introduced by promoting the establishment and participation
of microentrepreneur groups, which function as channeling and joint liability groups
without managing their own credit portfolios.
The linkage project provides technical assistance to banks and SHPI in the form of
training, seminars, workshops, exposure field visits and consultancy. Bank managers
and staff are trained in
Table 1.3
best
practices
for
Project Linking Banks and Self-help Groups (1997 – 2000)
establishing and serving
Indicator
3/1997 12/1998 12/1999 6/2000
microentrepreneur
groups. SHPI staff is Number of participating institutions
Commercial bank branches
211
198
218
184
trained in best practices
People’s credit banks (BPR)
225
610
667
515
of strengthening savings
and
credit
groups.
SHPI/NGOs
130
142
131
99
Short-term
training
Savings & credit groups
2,016
1,852
1,312
1,229
courses and regular
Microentrepreneur groups
3,065
7,992 12,137 10,586
follow-up guidance for
SHG savings in banks (Rp. billion)
3.7
8.4
10.8
17.2
developing
bankable
Loans outstanding (Rp. billion)
24.3
42.5
71.7
68.2*
savings
and
credit
6.2
12.5
7.6
10.3
groups is financed by Loan amount in arrears (%)
Long-term repayment rate (%)
96.2
94.8
96.5
96.3
the project.
Default rate (%)
0.6
2.4
2.2
3.1
Concentrating program
Source : Bank Indonesia, PHBK Report of July 2000.
expansion on BPR and * Another table of the report records a lower loan amount (Rp. 55.1 billion).
direct linkages between
banks and channeling groups led to a rapid growth since 1996. Between March 1997
and December 1999, the number of participating BPR increased from 211 to 667 and
the number channeling microentre-preneur groups with loans outstanding from 2,016 to
12,137. The number of savings and credit groups with loans outstanding decreased
from 2,016 to 1,312. Savings deposited by self-help groups in banks increased from
Rp. 3.7 billion to Rp. 10.8 billion and the amount of loans outstanding to self-help
groups from Rp. 24.2 billion to Rp. 71.7 billion during the same time period.
In early 2000 GTZ phased out its project support and Bank Indonesia continued with
considerably reduced technical assistance staff. As of June 2000, the project still had
184 commercial bank branches, 515 BPR, 99 SHPI, 1,229 savings & credit groups and
10,586 microentrepreneur groups participating in 24 provinces. The 11,815 self-help
groups had loans outstanding amounting to Rp. 68 billion. The loan amount in arrears
had increased to 10% because of the downward trend in new loan disbursements.
Since its inception the linkage project had facilitated linkages between 350 commercial
bank branches, 847 BPR (about one third of all BPR operating in Indonesia), 238
SHPI, 6,549 savings & credit groups, and 21,915 microentrepreneur groups. The banks
had disbursed 47,864 loans with a total value of Rp. 249 billion. The long-term
(accumulated) repayment rate of 96% points to the success of the linkage project.
Microcredit Project
The microcredit project has been implemented by Bank Indonesia since 1996. It aims
at increasing income and employment of poor people by providing them access to
financial services of small financial institutions. To achieve this objective the project
provides People’s Credit Banks (BPR) and Rural Credit Fund Institutions (LDKP) with a
credit line for onlending to microborrowers. Contrary to the linkage project, the
microcredit project employs both an individual and group approach in lending, and
does not require borrowers to deposit savings as partial collateral and a prerequisite for
getting access to credit. Funds for the credit line and technical assistance come from
the Asian Development Bank. Training and consulting services are provided to
participating financial institutions and non-government institutions that are responsible
for self-help group formation and microenterprise training. A separate credit line for
participating institutions is made available for the purchase of computers and
motorbikes.
Table 1.4
Microcredit Project (1997 – 2000)
Indicator
1996
1997
1998
1999
6/2000
Total
People’s credit banks (BPR)
44
113
251
316
-
724
Rural credit institutions (LDKP)
66
62
125
-130
-
123
SHPI/NGOs
21
6
8
12
-
47
-
93
1,423
3,177
133
4,826
Number of participating institutions per year
Microentrepreneur groups
Microborrowers per year
Individual
Group members
3,023
13,056 136,025 191,524
86,805 430,433
279
1,204
40,791
65,873
13,273 121,420
Loan amount disbursed per year (Rp. billion)
0.6
3.6
49.8
60.1
4.0
119.0
Loans outstanding end of period (Rp. billion)
-
-
-
-
-
65.8
Loan amount in arrears end of period (%)
-
-
-
-
-
1.6
Source : Bank Indonesia, Proyek Kredit Mikro, Laporan Perkembangan Juni 2000.
Since its inception the microcredit project cooperated with 724 BPR, 123 LDKP and 47
NGOs in eight provinces. The participating small financial institutions disbursed loans
to 551,853 microborrowers, of which 121,420 are organized in 4,826
microentrepreneur groups. Half of the borrowers were women. The total loan amount
disbursed amounted to Rp. 119 billion. As of June 2000, 523,142 borrowers had loans
outstanding amounting to Rp. 65.8 billion, of which only 1.6% was in arrears. This
repayment performance is an outstanding achievement compared to the generally
much lower loan portfolio qualities of BPR and LDKP (see chapters 3 and 4).
In 2000, the microcredit project experienced a considerable decrease in loan
disbursements and support activities as the project planning foresaw its termination in
this year and a decision on its extension were not yet taken.
1.2.2 Microfinance-focused Poverty Alleviation Programs
There is a range of poverty alleviation programs with microfinance components. The
programs described in the following do not provide a complete picture, but they are the
largest ones with some national relevance.
Rural Income Generation Project (RIGP/P4K)
The Rural Income Generation Project (RIGP/P4K) of the Ministry of Agriculture and
Bank Rakyat Indonesia (BRI) is the oldest microfinance project in Indonesia. It was
incepted in 1979 and underwent several changes in design and methodology. RIGP is
the third P4K phase, which has been carried out in 12 provinces since 1998. Funds for
the RIGP/P4K project come from the Indonesian Government, the Asian Development
Bank, and the International Fund for Agricultural Development.
The project targets households with income generating activities and an annual per
capita income equivalent to the local value of up to 320 kg rice. Project implementation
is based on the infrastructure of agricultural field extension workers and an elaborated
step-wise guidance and training methodology. The project facilitates the formation of
small farmer and women groups (consisting of 8 to 16 members), assists them in
developing savings activities and formulating business plans, and provides access to
BRI credit based on these business plans and after the small farmer groups have
fulfilled a set of eligibility criteria. Depending on the loan cycle, individual loan amounts
range from Rp. 300,000 to Rp. 700,000.
The project differs from other poverty alleviation projects. The microfinance component
is carried out independently by BRI. Data on financial transactions are detailed and
usually reliable. Interest rates should cover bank transaction costs and are subject to
adjustment if required. The groups have to mobilize savings and to deposit at least 5%
of the loan amount applied in BRI accounts before getting access to credit.
Misappropriation and misallocation of funds is not a prevalent feature. The target group
is given time to go through a process of education and training before getting access to
credit during four cycles of usually one year each. The project provides perspectives
beyond the narrower project framework. Individual and eligible group members may be
become regular customers of BRI units. The project framework includes also the
possibility to facilitate linkages with other banks and seek the assistance of NGOs in
this context.
A special feature of the project is that the small farmer groups are joint liability groups,
which provide a mechanism for participation, training, savings motivation and
channeling credit without requiring them to develop a comprehensive financial
administration and management capability. Only in a later step, when the groups have
successfully gone through several credit cycles and training modules, they are
facilitated to join into larger savings and credit associations, which intermediate
between savers and borrowers among their members, and may adopt the legal status
of a cooperative.
The first P4K phase was carried out in 6 provinces between 1979/80 and 1985/86.
During this phase the project facilitated the formation of 2,150 small farmer groups, of
which 1,094 groups received credit. 85% of the loan amount was repaid during a time
when credit programs usually experienced outstanding losses. The complete P4K
approach, however, was developed during its second phase, which was implemented
in 10 provinces from 1989 to March 1998. By September 1997, 48,169 small farmer
groups consisting of some 500,000 members had been formed and 75,684 group
business plans were financed by loans amounting to Rp. 117 billion. About 3% of the
loan amount outstanding was in arrears. At the time of project termination it was
estimated that the overall repayment rate was around 95% - a creditworthy
performance by any standard.
Table 1.5
Rural Income Generation project (RIGP/P4K) as of May 2000
Sumatra
Java &
Bali
Kalimantan
Sulawesi
West Nusa
Tenggara
Total
Loan amount disbursed (Rp. m)
2,368
73,461
821
1,547
13,896
92,091
Loan amount past due (Rp. m)
1,110
37,265
405
578
7,066
46,428
Loan amount paid (Rp. million)
1,050
34,733
401
577
6,869
43,635
Loan amount outstanding (Rp. m)
1,317
38,728
414
970
7,026
48,456
714
19,168
216
391
4,074
24,563
59
2,532
3
1
197
2,793
73
2,355
8
2
273
2,711
4.5
6.5
0.7
0.1
2.8
5.8
Long-term repayment rate (%) *
94.6
93.2
99.0
99.8
97.2
94.0
Group savings in BRI (Rp. million)
123
6,379
49
85
1,159
7,794
707
27,321
311
416
4,675
33,430
Indicator
Number of groups
Loan amount in arrears (Rp. m)
Number of groups
Arrears ratio (%) *
Number of groups
Source : Bank Rakyat Indonesia and Rural Income Generation Project, Reports of April and May 2000.
* Arrears ratio : loan amount in arrears / loan amount outstanding as of May 2000.
Repayment rate : loan amount paid / loan amount past due (accumulated November 1998 – May 2000).
As of June 2000, the RIGP/P4K project had 37,744 active small farmer groups, of
which 28,030 had received loans amounting to Rp. 104 billion. 20,772 groups still had
loans outstanding, while 16,972 groups had prepared business plans and loan
applications that were not yet approved. More complete data were available for May
2000, when 33,430 groups had deposited Rp. 7.8 billion in BRI accounts, and 24,563
groups had loan amount outstanding of Rp. 48.5 billion.
5.8% of the total loan amount outstanding was in arrears, mainly because a
deteriorating group performance in West, Central and East Java. The arrears ratio
increased 2.9% at the beginning of the year to 6.1% as of June 2000. The project
management regards fast loan approvals during the first half of the year (10,451 new
loan disbursements) as a major reason for this development. Nonetheless, the longterm repayment rate is with about 94% still considerably high.
Besides these achievements, the project had facilitated the establishment of 964
savings and credit associations, which were formed by 5,515 small farmer groups. 30
of these associations had adopted the legal status of a cooperative.
Family Welfare Income Generation Project (UPPKS)
The UPPKS (Usaha Peningkatan Pendapatan Keluarga Sejahtera) program was
launched by the government in 1996 and is implemented by the National Family
Planning Coordination Board (BKKBN), a government agency well known for its
effective family planning program. The family planning program has built up an
infrastructure in practically every village in Indonesia, giving also the UPPKS program
unrivalled outreach through the BKKBN extension workers and the women groups that
enroll a high proportion of Indonesian women in child-bearing age.
The UPPKS program targets women who have economic activities and belong to
families that are not able to meet their basic needs, and organizes them into small
groups of approximately 20 members. These groups have to be formally recognized by
the village head and are regarded as mechanisms for providing guidance,
entrepreneurship training and credit.
The core elements of the program are the Takesra (family welfare savings) savings
scheme and the Kukesra (family welfare loan) credit scheme. The UPPKS groups are
first enrolled in the Takesra scheme, with each woman receiving an initial grant of Rp.
2,000 to open a savings account. The women are encouraged to save small monthly
amounts for 6 months and will receive a bonus of Rp. 2,000 after this time. If they can
accumulate Rp. 25,000, they become eligible for loans under the Kukesra scheme.
Kukesra is a soft loan provided to eligible group members at the highly concessional
annual effective interest rate of 6%. The program emphasizes that cheap and easy
credit is required for start-ups of family businesses. Kukesra loans are provided in five
cycles. The first loan has a maturity of 5 months and amounts to Rp. 20000. The
following loans, granted after each successful repayment cycle, amount to Rp. 40,000
to Rp. 320,000 and are provided for 7 to 13 months. 10% of the loan amount disbursed
has to be deposited in the Takesra account.
The Kukesra program is a revolving fund that is financed by a foundation created by
the former President Soeharto. The funds dropped by this foundation amount to Rp.
754 billion. The revolving fund is managed by Bank Negara Indonesia (BNI), a state
bank, and channeled to UPPKS groups via the network of post offices. Post office staff
can approve loans up to Rp. 5 million, whereas larger loans have to be approved by
BNI.
An additional source of funds for UPPKS groups are funds collected from state
enterprises. Some Rp. 200 million of these funds were available to finance a second
credit scheme, Kredit Pengembangan Kemitraan Usaha (KPKU) later renamed into
KPPTG-Taskin. This scheme was designed to support business partnerships between
UPPKS groups, on the one hand, and small enterprises, medium enterprises and
cooperatives, on the other hand. The scheme provides access to larger loans with a
ceiling of Rp. 50 million per group or Rp. 2 million per member. Recent data about the
progress of this credit scheme were not available.
Table 1.6
Family Welfare Income Generation Project (UPPKS) as of July 2000
Sumatra
Java &
Bali
Kalimantan
Sulawesi
West Nusa
Tenggara
Total
-
-
-
-
-
600,843
Number of members (,000)
2,220
8,280
524
872
1,016
12,913
Total amount (Rp. million)
31,141
152,786
6,538
15,544
11,219
217,227
188.9
1,020.4
43.0
104.9
41.0
1,398.1
75.3
349.9
16.0
41.7
18.0
501.0
101,190
361,362
20,359
31,158
41,724
555,793
1,632
7,282
407
727
745
10,795
Arrears (Rp. billion)
37.5
98.7
7.0
17.1
8.7
168.9
Arrears ratio (%) *
49.7
28.2
43.5
41.0
48.7
33.7
Indicator
TAKESRA deposits
Number of groups
KUKESRA loans
Loans disbursed (Rp. billion)
Loans outstanding (Rp. billion)
Number of groups
Source : National Family Planning Coordination Board (BKKBN), Takesra/Kukesra Report July 2000.
* Arrears ratio : loan amount in arrears / loan amount outstanding.
According to BKKBN statistics of July 2000, the Takesra scheme involved 600,843
UPPKS groups with 12.9 million members in all of the Indonesian provinces. Assuming
that one woman participates per household, this number is equivalent to between 50%
and 60% of the Indonesian households classified by BKKBN into the two lowest family
welfare categories.
555,793 of these groups and 10.8 million of these members participated in the Kukesra
scheme. Since its inception the program had disbursed a total loan amount of Rp. 1.4
trillion, 73% of which were allocated to Java and Bali. As of July 2000, loans
outstanding amounted to Rp. 501 billion, of which an outstanding 34% was in arrears.
The long-term repayment rate (loan amount due to loan amount repaid since inception)
was 13%. Assuming that each group member had loans outstanding, the average
individual loan amount outstanding was only Rp. 46,500.
The UPPKS program as well as the IDT program (see below) represented a break from
careful expansion of state-led microfinance in Indonesia. The huge losses and the
highly subsidized interest rate indicate that financing under the program is not
sustainable. The low loan amounts are hardly able to support the start-up or expansion
of microbusinesses. Doubts must also be raised with regard to the capacity of family
planning and family health field staff to implement a microfinance program.
With the program being led by concern for short-term political gains rather than for
sustainable microfinance, the channeling of easy and cheap money reinforced the
perception that Kukesra funds are funds that are distributed by the government for
social purposes and do not have to be repaid.11
11
See: Khofifah Indar Parawansa, Keuangan Mikro dan Pembangunan, Lokakarya Nasional
Lembaga Keuangan Mikro, 4-5 July 2000, Bogor.
Other and New Poverty Alleviation Initiatives
In the first half of the 1990s, poverty alleviation became a top priority of the Indonesian
political agenda. The official expenditure-based poverty line indicated a considerable
decrease in absolute poverty, but poverty and vulnerability to poverty continued to be
main development problem. Additionally, income disparities between regions and
population groups tended to decrease. The Indonesian Government reacted with
initiating the first mass poverty alleviation program, which became known as Inpres
Desa Tertinggal (IDT) or Presidential Instruction on Backward Villages, in 1993. As an
ambitious crash program that targeted 44% of the Indonesian villages in only three
years and focused on providing revolving funds at highly subsidized interest rates, the
IDT program represented a break with the up to then prevailing careful expansion of
microfinance in Indonesia.
The IDT program was coordinated by Bappenas, the national planning agency, and
was implemented during the three financial years from 1994/1995 to 1996/97. The
program provided three sorts of inputs to 28,376 backward villages: a) capital grants of
Rp. 20 million per village and year to be used as revolving funds for income-generating
activities of the poor; b) technical support services through facilitators; and c) grant of
Rp. 100 million to Rp. 130 million per village for the improvement of the rural physical
infrastructure. The revolving funds for income generation were allocated to community
groups, which were usually formed for this purpose by the program facilitators. As of
March 1997, the program involved 123,000 community groups with 3.5 million
members. During the three financial years the program injected Rp. 1.3 trillion into
these community groups.
The program, however, lacked a proper monitoring and supervision system.
Information on group development, the flow and use of funds, and the program’s
impact is scarce. Only about half of the funds channeled were repaid. Field evidence
shows that group formation lacked sustainability and a considerable part of the funds
were misallocated or misappropriated. Sajogyo argued that the government focused on
distributing money in short time rather than the self-reliance of community groups and
the sustainability of microfinance services.12
The unsatisfactory performance of the IDT program contributed to the rethinking of
future program designs. Presently, there are two large poverty alleviation programs,
which are built on the lessons learned from the IDT program, the Sub-district
Development Program and the Urban Poverty Alleviation Project. Both programs are
financed by World Bank loans and implemented by Bappenas, the National Planning
Agency.
The Sub-district Development Program (Program Pengembangan Kecamatan –
PKK) aims at alleviating poverty in backward villages, strengthening sub-district and
village government in implementing development programs, strengthening community
participation and organization, and building public infrastructure through labor-intensive
12
See: Sajogyo, Konsultasi Bersama menuju Tumbuhnya Lembaga Ekonomi Desa yang
Berkelanjutan: Tujuan dan Metoda. Seminar dan Lokakarya Memberdayakan Ekonomi
Rakyat melalui Keuangan Mikro, Kerjasama Bank Indonesia Bandung, Pusat P3R Yayasan
Agro Ekonomika, Bandung, Pemerintah Propinsi Jawa Barat, 7-8 September 2000.
methods.13 Besides its technical assistance components, the program focuses on
providing block grants to sub-districts. Program implementation was planned for the
three financial years from 1998/1999 to 2001/2002. It started assisting 501 sub-districts
in 1998/1999 and expanded to 727 sub-districts in 1999/2000. The budget allocation
for these years and sub-districts amounts to Rp. 969 billion. The World Bank
contributes some USD 200 million to the program budget.
Annual block grants of Rp. 500 million to Rp. 750 million are provided over this threeyears period to each selected sub-district. A special sub-district forum (UDKP) is
responsible for distributing these funds to villages based on their investment proposals.
The funds are managed by a financial management unit (Unit Pengelolahan Keuangan
- UPK), which is established and supervised by the UDKP forum. The UPK is staffed
with a chairperson, an accountant and a secretary, who are appointed by the UDKP
forum and confirmed by the sub-district head. The UPK has a central function as it is
expected to develop into a viable unit capable of managing and coordinating various
sources of funds of rural development programs.
The UPK disburses funds to and collects funds from community groups and
responsible village government institutions. Funds are provided to community groups,
which must have existed in the prior year, for financing seed capital for economic
activities. These funds have to be repaid at commercial interest rates and are used to
build up a revolving fund at the sub-district level. Funds channeled to the village
government may also be used to finance public infrastructure on a grant basis.
Information and detailed data about program performance was not available.
The Urban Poverty Alleviation Project (Proyek Penanggulangan Kemiskinan di
Perkotaan - P2KP) aims at improving basic infrastructure in poor urban neighborhoods
and to promote sustainable income generation for its poor urban residents. The project
also seeks to strengthen the capability of local agencies to assist the poor and to
encourage broader participation in decision-making about community matters. The
P2KP project targets families with a household income of less than Rp. 250,000 per
month in the poorer kelurahan (urban administrative areas) of Java. The World Bank
has made available a USD 100 million for program implementation in the financial
years from 1999 to 2002.14
The core instrument of the program is a one-time grant provided to each selected
kelurahan for financing of income-generating activities and basic infrastructure works.
Depending on population size, the grants range from Rp. 150 million to Rp. 1,250
million per kelurahan. Microcredit for income-generating activities is provided to poor
families, which are organized in groups of at least three members for this purpose.
Loans are provided with a commercial interest rate and have to be repaid within one
year.
13
14
See: Bappenas, Tim Koordinasi Pengelolaan Bantuan PKK, Pedoman Umum Bantuan
Program Pengembangan Kecamatan (PPK), Tahun Anggaran 1998/1999; Bappenas, Tim
Koordinasi Pengelolaan Bantuan PKK: Petunjuk Pelaksanaan Bantuan Program
Pengembangan Kecamatan (PPK), Tahun Anggaran 1998/1999.
See: World Bank, Urban Poverty Project Appraisal Document, World Bank Report No:
18359-IND, April 19, 1999.
The corner stone of the project is facilitating the formation of legitimate kelurahan-level
institutions, which are called Badan Keswadayaan Masyarakat (BKM) or community
self-reliance boards. The BKM consist of community representatives and are
responsible for managing funds and approving kelurahan proposals. Similar to the Subdistrict Development Program, the BKM is supposed to establish a financial
management unit (Unit Pengelolahan Keuangan - UPK) that manage and build up a
revolving fund for microcredit to community groups.
In the first six months of operation, the project formed approximately 1,300 BKM, which
have provided loans to roughly 28,000 community groups. Detailed information on
project performance was not available.
Apart from these national poverty alleviation initiatives there are a variety of regional
development projects with similar objectives and implementation mechanisms.
Succeeding the IDT program and similar to the PKK and P2PK programs, these
projects usually use a group approach and combine measures in the fields of
infrastructure, agriculture, basic needs, and microfinance. Two examples are briefly
described in the following.15
The Nusa Tenggara Agricultural Area Development Project (NTAADP)16 is financed
by a World Bank loan and implemented by the provincial planning agencies in Nusa
Tenggara. The project covers 27 villages and aims at increasing income of village
communities through improved farm systems, livestock production, microenterprise
development and basic infrastructure development. NTAADP facilitates the formation
of community groups, provides grants for infrastructure development and has
established a revolving fund to finance agricultural and short-term productive activities
based on proposals prepared by the village community groups.
As in the other projects, the NTAADP strategy includes the establishment of financial
management units (Unit Pengelola Keuangan Desa - UPKD). This village-level units
have the task of managing program funds, provide guidance to community groups,
assist them in preparing loan proposals, disburse and collect credit, and monitor
community group activities. The UPKD is staffed with a chairperson, accountant,
secretary and two additional persons who are responsible for administering the
revolving fund and infrastructure projects. The project intends to develop these units
into village financial institutions with the legal status of a cooperative.
The Project Nusa Tenggara (PNT) or “Self-help Promotion for Low Income
Communities in Critical Rural Areas” is a poverty alleviation project carried out by the
Ministry of Home Affairs in cooperation with GTZ. Besides carrying out labor-intensive
infrastructure projects, providing agricultural inputs and training, and strengthening
institutions involved in village planning and development, the project aims at
strengthening self-help groups through savings and credit activities and active
15
16
See also: Detlev Holloh, Appraisal of the Proposal “Development and Upgrading of
Microfinance Institutions in West Nusa Tenggara”, Project Promotion of Small Financial
Institutions, Denpasar, September 2000.
See: Badan Perencanaan Pembangunan Propinsi Daerah Tingkat I NTB (BAPPEDA),
Technical Assistance for Implementation of Nusa Tenggara Agricultural Area Development
Project, NTAADP, IBRD Loan 3984-IND. Panduan Praktis & Rumusan. PT. Insan Mandiri
Konsultan in ass with PT. Global Adhikreasindi, PT. Hiway Indotek Konsultan.
participation in village planning processes. The project assumed the task to reactivate
village groups established under the IDT program.
As of April 2000, PNT operated in 19 villages and reached 9,575 households organized
in 364 village community groups. The groups had received loans from the IDT program
amounting to Rp. 1.5 billion, of which 1.2 billion still have to be repaid. Currently the
project concentrates on recovering loans, inducing new group dynamics, improving
group administration and motivating savings mobilization. The project aims at
developing the groups into savings and credit associations and facilitating access to
financial services from banks.
1.2.3 Crisis-related Programs with Microfinance Components
The impact of the crisis and the draught in 1997/1998, especially the outstanding
increase in poverty and acute food shortages, necessitated a quick response by the
Indonesian Government and to concentrate its efforts on those most affected by the
crisis. In cooperation with international organizations, the government embarked on
several programs, which were grouped under the name Social Safety Net (SSN) and
should follow five basic principles: quick disbursement; direct and well targeting,
transparency, accountability, community and civil society participation, and
sustainability.
The typical delivery mechanism of SSN programs is that the central government
allocates funds by each district/municipality. The local government determines village
level allocations based on local conditions and the communities themselves determine
the beneficiaries through village meetings. The funds are channeled from central
government directly to the beneficiaries via banks and post offices. This mechanism
was established to reduce the possibility of leakage and to ensure that the funds are
quickly channeled to the needy families.
The SSN programs have been implemented since the financial year 1998/1999 and
aim at:
•
•
•
•
Ensuring the availability of food at affordable prices for the poor;
Preserving access to critical social services in the education and health
sectors;
Creating productive employment to increase purchasing power of the poor;
Generating community-level economic activities.
During the financial years 1998/1999 and 1999/2000 the SSN programs were
categorized under five intervention sectors: food security, social protection in the
education sector, social protection in the health sector, employment and income
generation, and community empowerment funds. The total budget allocated for the
SSN programs during these financial years was about Rp. 15 trillion. In addition, the
World Bank has made available a Social Safety Net Adjustment Loan of USD 600
million to support the safeguarding of key safety net programs and the improvement of
their designs.
Of particular relevance for the microfinance sector are the community empowerment
funds, which are channeled by a project called Pemberdayaan Daerah dalam
Mengatasi Dampak Krisis Ekonomi (PDM-DKE) or Local Empowerment to
Overcome the Impact of the Economic Crisis. The national planning agency and the
Ministry of Home Affairs are the implementing agencies. Geographically, the program
will be implemented in all provinces and in villages of sub-districts where the Subdistrict Development Program and the Urban Poverty Alleviation Project are not
operating.
The PDM-DKE project aims to increasing the purchasing power of the poor by
generating employment and small business opportunities, and improving economic and
social infrastructure at the community level. Community groups are supposed to
participate in project planning with the assistance of sub-district and village facilitators.
Project proposals are eligible to funding in the fields of a) construction, operation and
maintenance of local infrastructure, and b) small scale business. Funds for approved
proposals are channeled directly to the account of the “village implementing team” that
is responsible for disbursing loans to community groups.
The PDM-DKE project was first launched in 1998/1999 and had the character of an
emergency rather than a development project. SMERU17 reported that the annual
budget of 1998/1999 foresaw expenditures of Rp. 1.7 trillion to cover almost all urban
and rural villages and that both the scale of funding and the planned speed of
disbursements was highly contested. SMERU’s rapid assessment of project
implementation before funds were available for project financing found that a) the
understanding of project objectives at the village level was inadequate and community
groups were not formed as intended; b) the village implementation teams usually
consisted of village officials, while poor community members were not involved in and
informed about the project; c) the projects selected for financing usually did not directly
target the poor. The appraisal concluded that “the program as currently designed and
implemented would not reach the poorest and unemployed”.
The author has no information whether the project was implemented as planned in
1998/1999. It seems that both budget limitations and findings such as by SMERU have
contributed to postponing project implementation. The annual SSN budget allocates
Rp. 792 billion to the PDM-DKE project, but the government further postponed project
implementations. Based on improvements in project design, the government included
the project in its budget plan for the financial year 2000 (April to December) and
reduced the project budget to Rp. 435 billion (PDM-DKE). While preparatory steps
were taken in 2000, the program was not expected to be fully operational before
November 2000.
The Community Recovery Program (CRP) is a civil society-led response to the crisis
and channels funds to community-based organizations on the basis of project
proposals for providing assistance to vulnerable populations groups, especially those
most severely affected by the social-economic crisis. The CRP was formally
announced at the Consultative Group for Indonesia (CGI) meeting in July 1998. It has
17
SMERU Newsletter March-April 1999, Results of A SMERU Team Rapid Assessment of the
First Phase of the PDM-DKE Program.
received the backing of the government and is supported by various multilateral and
bilateral donor agencies. The CRP is led by a National Council (NC), which consists of
three government members and nine individual members elected by a Civil Society
Consortium. The consortium is made up of Indonesia's 27 most prominent NGOs and
functions as an advisory body to the NC. A Trust Fund for the Community Recovery
Program is administered by UNDP. Audits of the Trust Fund and CRP expenditures are
carried out in accordance with UN audit procedures, with regular reporting to donors,
the NC and the public. The objectives of the CRP are to:
•
•
•
•
•
•
Fill gaps in the Social Safety Net (SSN) program;
Reach vulnerable groups not covered by other SSN programs;
Support innovative approaches to the SSN;
Encourage and facilitate civil society potentials for SSN initiatives;
Respond immediately to poor communities most affected by the crisis by
reversing declining standards of living and conditions, helping communities
restore their economic activities, and ensuring basic social services.
Create synergy between civil society, government and the private sector as
well as the international community.
Beneficiary and community needs are identified and project proposals are prepared by
community-based organizations and local NGOs. The CRP appraises and selects
project proposals. Funds are transferred directly to the bank account of local
organizations. By the end of 1999 CRP had received a total of 2798 proposals, of
which 466 had been approved with a total value of Rp. 45 billion.18
The CRP reports do not report on microfinance activities and the performance of
revolving funds. They, however, mention that a great part of NGO proposals referred to
the formation of savings and credit groups. Anticipating the ending of project support,
CRP also encourages the establishment of revolving credit funds.
Distribution of Fuel Subsidies
Despite the signs of recovery the government continued with its emergency and
recovery programs as is. Most strikingly, the government recently decided to convert
subsidies (Rp. 800 billion) saved through the fuel price increase in October 2000 to
funds that are to be channeled to poor households and villages through rapid
channeling mechanisms known from social safety net and subsidized credit programs.
The funds were to be channeled within only three months until the end of 2000. Rp.
450 billion was to be used for direct cash transfers to poor households and laborintensive local infrastructure development. Coordinated by the Ministry of
Cooperatives, commercial banks were supposed to channel Rp. 350 billion as
revolving funds to eligible cooperatives (Rp. 100 million each) and other memberbased microfinancial institutions (Rp. 57 million each). The individual member is
entitled to receive a Rp. 1 million loan at an annual effective interest of 16%. The
interest rate will be reduced to 6%, if repayment is good. Well performing cooperatives
and microfinancial institutions can retain the entire funds as equity capital, thus
receiving a grant rather than a revolving fund.
18
See: Community Recovery Program (CRP), Progress Report 2000, Jakarta 2000.
1.2.4 Non-Government Organizations and Microfinance
Compared to the outstanding role of bank and non-bank microfinance institutions as
well as of governmental microfinance programs, non-government organizations
(NGOs) do not play a strong role in the microfinance sector. Contrary to other
countries, Indonesia has no large-scale non-governmental microfinance institutions.
Depending on political conditions and regulatory frameworks, NGOs have been
focusing on small-scale development programs ‘form below’ and promoting self-help
and self-organization at the village level. This promotion of grassroots development,
particularly the promotion of self-help groups with the aim of increasing the self-reliance
and collective bargaining power of the rural poor, has played an important role in
strengthening civil society vis-à-vis the state at the local level. In promoting self-help
and self-reliance, many NGOs have focused on the development of savings and credit
groups, probably their major contribution to microfinance sector development.19
The concept of the linkage project (PHBK) to provide low-income groups organized in
self-help groups with access to bank services gave NGOs or so-called Self-help
Promotion Institutions for the first time a prominent place in the implementation of a
national microfinance sector program. Since the inception of the linkage project in 1989
more than 200 NGOs participated as intermediaries between banks and self-help
groups and as implementers of the project’s training component for self-help groups.
Leading NGOs, particularly Yayasan Bina Swadaya, did not only participate as
implementing agencies but played also a crucial role in designing the linkage concept
and promoting the concept in and outside Indonesia. Bina Swadaya took also the lead
in building an association of NGOs (Altrabaku) participating in the linkage project.
Altrabaku (Asosiasi LPSM Mitra Lembaga Keuangan dan Pengembangan Usaha
Mikro), or the Association of Self-help Promotion Institutions - Partner for Microfinance
Institutions and Microenterprise Development, was founded in 1995 by NGOs that were
participating in the linkage project. The association’s objectives are to promote the
linkage concept, expand linkages between NGOs and banks, and strengthen the
institutional capacities of members in empowering the people’s economy through
microfinance and microenterprise development. Altrabaku members are NGO partners
of the linkage project as well as other NGOs with microfinance services. Presently, the
association has 14 regional committees with 119 members. Unfortunately the
association was not able to provide data about the microfinance activities of its
members. The two largest Altrabaku members and NGOs with microfinance activities
are the Credit Union Coordination Board of Indonesia (CUCO or BK3I) and the
Yayasan Bina Swadaya (YBS).
The Credit Union Coordination Board is organized into 28 regional chapters, which
have 1,115 Credit Unions with 252,226 members and assets of Rp. 186 billion. Chapter
6 describes the Credit Union movement in more detail, as its organization does not
differ from that of savings and credit cooperatives and an increasing number of Credit
Unions and their secondary structures have been converted to cooperatives.
19
See: P.J. Eldridge, Non-Government Organizations and Democratic Participation in
Indonesia. Kuala Lumpur: Oxford University Press, 1995; Detlev Holloh, Microfinance in
Indonesia between State, Market and Self-Organization. Hamburg: LIT-Verlag, 1998.
Yayasan Bina Swadaya is one of the oldest and biggest NGOs in Indonesia, and
covers a wide range of development activities such as in the fields of education and
training, production and marketing, research and publication, self-help group
promotion, small enterprise development and alternative tourism. Financial sector
activities include the development of savings and credit groups, a group interlending
program and the establishment of people’s credit banks. As of March 2000, Bina
Swadaya had 9 self-reliant regional chapters in Java and Sumatra, and 13 so-called
newborn offices, which were established in Java, Central Kalimantan, South Sulawesi,
East Nusa Tenggara and Irian Jaya in the second half of 1999. At the end of 1999, the
self-reliant offices worked with 1,188 savings and credit groups, which had savings and
loan outstanding totaling to Rp. 1.4 billion. The ‘new-born’ offices served 810 savings
and credit groups with savings amounting to Rp. 1.2 billion.
Most other Altrabaku members are local NGOs for which data were not available. One
example is the Lembaga Penelitian dan Pengembangan Sumber Daya (LP2SD) in
East Lombok, West Nusa Tenggara. LP2SD cooperated with Bank Indonesia in the
framework of the linkage and microcredit projects, and aims at developing financial
self-help groups into formal savings and credit cooperatives. The NGO has set up an
own credit cooperative providing an umbrella for its savings and credit groups, and
sees the development of independent secondary structures (associations or
cooperatives) of these groups as a crucial element in sustaining financial services to
low-income groups.
The Altrabaku association organizes only a minority of the NGOs with microfinance
activities. In East Nusa Tenggara, for instance, only 8 of the 21 NGOs participating in
the linkage project are Altrabaku members. One of the largest non-governmental
microfinance initiatives comes from Yayasan Inkubasi Bisnis Usaha Kecil (YINBUK)
or the Foundation for the Incubation of Small Businesses, an Islamic NGO that
established 2,914 so-called Baitul Maal wat Tamwil (BMT). BMT are non-bank savings
and credit institution modeled on cooperative principles. Most of them resemble
savings and credit groups, while a minority operates like Rural Credit Banks. YINBUK
and BMT are described in more detail in chapter 7.
A different microfinance approch was adopted by Yayasan Dharma Bhakti
Parasahabat (YDBP) in West Java. In directly targeting the poor YDBP replicates the
Grameen Bank approach, but applies a cooperative approach with customers being
registered as members. As of June, the NGO had 5,065 savings customers with
deposits amounting to Rp. 114 million, and 4,888 borrowers with loans outstanding
amounting to Rp. 440 million. YDBP intends to increase the number of its members to
30,000 until 2004.
Some few NGOs have gone beyond these microfinance approaches and have
established Rural Credit Banks. Bina Swadaya is the most prominent example.
Yayasan Purba Danarta in Semarang, Central Java, even succeeded to establish a
locally operating commercial bank, Bank Purba Danarta.
The vast majority of small NGOs are not sustainable microfinance providers and lives
on its involvement in governmental and donor-financed programs. The mushrooming of
small local NGOs during the last years was also due to the huge influx of donor money
and the increasing involvement of NGOs in governmental credit, poverty alleviation and
social safety net programs. The Community Recovery Program, for instance, allocated
more than Rp. 4 billion to 35 NGOs in East Nusa Tenggara.
While the higher involvement of civil society and NGOs in the development process
has been an important progress, this has not always contributed to improving the
image of NGOs in Indonesia. Wrong concepts such as forming instant “self-help”
groups for channeling money remain wrong when their implementation is transferred
from government to non-government organization. NGOs with microfinance activities
are not adequately regulated and audited. Flows of funds go often unchecked. The
involvement of unreliable NGOs in the farmer credit scheme (KUT) has considerably
deteriorated the NGO image. Many NGOs established especially for this purpose and
"red-plate" NGOs were engaged in the disbursement of Rp. 8 trillion nation-wide. In the
East Lombok district of the West Nusa Tenggara province, for instance, the default rate
reached 75% of Rp. 3.2 billion channeled by NGOs. The ProFI microfinance appraisal
reported a taxi driver, who had carried foreign donors to local NGO offices, saying: "If I
could speak better English I would found an NGO. All these NGO-people have nice
houses and a car." He was convinced that a considerable part of the donations does
not reach the poor.20
A new initiative has recently announced to strengthen the microfinance movement in
Indonesia The Gerakan Bersama Pengembangan Keuangan Mikro Indonesia
(Gema PKM) or Indonesian Movement for Microfinance Development was established
in March 2000 in a ceremony attended by the President of Indonesia. Gema PKM
includes representatives of the government, NGOs, financial institutions, the business
sector, and universities and research institutes. The State Minister for the
Empowerment of Women and Head of the National Family Planning Board heads the
organization, while leading NGOs such as Bina Swadaya appear to be the driving
force.
The declaration of Gema PKM demands substantial changes in economic development
strategies and the recognition of microfinance as a mainstream development sector.
Gema PKM aims at alleviating poverty and socio-economic inequality by empowering
the people’s economy. Special objectives are to:
•
•
•
•
•
Increase the number and quality of microfinance institutions;
Increase the number and quality of support institutions for self-help group
development;
Develop linkages between microfinance institutions and support institutions;
Increase the participation of individuals, groups and financing institutions in
developing microfinance;
Increase access of the poor to financial services and technical support.
Gema PKM formulated the ambitious objective to reach 10 million poor families in
500,000 self-help groups during the five years from 2000 to 2005.
20
See: Wolfram Hiemann, Appraisal of the Proposal “Development and Upgrading of
Microfinance Institutions in East Nusa Tenggara”, Project Promotion of Small Financial
Institutions, Denpasar, September 2000.
1.3 Structure of the Microfinance Sector: Institutional vs. Program Microfinance
The microfinance sector in Indonesia is made up of a high variety of institutions,
programs, services, clients and target groups, which are also subject to various legal,
regulatory and supervisory frameworks. This allows for different classifications of
microfinance sub-sectors. The purpose of this study and the present situation of
microfinance in Indonesia suggest starting with distinguishing institutional microfinance
from program microfinance. The third sector of individual microcredit provided through
moneylenders, shopkeepers, traders, neighbors or family members cannot be covered
by this study, though evidence shows that these credit arrangements are still of
considerable importance for low-income groups.
Table 1.7
Participants of the Microfinance Sector in Indonesia
Institutional Microfinance
Commercial Banks (mainly BRI units)
R&S: Bank Indonesia
Level: District and sub-district
People’s Credit Banks (BPR)
R&S: Bank Indonesia
Level: Sub-district
Rural Credit Fund Institutions (LDKP)
R&S: Provincial governments
Level: Sub-district and village
Village Credit Institutions (BKD)
R&S: BRI on behalf of Bank Indonesia *
Level: Village
Village Savings & Credit Units (UED-SP)
R&S: Ministry of Home Affairs
Level: Village
State-owned Pawnshops
R&S: Ministry of Finance
Program Microfinance
Individual
Microcredit
Microfinance System Building
- Linkage project (PHBK)
- Microcredit project (PKM)
Commercial relations between banks,
LDKP, NGOs, self-help groups, and
individual customers. Strengthening
small financial institutions.
Poverty Alleviation Programs
- Rural Income Generation Project
(RIGP/P4K) : Commercial relations
between BRI and small farmer groups
- Family Welfare Income Generation
Project (UPPKS) : Subsidized credit to
family welfare groups
- Sub-district Development Project (PKK):
grant-based revolving fund for subdistrict financial management units
- Urban Poverty Alleviation Project
(P2KP): grant-based revolving fund for
village-level financial management units
- similar regional projects
Microfinance Cooperatives
- Savings & credit cooperatives (KSP) **
- Savings & credit units (USP) of coop.
R&S: Ministry of Cooperatives
- Savings & credit service points (TPSP)
R&S: MoC and BRI (TPSP)
Level: Village
Crisis-related channeling of funds
- Social Safety Net, i.e., PDM-DKE:
grants to villages and community groups
- Community Recovery Program : grants
channeled through NGOs
- Fuel subsidies converted to funds
channeled through cooperatives and
microfinancial institutions
Savings & Credit Associations ***
R&S: Non-regulated, apex organizations
Level: Village
NGO microcredit programs
Moneylenders
Traders
Shopkeepers
Neighbors
Family
members
R&S = Regulation and Supervision.
Level = Location and predominant area of operation.
* Note : BKD are recognized but not regulated as banks.
** Includes institutions such as Credit Unions, BMT that obtained the legal status of cooperative.
*** Includes Credit Unions, BMT and other cooperative-like associations, which do not have a clear legal status and
operate as financial intermediaries; does not include credit channeling groups.
1.3.1 Institutional Microfinance
Institutional microfinance here is defined as the provision of microfinance services by
bank and non-bank institutions that fulfill financial intermediation functions with their
own products and funds. This excludes institutions that were established for the sole
purpose to channel funds to target groups as well as commercial banks and other
financial institutions the microfinance activities of which are limited to the
implementation of governmental credit programs.
Institutional microfinance in Indonesia comprises commercial banks and people’s credit
banks that are subject to the banking act and regulated by Bank Indonesia, local nonbank financial institutions that are regulated by the Ministry of Home Affairs and
provincial governments, cooperatives that are subject to the cooperative law,
pawnshops that are regulated by the Ministry of Finance, and non-regulated local
organizations such as savings and credit associations.
Many commercial banks are involved in microfinance sector activities by acting as
channeling institutions for governmental credit programs and by cooperating with small
financial institutions and cooperatives. Only a few commercial banks, however, have
their own microfinance windows or were established especially for providing
microfinance services. Two recognized local examples are Bank Purba Danarta, which
were established by a non-governmental organization in Central Java, and Bank
Dagang Bali, a private bank in Bali that started as a small secondary bank and has not
been loosing touch with the microfinance sector.
The only microfinance window of the commercial banking sector with national
significance is the sub-district level unit system of Bank Rakyat Indonesia (BRI). The
BRI unit system is the backbone of the rural financial system, which has gained
international recognition for its outreach, profitability and soundness. The commercial
banking sector and the BRI unit system will be described in chapter 2.
People’s Credit Banks or Bank Perkreditan Rakyat (BPR) are secondary banks,
which are also subject to the banking law and are regulated and supervised by the
central bank. The vast majority of these institutions were established after the banking
reform in 1988 that introduced the new classification of primary and secondary banks.
BPR usually operate at the sub-district level. Note that this category does not include
non-bank financial institutions that are often subsumed under the generic term ‘BPR’.
The BPR industry will be described in chapter 3.
Rural Credit Fund Institutions or Lembaga Dana Kredit Pedesaan (LDKP) are
different types of non-bank microfinance institutions operating either at the sub-district
or village level. They were established on initiative of provincial governments since the
1970s and are licensed, regulated and supervised by the provincial governments.
Technical assistance and supervision is usually delegated to the Regional
Development Banks (BPD), which are owned by the provincial governments. The
different types of LDKP are described in chapter 4.
Village Credit Institutions or Badan Kredit Desa (BKD) operate in Java and are
village-level financial institutions with historical roots dating back to colonial times. The
evolution of banking laws and regulations has resulted in a strange and contradictory
situation that BKD were acknowledged as BPR in word, but are neither regulated nor
supervised as secondary banks. In reality, BKD are tiny institutions and lack all
features characterizing BPR. In the context of this study, therefore, they are not
classified as BPR as it is done by the generic term. BKD are supervised by BRI on
behalf of Bank Indonesia. The BKD industry will be described in chapter 5.
Village Economic Unit – Savings and Credit or Unit Ekonomi Desa – Simpan Pinjam
(UED-SP) are tiny village institutions that have been promoted by the Ministry of Home
Affairs since 1995 for providing credit to low-income groups. The ministry is also
responsible for their regulation and supervision. Actually, these institutions have to be
regarded as part of the program microfinance sector as they highly depend on
government subsidies and have been used for channeling funds rather than being
developed into viable financial institutions. In this report they are described in chapter 5
because their organization was modeled on the BKD model and the UED-SP program
can be regarded as an attempt to expand the BKD model throughout Indonesia.
Table 1.8
Institutional Microfinance in Indonesia
Deposits
Loans Outstanding
Members
(,000)
Institution
Units
Accounts
,000
Amount
Rp. billion
Accounts
,000
Amount
Rp. billion
BRI units ( June 2000)
3,694
24,883
18,055
2,627
6,713
-
BPR (March 2000)
2,427
4,837
2,252
2,197
2,632
-
LDKP (June 2000)
1,603
871
342
5
337
-
BKD (June 2000)
4,566
600
24
726
148
-
?
7
345
6
705
?
500
1
?
?
645
-
-
2
?
?
?
?
Credit Unions (Dec. 1999)
1,105
252
117
?
134
TPSP (April 2000)
1,582
254
16
240
37
254 8
BMT (Nov. 2000)
879
3
175
46
73
51
175
10,000 ? 4
?
?
?
?
UED-SP (March 1999)
Pawnshops (Dec. 1999)
Microfinance cooperatives
Savings & Credit Associations
52,222 ?
15,000 ?
4,000
116
252
8
8
?
1 This number reported by the Ministry of Home Affairs is not reliable (see chapter 5).
2 Reliable and new statistics differentiating between cooperatives with and without microfinance activities were not
available (see chapter 6).
3 PINBUK reports a number of 2,914 established BMT, though financial statistics include only 879 (see chapter 7).
4 The linkage project involved some 6,500 savings and credit groups. The estimate takes into account Credit Unions
and other savings and credit associations without a legal status. This estimate includes only institutions that build
up own loan funds and intermediate between savers and borrowers independently of access to outside funds. Does
not include pure credit channeling groups and rotating savings and credit associations (arisan).
5 Estimate based on data for 7 of 8 LDKP types (see chapter 4)
6 Estimate based on a number of 12.4 million customers served in 1999. The standard maturity is 4 months.
7 Reported as ‘revolving capital’ (see chapter 5).
8 Assumes that the number of members is equivalent to the number of deposit account, as members of cooperative
institutions have at least compulsory savings accounts.
Microfinance cooperatives here are defined as cooperatives that provide financial
services and are licensed, regulated and supervised by the Ministry of Home Affairs.
Cooperatives specialized in financial services are known as Koperasi Simpan Pinjam
(KSP) or savings and credit cooperatives. Multi-purpose cooperatives are allowed to
provide financial services, if they operate an organizationally differentiated savings and
credit unit or Unit Simpan Pinjam (USP). Tempat Pelayanan Simpan Pinjam (TPSP) or
savings and credit service posts operate at the village level under the umbrella KSP or
USP, but they are independent organizations that are additionally supervised by BRI.
The chapter also includes a description of the Credit Union movement. Credit unions or
Koperasi Kredit are organized by the non-governmental Credit Union Coordination
Board, and have been increasingly converted from non-regulated savings and credit
associations to licensed cooperatives since the liberalization of the cooperative law.
Another type of microfinance institution that partly operates as licensed cooperatives
and partly as unregulated savings and credit associations is the Baitul Maal wat Tamwil
(BMT). This institution operates based on Syariah principles and has been promoted by
the non-governmental Foundation for the Incubation of Small Businesses or Yayasan
Inkubasi Bisnis Usaha Kecil (YINBUK). The NGO and the BMT microfinance institution
are described in chapter 7.
Non-government organizations in Indonesia are usually not microfinance institutions in
the sense that they act as bank-like intermediaries. Few have established small banks
and most of them are either involved in or carry out their own microfinance programs.
Their traditional field of intervention has been the promotion of savings and credit
associations. The Credit Union Coordination Board and YINBUK are two examples of
these NGOs. Savings and credit associations that build up their own loan funds have
also been supported by other NGOs such as Bina Swadaya and other self-help
promotion Institutions that participated in the linkage program.
There is also a large number of rotating savings and credit associations (Arisan) in
Indonesia. These institutions are not included in this study as reliable data are not
available and empirical studies are scarce. Part of the savings and credit associations
are covered by the previous section as far as they are involved in microfinance
program or were recorded in statistics made available by NGOs. The same is true for
credit channeling groups, which are not regarded as microfinance institutions in the
context of this study.
Perum Pegadaian – the state-owned pawnshop company
Pawnshops are an important part of institutional microfinance. As they will not be
discussed in detail and a separate chapter, they are briefly described in the following.
The first pawnshops in Indonesia were established in the beginning of the 20th century.
The control of pawnshops was transferred from the colonial to the Indonesian
government. The pawning business has been a monopoly of the government and is
organized in form of a profit-oriented state enterprise (Perum Pegadaian) since 1990.
Since then the company has been professionalized and developed into a serviceoriented institution that provides low-income households who hold their savings in
movable assets with an important source of liquidity. The Ministry of Finance is
responsible for regulating and supervising the company.
Between 1990 and 2000 the number of the company’s offices increased from 505 to
645. Pawnshops can be found in every district capital and increasingly in sub-district
capitals. Pawnshops are usually staffed with two managers and six other employees,
and open six days a week from 7.00 hours to 15.00 hours. They provide simple and
fast (transactions usually take 15 minutes) services, and have the comparative
advantage that customers can turn their valuables easily into cash without having to
sell them, particularly in cases of emergency.
Pawnshops accept collateral in the form of gold, jewelry, household items, electronic
goods, motor vehicles, and even valuable fabrics and hand-woven cloth. They have
five credit schemes depending on loan size, with the loan size ranging from a minimum
of Rp. 5,000 to more than Rp. 20 million. Smaller loans are charged lower interest
rates. The interest per 15 days ranges from 1.25% for loans up to Rp. 150,000 to
1.75% for loans larger than Rp. 500,000. The standard loan term is 120 days.
Repeated loans using the same collateral are very usual.
The monetary crisis, with
Table 1.9
the intermediation function
Perum Pegadaian – State-owned Pawnshop Company
(in Billion Rupiah)
of the banking industry
Indicator
1996
1997
1998
1999
coming to a hold and the
Number of offices *
598
622
635
645
need for liquidity rising
674
798
1,221
1,151
sharply, contributed to the Total assets *
414
526
793
705
growth of the pawning Loans outstanding *
308
333
371
407
business. Between the end Equity *
of 1996 and the end of Net profits *
34
35
53
61
1999, the company’s assets Loan amount disbursed **
1,724
2,088
3,131
3,229
increased from Rp. 647
Number of customers (,000) **
5,030
5,305
9,822 12,428
billion to Rp. 1,151 billion,
Source : Perum Pegadaian, Annual Report 1999.
its loan amount outstanding * End of year ; ** During year.
from Rp. 414 billion to Rp.
705 billion, and its net profit from Rp. 34 billion to Rp. 61 billion. In 1999, the company
served 12.4 million customers with a total loan amount of Rp. 3.2 trillion. The average
loan size, therefore, amounted to about Rp. 260,000.
1.3.2 Program Microfinance
The main microfinance sector and poverty alleviation programs were already described
in a previous part of this chapter. Program microfinance consists of a wide range of
measures that aim at providing financial services to low-income groups but differ
considerably in methods and impact. In the context of this study it is important to
distinguish these programs with regard to their compatibility with institutional
microfinance sector development strategies. As argued earlier, both microfinance
programs directly targeting the poor and institutional development strategies have their
place within an overall microfinance strategy, if direct interventions do not undermine
the growth and viability of microfinance institutions.
A major finding of the 1980s was that easy and cheap credit had undermined the
viability of rural financial institutions. This finding resulted in a re-orientation of rural
finance policies also in Indonesia. Until the early 1990s, microfinance sector strategies
focused on rather careful approaches to increasing the access of low-income groups to
institutional finance and developing viable small financial institutions. The linkage and
microcredit projects of Bank Indonesia as well as the RIGP/P4K project of BRI and the
Ministry of Agriculture are examples of microfinance programs that have been
contributing to achieving these objectives. The linkage project introduced an innovative
microfinance sub-system. Both the linkage and microcredit project have been focusing
on strengthening small financial institutions in extending their outreach to low-income
groups. The RIGP/P4K project provides a successful mechanism of directly targeting
and reaching the poor with commercial microcredit and upgrading clients to more
sustainable microfinance providers, thus supporting rather than inhibiting the growth of
microfinance institutions.
In the light of mass poverty, however, these programs were regarded as moving too
slow. The IDT and UPPKS programs represented breaks with the pattern of a careful
microfinance expansion in Indonesia. Focusing on the number of loan disbursements,
applying subsidized interest rates, neglecting essentials of successful institution
building and sustainable financial services, and lacking prudential monitoring and
supervision, these programs experienced a rapid decline in repayment performance.
The emphasis on easy and cheap credit (or even grants) reached a new climax with
the policy response to the financial, economic and political crisis since 1997.
It is probable that the huge funds channeled in reaction to the crisis have become a
constraint for the growth of small financial institutions. Managers of such institutions,
which were conducted in the framework of the ProFI baseline studies and the ProFI
microfinance appraisal in East Java, Bali, South Sulawesi, West Nusa Tenggara, and
East Nusa Tenggara, confirmed this assumption.
To underpin this argument
it would be necessary to
quantify and compare the
volume
of
microcredit
provided by microfinance
institutions and through
microfinance
programs.
The lack of reliable data,
however, severely restricts
the possibility of such a
comparison. The following
attempt can only convey a
vague idea about the
relative significance of
institutional and program
microfinance.
Table 1.10
Program Microfinance Funds (in Billion Rupiah) *
Channeling
groups
Loans
Outstanding
Total funds
channeled
38,000
49
?
UPPKS
600,000
501
?
IDT **
123,000
?
1,300
PKK
-
?
900
P2KP
?
?
800
PDM-DKE
?
?
435
Fuel subsidy funds
?
?
350
Other crisis-related funds
?
?
?
NGO programs
?
?
?
Program
RIGP/P4K
Estimate of total funds channeled to/circulating at village level :
Rp. 5 trillion (minimum)
*
**
Does not include subsidized liquidity credit programs.
The IDT program is already terminated. Field evidence, however, showed
that up to three quarters of the loan amount disbursed is still outstanding.
1.3.3 Institutional and Program Microfinance Compared
The BRI unit system is the backbone of the rural financial system. This is especially
true with regard to savings mobilization. With some 25 million deposit accounts and a
total deposit amount of Rp. 18 trillion, the system covers between 70% and 80% of the
microsavings market. The units’ limited outreach to the village level and their riskaverse lending approach, however, leaves other institutions with relative larger shares
in the microcredit market. The number of loan accounts contributed by pawnshops and
the BPR industry come close or exceed that of BRI units. Taking also the cooperative
sector into account (for which information was not available), it is likely that BRI units
contribute not more than 25% to the total number of loan accounts in institutional
microfinance.
Based on the few data available it is not nearly possible to come up with a realistic
estimate of the loan amount outstanding in or total microcredit channeled by poverty
alleviation and crisis-related programs. The amount of Rp. 5 trillion would be a
minimum guess. The author found villages in West Nusa Tenggara where funds
channeled by poverty alleviation and social safety net programs approached the Rp. 1
billion mark (including funds other than microcredit). If the revolving funds of these
programs average Rp. 250 million per village, their total amount for some 65,000
villages most probably would exceed the total loan amount outstanding of all
microfinance institutions. However, even the minimum estimate of Rp. 5 trillion
suggests that the channeling of these usually cheap funds must have narrowed the
market for small financial institutions with outreach to low-income households. This
amount is equivalent to half of the loan amount outstanding of BRI units and BPR, the
majority of which does not have access to the village level, and exceeds the loan
amount outstanding of LDKP, BKD, UED-SP, TPSP, BMT, and Credit Unions by 6
times.
Chapter 2:
The Commercial Banking Sector
and BRI’s Unit System
Commercial Banking Sector
2. The Commercial Banking Sector and BRI’s Unit System
This chapter provides an overview of the commercial banking sector and deals with
Bank Rakyat Indonesia (BRI) and its well-known unit banking system at the sub-district
level. The chapter excludes governmental microfinance programs and small business
liquidity credit programs, in which commercial banks have been required to participate.
The microfinance window of Bank Bukopin, the Cooperative Bank of Indonesia, will be
described in the chapter on the cooperative sector (chapter 6). Bank Muamalat and
microfinance services provided on the basis of Islamic banking principles will also be
separately described (chapter 7). There are few other commercial banks with
independent microfinance windows. Two recognized examples are Bank Purba
Danarta, which were established by a non-governmental organization in Central Java,
and Bank Dagang Bali, a private bank in Bali that started as a small secondary bank
and has not been loosing touch with the microfinance sector. Though these banks
provide valuable microfinance services, time constraints did not allow including them in
this study.
2.1 Past and Current Development of the Commercial Banking Sector
2.1.1 The Commercial Banking Sector prior to the Financial Crisis in 1997/1998
State dominance over economy and society was the essential feature of the
Indonesian development model until the 1980s. The role of state banks was expanded
especially during the oil boom period between 1973 and 1982, when state banks were
used to channel huge amounts of government revenues in the form of 32 liquidity credit
programs to domestic industries, state enterprises and the agricultural sector. By 1982,
state banks accounted for 80% of total bank assets and 85% of total bank credit. The
share of private domestic banks in total bank assets had declined from 25% in 1968 to
only 12% in 1982. The rural financial system was closed for all banks but BRI, which
had been instructed to establish an extensive network of village units for channelling
subsidized credit to farmers, small entrepreneurs and cooperatives.
The collapse of oil prices in the 1980s made the adverse effects of this policy obvious.
The abuse and repression of the banking sector had undermined domestic savings
mobilization and the state banks’ viability. Unsound lending practices, misallocation of
funds and high default rates prevailed in most subsidized credit programs. The BRI
units operated at high losses and were near to collapse. Thus, in the mid-1980s the
government had no option other than adopting adjustment measures and starting to
deregulate the economy. The new market-oriented approach was most pronounced in
a series of financial sector reforms. The first reform in 1983 removed credit ceilings,
interest controls and nine subsidized credit programs. The BRI village units were
transformed into viable profit centers through the introduction of market-oriented
savings and credit products. The 1988 banking reform removed most entry barriers,
allowing commercial banks to extend their branch network throughout Indonesia. In
1990, all but four subsidized credit programs were abolished. The 1992 Banking Act
with its general emphasis on market-oriented banking removed the specialized
functions of state banks and transformed them into limited liability companies.
Between 1988 and 1993, the number of private national banks increased from 67 to
161 and the number of their branches from 546 to 3,036. Deposits and outstanding
credit of the banking industry grew by four to five times during the same period. The
liberalization of financial markets constituted a watershed in the relationship between
the state and private banking sectors. The private sector continuously increased its
business share and exceeded that of state banks in 1995. As of December 1996, the
private national banks accounted for 67% of all bank offices, 59% of total deposits and
51% to the total loan amount outstanding of the commercial banking sector.
Table 2.1:
Growth of Commercial Banks and Bank Offices by Ownership (1988 – 2000)*
December September Growth
March December December Growth
1993
1996 3/88-12/96
1998
2000 12/96-9/00
1988
State Banks
Number of banks
7
7
7
-
7
5
- 28.6%
Number of offices
835
1,076
1,379
65.1%
1,602
1,507
9.3%
As % of total offices
Number of BRI units
Reg. Development Banks
Number of banks
Number of offices
50.9
23.3
23.3
25.6
27.9
2,585
3,267
3,595
39.1%
3,703
3,694
2.8%
27
27
27
-
27
26
- 3.7%
105.9%
555
548
11.8%
8.9
10.1
238
426
490
14.5
9.2
8.3
Private National Banks
Number of banks
67
161
164
Number of offices
546
3,036
3,964
33.3
65.8
67.0
144.8%
130
83
- 49.4%
626.0%
3,976
3,258
- 17.8%
63.6
60.2
Foreign & Joint Banks
Number of banks
11
39
41
272.7%
44
52
26.8%
Number of offices
21
75
86
309.5%
121
96
11.6%
1.3
1.6
1.5
1.9
1.8
Total
Number of banks
112
234
239
113.4%
208
166
- 30.5%
Number of offices
1,640
4,613
5,919
260.9%
6,254
5,409
- 8.6%
Source: Bank Indonesia, Monthly Financial Statistics.
* Number of bank offices does not include BRI units. NOTE: Numbers reported by Bank Indonesia’s monthly financial
statistics deviate considerably from figures presented in the bank’s quarterly reports (see below).
The roots of the coming banking crisis were laid prior to the financial crisis in
1997/1998. The deregulation of the banking sector was not accompanied by a
comprehensive reform of the real sector, in which most state enterprises were deemed
financially unsound and large business conglomerates remained politically protected.
The banking industry was not freed from political intervention. Bank supervision by the
central bank lacked the capacity to cope with the rapidly growing banking industry as
well as independence and enforcement power. While the central bank and state banks
were prompted to take unsound credit decisions in favor of specific business groups
and economic sectors, private banks connected to large business conglomerates failed
to comply with legal lending limits in extending loans to their own shareholders. Already
in the first half of the 1990s several banks were at the brink of bankruptcy, and the
huge amounts of bad debts of business conglomerates and subsidized credit programs
had become a major issue of public debate.
2.1.2 Policy Response to the Financial and Banking Crisis
When the Asian exchange rate crisis spilled into Indonesia in mid 1997 it hit an already
fragile banking system. The Rupiah exchange rate turbulence reached its height in
January 1998 when the exchange rate of the US Dollar had soared to about 16,000
Rupiah. The inflation rate bounced to 78% in 1998. The pressure on the Rupiah and
the massive withdrawals of deposits from private banks plunged the banking industry
into a severe liquidity crisis. The inter-bank interest rate propelled to 350% in January
1998 and averaged 64% during the entire year. The interest rate for one-month
deposits increased from 17% in 1996 to 52% in 1998. With large parts of its loan
portfolio at risk, the intermediation function of the industry virtually came to a hold.
In a first response to the banking crisis the Government revoked the business licenses
of 16 insolvent banks in November 1997. The declining confidence in the banking
industry resulted in a massive withdrawal of deposits from private banks prompted
Bank Indonesia to embark on a liquidity support program. Although Bank Indonesia
liquidity credit was extended at high interest rates to discourage misuse of funds, the
liquidity support given rose from Rp. 62.8 trillion in December 1997 to Rp. 177.1 trillion
in July 1998. The absence of deposit insurance necessitated the Government to
declare a blanket guarantee for deposits in January 1998. The guarantee scheme
includes an additional guarantee on the claims of creditors. In 1998, the Government
supported the guarantee scheme with bonds amounting to Rp. 164.5 trillion. This
measure was followed by the establishment of the Indonesian Bank Restructuring
Agency (IBRA) with two major functions: (i) to supervise restructured banks and, based
on an evaluation of their viability, take over or suspend the operation of restructured
banks; (ii) to manage the assets acquired in the course of bank restructuring.
By mid-1998, the Government had articulated a comprehensive reform strategy
consisting of five major components: (i) a bank restructuring and recapitalization
program, (ii) a credit restructuring and recovery program, (iii) a program aiming at
creating good governance, (iv) the improvement of the legal and regulatory framework,
and (v) the strengthening of bank supervision.
Restructuring and recapitalization of the banking industry. Prior to the formation of
IBRA the government had liquidated 16 private national banks in November 1997.
Based on the banks’ capital adequacy ratio, Bank Indonesia classified the banking
industry into three classes. Class A banks, with a CAR of 5% and higher, were not
required to participate in the recapitalization program. Class B banks, with a CAR
between minus 25% and below 4%, were required to participate and their loans
classified as loss were transferred to IBRA. Class C banks, with a CAR less than minus
25%, were given one month to upgrade to class B or their licenses were to be revoked.
As of March 1998, Bank Indonesia had transferred 4 state banks, 37 private national
banks, 2 joint banks and 11 regional development banks to IBRA.
As of June 2000, the Government had liquidated 68 and merged 12 out of 238
commercial banks. After the creation of two new banks (Bank Mandiri and Bank Ekspor
Indonesia) there remained 161 banks, of which 19 still were in the recapitalization
process and 12 were classified as bank take-overs. During the third quarter of 2000, 8
bank take-overs were merged with Bank Danamon, with the number of commercial
banks decreasing further to 153. As of 31 October 2000, the Government completed the
recapitalization program with the recapitalization of six major banks. The total value of
government bonds issued as part of the bank recapitalization program amounted to about
Rp 430 trillion. The most costly effort was the merger of four state banks into Bank Mandiri,
with the value of government bonds amounting to Rp. 180 trillion.
The credit restructuring program has been aiming at the settlement of nonperforming loans of banks outside of IBRA. To facilitate agreements between banks
and debtors Bank Indonesia formed a credit restructuring task force in November 1998.
As of August 1999, Bank Indonesia calculated the amount of problem loans to Rp. 127
trillion, of which Rp. 44 trillion were in the process of restructuring. As of August 2000,
Bank Indonesia had succeeded to restructure loans of 16,996 debtors with a total loan
amount of Rp. 54.1 trillion. State banks accounted for about 83% of the debtors and
90% of the loan amount restructed.
To instill good governance into the banking system Bank Indonesia implemented a fit
and proper test program for bank owners and managers, carried out interviews with
new candidate owners and managers, assigned compliance directors to the banks’
board of directors, and intensified investigations in criminal banking cases. As of
September 2000, Bank Indonesia had carried out fit and proper test for 93
shareholders and 984 managers of 105 banks. 601 managers passed the test.
Interviews were carried out with one candidate owner and 91 candidate managers. 81
candidate managers were found to meet the requirements set by Bank Indonesia. 161
banks had proposed 215 compliance directors of which 145 were accepted by Bank
Indonesia. To emphasize law enforcement Bank Indonesia formed a special
investigation unit. As of September 2000, Bank Indonesia had reported 14 banks
suspected of being involved in criminal cases to police authorities for further
investigation.
In the years from 1998 to 2000 the government made any effort to improve the legal and
regulatory framework for the banking industry through the amendment of the Banking Act,
government regulations and Bank Indonesia decrees. Banking Act No. 10 of 1998
amended Banking Act No. 7 of 1992 to respond to the new challenges. Substantial
changes made were the transfer of licensing authority from the Ministry of Finance to
Bank Indonesia; the lifting of foreign bank ownership restrictions; the accomodation of
the banks operating based on Syariah principles; the limitation of bank secrecy to
information on deposits and deposit customers and deposits; and provisions for the
formation of a deposit protection institution and the bank restructuring agency. As a
follow up Bank Indonesia issued new regulations for both conventional banks and
banks operating according to the Syariah principles. Special regulations dealt with bank
mergers and acquisition, purchase of bank shares, the revocation of business licences
and bank liquidation. Other special regulations made provisions for fit and proper tests,
credit restructuring, short-term financing, and bond portfolio trading. A set of Bank
Indonesia decrees, such as on loan loss provision requirements, minimum capital
requirements, assessment of assets quality, legal lending limits, and financial reporting,
were designed to improve prudential banking practices in accordance with international
standards.
Bank Indonesia’s endeavors to improve the effectiveness of bank supervision are
reflected in the fact that the Senior Deputy Governor was appointed to oversee and
coordinate the bank’s supervision function. Off-site supervision and on-site supervision
were organizationally separated, and more emphasis was given to direct inspections
and enforcement. Compliance-based supervision was complemented with risk-based
supervision in accordance with international standards. In this context, Bank Indonesia
established on-site supervisory presence in four state banks and five private national
banks that are considered to have systemic impact on the entire banking industry.
2.1.3 Development of the Commercial Banking Sector 1997 – 2000
During the financial years of the financial crisis the banking industry experienced a
considerable growth of the nominal value of its business volume, loan portfolio and
fund mobilization. Holding the Rupiah exchange rate against the US Dollar constant,
however, the industry’s business volume slowed down. This is especially true for the
loan portfolio that showed growth rates considerably below that of assets. The loan
portfolio to assets ratio decreased from 76% as of the end of 1996 to 64% as of the
end of 1998. At the same time, the non-performing part of the loan portfolio rose from
9% in March 1996 to 20% in December 1997 and 59% in February 1999.
Table 2.2:
Commercial Banks’ Financial Development (1996 – 2000, in Trillion Rupiah)
December Growth
December Growth
December December Growth
1997 12/96-12/97
1998 12/97-12/98
1996
1999 12/98-12/99
Assets = Liabilities
387.5
528.9
36.5%
762.4
44.1%
815.1
6.9%
Outstanding credit
292.9
378.1
29.1%
487.4
28.9%
225.1
- 50.4%
As % of assets
Total deposits
As % of assets
Savings deposits
As % of total savings
Time deposits
As % of total savings
Equity *
As % of assets
75.6
281.7
72.7
357.6
162.7
57.7
68.9
206.4
11.9%
8.8
27.6
60.4%
69.3
26.9%
406.8
0.6%
97.1%
- 98.5 - 310.9%
- 12.9
13.6%
123.0
77.4%
18.9
70.9
25.9%
651.4
79.9
12.1
57.7
46.7
573.5
75.2
19.0
37.1
9.6
26.9%
67.6
61.6
21.9
63.9
71.5
387.1
- 4.8%
59.4
- 21.6
78.1%
- 2.7
Source: Bank Indonesia, Monthly Financial Statistics.
* Includes reserves and profit/loss.
The nominal growth of assets was mainly due to the rapid increase of time deposits
triggered off by exorbitant interest rates. Its share in total deposits increased from 58%
to 71% until the end of 1998. The decline in public confidence, therefore, did not
negatively affect deposit mobilization in absolute terms. Customers of private national
banks transferred their deposits to state banks and foreign banks that were considered
sound and safer places to save. The negative spread between time deposit and credit
interest rates as well as the increasing amounts of non-performing loans decapitalized
the industry. At the end of 1998, the industry had a negative capital of almost Rp. 100
trillion. As of February 1999, return on assets had reached minus 23% and the capital
adequacy ratio had plunged to minus 25%.
The financial development of the banking industry in 1999 showed the effects of the
progressing bank restructuring and recapitalization as well as of the improving net
interest margin because of declining deposit interest rates since May 1999. The loan
portfolio contracted by 50%, mainly because of the bad debts transferred from state
banks to IBRA and the liquidation of 40 banks in March and April 1999. The loan
portfolio to assets ratio declined to 28% with major parts of assets placed in the
government’s recapitalization bonds. Assets grew slightly because savings deposits
mobilized doubled in 1999. As an effect of normalizing time deposit interest rates the
structure of deposits adjusted again to that prior of the financial crises. As of December
1998, the industry still operated with a negative but considerably improved profitability
and capital. The credit-restructuring program, however, had not yet succeeded to
improve the industry’s loan portfolio, with its non-performing part still making up 37%.
In 2000, the banking industry
Table 2.3
Banking
Indicators
2000 (in Trillion Rupiah)
showed clear signs of recovery.
December November
Assets grew by 25% and the loan Indicator
Growth
1999
2000
portfolio by 41%. The bank interAssets
815.1
1,022.4
25.4%
mediation function was revived,
225.1
317.3
41.0%
however, to a very limited extent. Outstanding credit
651.4
689.7
5.9%
Credit extension increased at a Total deposits
- 21.6
54.7
153.2%
low level, with the loan portfolio to Equity
assets ratio staying at 31% only. Non-performing loans
83.3
75.8
- 9%
Due to the transfer of nonAs % of outst. Credit
37.0
23.9
- 35.4%
performing loans to IBRA, credit Source : Bank Indonesia Website.
restructuring and new credit
extension, the non-performing loan ratio decreased slowly but continually to 24% in
November 2000. The less significant decline in the absolute amount of non-performing
loans shows that the ratio declined mainly because the bank industry had resumed
lending. With non-performing loans still exceeding capital, however, the industry still
appears to be fragile. While the industry still recorded an aggregated loss in the first
half of 2000, it returned to profitability in the second half because of widening net
interest margins and improved loan portfolio quality. With the completion of the bank
recapitalization program in the second quarter of 2000, the industry’s capital increased
from minus Rp. 21.6 trillion at the end of 1999 to Rp. 55.7 trillion by November 2000.
However, despite these signs of recovery, the industry has not yet returned to normal.
The banking crisis had a deep impact on the structure of the banking industry. The
number of state banks decreased by only two banks (4 state banks merged into the
new Bank Mandiri and Bank Ekspor Indonesia was additionally created), whereas the
national private bank sector lost almost half of its institutions since 1997. As of
December 1999, the state-owned banking sector (state banks and regional
development banks) accounted for more than half of the industry’s assets, deposits
and outstanding credit. The slow recovery of national private banks in 2000 did not
allow them to recapture much of the business share they had prior to the crisis.
Considering that the Government also holds significant stakes in the recapitalized
private banking industry, its current control over the banking system is even higher than
indicated by the figures mentioned above.
Note on the number of banks:
Table 2.4
Change
in
Banking
Structure (1996 – 2000)
Figures in tables 1.1 and 1.4 are
December December
taken from Bank Indonesia’s Bank Ownership
1996
1999
monthly financial statistics. Other
State Banks
7
5
numbers of banks are recorded
21
Assets
36.5%
51.2%
by the bank’s quarterly reports.
Outstanding credit
37.2%
49.9%
According to the second quarterly
Total deposits
32.1%
47.9%
report of 2000, there were 161
banks with 6,958 offices as of Private National Banks
164
92
June 2000, consisting of 5 state
Assets
51.8%
35.8%
banks, 26 Regional Development
Outstanding credit
51.2%
24.9%
Banks, 120 private national banks
Total deposits
58.6%
38.8%
and 10 foreign banks. It seems
Foreign & Joint Banks
41
49
that the monthly financial statistics
Assets
9.2%
12.6%
do not account for joint venture
Outstanding credit
9.4%
22.2%
banks, that were liquidated, taken
over by or coverted to private
Total deposits
6.3%
11.1%
national banks. If this is the case, Source : Bank Indonesia, Monthly Financial Statistics.
the business share of the private
national banking sector would be considerably higher than indicated by table 1.4.
August
2000
5
50.5%
42.1%
45.5%
83
35.9%
29.0%
40.0%
52
12.0%
25.0%
11.9%
According to the third quarterly report of 2000, the number of commercial banks had
decreased to 153 and the number of bank offices to 6,522 as of October 2000, as 8
bank take-overs were integrated into Bank Danamon. The newest information provided
on Bank Indonesia’s website (Indikator Perbankan Nasional) records a further decline
in the number of banks to 151 and in the number bank offices to 6,510. It is most
problable that these figures rather than those of the monthly financial statistics are the
more reliable ones. The latter are used here because the other sources do not provide
a breakdown by ownership.
2.1.4 Regional Distribution and Outreach of Commercial Banks
Both the offices and business of the commercial banking industry are highly
concentrated in the western and mainly urban parts of Indonesia. As of March 2000,
two thirds of the banks’ head offices and 31% of their offices were located in the
Indonesian capital and its surroundings. As of August 2000, the greater Jakarta area
covered 58% of the deposits and 61% of the outstanding credit of the entire
commercial banking industry. The most densely populated provinces Java and Bali
added another 42% to the bank offices, 26% to the deposits, and 23% to the loan
portfolio of the industry. Thus, the islands of Java and Bali, which cover 63% of the
Indonesian households, accounted for 74% of the industry’s offices, 91% of its deposits
and 94% of its outstanding credit. Including also Sumatra, Kalimantan and the eastern
parts of Indonesia are left with only 13% of the bank offices and 6% of the deposits and
outstanding credit of the industry.
21
See, Bank Indonesia: Laporan Triwulan II/2000 and III/2000. Perkembangan Moneter,
Sistem Pembayaran, dan Perbankan, Bab 3: Evaluasi Kebijakan dan Perkembangan
Perbankan. Note that all sources mentioned are available on the Bank Indonesia website.
Table 2.5
Regional Distribution of Commercial Banks, Outstanding Credit and Deposits
DKI
Jakarta
Java &
Bali
Sumatra
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
No. of households (million)
1.4
28.0
8.8
2.4
3.1
2.5
46.2
Number of banks **
115
22
10
5
6
4
172
As % of total
66.9
18.6
5.8
2.9
3.5
2.3
100.0
1,810
2,432
761
267
297
194
5,761
As % of total
31.4
42.2
13.2
4.6
5.2
3.4
100.0
State banks & BPD (%)
23.0
32.5
51.6
64.4
62.3
75.8
36.5
Households per office
784
11,515
11,520
9,035
10,499
12,780
8,020
146.9
56.7
23.1
6.8
6.1
2.4
241.9
60.7
23.4
9.5
2.8
2.5
1.0
100.0
383.6
172.6
60.7
18.6
14.4
8.1
658.0
58.3
26.2
9.2
2.8
2.2
1.2
100.0
Indicator
Number of bank offices **
Outstanding credit ***
As % of total
Total deposits ***
As % of total
Sources : Bank Indonesia, Monthly Financial Reports.
* West Nusa Tenggara, East Nusa Tenggara, Maluku, Irian Jaya.
** Number of banks and bank offices as of March 2000.
*** Outstanding credit and total deposits as of August 2000.
The regional distribution of commercial banks and their offices is, of course, related to
varying population numbers and density between the regions. 60% of the Indonesian
population lives in Java and Bali, where population densities range from 550 to 750
(per province outside Jakarta) inhabitants per square kilometer. In other provinces,
except of North Sumatra, Lampung and West Nusa Tenggara, population densities are
not higher than and often far below 120 inhabitants per square kilometer. This is
reflected in the fact that the number of households per bank office outside Jakarta,
ranging from 9,035 in Kalimantan to 12,780 in the eastern regions, does not show an
extreme variance between the regions.
The role of the state and private banking sectors varies considerably between the
regions. Especially the eastern parts of Indonesia depend to a high extent on financial
services provided by state and provincial government-owned banks. As of March 2000,
the offices of state bank and Regional Development Banks (BPD) made up two thirds
of all commercial bank offices in Kalimantan, Sulawesi and other eastern provinces. In
Central Kalimantan, Southeast Sulawesi, East Nusa Tenggara, Maluku, Irian Jaya as
well as in West Sumatra and Jambi these banks contributed three quarters and more to
all bank offices. Contrary to government-owned banks, which set up 43% of their
offices outside of Java and Bali, private national banks have not significantly extended
their branch networks to other regions. 10% of their offices are located in Sumatra (with
a high concentration four of the eight provinces) and only 7% in other regions outside
of Java and Bali. In Java and Bali, however, private national banks contribute 70%, and
in the greater Jakarta area, East Java and Bali even more than 70% to all commercial
bank offices.
2.2 Bank Rakyat Indonesia (BRI) and its Unit Banking System
2.2.1 Overview of Bank Rakyat Indonesia
Based on the Banking Act of 1997 became an independent commercial bank after
changeable years of mergers and rapid changes in banking policies. With the banking
act of 1992 BRI changed its status into a limited liability company, with 100% of its
shares owned by the state. The bank is organized into four “Strategic Business Units”
(SBU). The SBU Treasury and Investment handles treasury functions and controls BRI
financial subsidiaries. The SBU Corporate makes corporate loans larger than Rp. 3
billion in both Rupiah and US Dollar. The SBU Retail Banking is in charge of some 330
branches that provide full banking services, make loans of up to Rp. 3 billion, and
channel loans for government programs. The SBU Micro Banking is in charge of the
3694 BRI units, which maintain also 349 village service points and make loans of up to
Rp. 25 million.
BRI has developed a range of deposit products, which are adjusted to the varying
demand of its customers. Savings deposit products, which allow withdrawals at any
time, are the rural savings scheme Simpedes, the urban savings scheme Simaskot,
and the national savings product Tabanas. All of these products provide semi-annual
lottery prices. BRI time deposit products (Depobri) are offered with maturities of one
two 24 months in Rupiah and foreign currencies. Besides its normal corporate loan
products, small-enterprise credit schemes and the rural loan product Kupedes, BRI
channels loans to targeted sectors and cooperatives, and also participates as a
stakeholder of microfinance programs such as the P4K project in cooperation with the
Ministry of Agriculture (see part of microfinance programs).
In the 1990s BRI developed into one of the largest banks in Indonesia with assets
boosting from Rp. 34 trillion as of the end of 1996 to Rp. 41 trillion as of the end of
1997. The financial crisis 1997/1998 and unsound banking practice had also a
profound impact on BRI. As of December 1998, the bank had to make loan loss
provisions (Rp. 22.1 trillion) making up almost half of its loan portfolio (Rp. 43.4 trillion),
reducing assets to Rp. 34 trillion. Losses soured to Rp. 26.5 trillion decapitalized the
bank. In 1998 BRI entered the restructuring and recapitalization program, with the
government’s recapitalization bonds Rp. 20.4 trillion and bad debts transferred to IBRA.
As of December 1999, Loan portfolio (27.8 trillion) reduces by 15.6 trillion, with loan
loss reserves fall to 5.4 trillion and assets to Rp. 31 trillion. Loss accounted for in the
consolidated balance sheet stood at 28.2 trillion. The bank’s recapitalization was
finalized only in October 2000, with recapitalization bonds of Rp. 20.4 trillion bringing its
assets again to about Rp. 50 trillion.
With respect to its corporate business BRI will undergo a profound change in the near
future. The BRI business plan states that the bank will gradually divest its corporate
loans until 2002. The letter of intent signed by the Indonesian Government and the
International Monetary Fund in September 2000 requires BRI to transfer all corporate
loans to other bank by the end of 2000, thus focusing its role on micro, retail, and small
and medium businesses. This has led to an ongoing dispute between BRI and the
Government. While BRI and banking experts have been highly pessimistic about the
bank’s ability to meet this target, the Government has been adhering to the target.
2.2.2 Inception and Transformation of the Unit System
The development of the BRI unit system is well documented and has been recognized
as the world’s most profitable and sustainable microfinance system.22
Within the state-led development of the financial system until the early 1980s BRI was
led by bureaucratic rather than banking logic. The establishment of the unit system was
instructed by presidential decree in the early 1970s in order to handle credit component
of the BIMAS (mass guidance) program of achieving national self-sufficiency in rice
production, a typical example of targeted and subsidized credit scheme that led to the
misallocation of resources and undermined savings mobilization and institutional
viability. In 1974, the units were made responsible for channeling micro loans (Kredit
Mini) for off-farm activities. In 1980, another credit scheme for larger non-agricultural
loans (Kredit Midi) was added. In the early 1980s, the system could no longer be
sustained as is because of the huge losses incurred by the BIMAS and other
subsidized credit schemes, on the one hand, and the limitation imposed on the
government budget at the end of the oil boom period, on the other hand.
Schmit (1991) provided a comprehensive analysis of the historical and political
dimensions that led to the decision of transforming the unit system into a commercially
viable system. A major condition for this transformation was the beginning financial
sector deregulation in 1983, which removed credit ceilings and interest rate controls.
The Kupedes loan product with a market-oriented and cost-covering interest rate was
introduced in 1984. The Simpedes savings product was pilot-tested in 1985 and
nationwide introduced in 1986. With a large part of the units relocated to economically
potential locations, the number of units reduced from 3,626 to 2,247, and 79% of the
units making profit in 1986, the transformation of the unit system was largely completed
until 1987. As of the end of 1987, the units’ deposit accounts had a value of Rp. 250
billion, while their total loan portfolio amounted to Rp. 418 billion. Already two years
later, deposits had grown to Rp. 927 billion and surpassed the value of the loan
portfolio by 13%.
2.2.3 Institutional Set-up and Framework
The BRI unit system is a "strategic business unit" of BRI. The units operate at the subdistrict level under the supervision of BRI branches at the district level, but they are
separate profit centers with their own financial statements. The units’ financial
operations are included in the financial statements of BRI. Some BRI units also
maintain village services posts (Pos Pelayanan Desa) or village service points (Tempat
Pelayanan Desa), which service areas in which units appear not yet profitable and able
22
The following description has benefited from the following publications: L. Th. Schmit: Rural
Credit Between Subsidy and Market, Leiden Development Studies No. 11, Leiden 1991;
Richard H. Patten and Jay K. Rosengard, 1991. Progress with Profit: The Development of
Rural Banking in Indonesia. San Francisco: ICS Press, 1991; James J. Boomgard and
Kenneth J. Angell: "Bank Rakyat Indonesia’s Unit Desa System: Achievements and
Replicability," in: Maria Otero and Elisabeth Rhyne (eds): The New World of Microenterprise
Finance: Building Healthy Institutions for the Poor, 1994; Stephanie Charitonenko, Richard
H. Patten, and Jacob Yaron: Bank Rakyat Indonesia. Unit Desa 1970 – 1996, June 1998;
Richard H. Patten, The East Asian Crisis and Micro Finance. The Experience of Bank
Rakyat Indonesia Through June 1999, Jakarta, July 1999.
to break even. As of June 2000, the 3,694 units maintained 349 service posts and 266
service points. The first are typically manned by a cashier and bookkeeper, and open
three to five days a week to handle financial transactions. The second may be better
understood as mobile services that usually operate on market days and one to two
times a week. Depending on the business volume, service posts may be upgraded to
units and units downgraded to service posts. BRI follows a strict policy of closing or
downgrading unprofitable units.
A typical BRI unit has a staff consisting of four to six employees, while larger ones have
up to 11 employees. The basic staff is made up of a unit manager, who approves loans
and is responsible for the unit’s performance, a teller, an accountant, and a loan officer.
Growing units employ additional loan officers based on pre-defined standards. The
unit’s staff is often recruited from its area of operation in order to inspire confidence and
maintain close customer contact. A striking feature of the unit system is its staff
incentive system. 10 percent of each unit’s annual profit is distributed to employees as
bonuses based on individual performance. Features such as decentralized authority
and responsibility as well as giving employees a stake in performance have to be
regarded as a major factor predicating the units’ success.
Other success factors have been simplicity, standardization and transparency in
organization and management. This is particularly true for the system’s accounting,
supervision and financial reporting, which are functioning effectively and efficiently. The
management information system consists of six reports, which provides information on
the number of deposit customers, the Kupedes loan classification, the unit’s business
development, the unit’s budget and annual performance, the balance sheet and income
statement.
BRI district braches are responsible for the supervision of units in their area of
operation. The branch manager is obliged to visit the units himself and is authorized to
take swift action, including direct warnings and score penalties for employee
performance. Branch supervisory personnel work under the supervision of a unit officer
and, on average, are responsible for four units. Off-site supervision is carried out
based on the management reports provided by the units. On-site supervision is carried
out once a month for each unit and takes up to five days. These inspections are based
on a standard report format that helps to examine financial and human resource
aspects, and includes recommendations and a follow-up plan for the unit. BRI also
maintains 12 regional inspection offices that carry out on-site audits once in 18 months.
One of the few weaknesses of the supervision system is that BRI has not implemented
a unit rating system such as the CAMEL systems used for local financial institutions.
Nonetheless, it is safe to argue that BRI units are among the most accountable and
professionally supervised local financial institutions in Indonesia.
It is also safe to say that unit staff members receive the best training available for
microfinance professionals. BRI maintains five training centers, in which unit staff
members are trained. The training covers not only technical aspects (financial and legal
subjects) but also subjects such as customer satisfaction and cultural characteristics of
the units’ clientele.
2.2.4 Products and Services
Deposit products. BRI units offer checking accounts (Girobi), savings deposit
accounts and time deposit accounts. Checking accounts have not yet met a significant
demand in rural areas. According to Charitonenko et al. (1998), these accounts are
used primarily by the national government to channel funds to local governments. BRI
units offer also transfer services to any other account in Indonesia. The service,
however, is expensive (up to Rp. 15,000)
Simpedes, the rural savings deposit product, is the unit’s basic savings product that
constituted the popularity of BRI units. The success of Simpedes has been achieved,
although the product usually provides lower returns than comparable products. Prior to
the financial crisis its interest rate was 9% and currently approaches the same level
after it had moved between 16% and 20% during the financial crisis. An important
factor that contributed to the product’s success was that at its time of introduction it was
the first and only banking product recognizing the demand for flexible savings
instruments in rural areas. Other financial institutions were not permitted to mobilize
savings from the public. In many rural areas of Indonesia BRI units are still the only
bank offices or, as part of a state-owned bank, have the comparative advantage of
being able to promote the high protection of deposits.
Another success factor has been the product’s design. It requires a minimum balance
of only Rp. 5,000 and allows unlimited withdrawals, reflecting the need for instruments
through which rural customers are able to flexibly manage their liquidity. Simpedes
savings may also be pledged as partial collateral for loans. A special feature of the
product is that it carries semi-annual non-cash lottery prices such as motorbikes and
television sets. Considering that national lotteries were prohibited some years ago, the
effect of this feature should not be under-estimated.
Tabanas is the national savings program sponsored by Bank Indonesia since 1976.
Until 1984, it was the only savings instrument in the Village Units. The minimum
balance is only Rp. 1,000 and withdrawals are possible at any time. Interests are
calculated on the daily balance. The product carries semi-annual cash prices and
similar interest rates as the Simpedes product.
Simaskot is the units’ urban savings deposit product that was introduced in 1989 to
attract urban customers. The product carries semi-annual lottery prizes in cash and
requires a minimum balance of Rp. 10,000. Its interest rate does usually not differ from
the Simpedes product.
Depobri is BRI’s time deposit product with maturities ranging from one to 24 months.
The minimum time deposit amount is Rp. 500,000. Time deposits can also be pledged
as partial collateral. As of October 2000, the interest paid on time deposits ranged from
10.5% to 12%. During the financial crisis the rate moved up to 57% in September 1998.
Loan product. The BRI units have a single loan product, Kupedes or General Rural
Credit. Kupedes loans are provided as working capital or investment loans to eligible
borrowers from all economic sectors or to individuals with regular income such as civil
servants and employees of local enterprises. Typical borrowers are government
employees or pensioners, small traders and entrepreneurs. Loans can be provided with
amounts ranging from Rp. 25,000 to Rp. 25 million, but loan applications below Rp.
500,000 are nowadays seldom. As long as the maximum ceiling is not reached one
borrower can take both working capital and investment loans in parallel. Kupedes
terms range from 3 to 36 months, with repayment schedules being adjusted to the
borrowers’ cash-flows. All loans are monthly installment loans, partly with grace periods
ranging from 3 to 6 months.
A special feature of Kudepes loans, that has proven to improve loan collection, are
incentives paid for timely repayments, a refund of 25% of the interest paid when
installments are not delayed for six consecutive months. The original interest rate was
1.5% per month on the loan principal. During the financial crisis the rate was increased
to 2.2% flat per month flat and has currently returned to the original rate. Collateral is
required equivalent to the value of the loan principal and interests to be paid. Loans are
usually secured with a land certificate, motor vehicle ownership certificate or a cession
of salary or pension. Loans larger than Rp. 5 million require a land certificate as
collateral. Deposits may be pledged as partial collateral. The loan principal and interest
is secured by a life insurance. The 0.75% premium is taken over by BRI.
The unit managers have the authority to approve loans of up to Rp. 5 million. Larger
loans require approval from the district branch. Loan officers usually consider the
present income for appraising the borrowers’ repayment capacity. The client has to
sign an acknowledgement of his debt, an authorization for the bank to execute the
collateral pledged, and his wife/her husband has to sign a guaranty. It is often claimed
that loan processing takes not longer than one week. Field visits indicate that three to
four weeks are not unusual. Even longer periods can be found depending on the time
borrowers need to prepare the documents required.
2.2.5 Development Trends 1997 - 2000
As of December 1996, the number of BRI units had grown to 3,595 units, the Kupedes
loan portfolio to Rp. 4.1 trillion, and their total deposits to Rp. 7.1 trillion, an amount
more than 7 times as high as in 1989. The Simpedes product contributed 53% to total
deposits. Deposits financed 85% of the unit’s assets, while Kupedes loans made up
only 49% of their assets. The deposits to loan portfolio ratio of 212% points to the
outstanding success in savings mobilization and, at the same time, to the restrictive
lending policy of the units. On average, the units had 692 loan accounts with an
average outstanding amount of Rp. 1.6 million. Charitonenko et al. (1998) reported that
the unit system made about 160,000 loans per month in 1996.
Contrary to other financial institutions, BRI units maintained their good performance
and experienced an unprecedented growth during the financial crisis in 1997/1998.
Between December 1996 and December 1998, the units’ deposits increased by 128%.
This was partly due to the liquidation and deteriorated image of other banks, motivating
many customers to transfer deposits to the sound BRI units, which, as state-owned
institutions, were regarded as comparably safe places to save. Another reason was the
crisis’ economic impact on the units’ clientele. Part of the clientele experienced
increasing incomes because of the inflationary pressure on prices of agricultural
products. Another part lost investment opportunities that provide higher returns than
interest rates offered on deposits during the crisis.
Table 2.6:
Development Trends of BRI Units (December 1994 – June 2000, in Billion Rupiah)
December Growth
December December Growth
1996 12/94-12/96
1998 12/96-12/98
1994
June Growth
2000 12/98-6/00
Number of units
3,388
3,595
6.1%
3,703
3.0%
3,694
- 0.2%
Assets = Liabilities
5,957
8,354
40.2%
18,073
116.4%
19.449
7.6%
1.8
2.3
32.2%
4.9
110.0%
5.3
7.9%
2,458
4,076
65.8%
4,697
15.2%
6,713
42.9%
Average assets per unit
Kupedes loan portfolio
As % of assets
Total deposits
As % of assets
Simpedes deposits
As % of total deposits
41.3
87.8
As % of total deposits
Kupedes accounts per unit
Avg. amount (Rp. Million)
7,092
35.5%
3,352
4,407
31.5%
8.1
127.7%
775
83.6%
7,392
67.7%
11.8%
10,832
46.5%
60.0
6,323
715.9%
39.2
10.9
18,055
92.8
45.8
62.1
422
34.5
16,146
89.3
84.9
61.1
Time deposits
26.0
48.8
5,232
3,397
- 46.3%
18.8
606
692
14.2%
664
- 4.1%
711
7.2%
1.2
1.6
36.9%
1.9
16.7%
2.6
33.7%
Source : Bank Rakyat Indonesia.
The number of savings deposit accounts increased by more than 4 million, but the
increase of deposits was mainly due to time deposits, which grew by an outstanding
716% during 1997/1998. While interest rates of savings deposit increased from 9% to
20%, time deposit rates jumped from 19% in January 1998 to 57% in September 1998.
In response to these interest rate differentials, the share of time deposits in total
deposits increased from 11% in December 1996 to 39% in December 1998.
Time deposit mobilization allowed the units to increase average assets to Rp. 4.9
billion, more than twice as high than prior to the crisis, but it also made the units
extremely over-liquid. Though the Kupedes loan portfolio increased by 15% despite the
crisis, its share in assets dropped from an already low 49% to 26% as of December
1998. The average number of loan accounts per unit declined to 664, while the
average amount of loans outstanding increased from Rp. 1.6 million to Rp. 1.9 million.
According to Patten (1999), Kupedes borrowers have being paying back about 97% of
all loans that ever have fallen due. The 12-months loss ratio at the end of May 1999
was 1.5% only. The arrears ratio rose from 3.7% at the end of 1996 to 5.6% at the end
of 1998, but had declined again to 3.9% as of November 1999. According to BRI, more
than 96 percent of the units were profitable in the third quarter of 1999.
Since 1999, the BRI unit system has been growing at a lower rate and its financial
structure has been normalizing. With total deposits growing by 12%, the units’ assets
grew by 8% during the one and half years until June 2000. In response to normalized
interest differentials time deposits decreased and Simpedes deposits increased by
46%. The share of Simpedes in total deposits returned to the level existing prior to the
crisis. Improving economic conditions allowed the units’ to expand the Kupedes loan
portfolio by 43% and to increase the average number of loan accounts from 664 as of
the end of 1998 to 711 as of June 2000, with the average loan amount outstanding
increasing from Rp. 1.9 million to Rp. 2.6 million. With a deposit to loan portfolio ratio of
269%, however, the units remained extremely over-liquid.
2.2.6 Regional Distribution and Outreach
National BRI reports provide information per regional branch. Regional branches are
located in provincial capitals and supervise the district branches in one or more
provinces, sometimes across the major islands of Indonesia. The regional branch in
Jakarta supervises also the district branches in West Kalimantan. The regional branch
in Denpasar, Bali, is additionally responsible for West and East Nusa Tenggara. The
district branches in Maluku and Irian Jaya operate under the supervision of the regional
branch in Ujung Pandang, Sulawesi.
55% of the BRI units are
Table 2.7
Regional Distribution of BRI Units (June 2000)
located
in
Java
(outside
No. of
No. of
Jakarta), while only 16% of the
Number
% villages households
Region
of Units
per unit
per unit
units operate in the eastern
653
17.7
33
13,425
parts
(including
Bali)
of Sumatra
Indonesia. The number of Java
2,024
54.8
12
13,488
households per unit shows that Jakarta & Kalimantan
432
11.7
15
8,868
this distribution corresponds to Bali, East & West NT
202
5.5
18
11,699
the varying population densities.
Other East Indonesia*
383
10.4
31
12,285
With the exception of Jakarta
Total
3,694 100.0
18
12,507
BRI units have an average
Sources : Bank Rakyat Indonesia; Ministry of Home Affairs ; National
theoretical market of 11,500 to Family Planning Board. * Sulawesi, Maluku, Irian Jaya
13,500 households. The higher
variance of the average number of villages (includes urban administrative areas)
indicates large differences in the units’ area of operation. Field evidence from West and
East Nusa Tenggara shows that the distance between units ranges between 10 and
more than 100 kilometers, and that some units serve scattered villages in a distance of
100 kilometers from their offices. On average, 12 villages are covered by a BRI unit in
Java compared to 41 villages in East Nusa Tenggara and 36 villages in the southern
provinces of Sumatra. The lowest coverage exists outside of Jakarta exists in the
provinces of Yogyakarta and Central Java, where the average market of a unit
comprises only 10 villages and 9,500 households.
As of June 2000, the BRI unit system had almost 25 million deposit accounts, to which
the Simpedes product contributed almost 17 million accounts. The average BRI unit
had 6,736 deposit accounts, a number equivalent to 53% of all Indonesian households
per unit. Note that this figure does not indicate the actual percentage of households
reached, because one household often consists of members with separate deposit
accounts or may use different deposit products at the same time. Considering that the
rural Simpedes and the urban Simaskot products made up three quarters of all deposit
account, and assuming that one household had two deposit accounts, it can be
estimated that at least 20%, and more likely 25%, of the Indonesian households
deposited their savings in BRI unit accounts. Outreach scope in terms of deposit
accounts varies considerably between the regions. The BRI units under the Jakarta
regional office had 8,400 deposit accounts, on average, and more accounts than their
area of operation has households. The average unit in West Java had 5,820 deposit
accounts equivalent to 32% of the households in the province.
Table 2.8
Outreach of BRI Units by Region (June 2000)
Outreach indicator
Jakarta & Bali, West Other East
Kalimantan & East NT * Indonesia**
Total
Sumatra
Java
8.8
27.3
3.8
2.4
3.9
46.2
4,422
12,923
3,503
1,459
2,575
24,883
Avg. number per unit
6,772
6,385
8,110
7,222
6,725
6,736
As % of households
50.4
47.3
91.5
61.7
65.4
53.3
0.8
0.6
1.1
0.8
0.6
0.7
3,237
8,783
1,734
1,114
1,866
16,733
4,957
4,340
4,013
5,515
4,871
4,530
As % of households
36.9
32.2
45.3
47.1
47.4
36.2
0.7
0.6
0.8
0.7
0.6
0.6
391
1,547
306
141
242
2,627
599
764
708
700
632
711
As % of households
4.5
5.7
8.0
6.0
6.1
5.7
Avg. amount/acc. (Rp. million)
2.9
2.4
2.5
2.8
3.2
2.6
Total deposit accounts (,000)
Simpedes accounts (,000)
Loan accounts (,000)
Sources : Bank Rakyat Indonesia; National Family Planning Board.
* Bali, West & East Nusa Tenggara. ** Sulawesi, Maluku, Irian Jaya.
The average number of time deposits per unit was 98, ranging from only 28 in the Aceh
province to 226 in the area of the BRI’s regional Jakarta office. Nonetheless, time
deposits have become an important source of funds. Average time deposits per
account amounted to Rp. 9.4 million compared to Rp. 647,000 for the average
Simpedes account. In Jakarta, Kalimantan, and North Sumatra had the customers with
the highest savings capacities, with average time deposit amounts of Rp. 12 to 14
million. The units in West Sumatra, Yogyakarta and Central Java had mobilized about
Rp. 7 million per time deposit account. Average Simpedes amounts ranged from about
Rp. 470,000 in Aceh, North and Central Sulawesi, and West Java to more than Rp.
800,000 in North Sumatra and Kalimantan.
As of June 2000, the BRI unit system had 2.6 million Kupedes accounts and reached
about 6% of the households in Indonesia. The highest outreach had the BRI units
operating under the Jakarta regional office (10% of the households), whereas the units
in the southern provinces of Sumatra reached only about 3% of the households. The
average number of accounts per unit was 711, ranging from 450 in the Aceh province
to 850 in North and Central Sulawesi. The average loan amount outstanding was Rp.
2.6 million and ranged from Rp. 2.2 million in Yogyakarta and Central Java to Rp. 3.3
million in South and Southeast Sulawesi.
Both the relatively high average deposit amounts and the relatively high average loan
amounts outstanding indicate that a considerable part of the units’ clientele consists of
middle-income rather than low-income groups. In comparison, the BPR industry had
average savings deposits of Rp. 205,000 and an average loan amount outstanding of
Rp. 1,2 million per account as of March 2000.
2.2.7 Current Financial Situation and Loan Portfolio Quality
The average assets size per unit and region deviates considerably from the overall
average of Rp. 5.3 billion. It was smaller than Rp. 4 billion in the Aceh province and
West Java, but larger than Rp. 7.5 billion in Jakarta and the provinces of Kalimantan.
While deposits contribute generally between 90% and 95% to the units’ total liabilities,
the composition of deposits shows a high variance between regions and provinces.
Time deposits made up one third of total deposits of the units in Jakarta and West
Kalimantan, and 27% to the deposits of the units in Bali, West and East Nusa
Tenggara. In other eastern Indonesian provinces and the Aceh province, however time
deposits contributed less than 10% to total deposits. Simpedes accounts contributed
more than three quarters to total deposits in Aceh, Central, South and East Kalimantan,
whereas only 22% of units’ deposits in Jakarta and West Kalimantan were made up of
Simpedes savings.
Table 2.9
Assets and Balance Sheet Structure of BRI Units by Region (June 2000)
Other East
Indonesia**
Total
6.3
4.7
5.3
3,970
1,281
1,817
19,449
41.7
19.3
30.6
42.7
34.5
94.0
92.1
94.5
94.8
89.1
92.8
% Simpedes
67.0
65.5
35.5
61.6
73.2
60.0
% Time deposits
14.3
17.0
28.1
27.1
9.5
18.8
Loans to deposits (%)
33.3
45.2
20.4
32.3
48.0
37.2
Balance Sheet Item
Avg. assets per unit (Rp. b)
Total assets (Rp. billion)
Kupedes (%)
x)
Total deposits (%)
x)
Jakarta & Bali, West &
Kalimantan
East NT *
Sumatra
Java
5.6
4.3
9.2
3,651
8,730
31.3
x)
* Bali, West & East Nusa Tenggara. ** Sulawesi, Maluku, Irian Jaya. as percentage of total assets.
A similar variance can be found with regard to both the loans to assets ratio and the
deposits to loan ratio. The units in Jakarta, Kalimantan, North Sumatra and West
Sumatra had less than 30% of their assets placed in the loan portfolio, whereas the
loans to assets ration was higher than 50% in West Java, North and Central Sulawesi.
The units in Jakarta and Kalimantan had mobilized deposits four to five times as high
as the amount of assets placed in their loan portfolios, compared to deposits to loan
ratios of 174% in West Java and 125% in North and Central Sulawesi.
With the exception of the latter provinces, the unit system has become extremely overliquid. As huge amounts of funds have not been placed in the loan portfolio, it can be
assumed that less profitable placements have considerably impaired the units’
profitability. And, as the unit system’s profitability has already been high because of the
high interest net margin, it can be assumed that the high credit interest rates have been
subsidizing the opportunity costs incurred through this inefficient use of funds. Both the
high profitability of the units and their inefficiency in transforming deposits into loans
indicate the great potential to increase the system’s positive impact on small
businesses and low-income households by reducing the net interest margin without
setting the system’s profitability at risk.
Kupedes loan portfolio quality
Information about the unit system’s loan classification and the total amount of loans
with late payments was unfortunately not available for this report. Information available
is limited to the loan amount in arrears, or the amount fallen due but not yet repaid. The
ratio between arrears and the loan portfolio presented in table 2.10, therefore, does not
adequately express the risk the units’ loan portfolios are exposed to, because it does
not cover the entire outstanding amount of loans affected by arrears. This ratio does
also not allow assessing loan portfolio quality based on the aging of arrears as it is
done by loan classification systems.
Table 2.10
Loan Portfolio Quality of BRI Units by Region (June 2000)
Sumatra
Java
Jakarta &
Kalimantan
Kupedes portfolio (Rp. b)
979
3,157
619
340
674
5,769
Arrears (Rp. billion)
46.3
106.8
27.9
13.7
28.2
223.1
4.7
3.4
4.5
4.0
4.2
3.9
10.4
8.1
11.7
11.7
9.7
9.2
Indicator
Arrears ratio (%)
Loan accounts in arrears (%)
Bali, West Other East
& East NT * Indonesia**
Total
* Bali, West & East Nusa Tenggara. ** Sulawesi, Maluku, Irian Jaya.
As of June 2000, 9.2% of the unit system’s loan account and 3.9% of the amount of
loans outstanding were in arrears. The unit systems in Yogyakarta, Central Java,
Central, South and East Kalimantan were the best performers with average arrears
ratios for the regions ranging between 2.2 (Kalimantan) and 2.7% (Yogyakarta and
Central Java) only. The units in the Aceh province (5.6%) and in Jakarta/West
Kalimantan (5.4%) were the only ones that incurred average arrears larger than 5%. In
the latter regions, however, close to 15% of the loan accounts were affected by arrears.
While the overall average arrears ratio of 3.9% indicates the outstandingly good loan
portfolio quality of the BRI unit system, a further disaggregating of data most probably
would identify single areas and units where the system is exposed to a level of risk
much higher than indicated by aggregated data. This would be especially indicated by
disaggregated loan portfolio at risk ratios, which are based on the entire outstanding
amount of loans in arrears.
Though this approach may provide a more comprehensive insight into some of the unit
system’s problem areas, the aggregated arrears are generally too low to affect the
system’s profitability and soundness negatively. There can be no doubt that the BRI
unit system is not only the most profitable microfinance system in Indonesia but also
that with the best loan portfolio quality. This is also indicated by the 12-months loss
ratio of 1.5% reported by Patten (1999) for May 1999.
Undermining the viability of financial institutions and, consequently, undermining
sustained access to financial services by channeling targeted, cheap and easy credit
according to political rather than banking logics was for long the prominent feature of
rural finance. Sustainable financial services to a continuously growing part of lowerincome groups can only be achieved through viable financial institutions. The
development of viable financial institutions requires enabling legal, regulatory and
supervisory frameworks, emphasis on market-orientation, savings mobilization and
institution building, prudential banking practice, and the human resources capable of
executing these functions.
The major merit of the BRI unit system has been to transform this theory into practice.
Achieving an outreach to some 25 million customers and at the same time developing
into a sound, profitable and self-sustained network of 3,700 units has been a
superlative in the history of microfinance.
The BRI unit system has gained international recognition that, however, often focuses
on Kupedes as “a success story in microlending”23. There is no doubt that Kupedes has
been successful in holding losses extremely low and contributing to the profitability of
the unit system. The essence of the success story, however, has been savings
mobilization and financial intermediation rather than lending. At the time the Simpedes
product was introduced rural finance was supply-led and credit-led, and governed by
bureaucratic command rather than market logics. The rural population was not a
market segment of business-oriented banking as it was considered too poor to save
and in need of cheap credit.
The revolution commenced with Simpedes is two-fold. First, the BRI unit system has
proved that serving the rural people's demand for savings instruments is just as
important as satisfying their demand for credit. All rural households are in need of safe
instruments that allow managing their liquidity in flexible ways. Only a part of the rural
households, though a continuously growing one, is in need of working capital and
investment loans that exceed their capacity of self-finance to a considerable extent.
Second, the BRI unit system has proved that independent and cost-covering financial
intermediation between savings customers and borrowers rather than targeted and
subsidized credit is able to achieve both sound institution building and outreach to the
masses of the rural population.
These outstanding achievements have to be taken into account before critical
observers start to point to shortcomings and untapped potentials of the BRI unit
system. In this sense, the following assessment points to the need for answering four
questions: (1) what is the impact of BRI as a restructured bank on its microfinance arm;
(2) what happens to the large profits of the unit system, (3) what happens to the huge
amount of deposits mobilized by the unit system, and (4) why has the success of
savings mobilization not been transformed in expanding rural credit outreach?
1)
23
BRI emphasizes to focus on serving small businesses and low-income
households. As of November 2000, Rp. 17.6 trillion of BRI’s bad debts transferred
This header was used in the World Bank News published in 1996.
to IBRA was outstanding to only 168 borrowers (Kompas, 11 November 2000).
This amount is equivalent to an estimated 40% of the bank’s loan portfolio at the
time these debts were transferred to IBRA. Considering that also a considerable
part of the well-performing loans were made up of corporate loans, it may be
concluded that BRI has been giving high emphasis on serving a clientele other
than its small business and low-income clientele. Though BRI remained a major
source of rural credit, it has to be asked whether the corporate arm with its huge
losses has not considerably inhibited the expansion of rural credit, particularly
because profits made by the BRI unit system may have been used to compensate
for the losses incurred by other BRI activities.
2)
BRI units are not subsidized and have been highly profitable since the mid-1980s.
From 1996 to 1999 the units made profits amounting to about Rp. 3.2 trillion. Prior
to the financial crisis the units contributed to about one quarter of BRI assets and
produced annual profits larger than the bank’s total retained profits, thus holding
its returns positive. As of the end of 1999, BRI recorded a loss of Rp. 28.2 trillion,
whereas the units had earned a profit of Rp. 1.2 trillion. Patten (1999) concluded
that “the vast profits of the unit system have been used to cross-subsidize
wealthier (non-low-income) clients of BRI”. The units’ impact on rural development
and poverty reduction could have been much higher, if the “large surplus had been
used to decrease the spread between its on-lending and deposit interest rates”.24
3)
During the second half of the 1990s the unit’s deposits made up about half of
BRI’s Rupiah savings and time deposits, but they contributed only 14% to 25% to
the bank’s loan portfolio. Prior to the financial crisis the units reinvested less than
60% of deposits mobilized in their loan portfolios. This ratio was diminished to
between 30% and 37% since the financial crisis. Also this drain of funds indicates
that the many small savings mobilized by BRI units have been converted into
larger loans provided to an urban and more affluent clientele of the bank. Thus,
the assumption that rural savings are kept in rural areas cannot be fully adhered
to.
4)
Credit expansion has been limited in two respects, the lacking attempt of existing
BRI units to expand their outreach to new clienteles and the lacking expansion of
new units and service posts to areas not yet effectively served by the system.
Most of the units are located in or in close vicinity of urban areas, most usually in
sub-district capitals, where the important clientele of government employees and
traders with sufficient collateral and fixed income is concentrated. The units’ riskaverse lending policy has severely restricted their outreach to potential customers
without a fixed income or collateral such as land titles and motor vehicles.
Furthermore, services are mainly provided to people living in the vicinity of unit
offices. Most units lack the human resources to expand their business to the
village level. These restrictions are also reflected by the units’ loan sizes, which
are usually larger than Rp. 1 million and relatively high for rural areas. The
coverage of BRI units differs considerably. In some provinces they operate in
24
Richard H. Patten, The East Asian Crisis and Micro Finance. The Experience of Bank
Rakyat Indonesia Through June 1999, Jakarta, July 1999.
almost all sub-districts, whereas in provinces such as West Nusa Tenggara and
East Nusa Tenggara they can be found in only three quarters and half of the subdistricts.
BRI units are the backbone of the rural financial system. However, they have not yet
developed into financial institutions of low-income households at the village level. The
units’ potential to serve rural households and microentrepreneurs is not yet fully
exploited. As Charitonenko et al. (1998) pointed out, the main challenge for the future
development of the BRI unit system is to increase its outreach in breadth and depth,
while maintaining its high degree of financial self-sustainability.
The high profitability and liquidity of the system given, it seems not be unreasonable to
expect the system developing a less risk-averse lending strategy and expanding its
credit outreach to rural low-income clients. BRI is in the favorable position to be a
stakeholder of microfinance programs such as the RIGP/P4K project carried out in
cooperation with the Ministry of Agriculture. With some 250,000 members organized in
small groups, this program has been developing a huge market of low-income clients.
A major constraint in this context is that BRI has been refraining from expanding the
unit system’s outreach by actively approaching this clientele.
Chapter 3:
Bank Perkreditan Rakyat (BPR) –
The People’s Credit Banks in Indonesia
Bank Perkreditan Rakyat (BPR)
3. Bank Perkreditan Rakyat (BPR) – The People’s Credit Banks in Indonesia
3.1 “BPR”: Definition and Clarification
The term Bank Perkreditan Rakyat (BPR), or People’s Credit Bank, has been used in
three ways that are often not clearly distinguished in descriptions of the BPR industry.
First, the term has been used retrospectively to distinguish the development of popular
financial institutions since 1895 from the commercial banking sector.25 This point of
view tends to neglect institutional discontinuities in the local financial system. With a
few exceptions, older “BPR” are fresh start-ups by local governments in the 1950s and
1960s. Prior to the banking reform in 1988, the term was not part of the official banking
language and emerged in the mid 1980s as part of the effort to formalize the secondary
banking sector and enable new secondary banks to expand the outreach of the
financial system to rural areas and low-income households.
Second, the term has been used as a generic term for various sorts of secondary
banks and microfinancial institutions that are regarded as “BPR candidates”. The
generic term includes a) local financial institutions established prior to the 1988 banking
reform and allowed to continue as BPR, b) new BPR established on the basis of the
1988 banking reform, c) Badan Kredit Desa (BKD), or Village Credit Boards, which
have their roots in colonial times and were declared BPR by the Banking Act of 1992,
and d) Lembaga Dana Kredit Pedesaan (LDKP), or Rural Credit Fund Institutions,
which were made “BPR candidates” by the 1992 Banking Act and following regulations.
Third, the term has been used as a legal, regulatory and supervisory category and
stands for secondary banks that, according to currently valid laws and regulations, are
legal entities (limited liability company, regional government enterprise, or cooperative),
have to comply with the regulations enacted for secondary banks, and are subject to
supervision and enforcement of secondary bank regulations by the central bank. This
use of the term excludes BKD and LDKP, as they do not meet the requirements
mentioned above.
Bank Indonesia uses the generic term in reporting the number of institutions and
distinguishes three sub-groups: BKD, LDKP, and non-BKD. The latter sub-group is
further divided into “old” (established prior to the 1988 banking reform) and “new”
(established on the basis of the 1988 banking reform) BPR. Financial reports of the
BPR industry, however, usually do not include BKD and LDKP. This has led to
distortions in the description of the BPR industry and is unsatisfactory because of
several reasons. First, the number of more than 9,000 institutions reported exaggerates
the strength of the secondary banking industry. Second, BKD were acknowledged as
BPR in word, but they are neither regulated nor supervised as secondary banks. Their
organization, management and tiny sizes make it rather ridiculous to speak of them as
banks (see chapter 5). Third, LDKP are non-bank microfinance institutions of which the
majority was either not willing or not able to convert to BPR. They do not have to
comply with BPR regulations and are supervised by provincial governments (see
chapter 4).
25
See, Pandu Suharto, 100 Tahun BPR Di Indonesia, 1895-1995, Penerbit InfoBank, Jakarta
1996.
To avoid confusion and stress the need for a separate legal, regulatory and supervisory
framework for non-bank microfinance institutions, the very different worlds of the
generic term have to be clearly distinguished and the “BPR” label should only be
attached to institutions that have the legal entity necessary for secondary banks and
are regulated and supervised as secondary banks. This description is limited to these
BPR, while the BKD and LDKP industries will be discussed in the following chapters.
3.2 History, Number and Types of BPR
The commercial banking system established under the Dutch colonial administration
served to finance large estates and import-export activities. The first independent bank
founded by an Indonesian citizen for indigenous civil servants was established in 1895.
This bank is nowadays referred to as the first Bank Perkreditan Rakyat (BPR) in
Indonesia. Kuiper (1994)26 offered a more appropriate interpretation according to which
this bank had been the beginning of the history of the popular credit system that
became institutionalized into the “Algemeene Volkscredietbank” (AVB) and, after
national independence, into the Bank Rakyat Indonesia (BRI).
Motivated by nationalistic pride and commercial interest, 90 of these independent
banks were established until the early 1930s. Together with the huge number of village
credit institutions (see chapter 5) they made up the “Volkskredietwezen” (popular credit
system). Contrary to the intention of the colonial administration, this system strived for
developing an independent network through which the popular credit banks expanded
their outreach and capacity mobilize local savings resources. With an outreach
comparable to that of BRI today and 80% of their capital mobilized from the village
level, the financial independence of popular credit banks was a thorn in the colonial
administration’s side.
Pointing to the large but fragmented resources of the popular credit system, the Dutch
administrator Fruin argued that the “time was ripe for the merger of the local popular
credit banks to form a general bank” (Kuiper 1994:10). Thus, in 1934 the popular credit
banks and village credit institutions were joined into the “Algemeene Volkscredietbank”
(AVB).27 Within this financially stronger single organization, the AVB branches became
responsible for provide larger loans and channel government credit, while the village
units were to provide micro loans. This system became the model for developing the
broad BRI unit network in the 1980s (see chapter 2).
New secondary banks that emerged in the 1960s had mainly two origins. A network of
Bank Pasar or market banks was developed by the Kosgoro organization, an umbrella
organization of multi-purpose cooperatives. In 1970, this organization had 277 market
banks of which only 6 were located outside of Java. After the establishment of the first
Regional Development Bank (BPD) in West Java, the BPD tried to reorganize village
banks by creating 217 Bank Karya Produksi Desa (BKPD) in the ownership of the
26
27
Klaas Kuiper (ed.), Provisional Manual for the Credit Business of the General Popular Credit
Bank by Th. A. Fruin, with A History of the “Volkscredietwezen” (Popular Credit System) in
Indonesia (1895-1935), The Hague 1994.
The political and economic dimensions of centralizing the popular credit system are
analyzed in L. Th. Schmit: Rural Credit Between Subsidy and Market, Leiden Development
Studies No. 11, Leiden 1991.
district governments. 26 similar institutions were established by the local governments
in Central Java (4), Yogyakarta (3), East Java (1), Bali (15), Lampung (1) and South
Sumatra (2).28 The formation of new institutions was stopped when a decree of the
Ministry of Finance prohibited the establishment of village and market banks in 1970.29
Together with a few privately owned small
banks, these institutions make up the
class of ‘old’ BPR established prior to the
banking reform in 1988. In the 1980s,
these institutions tended to move their
business to urban areas. 86% of their
assets were concentrated in large urban
areas, and many of them faced severe
credit collection problems.30 423 of these
‘old’ BPR operated in 1988, when ‘new’
BPR were not yet established.
Table 3.1
Number of BPR 1988 – 2000
End of
‘Old’
‘New’ *
Total
1988
423
-
423
1993
391
1,045
1,436
1996
371
1,616
1,987
1998
371
1,891
2,262
March 2000
371
2,056
2,427
Source: Bank Indonesia, BPR Supervision Department.
* Includes former LDKP
The banking reform of 1988 (PAKTO 1988) had the objective to expand the outreach of
financial services to rural areas. The government permitted the establishment of new
secondary banks at the sub-district level with a paid-up capital of Rp. 50 million only.
More than 1,000 new BPR were established during the following five years. The
Banking Act of 1992 finally recognized BPR as secondary banks, while Presidential
Decree No. 71 of 1992 required LDKP to seek a BPR license until October 1997. 630
LDKP converted to BPR between 1994 and early 1999. LDKP that obtained a BPR
license were responsible for almost two thirds of the industry’s growth between 1994
and 1999 and for more than 90% of the industry’s growth between 1995 and 1999.
After the rapid growth of the BPR industry it has been facing a severe crisis caused by
factors such as low capitalization, weak management and unsound banking practices.
This situation was aggravated by the financial crisis in 1997/1998. Until 1996 the BPR
industry experienced a loss of 98 institutions, 52 of which were ‘old’ BPR. Bank
Indonesia withdrew the licenses of 58 BPR. 30 BPR were upgraded to commercial
banks and 12 institutions were merged into two BPR. Between 1997 and 1999, Bank
Indonesia withdrew five licenses and was forced to freeze the operation of 72 BPR.
This situation, among other factors, led Bank Indonesia to issue a set of BPR
regulations in May 1999, which expanded the area of operation but increased the
minimum paid up capital to Rp. 2 billion for the greater Jakarta region, Rp. 1 billion for
provincial capitals, and Rp. 500 million for other areas. Aiming at a sound BPR industry
with fewer but larger BPR, these requirements made the establishment of new BPR,
especially in rural and economically less favorable areas, almost impossible. New BPR
were not established after May 1999. Bank Indonesia liquidated or planned the
liquidation of about 300 further BPR in 2000/2001.31
28
29
30
31
See: L. Th. Schmit (1991) and Pandu Suharto (1996).
Surat Keputusan Menteri Keuangan No. B-331/MK/IV/70 tentang Larangan Pembentukan
Bank Desa, Lumbung Desa, Bank Pasar dan Bank-bank Sejenis Lainnya.
See: Lembaga Pengembangan Perbankan Indonesia: Seminar Lembaga Dana dan Kredit
Pedesaan, LPPI, Jakarta 1987; Pandu Suharto (1996).
See, Bisnis Indonesia, 18 November 2000.
Table 3.2
BPR Types and Legal Forms by Region (March 2000)
BPR Type (%)
Legal Form (%) **
Number
of BPR
LLC
COP
RGE
‘Old’
‘New’
BPRLDKP
2.9
61.9
35.1
239
61.9
1.7
36.4
Java
17.4
56.7
25.9
1,854
56.1
3.0
40.7
Bali & West Nusa Tenggara
15.6
64.5
19.9
231
68.0
0.4
22.5
Kalimantan
9.1
45.5
45.5
44
47.7
4.5
47.7
Sulawesi
4.3
95.7
-
47
95.7
2.1
2.1
-
100.0
-
12
100.0
-
-
15.3
58.8
26.0
2,427
58.6
2.6
37.7
Region
Sumatra
Total
Sources : Bank Indonesia, BPR Supervision Department.
* East Nusa Tenggara, Maluku, Irian Jaya.
** LLC : Limited Liability Company ; COP : Cooperative ; RGE : Regional Government Enterprise.
As of March 2000, there were 2,427 BPR32, of which 60% are ‘new’ BPR established
after the banking reform in 1988, 26% former LDKP converted to BPR between 1994
and 1999, and 15% ‘old’ BPR established prior to the banking reform in 1988. 56% of
the 630 LDKP that obtained BPR licenses are former BKK in Central Java. A
considerable number of LDKP converted to BPR also in West Sumatra, East Java,
West Java and West Nusa Tenggara (see chapter 4). Almost all of the 371 ‘old’ BPR
operate in Java (86%) and Bali (10%), and 59% of them are the 217 BKPD in West
Java. The latter are owned by district governments and have been struggling with
governance problems, corruption and insolvencies.33 According to Pandu Suharto
(1996), 45% of the BKPD were classified as less sound or unsound. As of March 2000,
Bank Indonesia had frozen the operation of 76 BKPD.
59% of the BPR were registered as limited liability companies, 38% as regional
government enterprises and 3% as cooperatives. The remaining 24 institutions (21 are
located in Bal) have the legal form of Maskapai Andil Indonesia (MAI), a shareholder
company in which only indigenous citizens are allowed to hold shares. All BPR-LDKP
and 74% of the ‘old’ BPR are owned by local governments and operate as regional
government enterprises. While only 15% of the ‘old’ BPR are registered as limited
liability companies, this is the case for almost all (96%) of the ‘new’ BPR.
With regard to the regional distribution of BPR types it is striking that almost all
institutions in the eastern parts of Indonesia (Sulawesi, East Nusa Tenggara, Maluku
and Irian Jaya) are ‘new’ BPR registered as limited liability companies. Former LDKP
have considerably contributed to the growth of the BPR industry in Sumatra (mainly
West Sumatra) and Kalimantan (mainly South Kalimantan), whereas ‘old’ BPR do not
play a significant role. This is also true for West Nusa Tenggara where 73% of the BPR
are former LDKP, whereas more than three quarters of the BPR in Bali are ‘new’ BPR
that are registered as limited liability companies.
32
33
Note that this number does not reflect BPR liquidations planned for 2000/2001. Currently,
the number of operating BPR may have declined to about 2,100 to 2,200.
See, i.e., Suara Pembaruan Daily, 6 January and 15 April 2000.
Note on Bank Indonesia Data and Sources of Information
Unless otherwise mentioned, the data provided in this chapter were taken from three Bank Indonesia
sources: annual financial reports, monthly financial statistics and monthly BPR reports of the BPR
supervision department. It is important to note that the monthly financial statistics, that can also be
accessed via the Bank Indonesia website, only report the number of BPR, BKD and LDKP and are not
up-to-date in this respect. Numbers presented for BKD include institutions that have terminated their
operations (see chapter 5). Numbers presented for LDKP include institutions already converted to
BPR and exclude a considerable number of institutions still operating as LDKP (see chapter 4).
Numbers presented for BPR exclude almost all LDKP that obtained BPR licenses. Data made
available by the BPR supervision department are more reliable in this respect and are usually used for
describing the overall situation of the BPR industry.
Qualitative information and the assessment of the BPR industry are additionally based on studies
carried out by the ProFI project in 2000:
Detlev Holloh: Bank Perkreditan Rakyat (BPR) in East Java, Bali and West Nusa Tenggara, ProFI
Baseline Survey, Bank Indonesia and GTZ, Denpasar, June 2000.
Detlev Holloh: Small Financial Institutions in East Java, Bali and West Nusa Tenggara, ProFI Baseline
Survey Summary Report, Bank Indonesia and GTZ, Denpasar, June 2000.
Flora Giassemi, Wolfram Hieman and Detlev Holloh: Appraisal of the Proposal “Development and
Upgrading of Microfinance Institutions in Indonesia”, Project Promotion of Small Financial Institutions,
Denpasar, September 2000.
3.3 Regulation and Supervision
3.3.1 Evolution of the regulatory framework
1967-1970. The Banking Act No. 14 of 1967 recognized general banks, savings banks,
regional development banks and foreign banks. It allowed BKD, BKPD and market
banks to continue as is until a separate law regulates their status.34 This law was not
enacted until 1992. In 1970, the Ministry of Finance permitted existing viable market
banks and village banks functioning as market banks to continue their operations, but it
closed the entry for new small banks.35 To revive the rural financial system Bank
Indonesia allowed provincial governments to establish LDKP.36
1988-1989. The banking reform of October 1988 was enacted by presidential decree,
while the establishment and operation of BPR was further regulated by subsequent
decrees of the Ministry of Finance and Bank Indonesia.37 The reform allowed
commercial banks to expand their branch networks and permitted the establishment of
new BPR with a paid up capital of Rp. 50 million only. Their area of operation was
limited to one sub-district. Existing local financial institutions were required to comply
with the new regulations within two years. It is interesting to note that the circular letter
of Bank Indonesia classified existing BKD, market banks and LDKP as BPR.
34
35
36
37
Undang-undang Nomor 14 Tahun 1967 tentang Pokok Perbankan, Article 41.
Surat Menteri Keuangan Republik Indonesia kepada Direksi Bank Indonesia Nomor B
331/MK/IV/8/1970.
Bank Indonesia, Surat Edaran Nomor 4/26-V/PPTR Tahun 1970.
Keputusan Presiden Repubik Indonesia Nomor 38 Tahun 1988; Keputusan Menteri
Keuangan Republik Indonesia Nomor 1064/MK.00/1988 Tanggal 27 Oktober 1988; Surat
Edaran kepada semua BPR di Indonesia Nomor 21/5/BPPP Tanggal 27.10.88.
The banking reform package of March 198938 provided BPR with the opportunity to
open branches in other sub-districts outside of the national, provincial and district
capitals, to upgrade to or merge with commercial banks, and to undergo mergers with
other BPR. The time limit set for complying with the 1988 regulations was eliminated.
Compliance with capital requirements was made dependent on the financial capacity of
a BPR. This made the BPR industry subject to a double standard: part of the industry
had to obtain licenses based on decree No. 1064/1988 of the Ministry of Finance and
has to comply with BPR regulations; the other part is recognized as BPR in word, but
has not been required to meet BPR standards and comply with BPR regulations.
1992-1994. The Banking Act No. 7 of 199239 synthesized the financial sector reforms
since the 1980s. It distinguished commercial banks as primary banks, which are
permitted to offer the full range of banking services, from BPR as secondary banks.
BPR were defined as banks permitted only to accept deposits in the form of time
deposits, savings, and/or equivalent forms (article 1). BPR were further permitted to
provide credit and financing (based on the profit-sharing principle) services, and to
place funds in deposit instruments of Bank Indonesia and other banks (article 13).
Article 16 requires any party collecting funds from the public to obtain a bank license.
BPR are required to operate as regional government enterprises, cooperatives, limited
liability companies, and as other legal forms stipulated by government regulations
(article 21). Article 58 states that BKD, BKPD, market banks and LDKP will be given
the BPR status with fulfilling requirements to be stipulated by a government regulation.
The subsequent regulation40 declared institutions already in possession of a business
license to be BPR. Other institutions were required to seek a license within five years
until October 1997. For obtaining a license BPR had to be registered as a legal entity
and had to deposit a minimum paid up capital of Rp. 50 million. BPR managers had to
meet criteria to be stipulated by the Ministry of Finance. Requirements and procedures
for converting LDKP to BPR were regulated by decree in 1993 and a joint agreement
between Bank Indonesia and the Ministries of Finance and Home Affairs in 1994.41
Among other things, LDKP had to meet the same capital requirements as new BPR, to
have operated profitably in three consecutive years, and to employ directors with
certain formal qualifications. LDKP not meeting such standards until October 1997
were required to refrain from mobilizing deposits from the public.
1998. The amendment of the Banking Act in 199842 largely intended to accommodate
the growing Islamic banking industry and to regulate banking operations based on
Syariah principles more adequately. Two major changes were made with regard to
BPR. First, the BPR industry was now defined as having conventional and Syariah
38
39
40
41
42
Keputusan Menteri Keuangan Republik Indonesia Nomor 278 dan 279/KMK-01/1989
Tanggal 25 Maret 1989.
Undang-undang Nomor 7 Tahun 1992 tentang Perbankan Tanggal 25 March 1992.
Peraturan Pemerintah Republik Indonesia Nomor 71 Tahun 1992 tentang Bank Perkreditan
Rakyat Tanggal 30 Oktober 1992.
Keputusan Menteri Keuangan Republik Indonesia Nomor 221/KMK.017/1993 tentang BPR
Tanggal 26 Februari 1993; Bank Indonesia, Departemen Keuangan, Departemen Dalam
Negeri, Surat Keputusan Bersama tentang Persyaratan Dalam Rangka Pengukuhan LDKP
Menjadi BPR Tanggal 26 September 1994.
Undang-Undang Republik Indonesia Nomor 7 Tahun 1992 tentang Perbankan Sebagaimana Telah Diubah dengan Undang-Undang Nomor 10 Tahun 1998.
institutions that are not permitted to provide payment services (article 1). Third, BPR
are required to guarantee funds mobilized from the public. A deposit protection
institution shall be established for this purpose (article 37B). Article 58, stating that local
financial institutions will be given the BPR status with fulfilling requirements to be
stipulated by a government regulation, was not changed. The 1992 Banking Act and
subsequent regulations had already revoked the elimination of time limits for complying
with BPR standards, but they were not followed by consequent enforcement. The 1998
Banking Act and subsequent regulations sustained this ambiguity, as new time limits
were not set, although the old deadline had expired in 1997.
1999. The new BPR regulations issued by Bank Indonesia in May 1999 substantially
changed the framework for both BPR and non-bank microfinance institutions.
Government regulation No. 30 of 199943 declared decree No. 71 of 1992, in which
capital and conversion requirements had been stipulated, invalid. The regulation itself
was to become valid when new BPR regulations were in place. Bank Indonesia issued
these regulations separately for conventional and Syariah BPR on 15 May 1999.44
Article 2 stipulates that BPR may only be established and operated with a Bank
Indonesia business license. Article 3 determines three legal forms for BPR (limited
liability company, cooperative, regional government enterprise), thus omitting “other
forms” as mentioned in the banking act. BPR may not have foreign shareholders.
Article 4 changes the capital requirements. The minimum paid up capital is increased
to Rp. 2 billion for the greater Jakarta region, to Rp. 1 billion for provincial capitals, and
to Rp. 500 million for other areas.
BPR must have at least one commissioner. Commissioners must have knowledge of or
experience in banking operations (article 20). The board of directors has to consist of at
least two members. Half of the directors must have not less than 2 years experience in
banking operations. Directors must have an educational attainment equivalent to at
least the diploma 3-level (article 21). Family relationships between directors as well as
between directors and commissioners are prohibited (article 22). BPR are now
permitted to operate in urban areas and to open branches throughout one province
(article 25), when they had been classified as sound for one year and have deposited
additional capital required for branches in accordance with article 4. Sound BPR are
also given the opportunity to expand their outreach through services such as payment
points and mobile cash units (article 30). BPR that do not meet requirements for
commissioners and directors have to comply with them within one year (article 56).
The decrees for conventional and Syariah BPR only differ in that BPRS have to be
established and operated on the basis of Syariah principles. Additionally, BPRS have
to set up Syariah supervision boards that supervise compliance with Syariah principles
and the provisions made by the National Syariah Council. BPRS are not permitted to
offer conventional banking services and to change their status to conventional BPR.
43
44
Peraturan Pemerintah Republik Indonesia Nomor 30 Tahun 1999 tentang Pencabutan (…)
Peraturan Pemerintah Nomor 71 Tahun 1992 tentang Bank Perkreditan Rakyat (…)
Tanggal 7 Mei 1999
Surat Keputusan Bank Indonesia Nomor 32/35/KEP/DIR tentang Bank Perkreditan Rakyat
Tanggal 12 Mei 1999; Surat Keputusan Bank Indonesia Nomor 32/36/KEP/DIR tentang
Bank Perkreditan Rakyat Berdasarkan Prinsip Syariah Tanggal 12 Mei 1999.
Other relevant regulations
There are several other regulations dealing with ensuring prudential banking practice
and the soundness of the BPR industry. Decree No. 30 of 199745 deals with the
CAMEL system applied by Bank Indonesia and determines the benchmarks for BPR
ratings. Decree No. 32/54 of 199946 deals with the revocation of BPR business
licenses. Note that both decrees explicitly exclude BKD. The protection of funds
mobilized by BPR from the public is regulated by presidential decree No. 193 of 1998
and Bank Indonesia decree No. 31/166 of 1998.47
3.3.2 Supervision
The banking reform in 1988 assigned the task of BPR supervision to Bank Indonesia.
Prior to the reform local financial institutions were supervised by Bank Rakyat
Indonesia (BRI) on behalf of Bank Indonesia. While Bank Indonesia took over BPR
supervision, BRI continued to supervise the BKD in Java on behalf of Bank Indonesia
and the provincial governments remained responsible for the supervision of LDKP.
In 1999, the government enacted a new Central Bank Law48 through which Bank
Indonesia became an independent authority responsible for achieving and maintaining
monetary stability. To be able to achieve this task Bank Indonesia was given the
authority of licensing, regulating and supervising banks. Bank Indonesia gained full
authority to enforce compliance with existing regulations and liquidate banks that are
unviable or have a detrimental impact on the banking system and the national
economy. The law mandates the transfer of supervisory functions to a new
independent supervisory agency. This agency has to be established not later than
December 31, 2002. Bank Indonesia continues to conduct bank supervision as long as
the new agency has not been established.
BPR supervision lies in the responsibility of Bank Indonesia’s BPR supervision
department (Urusan Pengawasan Bank Perkreditan Rakyat – UBPR) and is carried out
by Bank Indonesia branches. The supervision task comprises both on-site and off-site
supervision. On-site inspections may be conducted periodically or at any time it deems
necessary. Bank Indonesia aims at inspecting each BPR once a year. Off-site
supervision is based on the banks’ obligation to submit monthly reports and any
information required by Bank Indonesia. Bank Indonesia has the right to impose
sanctions on BPR that submit reports later than the 15th of each month.
For both on-site and off-site supervision Bank Indonesia has developed standard
instruments, which cover qualitative and quantitative aspects of BPR operations. In
assessing the soundness of BPR Bank Indonesia applies a CAMEL system, consisting
45
46
47
48
Surat Keputusan Direksi Bank Indonesia Nomor 30/12/KEP/DIR tentang Tata Cara
Penilaian Tingkat Kesehatan Bank Perkreditan Rakyat tanggal 30 April 1997.
Surat Keputusan Direksi Bank Indonesia Nomor 32/54/KEP/DIR tentang Pencabutan Izin
Usaha Bank Perkreditan Rakyat tanggal 14 Mey 1999.
Keputusan Presiden Republik Indonesia Nomor 193 tentang Jaminan Terhadap Kewajiban
Pembayaran Bank Perkreditan Rakyat tanggal 13 November 1998. Surat Keputusan Direksi
Bank Indonesia Nomor 31/166/KEP/DIR tentang Persyaratan dan Tatacara Penjaminan
Pemerintah terhadap Kewajiban Pembayaran Bank Perkreditan Rakyat tanggal, 1998.
The President of the Republic of Indonesia, Act of the Republic of Indonesia Number 23 of
1999 concerning Bank Indonesia, 17 May 1999.
of 7 ratios for measuring capital adequacy, quality of performing assets, profitability and
liquidity, and 25 questions used for assessing general and risk management. Details of
the BPR supervision system were analyzed by separate ProFI reports.49 The ProFI
baseline survey pointed to the need for reviewing the current rating system, because it
gives too much tolerance to short-term loans being in arrears, gives too little weight to
assets quality and loan loss provisioning, and tends to over-state profitability when full
loan loss costs are not accounted for in income statements.
As Bank Indonesia supervision staff did not grow in accordance with the rapid growing
BPR industry, supervision practice often differs from theory. The ProFI baseline survey
showed that only half of the BPR were inspected during the preceding year and that
the frequency for on-site supervision did not correlate with BPR performance. BPR
managers were found to be highly interested in improving Bank Indonesia’s supervision
capacity. They asked for increasing the frequency of on-site inspections, combining
supervision with technical assistance, more effectively enforcing the owners’
compliance with supervision recommendations, and focusing on supervision of
unsound institutions.
New trends in BPR regulation and supervision
Bank Indonesia has realized the weaknesses of the current regulatory and supervisory
frameworks for BPR and non-bank microfinance institutions. Currently, Bank Indonesia
with technical assistance from GTZ-ProFI project is reviewing the existing frameworks
with the aim to improve BPR regulation and supervision, on the one hand, and provide
small financial institutions that do not want to convert to BPR with an adequately
regulated place in the financial sector, on the other hand.
3.4 Regional Distribution and Outreach
The BPR industry is highly
concentrated in Java. More than
three quarters of the BPR
operate in this region. Together
with the BPR in Bali they make
up 83% of all BPR in Indonesia.
A considerable number of BPR
was established in Sumatra, but
68% of the BPR are located in
West and North Sumatra. This
uneven distribution does also
exist in other parts of Indonesia,
while the relevance of the BPR
industry generally has remained
very limited. There are only 44
49
Table 3.3
BPR Regional Distribution (March 2000)
No. of
No. of
villages households
per BPR
per BPR
Number
of BPR
%
239
9.8
90
36,700
1,854
76.4
13
15,500
231
9.5
6
7,000
Kalimantan
44
1.8
138
54,800
Sulawesi
47
1.9
126
58,800
12
0.5
550
131,000
2,427
100.0
19
18,900
Region
Sumatra
Java
Bali & West Nusa T.
Total
Sources : Bank Indonesia, BPR Supervision Department ; Ministry of
Home Affairs ; National Family Planning Board.
* East Nusa Tenggara, Maluku, Irian Jaya
Hendrik Prins: Regulation and Supervision of BPR, Project Promotion of Small Financial
Institutions, Denpasar, March 2000; Detlev Holloh: Bank Perkreditan Rakyat (BPR) in East
Java, Bali and West Nusa Tenggara, ProFI Baseline Survey, Bank Indonesia and GTZ,
Denpasar, June 2000.
BPR in Kalimantan, 61% of which operate in South Kalimantan. 94% of the 47
institutions operating in Sulawesi are located in South and North Sulawesi. With only
12 institutions in East Nusa Tenggara, Maluku and Irian Jaya, the BPR industry has not
achieved a significant outreach in these provinces.
The ratios of BPR to villages (includes urban and rural administrative units) and
households per region show a considerable variance depending on regional
distribution, size of the regions and population density. On average, there is a
(theoretical) market of 19 villages and 18,900 households per BPR. In Bali, the ratio of
BPR to villages is only 1 to 4 and the ratio of BPR to households only 1 to 4,200. In
Java, these ratios are also below the overall average, whereas they are far above the
overall average in all other regions. In Kalimantan and Sulawesi, there are more than
100 villages and 50,000 households per BPR. In other eastern parts of Indonesia there
is a ratio of one BPR to 550 villages and 131,000 households.
Table 3.4
BPR Outreach (March 2000)
Sumatra
Java
Bali &
WNT**
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
8.8
28.7
1.6
2.4
2.8***
1.6
45.8
1,477
1,623
4,496
1,604
1,525
2,075
1,882
As % of households
4.0
10.5
64.4
2.9
2.6
1.6
10.0
Avg. amount/acc. (Rp.,000)
381
208
128
326
219
157
205
Avg. number per BPR
37
124
97
25
20
44
109
As % of households
0.1
0.8
1.4
0.04
0.03
0.03
0.6
20.5
4.1
7.3
11.9
18.5
17.0
5.0
Avg. number per BPR
381
1,019
727
469
364
845
905
As % of households
1.0
6.6
10.4
0.9
0.6
0.7
4.8
Avg. amount/acc. (Rp. m)
3.4
1.0
2.0
2.0
2.7
1.7
1.2
Outreach Indicator
Savings deposit accounts
Avg. number per BPR
Time deposit accounts
Avg. amount/acc. (Rp. m)
Loan accounts
Sources : Bank Indonesia, BPR Supervision Department ; National Family Planning Board.
* East Nusa Tenggara, Maluku, Irian Jaya ; ** West Nusa Tenggara ; *** There are no BPR in South-east Sulawesi ;
figure does not include the number of households of this province.
As of March 2000, the average BPR had 1,882 savings deposit accounts and,
assuming one account per household, an outreach to about 10% of all households.
With the exception of Bali, the average number of savings accounts shows a
considerably lower variance than the percentage of households reached. This is due to
uneven regional distribution of BPR. The BPR in West Sumatra, the greater Jakarta
area, Central Java, Yogyakarta and West Nusa Tenggara reached between 15% and
20% of the households in their areas, whereas BPR in the eastern parts of Indonesia
reached less than 3% of the households. Bali is an exceptional case with the number of
savings accounts exceeding the number of households in the province. The ProFI
baseline surveys showed that Balinese households usually have more than one
passbook. Besides socio-cultural factors, this is due to high competition among and
effective mobile services of financial institutions in Bali.
BPR usually have only few time deposit accounts, with their average number ranging
from 20 in Sulawesi to 124 in Java and Bali. However, as will be shown later, time
deposit accounts have become the major instrument for mobilizing deposits from the
public. Average time deposits amounted to Rp. 5 million, while average savings
deposits amounted to only 205,000 per account. Contrary to average savings deposits,
average time deposits vary significantly between the regions. While the BPR in Java
mobilized Rp. 4 million per account, average time deposits in Sumatra, Kalimantan,
Sulawesi and the other eastern parts of Indonesia were three to four times as high.
Average time deposits exceeded Rp. 20 million per account in Lampung, the greater
Jakarta, South Kalimantan, North Sulawesi, East Nusa Tenggara, and Irian Jaya. This
suggests that many BPR in these provinces serve a rather different clientele compared
to the BPR in Java. Contrary to savings deposit instruments, which are also needed by
low-income households for managing their liquidity, time deposit products with much
higher returns have attracted middle-income households.
As of March 2000, about 5% of the Indonesian households had loans provided by BPR.
The average BPR had 905 loan accounts with an average outstanding amount of Rp.
1.2 million. The BPR in West Java with more than 2000 loan accounts, on average,
had the highest outreach in terms of the number of borrowers, whereas the average
number of loan accounts was below 500 for the BPR in Sumatra, Kalimantan and
Sulawesi. It is interesting to note that the ratio of savings to loan accounts in Java was
lower than 2 to 1, whereas the number of savings accounts in West Kalimantan,
Central Sulawesi and Bali exceeds the number of loan accounts by seven to ten times.
The Balinese BPR had the highest outreach in terms of the percentage of households
reached with credit services (14%). With 8% to 10% this outreach was also significant
in the greater Jakarta area, Central Java, Yogyakarta and West Nusa Tenggara.
The BPR in West Java (Rp. 469,000) and West Nusa Tenggara (Rp. 590,000) had the
lowest average loan amounts outstanding. The Javanese BPR, in general, serve many
borrowers with relatively low loans amounts. The BPR in the greater Jakarta area, for
which loan amounts outstanding per account averaged Rp. 2.7 million, are an
exception in this respect. Exceptionally large loans were provided by the BPR in West
Kalimantan and Lampung, with average loan amounts outstanding amounting to Rp.
4.2 million in the first and even to Rp. 7.2 million in the second case. Also these
findings indicate that the BPR industry does not serve a homogeneous clientele. They
also indicate that, contrary to the expectation of the Banking Acts of 1992 and 1998,
many BPR opened up an urban and middle-income market rather than providing
financial services to rural areas and low-income groups. It can also be concluded that
BPR fulfil their intermediation function in different ways. The BPR in Java tend to
collect small savings from many customers to finance relatively small loans of many
borrowers. The BPR in Bali collect small savings from an outstanding number of
customers to finance larger loans of a relatively small number of borrowers. The BPR
in West Kalimantan and Lampung collect relatively large savings from a large number
of customers to serve a few number of borrowers with large loan amounts.
3.5 Current Financial Situation and Performance
Assets size and financial structure
As of March 2000, the average assets per BPR amounted to Rp. 1.5 billion and ranged
from only Rp. 573 million in West Sumatra to Rp. 9.3 billion in Lampung. 72% of the
total liabilities and equity of the BPR industry was invested in the BPRs’ loan portfolios.
In most provinces the loan portfolio to assets ratio was between 65% and 75%. Two
major exceptions are the BPR in South Sumatra with a ratio of only 38% and the BPR
in North Sulawesi with a ratio of 86%.
Table 3.5
BPR Assets and Balance Sheet Structure (March 2000)
Region
Avg. assets per BPR (Rp. b)
Total assets (Rp. b)
Inter-bank assets (%)
Loan portfolio (%)
x)
Savings deposits (%)
Time deposits (%)
x)
x)
x)
Inter-bank liab. & loans (%)
x)
Sumatra
Java
Bali &
WNT**
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
1.9
1.4
2.0
1.4
1.2
2.1
1.5
462.0
2,574.5
457.6
63.5
58.1
25.1
3,640.8
28.5
19.1
15.3
27.2
11.7
15.5
19.8
67.3
73.2
72.3
64.5
79.1
68.6
72.3
29.1
24.3
29.1
36.2
27.0
15.5
25.7
39.3
36.3
35.4
20.3
30.6
35.5
36.2
12.4
16.4
17.6
10.4
12.4
8.0
15.8
x)
* East Nusa Tenggara, Maluku, Irian Jaya ; ** West Nusa Tenggara ; as percentage of total assets.
Time deposits are the major source of funds for the BPR industry, and contributed 36%
to its total liabilities and equity as of March 2000. There is high variance between the
provinces also in this respect. The BPR in Lampung, Central Java, East Java, and East
Nusa Tenggara had more than 40% of their funds mobilized through time deposit
instruments, whereas time deposits contributed less than 20% to the BPR funds in
Aceh, West Sumatra, South Sumatra, South Kalimantan and South Sulawesi.
Savings deposits are the second major source of funds and contributed 26% to the
industry’s total liabilities and equity, and together with time deposits they financed 62%
of total BPR assets. This share of savings and time deposits was less than 50% in
Aceh, the greater Jakarta area, South Kalimantan and Maluku, while it exceeded 70%
in Riau, Jambi and Lampung.
The BPR in the eastern parts of Indonesia generally depend to a much higher degree
on equity as a source of funds than BPR in other regions. In Bengkulu, South
Kalimantan and Maluku equity financed more than 35% of the total BPR assets in
these provinces. Inter-bank liabilities and loans were most important as a source of
funds in the greater Jakarta area and Aceh, where they contributed more than one
quarter to the BPRs’ total liabilities and equity.
Assets and loan portfolio quality
As of March 2000, the classified to performing assets ratio was 14% for the entire BPR
industry and ranged from a low 2% in Lampung to 32% in the greater Jakarta area. As
classified assets according to Bank Indonesia standards include only 50% of substandard assets, 75% of doubtful assets, and 100% of loss, these ratios already
indicate that a considerable part of the industry experienced serious loan collection
problems. The loan portfolio at risk ratio, which includes the total loan amount not
classified as standard, is a better measurement for credit performance.
Table 3.6
BPR Assets and Loan Portfolio Quality (March 2000)
Sumatra
Java
Bali &
WNT**
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
92.1
78.7
67.5
79.1
82.4
80.1
79.0
Sub-standard (%)
2.2
4.2
3.6
2.9
4.0
9.1
3.9
Doubtful (%)
3.0
6.7
4.7
2.7
6.6
9.3
6.0
Loss (%)
2.6
10.3
24.4
15.3
7.0
1.5
11.1
7.9
21.3
32.5
20.9
17.6
19.9
21.0
17.3
39.3
33.8
28.9
29.5
18.7
37.7
4.2
13.9
24.4
13.2
12.1
10.6
13.8
Region
Loan portfolio classification
Standard (%)
Loan portfolio at risk (%) ***
No. of loans at risk (%)***
Classified to performing
assets ratio (%)
* East Nusa Tenggara, Maluku, Irian Jaya ; ** West Nusa Tenggara ; *** Includes loans not classified as "standard".
The overall loan portfolio at risk ratio was 21%. Bank Indonesia classified 4% of the
industry’s total loan portfolio as sub-standard, 6% as doubtful and 11% as loss. Note
the loan classification system provides high tolerances. I.e., monthly installment loans
in arrears for less than three months are classified as standard. These loans have to be
classified as loss only after 27 months. The loan portfolio at risk ratio ranged from only
3% in Lampung to an outstanding high 48% in the greater Jakarta area. Extremely high
ratios of more than 30% were also faced by the BPR in East Kalimantan and Bali.
Loans classified as loss made up more than one quarter of the total loan portfolio in
these regions. Apart from Lampung, only the BPR in Central Sulawesi, Jambi and
Bengkulu had less than 10% for their loan portfolio value at risk.
CAMEL rating
The BPR supervision system includes a rating of BPR soundness based on 7 CAMEL
ratios and 25 management indicators. As of March 2000, Bank Indonesia classified
62% of the BPR as sound or fairly sound, 8% as less sound and 26% as unsound. The
soundness of BPR varies extremely between provinces. All or close to all BPR were
classified as sound or fairly sound in Jambi, Bengkulu, Lampung, Central Kalimantan,
Central Sulawesi, Maluku and Irian Jaya. More than or close to half of the BPR were
rated less sound or unsound in West Sumatra, South Sulawesi and East Kalimantan.
The worst performing region is the greater Jakarta area with 49% of the BPR classified
as unsound and only 30% rated sound or fairly sound.
Table 3.7
BPR CAMEL Rating (March 2000)
Region
Sumatra
Number
of BPR
Classification in % of BPR
Sound
Fairly
sound
Less sound
Unsound
Not
Classified
239
51.0
15.5
11.3
21.8
0.4
1,854
44.1
16.2
12.7
27.0
4.9
231
61.0
10.4
7.8
20.8
0.0
Kalimantan
44
50.0
23.7
15.8
10.5
13.6
Sulawesi
47
48.0
8.0
12.0
32.0
0.0
12
58.3
33.3
0.0
8.3
0.0
2,427
46.7
15.6
8.3
25.6
3.9
Java
Bali & West Nusa Tenggara
Total
Source : Bank Indonesia, BPR Supervision Department.
* East Nusa Tenggara, Maluku, Irian Jaya
3.6 Development Trends 1995 - 2000
The number of BPR increased considerably in the second half of the 1990s, mainly
because of the conversion of LDKP to BPR. Thus, the growth rate of average BPR
assets has been slower than that of the total assets of the BPR industry, and it went
negative during the financial crisis in 1997/1998. As of March 2000, total assets had
grown by 42% and average assets by 15% compared to the end of 1996. The
considerable growth of both total and average assets since 1999 indicates that at least
part of the industry has been recovering from the impact of the crisis.
This is also suggested by the changing financial structure of the industry, the growth in
the number and amount of loans outstanding, and the growth in savings accounts and
amounts. While the loan portfolio to assets ratio decreased from 79% to 68% during
1997/1998, it recovered to 72% until March 2000. The BPRs’ gross loan portfolio
decreased by 9% and the number of loan accounts by during the financial crises, but it
grew by 41% during the 15 months until March 2000. The number of loans showed
negative growth rates in both the period between 1995 and 1996 and the period
between 1997 and 1998. During 1999 until March 2000, however, the total number of
loan accounts increased by 49% and the average number of accounts per BPR by
38%. This trend can also be found for other financial institutions, as economic
conditions for profitable loan uses have been improving since 1999.
A similar recovery can be found with regard to deposit mobilization, with savings and
time deposits growing by 50% between December 1998 and March 2000, and their
share in total BPR funds increasing to a level comparable to that prior to the crisis. The
number of savings and time deposit accounts showed the fastest growth since 1994. In
this respect, however, the BPR have been facing a different situation compared to
financial institutions such as the BRI units and the LPD in Bali, which experienced an
outstanding savings growth during the financial crisis. The lacking soundness and
solvency of many BPR during the 1990s had undermined the public image of the entire
industry. Many clients lost confidence in the industry and transferred deposits to
financial institutions regarded as safe places to save.
Table 3.8:
BPR Development Trends December 1994 – March 2000 (in Billion Rupiah)
Growth
Number of BPR
Total assets
Average assets per BPR
Inter-bank assets
Gross loan portfolio
As % of total assets
Savings & time deposits
Loan accounts
Number (,000)
Avg. number per BPR
Avg. amount
Savings deposit accounts
Number (,000)
Avg. number per BPR
Avg. amount (Rp. 000)
Time deposit accounts
Number (,000)
Avg. number per BPR
Avg. amount
Growth
Growth
Dec 1994 Dec 1996 12/94-12/96 Dec 1998 12/96-12/98 Mar 2000 12/98-3/00
2,262
2,427
1,873
1,987
6.1%
13.8%
7.3%
2,751
3,641
1,900
2,574
35.5%
6.9%
32.3%
1.2
1.5
1.0
1.3
27.7%
- 6.1%
23.3%
230
294
624 112.4%
720
27.8%
15.5%
1,861
2,632
1,476
2,036
38.0%
- 8.6%
41.4%
77.7
79.1
67.6
72.3
1,500
2,252
1,207
1,554
28.8%
- 3.5%
50.1%
63.5
60.4
54.5
61.9
1,642
877
1.7
1,609
810
2.5
- 2.0%
- 7.6%
49.4%
1,479
654
2.8
- 8.1%
- 19.3%
13.2%
2,197
905
2.9
48.5%
38.4%
2.2%
3,806
2,032
0.11
3,865
1,945
0.14
1.6%
- 4.3%
30.3%
3,883
1,717
0.16
0.5%
- 11.7%
9.3%
4,568
1,882
0.21
17.6%
9.6%
29.9%
160
85
9.1
122
61
16.2
-23.8%
- 28.1%
76.5%
117
52
17.2
- 4.1%
- 15.8%
5.8%
264
109
12.1
125.6%
110.3%
- 29.5%
Source: Bank Indonesia, BPR Supervision Department and Monthly Financial Statistics.
Since then, the BPR industry and its associations have been struggling with improving
the BPR image and regain the trust of its clientele. Especially the outstanding growth in
the number of time deposit customers shows that a great part of the industry has been
succeeding in this respect. While this number decreased continually until 1998, the
total number of time deposit account increased by 126% and the average number of
accounts per BPR increased by 110% between December 1998 and March 2000.
3.7 The ProFI BPR Baseline Survey in East Java, Bali and West Nusa Tenggara
The ProFI baseline survey was conducted in the first half of 2000 and covered 115
BPR in East Java, Bali and West Nusa Tenggara, which were selected based on
assets size and loan portfolio quality. An additional survey on the perceptions and
preferences of BPR customers covered 552 respondents. The survey was conducted
with standardized questionnaires covering organizational, management and financial
information as of December 1999. Management information was complemented and
discussed during four workshops with directors of BPR participating in the survey.
Major Findings
High variance. The baseline survey gave high emphasis to showing that the BPR
industry is extremely differentiated in terms of governance, organization, management,
outreach and performance. BPR are simple organizations with few employees or they
are highly differentiated organizations with dozens of employees and a network of
service units. They enjoy high management autonomy or operate with considerable
involvement of owners and commissioners. They are market-oriented institutions or
depend on bureaucratic decision-making. They operate in the boundaries of one subdistrict or reach out to dozens of sub-districts. They operate in economically less
favorable rural areas or are urban financial institutions. They serve low-income
households or a clientele with rather high savings and credit absorption capacities.
They reach out to dozens or thousands of customers. They reach financial volumes of
small commercial banks or operate at scales similar to that of savings and credit
associations. They are sound and highly profitable or unviable institutions at the brink
of bankruptcy.
•
•
•
•
Ownership and management. The BPR had 9 shareholders, on average, but 40%
of them had less than 3 shareholders. One shareholder held the majority shares in
57% of the BPR. The board of commissioners usually includes owners and consists
of two or three members, who often had no prior banking experience. 43% of the
BPR had only one director. The percentage of BPR managed by directors without
prior banking experience was also 43%. More than half of the directors had attained
university degrees, but 16% of the BPR had directors with educational levels not
higher than the high school level. 47% of the BPR enjoyed full or relatively high
autonomy. Low management autonomy with owners or commissioners dominating
operational decision-making was found in 13% of the cases. Owner involvement did
not generally affect performance negatively. Findings, however, did also not show
that owner involvement helps to improve BPR performance.
Organization and staffing. The BPR organization may be simple or highly
differentiated. In the first case, BPR had less than 10 staff and low degrees of
organizational differentiation. In the latter case, BPR were managed by 2 or 3
directors, has more than 40 employees, several divisions and, in some cases,
networks of service units. The average BPR had 22 but 28% had less than 10 staff.
60% of the BPR had hired only staff without banking experience. Educational
attainments were usually not higher than the high-school level.
Internal and financial management. The major management problems identified
by BPR directors were loan collection and human resource problems. Loan losses
were ascribed to character-related factors, adverse economic conditions, and
internal factors such as inadequate credit analysis. One third of the BPR lacked an
internal control system. Weak internal control and other management weaknesses
were found to be striking features of poorly performing BPR. One third of the BPR
lacked clear policies for lending to related parties. General lending limits applied did
not prevent concentrating large parts of the loan portfolios in few hands. 26% of the
BPR had 10% to 30%, and 10% had more than 30% of their loan portfolios
allocated to only five borrowers. The loan portfolio quality was found to be
significantly poorer for the letter institutions. Collateral is an unpredictable
management field. 72% of the BPR had no experience with formal collateral
execution. There is one theme independently of practical experience: collateral
execution does not pay because of small loan sizes and low worth of collateral, on
the one hand, and lacking law enforcement and corruptive jurisdiction, on the other
hand. Many BPR had no clear standards for writing off loans. Small institutions
were inclined to avoid write-offs because of undefined hope for loan recovery or
insufficient loan loss provisions.
Savings and credit products. All BPR offered savings deposit products that allow
daily withdrawals and enable customers to manage their liquidity. The average
annual effective interest paid on the main product was 12%, with 39% of the BPR
paying less than 11% and 20% more than 12%. Almost all BPR offered time deposit
products with varying terms. The average annual effective interest rate was 16%,
with 39% of the BPR paying less than 15% and 21% more than 20%. The BPRs’
competitive position and demand for loanable funds were the major predicators for
this variance. Credit products varied with regard to interest rates and terms. The
average annual effective interest rate was 31% for the products with the lowest and
44% for those with the highest interest rate. Loan terms averaged 9 months for the
shortest and 26 months for the longest terms provided.
•
Location and outreach. BPR usually operate one office in sub-district centers, at
local markets or main arteries. Only 6% of the BPR operated in a distance of more
than five kilometers from the sub-district capital. Average assets decrease and loan
portfolio quality increases with the distance to the district capital. The outreach to
sub-districts varied considerably with 35% of the BPR reaching up to 4 and 32%
more than 9 sub-districts. Average assets increase with outreach. On average, 57%
of the savings were mobilized and 51% of the loan portfolio was concentrated in
one sub-district. The average BPR had 3,383 savings deposit accounts with an
average amount of Rp. 437,000. The number of accounts ranged from below 10 to
58,429, and the average amount per account from Rp. 27,000 to Rp. 10.7 million.
The BPR had 107 time deposit accounts, on average, with an average amount of
Rp. 18 million per account. Large BPR are large because of time deposit services.
BPR with assets larger than Rp. 5 billion had mobilized Rp. 19.7 billion from only
7,934 time deposit customers compared to Rp. 4.9 billion from 210,000 savings
deposit customers. With 887 loans outstanding, on average, the number of loan
accounts ranged from 35 to 8,263. The average loan amount outstanding per
borrower was Rp. 2.9 million, but ranged from Rp. 181,000 to Rp. 54 million. Three
quarters of the loans were working capital loans and 19% consumption loans. 52%
of the loans were disbursed to the trading and 14% to the agricultural sector.
•
Assets size and financial structure. The average BPR placed 20% of its
resources in bank accounts and 68% in the loan portfolio. The average share of
savings and time deposits in all resources was 53%. The average BPR generated
76% of its income from lending and 18% from bank placements. Financing costs
contributed 43% operating costs contributed 56% to total costs. The financial
structure varied dependent on assets size or vice versa. Assets were the larger the
more savings and time deposit mobilization replaced dependence on equity and
loans. With growing assets an increasing part of assets is placed in banks at the
cost of the loan portfolio. Consequently, the role of income from bank placements
increased at the cost of income from lending, while the role of financing costs
incurred by higher degrees of deposit mobilization increased at the cost of
operating costs. The crucial role of deposit mobilization for BPR growth is reflected
in the fact that BPR with assets larger than Rp. 5 billion are much higher leveraged
institutions (debt to equity ratio: 13:1) than BPR with assets smaller than Rp. 500
million (debt to equity ratio: 2:1).
Financial Structure by Assets Class
Assets < Rp. 500 million (29 BPR)
Liabilities & Equity
Assets
Assets
Inter-bank
11%
Deposits
37%
Inter-bank
27%
Deposits
Loan portfolio
73%
Equity
44%
Loan portfolio
65%
Equity
Income
•
Assets > Rp. 5 billion (21 BPR)
Costs
Income
80%
8%
Costs
Bank interests
10%
Financing costs
27%
Bank interests
24%
Financing costs
65%
Credit income
83%
Operating costs
72%
Credit income
72%
Operating costs
34%
Financial performance and soundness. Based on the CAMEL ratios currently
applied by Bank Indonesia, three quarters of the BPR were found to be sound or
fairly sound. Major problems were found with regard to assets quality. While the
average ratio of classified assets to performing assets was 10%, 20% of the BPR
were unsound in this respect. The average ratio of loan loss provisions made to
provisions required was only 52% (without collateral taken into account), and 48%
of the BPR were unsound in this respect. This rating does not require full loan loss
provisions and is based on a loan classification that provides high tolerances.
Taking into account the total loan amount not classified as standard, the BPR had
an average 17% of their loan portfolios at risk. Taking into account full loan loss
provision costs as well as imputed capital costs, more than half of the BPR arrived
at negative net margins in 1999. An alternative rating that gives more emphasis to
loan portfolio quality and compliance with loan loss provision requirements showed
that about 35% of the BPR would be rated less sound or unsound, if this approach
is applied. The high losses incurred by one quarter of the BPR indicated that their
financial sustainability was at stake.
•
Trends in financial performance. While this situation is far from satisfying, the
BPRs’ development showed encouraging trends of improvement after the financial
crisis in 1997/1998. During the years from 1997 to 1999 the BPR experienced a
similar financial development. Fund mobilization and asset growth stagnated in
1997 and increased slowly in 1998. Increasing fund mobilization in 1998 was not
accompanied by growth in portfolio investment. The two years of the financial crisis
and its aftermaths provided less favorable conditions for loan portfolio investments
than for fund mobilization. The average value of loan portfolios declined by 19%
until the end of 1998. Funds mobilized had to be placed in bank accounts the
average value of which doubled between 1996 and 1998. The average loan
portfolio at risk increased only slightly during this period, indicating that portfolio
quality was not generally negatively affected by the financial crisis. 1999 was the
year of recovery and new growth. Savings and time deposits mobilized grew by
54% and assets by 38%, on average. The growth in funds could be invested in the
loan portfolio. The latter grew by 56% and bank placements by only 8%. The loan
portfolio was also positively affected with the portfolio at risk declining by 8%. The
BPRs’ assets quality and profitability improved slightly but continuously. The
percentage of sound BPR increased from 55% in 1997 to 65% in 1999, and that of
unsound BPR decreased from 18% to 9% during the same period.
•
Perception and preferences of the BPR clientele. The most striking, and
because of the industry’s poor performance partly unexpected, result of the
customer survey was the relatively high satisfaction at least of the BPRs’ own
clientele. Easy and fast services combined with door-to-door services are the
dominating factors predicating the customers’ satisfaction and choice of financial
institutions. The vast majority of customers felt that their BPR is a safe place to
save, though state banks were ranked higher in this respect. Interest paid on
deposits does not generally provide a strong savings motivation. In competitive
environments such as in Bali, however, BPR customers regard lower interest paid
on deposits as a disadvantage. The major disadvantages mentioned are the BPRs’
high credit interests and their lacking capacity to approve larger loans. In some
regions actual and potential BPR customers missed an active market orientation of
the industry. It was concluded that BPR might improve their image and competitive
position by making deposit products more attractive, increasing loanable funds to
be able to meet the credit of their potential clientele, and improving product
marketing and mobile services.
3.8 Assessment and Conclusions
Strength and weaknesses
The BPR industry, in general, has achieved a considerable outreach and, in certain
regions of Indonesia, serves a clientele that had no access to banking services prior to
the banking reform in 1988. This is particularly true in provinces where large numbers
of LDKP were converted to BPR. BPR contribute 20% to all bank offices in East Java
(including BRI units, excluding BKD), 30% to all bank offices in West Sumatra, 32% to
all bank offices in Bali, and 38% to all bank offices in West Nusa Tenggara. In the latter
province they are, besides BRI units, the only banks with a significant outreach to the
sub-district level. They have a similar number of savings customers as the Regional
Development Bank and outclass the private banking industry in this respect. In the East
Lombok district they account for one third of the banking industry’s total loan amount
outstanding. BPR as independent bank units were able to adjust their products and
services to local conditions and the demand of a clientele that has not been able to get
access to commercial banks. Especially, simple products, convenient services and fast
procedures have attracted and satisfied BPR customers.
These strengths of the BPR industry, however, most probably apply to only half of its
institutions. After the rapid growth of the BPR industry in the first half of the 1990s it
faced a severe crisis caused by factors such as low capitalization, weak management
and unsound banking practices. Many BPR were established by business
conglomerates and other parties in urban rather than in rural areas. Fast profit and
rent-seeking motivations rather than sustainable institution building characterized part
of the industry.
The idea of the 1988 banking reform and the 1992 Banking Act was to expand the
outreach of banking services to rural and low-income households through a viable
secondary banking industry. Already in the mid of the 1990s it became clear that the
industry had fallen short of this expectation. The conversion of 630 LDKP to BPR in the
second half of the 1990s contributed to improving this situation. The financial crisis in
1997/1998 brought the real state of the industry to light. Cases of mismanagement,
fraud and insolvencies considerably deteriorated the image of the industry and the
confidence of its customers. Bank Indonesia as well as the BPRs’ associations realized
the need for cleaning up the industry in order to allow its sound and viable part to
recover and regain public trust. As of November 2000, Bank Indonesia had liquidated
about 90 BPR and planned to finalize the liquidation of a further 260 institutions. Signs
of recovery and new growth since 1999 indicate that the BPR industry, will be able to
overcome the causes of its crisis after the final cleanup of its unviable part.
The assessment of strengths and weaknesses of BPR would necessarily be very
limited, if it has to be based on aggregated data only. The results of the ProFI baseline
survey allow summarizing some major issues that have to be resolved by the BPR
industry and other related parties. It has to be taken into account that these issues
were derived from the analysis of BPR in East Java, Bali and West Nusa Tenggara.
Most probably, however, they also apply to BPR in other provinces.
•
Restricted management autonomy. The management autonomy of BPR is often
restricted by the involvement of owners and commissioners in operational decisionmaking. BPR with strong owner involvement do not perform better and often worse
than those enjoying high management autonomy. Higher degrees of functional
differentiation, clearly distinguishing between the roles of owners, commissioners
and directors, and making directors fully responsible for BPR operations may
contribute to improving soundness.
•
Bureaucratic governance. Restricted management autonomy is a special issue
for BPR-LDKP. Owned by local governments they tend to be governed by
bureaucratic command. Dependence on centralized decisions undermines marketoriented banking necessary to react flexibly to local conditions.
•
Ineffective internal control. Effective internal control is a major factor relevant for
improving BPR soundness. Its lacking effectiveness is a striking feature of poorly
performing BPR. Effective internal control requires functionally differentiated
authorities for special internal control staff.
•
Low functional and organizational differentiation. Low levels of functional and
organizational differentiation characterize the institutional setup and practice of
many BPR. The effectiveness and efficiency of these institutions suffer from an
unclear division of labor and understanding of specialized functions. Institution
building requires improving this differentiation in accordance with financial and
human resources.
•
Lacking compliance with loan loss provision requirements. The serious underprovisioning reveals unsound management practice and is a major problem to be
solved in the field of financial management. Loan loss provision costs have to be
fully accounted for in the income statement. Creating a sound BPR industry
requires enforcing full loan loss provisioning.
•
Unsound credit management. Loan loss was incurred through business failures,
moral hazard, inadequate credit analysis, and deviation from prudential credit
procedures. Neglect of lending limits is also a major issue in this respect. Loan
portfolio quality worsened with large parts of the loan portfolio concentrated in few
hands. Considering that prudential credit analysis and loan approval procedures
would have prevented also much of the loss managers ascribe to business failures
and the borrower’s character, improvement of credit management has to be
regarded as a priority field of action.
•
Low operating efficiency. The average operating costs to operating income ratio
was unsound for the small BPR. The margin between income and costs is often too
small to generate returns sustaining the real value of capital. The BPR-LDKP in
West Nusa Tenggara, for example, have more than 10 staff but average assets of
Rp. 547 million only. Their staff is two to three times as large but their assets four
and more times as low as for the BRI units in the province. Operating efficiency has
to be improved by reducing personnel costs and/or increasing outreach.
•
Lack of capital versus over-liquidity. Lack of capital and over-liquidity are two
opposite financial situations faced by BPR. Over-liquidity, mainly experienced by
large BPR for which time deposits are the major source of funds, reflects difficulties
in creating new credit markets. Lack of capital reflects low degrees of deposit
mobilization of mainly small BPR and BPR-LDKP. Both situations required active
market-orientation and entrepreneurship.
•
Weak market-orientation and entrepreneurship. Innovative product, marketing
and entrepreneurship are crucial for tackling both problems. Time deposit services
of small BPR are considerably under-developed. Opening new credit markets
requires diversifying loan products, convenient and fast credit procedures. Lack of
market-orientation and entrepreneurship is a major weakness of BPR-LDKP
operated by civil servants who depend on decisions of local governments.
•
Low quality of human resources and lack of training impact. Low quality of
human resources is the keyword most often used to define the core problem of
BPR. The analysis of management aspects and the BPR directors’ own problem
analysis pointed to lacking skills covering the entire range of banking operations.
Training is often considered the key to solving these problems. There is, however,
considerable lack of knowledge regarding the impact of training. Data and evidence
do not show that training has positively affected performance. Training contents is
often not tailored to the needs of a specific institution, and trainees are often not
able or authorized to transform training contents into practice.
Potentials and constraints
Despite the rapid development of the commercial banking sector and the large network
of some 3,700 BRI units, the primary banking sector still has a highly limited outreach
to rural areas, in general, and the village level, in particular. With more than 2,000
viable institutions the BPR industry has developed into an indispensable sub-system of
the financial system in Indonesia. However, it has not yet been able to fully develop the
huge market left by the primary banking sector. The BPR industry is highly
concentrated in Java and Bali, and the majority of its institutions have been operating in
urban and business centers.
This situation may suggest that the development of viable financial institutions has
economically not been feasible in rural areas and regions outside of Java and Bali.
Especially private investors avoided penetrating rural markets and regions that
appeared to be less profitable. There is, however, every indication that this explanation
is too simple and, therefore, misleading. Since the return to the “wisdom of the market
economy”50 in the 1980s private entrepreneurship has been developing only slowly.
Especially in the early 1990s, many private investors in the BPR industry showed a
rent-seeking rather than profit-seeking orientation. The promise of fast and high returns
rather than viable institution building determined their investment decisions. There are
other examples of privately owned BPR that have expanded their outreach to rural
areas and low-income households in profitable and sound ways. Non-governmental
organizations such as Bina Swadaya proved the viability of rural BPR, which now serve
a clientele formerly dependent on financial self-help and informal sources of finance.
The same is true for many BPR-LDKP, although they have not yet fully succeeded to
transform bureaucratic governance into market-oriented banking.
There is sufficient evidence that the majority of rural households have considerable
demand for both savings and credit services. Moneylenders are still omnipresent and
meet the existing credit demand at high interest rates. Microfinancial institutions with
scarce loanable funds are not able to meet the existing credit demand. Loan approvals
often distribute scarce funds, thus limiting the profitability of investments. Savings and
credit groups need financial institutions to deposit excess funds and increase their
loanable funds. There is a range of development projects with microfinance activities
that prepare new markets for financial institutions and aim at sustaining financial
services to their target groups. Poverty and social safety net programs channeling
cheap and easy money to the villages have been inhibiting BPR from expanding
outreach to the village level. These programs, however, are not sustainable. If the
government changes its mind and returns to focusing on viable institution building in
microfinance, BPR would be better able to develop their potential rural markets.
Based on these considerations, the assessment of the BPR industry’s potentials and
constraints has to distinguish between the potentials and constraints of the currently
existing institutions, on the one hand, and the potentials and constraints for expanding
the BPR industry into regions and markets which are currently not yet reached by the
industry.
50
Radius Prawiro, Coordinating Minister for Economic Affairs, Jakarta Post, 16 December 1989.
Regarding the current BPR industry it is first of all necessary to distinguish its unviable
from its viable part. Its unsound part has been detrimental to the entire industry and still
constitutes a major constraint for realizing the potential of the industry. Furthermore,
actions planned for strengthening the industry through, i.e., a new deposit protection
system can hardly succeed before the industry is cleaned up. Bank Indonesia has
already put substantial effort in liquidating about 350 BPR. Finalizing this effort has to
be a short-term priority.
The still viable part of the industry does not only consist of sound and well-performing
BPR. To improve this situation prudential regulatory and supervisory frameworks must
be in place. BPR regulations and supervision instruments still have to be improved. It
has, however, to be considered that the major constraints for influencing the
soundness of the BPR industry in the past have been weak supervision practice and,
above all, weak enforcement of compliance with existing regulations. The strict
enforcement of full loan loss provisioning, compliance with legal lending limits and
other regulations is of utmost importance for improving the soundness of the industry.
Supervision practice has to give more emphasis to assets quality, loan loss
provisioning and prudential accounting, especially of loan loss and write-off costs. The
frequency of on-site inspections has to be increased and inspections have to focus on
BPR that are not sound. Recommendations of on-site supervision have to be followedup and enforced. According to the Bank Indonesia Act of 1999, bank supervision has to
be transferred to a new independent agency until the end of 2002. The objectives and
tasks mentioned above would be difficult to achieve, if this agency, its quantitative and
qualitative human resources, are not timely prepared.
The training of bank staff could not cope with the rapid development of the banking
industry, in general, and of the BPR industry, in particular. The lack of a comprehensive
training system, and the resulting human resource problems, has been a major
constraint for the development of the BPR industry. Training did not necessarily
improve institutional performance, as individual knowledge was not transformed into
practice. The transformation of individual to institutional learning requires a training
management system that includes participative training needs assessment,
procurement of quality trainers, evaluation of training, and evaluation of training impact.
However, training has only a limited function for the institutional development of
individual BPR. Institutional strengthening requires setting up systems of internal
control, financial and human resource management. Human resource problems are
often related to low remuneration and lacking career opportunities. An important step in
solving these problems is to establish clear remuneration and incentive systems, and to
provide staff with personal development plans. Improving BPR governance by
adequate functional differentiation of roles played by owners, commissioners, directors
and employees is another crucial factor of institutional development. Institutional
development requires institutional development plans and management consulting
services. A major task ahead is to institutionalize both functions, training management
and management consultancy, i.e., in BPR associations.
The major constraint for expanding the BPR industry into new regions and markets are
the capital requirements stipulated by the new BPR regulations in May 1999. With a
minimum paid up capital ten times as high as the previous capital requirement new
BPR establishments in rural areas are practically impossible. These high entry barriers
contradict the idea of the banking reforms in the late 1980s and early 1990s. The
intention of this policy change was to arrive at a sound industry with fewer but larger
BPR. This tends to change the BPR character from a local secondary bank to a small
primary bank, but it does not necessarily improve the soundness of the industry. There
are a lot of smaller institutions that have proved their viability and provide important
services to rural clients. Many of the unsound BPR were rather large ones operating in
urban areas.
The further expansion of the BPR industry to rural areas and regions outside of Java
and Bali would require decreasing the current capital requirements for rural areas. This
would also allow growing non-bank microfinance institutions to develop into BPR.
There is another, not necessarily alternative, possibility that increasingly has become
important for strengthening the local financial system. The current legal and regulatory
framework is too narrow to enable the high variety of microfinancial institutions to grow
and to provide sustainable financial services with a significant outreach. Improving this
situation requires distinguishing BPR as microbanks from non-bank microfinance
institutions as a third category of financial institutions, and enabling the latter to develop
by providing them with an own legal and regulatory framework. An enabling legal and
regulatory framework would contribute to sustaining the local focus of BKD and LDKP,
and to broadening the outreach to rural areas by new non-bank microfinance
institutions. It would allow for upward mobility of non-bank microfinance institutions
capable of converting to BPR and downward mobility of small BPR unable to sustain
the BPR status.
Bank Indonesia and related parties are currently working on the issues mentioned
above. The GTZ-ProFI project has been supporting these efforts. The regulatory
framework for BPR has been reviewed and a new regulatory framework for non-bank
microfinance institutions is being developed. The BPR supervision system is being
improved and a deposit protection concept was designed. First steps were undertaken
to strengthen BPR associations and develop a comprehensive BPR training system.
Chapter 4:
Lembaga Dana Kredit Pedesaan (LDKP) –
The Rural Credit Fund Institutions
Lembaga Dana Kredit Pedesaan (LDKP)
4. Lembaga Dana Kredit Pedesaan (LDKP) – The Rural Credit Fund Institutions
Lembaga Dana Kredit Pedesaan (LDKP) or Rural Credit Fund Institutions is the term
that is used in Indonesia since the 1980s to summarize non-bank microfinance
institutions established on initiative of provincial governments since the 1970s and to
distinguish them from both banks and the older village credit institutions in Java (see
chapter 5). The term stands for a variety of institutions, which have their own names
and differ in ownership, organization, services and outreach.
4.1 General Description
The first LDKP, Badan Kredit Kecamatan (BKK) in Central Java, Lembaga Perkreditan
Kecamatan (LPK) in West Java, and Lumbung Pitih Nagari (LPN) in West Sumatra,
were established in the early 1970s. The Lembaga Kredit Usaha Rakyat Kecil (LKURK)
in East Java were initiated in 1979/1980. The establishment of LDKP in other provinces
was mainly a result of a seminar carried out by the Ministry of Home Affairs in February
1984 in order to disseminate the existing LDKP models to attending governors and
officials from various provinces. In the following, provincial governments initiated the
establishment of Lembaga Perkreditan Desa (LPD) in Bali, Badan Kredit Kecamatan
(BKK) and Lembaga Pembiayaan Usaha Kecil (LPUK) in South Kalimantan, Badan
Kredit Kecamatan (BKK) in Bengkulu, Badan Kredit Kecamatan (BKK) in Riau,
Lembaga Kredit Pedesaan (LKP) in West Nusa Tenggara, Badan Usaha Kredit
Pedesaan (BUKP) in Yogyakarta, and Lembaga Kredit Kecamatan (LKK) in Aceh.
With the exception of the LPD in Bali and the LPN in West Sumatra, which are owned
by customary villages and operate at the village level, LDKP are owned by provincial
and/or district governments and operate at the sub-district level. All LDKP are licensed,
regulated and supervised by the provincial governments. Technical assistance and
supervision is usually delegated to the Regional Development Banks (BPD), which are
owned by the provincial governments.
According to the monthly financial statistics of Bank Indonesia, the total number of
LDKP did almost not change between the late 1980s (1,936) and the end of 1996
(1,978), and then decreased to 1,626 as of March 2000 because of the conversion of
LDKP to People’s Credit Banks (BPR). According to the reports of Bank Indonesia’
BPR supervision department, a more reliable source, this decrease does not
correspond to the real number (630) of LDKP that were licensed as BPR until March
2000. 56% of these BPR-LDKP came from the BKK in Central Java and a further 32%
from the LDKP in West Sumatra, West Java and East Java. Based on the numbers of
presently active and converted LDKP it can be estimated that only about one quarter of
the LDKP have become banks.
It is important to note that there is no system providing reliable LDKP data at the
national level. The national statistics of Bank Indonesia are not reliable and consistent.
The real number of still operating LDKP is not lower but the composition of the LDKP
industry differs considerably from these statistics (see table 4.1). One the one hand,
Bank Indonesia statistics still may include LDKP that either terminated their operations
or converted to BPR. On the other hand, they do not include a great part of the LDKP
operating in Bali, South Kalimantan and East Java.
The Regional Development Banks
provided up-to-date data for the
purpose of this report. Those in Aceh,
Riau and Bengkulu, however, were not
informed whether the 28 LDKP found
in Bank Indonesia statistics are still
active. 13 LDKP converted to BPR.
This is also true for 71 LPN in West
Sumatra, while 122 LPN are still active
as LDKP. 82 LPK operate in West
Java and 62 were licensed as BPR. In
Central Java, 351 BKK have a BPR
license, while 160 operate as LDKP.
None of the 75 BUKP in Yogyakarta
and of the 912 LPD in Bali converted
to BPR. 156 LKURK are active in East
Java and 67 converted to BPR. There
are 46 LKP with BPR licenses in West
Nusa Tenggara. 6 LKP are still active.
90 LDKP (76 LPUK, 14 BKK) operate
as LDKP in South Kalimantan. 20 BKK
converted to BPR.
Table 4.1
Number of LDKP by Province
Province
LDKP
Aceh
LKK
*
7
12
West Sumatra
LPN
122
498
71
Riau
BKK
*
5
1
Bengkulu
BKK
*
16
0
West Java
LPK
82
63
62
Central java
BKK
160
636
351
Yogyakarta
BUKP
75
9
0
East Java
LKURK
156
118
67
Bali
LPD
912
264
0
West Nusa Tenggara
LKP
6
0
46
South Kalimantan
BKK/LPUK
90
10
20
1,603 1,626
630
TOTAL
(1)
(2)
(3)
(1) Number of active LDKP (June 2000). Source: Regional
Development Banks and own data collection.
(2) Number of LDKP (March 2000). Source: Bank Indonesia
monthly financial statistics (September 2000).
(3) Number of LDKP converted to BPR until March 2000.
Source: BPR supervision department of Bank Indonesia.
* Number of LDKP still active not available in Regional
Development Banks. Most of them may be inactive.
With the exception of West Sumatra and South Kalimantan, therefore, the present
significance of the LDKP industry is greatly limited to Java and Bali. With an increasing
number of LDKP converting to BPR, the LDKP in Java tend to become a phase-out
model. The Balinese Government has resisted the pressure to convert LPD to BPR
and demands a national regulatory framework that provides room to move for non-bank
microfinance institutions. The LPD make up 57% of the presently active LDKP, and
they operate with 77% of the assets and 85% of the deposits of all LDKP, though the
number of households in Bali contributes only 2.4% to the total number of households
in all provinces with active LDKP.
The LPD are an indispensable part of the financial system in Bali. Being owned by
custom villages, they provide financial services in two thirds of these villages and to
about one third of the Balinese households. Regarding savings mobilization it is safe to
argue that they are the most successful non-bank microfinance institutions in
Indonesia. The entire loan portfolio and more than three quarters of the total assets of
the LPD industry is being financed through voluntary savings. Except of the BKK in
Central Java, the average LPD has more than twice as many savings customers as
other LDKP. Savings mobilization makes also the difference in asset size. As a villagelevel financial institution, the LPD industry has assets as large as the BKK in Central
Java and much larger than that of other LDKP operating at the sub-district level. A
smaller part of the LPD industry is financially stronger and sustainable than small BPR
are. Compared to other LDKP, the LPD are the only ones with a relatively sound loan
portfolio quality.
Table 4.2:
LDKP Indicators by Province (June 2000)
Province
LDKP
West
Sumatra
West
Java
Central
Java
Yoyakarta
East Java
Bali *
West
Nusa T.
South
Kalim.
LPN
LPK
BKK
BUKP
LKURK
LPD
LKP
BKK/LPUK
0.91
No. of active LDKP
122
82
160
75
156
912
6
90
Assets (Rp. billion)
2.5
16.0
67.9
9.3
11.3
375.3
0.8
4.1
21
195
425
124
72
412
128
45
11.4
5.1
16.2
5.8
4.5
29.9
0.0
4.1
91.3
Avg. assets (Rp. million)
Inter-bank assets (%)
10.02
7.56
0.74
8.99
0.70
0.91
0.71
Loan portfolio (%)
77.1
70.0
75.9
93.5
80.8
66.7
67.9
Deposits (%)
33.5
30.9
65.4
26.7
-
77.5
29.7
-
Equity (%)
41.4
38.8
7.3
28.0
59.8
18.0
32.2
44.8
Loan portfolio at risk (%) ***
35.6
50.2
25.9
22.5
22.5
8.9
20.3
27.3
Loan accounts (thousands)
10.9
16.6
130.7
26.8
n.a.
211.3
2.4
19.8
as % of total households
1.2
0.17
1.7
3.6
n.a.
30.0
0.27
2.8
avg. number / LDKP
90
203
817
357
n.a.
232
404
220
176
671
394
324
n.a.
1,185
215
188
22.2
24.7
179.7
22.7
- 584.6**
n.a.
-
as % of total households
2.5
0.25
2.4
3.1
-
82.9**
n.a.
-
avg. number / LDKP
182
302
1,123
302
-
641**
n.a.
-
38
199
247
109
-
283**
n.a.
-
avg. amount / acc. (Rp. ,000)
Deposit accounts (thousands)
avg. amount / acc. (Rp. ,000)
Sources: Regional Development Banks, National Family Planning Board (number of households, January 2000).
* Data for LPD in Bali as of March 2000.
** These figures do not include time deposit accounts that numbered 37,470 and averaged to Rp. 3.3 million as of
March 2000. Note that households usually have one loan account but several deposit accounts. The actual
coverage of households is about one third of the total number of households in Bali.
*** Percentage of loan portfolio not classified as “standard” according to LDKP classification systems.
n.a.: Data not available
As almost 70% of the BKK in Central Java converted to BPR, the remaining 160
institutions contribute only 10% to the presently active LDKP. Nonetheless, they are
still the second most important LDKP and, except of the LPD in Bali, the only one that
effectively intermediates between deposit customers and borrowers. Deposits finance
65% of their assets, which are more than twice as large as those of comparable LDKP.
Operating with village outlets, the average BKK has the largest outreach with regard to
the number of deposit customers and borrowers served. However, as of June 2000 the
BKK industry served not more than 2% of the households in Central Java. With one
quarter of the aggregated loan portfolio at risk many BKK appear to suffer from poor
loan portfolio qualities.
LDKP other than the LPD in Bali and the BKK in Central Java are much weaker
institutions. They have a considerable lower outreach and financial capacities. A major
factor predicating their weakness is the lack of deposit services or the low degree to
which they mobilize voluntary savings. The LKURK in East Java and the BKK/LPUK in
South Kalimantan have not developed deposit products. With equity and limited access
to credit being the only sources of funds, the 156 LKURK have average assets of Rp.
72 million and the 90 BKK/LPUK of Rp. 45 million only. The loan portfolio quality of
both the LDKP in East Java and South Kalimantan is poor.
The BUKP in Yogyakarta and the LPK in West Java have larger but still small assets.
The BUKP depend highly on loans provided by the government, while deposits finance
only about one quarter of their assets. The fact that they have invested 94% of assets
in the loan portfolio indicates considerable lack of loanable funds. 23% of their
aggregated loan portfolio is at risk. The LPK have a more balanced structure of
liabilities and equity, with deposits, however, not exceeding one third of their total
funds. With half of their aggregated loan portfolio at risk they are the worst performers
of all LDKP. With regard to outreach scope they play an insignificant role in West Java.
The 122 active LPN in West Sumatra are tiny institutions with average assets (Rp. 21
million) similar to those of many financial self-help groups and deposits contributing
only one third to their total funds. They have an average outreach to only 90 borrowers
and their average loan portfolio quality is worse than that of most of the other LDKP.
Since 46 of the formerly existing 55 LKP in West Nusa Tenggara converted to BPR,
LKP are a negligible factor of the financial system in this province. The ProFI appraisal
on the “Development and Upgrading of Microfinance Institutions” (Denpasar 2000) in
West Nusa Tenggara found that only one of these institutions is performing well,
whereas the others may not be able to sustain their operations.
4.2 Evolution of the Regulatory Framework
LDKP are regulated by provincial government regulations within the existing national
regulatory framework. This description refers only to national regulations of relevance
for LDKP, while provincial regulations are discussed in the following chapters that deal
with each LDKP type.
The Banking Act No. 14 of 1967 and following decrees of the Ministry of Finance in
197051 enabled village credit institutions and popular credit banks, which were already
operating at that time, to continue their operations as part of the banking system. The
entry for new small financial institutions, however, was closed. In order to cope with this
situation and to revive the rural financial system, that had suffered from extremely high
inflation rates in the 1960s, Bank Indonesia issued a circular letter52 in 1970 that
provided provincial governments with the opportunity to establish non-bank financial
institutions. Until the early 1980s, however, the development of LDKP remained limited
to the provinces of West Sumatra, West Java, Central Java and East Java.
The second wave of LDKP establishments was initiated in the mid of the 1980s, when
the Ministry of Home Affairs disseminated the existing LDKP model to other provinces
and Bank Indonesia, in cooperation with universities and its own training institute,
carried out a research project on LDKP, the results of which were presented at a
seminar in 1987.53 This national recognition of LDKP had much influence on the
following financial sector reforms. The banking deregulation in 1988 (Pakto 88)
established low entry barriers for a new secondary bank type (BPR).
51
52
53
Article 41, Undang-undang Nomor 14 Tahun 1967 tentang Pokok Perbankan; Surat Menteri
Keuangan kepada Direksi Bank Indonesia Nomor B 331/MK/IV/8/1970.
Bank Indonesia, Surat Edaran Nomor 4/26-V/PPTR Tahun 1970.
Lembaga Pengembangan Perbankan Indonesia:.Seminar Lembaga Dana dan Kredit
Pedesaan, LPPI, Jakarta 1987.
Since the Banking Act No. 7 of 1992 LDKP are acknowledged as BPR candidates.
Article 58 of the act states that the various types of non-bank microfinance institutions
will be given the BPR status with fulfilling the requirements and procedures to be
stipulated in further government regulations. Government regulation No. 71 of 199254
determined that LDKP are required to seek a BPR license within five years until
October 1997. The vast majority of these institutions has not been able to fulfill
licensing requirements55 or has not been willing to convert to BPR.
The new Banking Act No. 10 of 199856 requires any party mobilizing deposits from the
public to obtain a business license from Bank Indonesia (article 16). Banks in a
possession of a license are declared to have obtained a license based on the new
Banking Act (article 55). Article 58 remained unchanged, thus still requiring LDKP to
fulfill BPR licensing requirements. The explanation of article 58 emphasizes that the
existence of these institutions is acknowledged, but that requirements and procedures
for converting to BPR are still to be stipulated by following government regulations.
Government regulation No. 30 of 199957 declared regulation No. 71 of 1992 invalid as
soon as new BPR regulations are issued, while its practical provisions are said to
remain valid as long as they do not conflict with the 1998 Banking Act. On 15 May
1999, Bank Indonesia issued the new BPR decree58 that substantially changed the
framework conditions for BPR and non-bank microfinance institutions. The minimum
paid up capital for establishing a new BPR was increased to Rp. 2 billion for the greater
Jakarta region, to Rp. 1 billion for provincial capitals, and to Rp. 500 million for other
areas (article 4). Existing BPR are required to hire two managers with at least a
diploma 3 level and two years banking experience. These entry barriers closed the
BPR market for almost all still operating LDKP.
Presently, Bank Indonesia with technical assistance from GTZ through the ProFI
project are reviewing the existing regulations with the aim to improve BPR regulations
and provide non-bank microfinance institutions such as the LDKP with an adequately
regulated place in the financial sector without requiring them to convert to BPR.
54
55
56
57
58
Rakyat, 30 Oktober 1992.
Licensing requirements were determined by a joint decree of Bank Indonesia, the Ministry of
Finance and the Ministry of Home Affairs in 1994: Bank Indonesia, Departemen Keuangan,
Departemen Dalam Negeri, Surat Keputusan Bersama, 26 September 1994. Among other
requirements LDKP applying for a BPR license had to store a paid-up capital of Rp. 50
million, had to operate without loss for three consecutive years, and had to be managed by
directors with certain formal qualifications.
Undang-Undang Republik Indonesia Nomor 7 Tahun 1992 Tentang Perbankan Sebagaimana Telah Diubah dengan Undang-Undang Nomor 10 Tahun 1998.
Peraturan Pemerintah Republik Indonesia Nomor 30 Tahun 1999 tentang pencabutan
Peraturan Pemerintah Nomor 70 Tahun 1992 Tentang Bank Umum (…), Nomor 73 Tahun
1998, Peraturan Pemerintah Nomor 71 Tahun 1992 Tentang Bank Perkreditan Rakyat, dan
Peraturan Pemerintah Nomor 72 Tahun 1992 Tentang Bank Berdasarkan Prinsip Bagi
Hasil. 7 Mei 1999.
Bank Indonesia, Surat Keputusan No. 32/35/KEP/DIR tentang Bank Perkreditan Rakyat, 12
Mei 1999.
4.3 Lembaga Perkreditan Desa (LPD) in Bali
The Lembaga Perkreditan Desa (LPD) in Bali are village-level financial institutions
which have been established since 1985 and of which 912 were operating as of June
2000. As shown by the previous comparison, they are the most successful LDKP type
in Indonesia. This success has been greatly due to the high commitment of the
Government of Bali to establish an enabling framework for the development of selfreliant and sustainable financial institutions in the ownership of the Balinese Desa Adat
(custom villages).
This description is based on financial data (as of March 2000) provided by the Regional
Development Bank (BPD) in Bali and the ProFI baseline survey59 on LPD carried out in
the first half of 2000. It, therefore, is able to provide a more thorough and detailed
analysis than the following reports on LDKP in other provinces of Indonesia.
4.3.1 History, Ownership and Socio-cultural Environment
Aiming at developing the people’s economy and fighting usury moneylending through
sustainable community-owned financial institutions, the Governor of Bali took the
initiative for establishing LPD in 1984/1985. The political motivation to sustain and
strengthen the Desa Adat system in the light of central government efforts to impose an
uniform village administration was as important as the economic motivation. The
establishment of LPD became closely linked to the objective of empowering the Desa
Adat as a recognized unit of village organization and customary law. The Desa Adat
regulation60 of 1986 gave the Desa Adat the right to generate and use assets through
their own organizations.
The first 161 LPD were established during a three-years
pilot phase between March 1985 and March 1988. After
the Governor and the provincial parliament had issued the
new framework of LPD regulation and guidance (see
below), the number of LPD increased rapidly during the
next five years and reached 650 as of March 1993. Also
during the following three years the LPD industry
experienced a considerable growth with 206 additional
LPD operating as of March 1996. Since then, however,
only 56 new LPD were added. As of June 2000, 912 LPD
operated in two thirds of the Desa Adat. The slower growth
during the second half of the 1990s was due to a higher
emphasis on consolidation and the lacking feasibility of
new establishments.
59
60
Table 4.3
Number of LPD 1988 – 2000
March 1988
161
March 1993
650
March 1996
856
March 1997
856
March 1998
904
March 1999
910
March 2000
912
Sources: Regional Development
Bank, Head office, Denpasar, and
Bank Indonesia, Branch office,
Denpasar.
See Detlev Holloh, Lembaga Perkreditan Desa (LPD) in Bali, ProFI Baseline Survey, Bank
Indonesia and GTZ, Denpasar, June 2000; Detlev Holloh, Small Financial Institutions in
East Java, Bali and West Nusa Tenggara, ProFI Baseline Survey Summary Report, Bank
Indonesia and GTZ, Denpasar, June 2000.
Peraturan Daerah Popinsi Daerah Tingkat I Bali Nomor 06 Tahun 1986 tentang Kedudukan,
Fungsi dan Peranan Desa Adat sebagai Kesatuan Masyarakat Hukum Adat dalam Propinsi
Daerah Tingkat I Bali. (The regulation became effective in February 1988)
The Desa Adat is the owner of the LPD. The Desa Adat is a village unit in which
customary symbols and regulations play an important role in community life and for
social integration.61 As a custom village it has to be distinguished from the Desa Dinas,
the administrative village unit. The boundaries of the Desa Dinas were determined
along territorial lines, whereas those of the Desa Adat are related to the origin and
social bonds of its members. Their boundaries and population do seldom coincide. One
Desa Adat may be made up of several Desa Dinas or one Desa Dinas may cover
several Desa Adat, or only parts of them.
The LPD as a financial institution is unique because the Desa Adat is not only its
geographical but also its social place. The LPD is owned, operated and used by the
members of the Desa Adat. The highest authority of the Desa Adat is the assembly of
its members, the paruman. It elects its leadership board, the prajuru, and agrees upon
the customary law. The prajuru and its chairman, the bendesa, take ongoing decisions
on the basis of agreed upon customary law. They are, therefore, the main institutions
dealing with LPD and play a crucial role in supervising LPD operations.
Ideally, the LPD is embedded in a community that is regulated and socially integrated
by adat or customary law. Adat describes local practice codified in customary law and
embodied in local institutions. It can be a powerful framework of social integration and
control, and it determines sanctions that may also be a powerful tool for LPD
management. In reality, there is a considerable variance between customary laws and
between the Desa Adat with regard to their ability to enforce these laws. The degree to
which customary law is able to fulfill the function of social integration and control is a
major predicator for LPD performance. In this context, it is important whether the LPD
becomes a subject of the village assembly and the customary law, and whether
customary village leaders fulfill their supervisory function on this basis. Evidence shows
that many LPD have not been performing well in villages where social integration and
control through customary law is weak.
Regulation
The Government of Bali is responsible for regulating and supervising the LPD industry
within the framework of national regulations. National banking regulations have been
requiring LDKP to convert to BPR. Because of the unique features of the LPD industry,
the Balinese Government has been resisting this requirement. A long debate with Bank
Indonesia and the Ministry of Home Affairs resulted in the decision of Bank Indonesia
(letter of 17 February 1999) that allows LPD to continue their operations as non-bank
financial institutions. They are allowed to mobilize funds from members of the Desa
Adat but are asked to refrain from using banking terminology. This compromise
provided LPD with room to move without, however, solving the structural problem of
how they can find a recognized and legalized place in the financial sector. Both the
national and provincial regulatory frameworks are presently reviewed by Bank
61
See, i.e., Carol Warren, Adat and Dinas. Balinese Communities in the Indonesian State,
Oxford University Press, Kuala Lumpur 1993; I Gusti Ngurah Oka, Peranan Awig-Awig Desa
Dalam Operasional LPD, Majelis Pembina Lembaga Adat Propinsi Daerah TK. I Bali.
Indonesia and the Balinese Government with technical assistance provided by GTZ
through the ProFI project. The presently valid provincial regulations are summarized in
the following. More detailed examinations of these regulations can be found in two
other ProFI reports.62
The establishment of LPD was initiated by a government decree63 issued in 1984. It
made basic provisions for the establishment, organization and operation of LPD, which,
after termination of the pilot phase, were replaced by the still valid LPD regulation64 of
1988. Important revisions were the new emphasis on savings mobilization and Desa
Adat. Amendments of the regulation have been made by various government decrees.
Desa Adat may establish a LPD as an operational unit with the major functions of
mobilizing deposits and providing credit (chapter 3 of 1988 regulation). The LPD capital
may consist of retained profits and funds contributed by the Desa Adat, its members
and the government (chapter 4). The LPD has to be managed by a committee
consisting at least of a chairman, accountant and treasurer. The management
committee is to be elected by and from Desa Adat members and is given the authority
to appoint additional staff (chapter 5). The committee is required to prepare annual
work and budget plans (article 11 of chapter 6) as well as annual reports and financial
statements (article 12 of chapter 6), which have to be approved by the Desa Adat,
ratified by the district head and to be forwarded to the government and the BPD.
The district head may dismiss the committee on recommendation of the Desa Adat, if it
does not comply with existing regulations and inflicts losses on the LPD (article 10 of
chapter 6). The LPD management committee is made liable for losses incurred through
negligence and non-compliance with existing regulations (chapter 10). The Governor
may dissolve a LPD on recommendation of the district head (chapter 11).
Article 14 of chapter 7 regulates the allocation of annual net profits. 40% have to be
allocated to equity and general reserves, 20% to targeted reserves, 20% to the village
development fund, 10% to the service and compensation fund, 5% to a LPD guidance
fund, and 5% to the social fund. Government decree No. 1365 of 1999 specifies that
general and targeted reserves have to be allocated to equity. The compensation fund is
to be used for LPD employees. The social fund shall be used for social activities of the
Desa Adat. The village development fund is transferred to the Desa Adat and the LPD
guidance fund, to be used for compensation of the support teams and centers at the
various levels, to a special account of the BPD.
62
63
64
65
Hendrik Prins: Regulation and Supervision of LPDs, Report to ProFI/GTZ Denpasar, March
2000. Detlev Holloh, Lembaga Perkreditan Desa (LPD) in Bali, ProFI Baseline Survey, Bank
Indonesia and GTZ, Denpasar, June 2000. See also: Biro Bina Perekonomian Setwilda
Tingkat I Bali, Himpunan Ketentuan Lembaga Perkreditan Desa (LPD) Propinsi Daerah Tk. I
Bali; Made Adi Djaya, Kepala Biro Bina Perekonomian Setwilda Tingkat I Bali, Pemerintah
Propinsi Daerah Tingkat I Bali, 1999; I Made Artha, Pembinaan dan Pengawasan Lembaga
Perkreditan Desa, Bank Pembangunan Daerah Bali, 1999.
Keputusan Gubernur Kepala Daerah Tingkat I Bali Nomor 972 Tahun 1984 tentang
Pendirian Lembaga Perkreditan Desa di Propinsi Daerah Tingkat I Bali.
Peraturan Daerah Propinsi Daerah Tingkat I Bali, Nomor 2 Tahun 1988, tentang Lembaga
Perkreditan Desa.
Pembagian dan Penggunaan Keuntungan Bersih LPD di Propinsi Daerah Tingkat I Bali.
Governmental guidance boards at the provincial, district and sub-district level are given
the tasks to design and implement policies, and to provide general guidance to LPD
(chapter 8) Government decree No. 401 of 199766 made further provisions on the
establishment, functions and composition of the provincial board. The board consists of
eight members from various government institutions and is headed by the Governor.
Responsibility for LPD supervision is given to governmental inspectorates. Technical
aspects of supervision and guidance are to be carried out by the BPD on the basis of
monthly reports and quarterly financial statements of LPD (chapter 9). Article 20 of
chapter 9 requires LPD to deposit excess liquidity in the next BPD branch.
Acknowledging the limited personnel resources of the BPD, the establishment of Subdistrict LPD Centers (PLPDK) was decreed in May 1989.67 The PLPDK were to provide
technical assistance and carry out supervision tasks under the authority of the LPD
guidance boards. Technically, they became responsible to the BPD. An additional
decree issued in 199368 specified BPD functions as to provide technical assistance via
off-site and on-site supervision analyzing financial LPD reports (passive guidance) and
on the spot visits (active guidance) in cooperation with other parties, and to prepare
quarterly reports for the bureau of the Governor.
To improve internal control the government decreed69 the establishment of supervisory
boards in 1998. The board has to consist of the Desa Adat head as its chairman and
two other members. The Desa Adat assembly has the right to appoint and dismiss the
board. The district head is given the authority to dismiss board members, if they cause
losses or are not able to carry duties properly. The tasks of the board are to promote
the LPD, improve its performance, and supervise credit management. Instruments and
procedures of supervision are not clarified. Members of the supervisory board are
prohibited to take advantage from their position and are made liable for losses incurred
through negligence and lacking compliance with existing regulations.
Supervision and technical support
Supervision and technical support are not clearly distinguished and involve many
parties. In practice, the governmental inspectorates carry out audits. Supervisory
authority lies with the government, while the BPD credit management bureau is
technically responsible but has no real authority and enforcement power. The BPD
cooperates with so-called Sub-district LPD Centers (PLPDK), of which 16 were
operational as of December 1999. Each PLPDK carries out supervision and technical
66
67
68
69
Pembentukan dan Susunan Keanggotaan Badan Pembina Lembaga Perkreditan Desa
Propinsi Daerah Tingkat I Bali. (The decree replaced decree No. 242 of 1992.)
Keputusan Gubernur Kepala Daerah Tingkat I Bali, Nomor 180 Tahun 1989 tentang
Pendirian Pusat Lembaga Perkreditan Desa Kecamatan (PLPDK) di Propinsi Daerah
Tingkat I Bali.
Penunjukan Bank Pembangunan Daerah (BPD) Bali sebagai Pembina Teknis Lembaga
Perkreditan Desa (LPD) Propinsi Daerah Tingkat I Bali.
Ketentuan Pembentukan, Pengangkatan dan Pemberhentian Badan Pengawas Lembaga
LPD di Propinsi Daerah Tingkat Bali I.
guidance for 40 to 80 LPD. While PLPDK function as technical arms of the BPD, the
BPD does not have the authority to appoint and dismiss staff.
Theoretically, PLPDK are concerned with compiling monthly reports and financial
statements, examining these reports (the PLPDK is the only party being able to carry
out off-site supervision as all other parties do only receive aggregates!), and carrying
out on-site supervision with a standard report including qualitative questions, loan
classification and CAMEL rating. In practice, supervision is often carried out with
emphasis on form rather than on substance. PLPDK often focus their work on
preparing aggregate reports for higher levels rather than on examining the soundness
and existing problems of individual LPD. On-site supervision is supposed to be carried
out once a month for each LPD. The ProFI baseline survey found that in more than half
of the cases on-site supervision had been carried for not more than twice a year.
The ProFI reports mentioned earlier pointed to the weaknesses of the LPD supervision
system and recommended to reorganize and properly distinguish the different functions
of supervision and technical assistance. Supervision is a formal act in which
compliance to existing regulations is examined and ideally enforced from outside.
Technical assistance works from inside and by means of communication rather than
enforcement. Regarding the latter function the BPD lacks human resources in quantity
and the PLPDK in quality. The improvement of these human resources and the
establishment of a consistent LPD consultancy system would be required to strengthen
the institutional development of LPD. The findings and recommendations of the ProFI
reports are presently discussed with the Balinese government and the BPD. A new
LPD regulation was drafted as a first result of these discussions.
4.3.3 Organization and Management
The LPD organization varies depending on duration and scale of operation. New and
small LPD operate with a management consisting of a chairman, accountant and
treasurer. Field staff is added with growing numbers of customers and increasing
savings mobilization through door-to-door services. A smaller part of the LPD industry
has been developing models of organizationally differentiated divisions and functionally
differentiated field staff. The 81 LPD included in the ProFI baseline survey operate with
6 employees, on average, while large LPD with assets exceeding Rp. 1 billion usually
operate with more than 6 employees. The LPD management usually consists of elder
and male members of the Desa Adat. In contrast to most of the other governmentinitiated small financial institutions in Indonesia, village officials do usually not dominate
LPD management. LPD staff often consists of younger members of the Desa Adat. A
great part of the LPD managers consider the lacking quantity and quality of human
resources as a major constraint for expanding and improving LPD operations.
The LPD usually operates from its own building in the Desa Adat. One quarter of the
baseline survey LPD regarded the office space and facilities available to them as
inadequate. Computers support operations only in a small minority of larger LPD.
Software applications tailored to their needs, however, are not available. In about 10%
of the cases records were not complete and easily accessible. LPD customers are
served every working day with office hours ranging between four and eight hours a
day. Half of the LPD provide door-to-door services. The lack of transport facilities is a
major constraint for LPD with larger areas of operation.
LPD administration and management is usually carried out on the basis of annual plans
and written guidelines. Financial reports are prepared periodically in accordance with
existing regulations. Sometimes reports are seen as an obligation imposed by other
parties rather than an internal instrument of control and decision-making. Decisionmaking processes vary considerably. Especially larger LPD enjoy high degrees of
management autonomy, whereas smaller LPD experience a considerable involvement
of the Desa Adat and its leaders in decisions such as staff employment, determination
of product features, and loan approvals. An interesting finding of the baseline survey is
that this external involvement in management does not lead to better performance.
4.3.4 Products, Outreach, Market and Image
Savings and credit products
LPD offer savings deposit, time deposit and credit services with varying terms. The
majority of LPD collects compulsory savings as a percentage of the loan amount
disbursed. The latter are only relevant for small institutions in areas with limited savings
capacities. But, also in these cases compulsory savings seldom contribute more than
10% to total funds mobilized.
Voluntary deposit accounts are the major instruments of fund mobilization. As of March
2000, savings deposits made up 44% of the total liabilities and equity of the LPD
industry. They are presently offered with annual effective interest rates (most usually
10%-12%) close to those offered by commercial banks. In determining interest rates
most LPD react flexibly to local market conditions and their own need for funds. Time
deposit accounts are offered by most LPD and are the major fund mobilization of large
LPD. As of March 2000, time deposits financed one third of the total assets of the LPD
industry. Time deposit services are offered with terms of 3 to 12 months and,
depending on local market conditions, with interest rates ranging from 9% to 24%.
LPD provide mainly loans for productive purposes. Consumption loans are of some
importance in larger ones in urban areas. Most loans provided are monthly installment
loans that have a high variance with regard to both terms (10 to 36 months) and
interest rates (2% declining to 3% flat per month). Loans with daily installments have
most usually a 100-day term, with annual effective interest rates ranging from 36% to
72%. Seasonal loans for usually 6 months are provided with similar interest rates.
Outreach and market
Excluding the cooperative sector, the 912 LPD make up almost two thirds of all
financial points (bank and LPD offices), and they have an outreach to two thirds of the
1,371 Desa Adat in Bali. With this geographical outreach the LPD industry has become
stronger in terms of assets and funds mobilized than the 168 BPR operating in Bali. As
services of commercial banks and most BPR are concentrated in urban and growth
areas, the LPD industry contributes about one third to the total assets and loan portfolio
of the entire financial sector in some rural areas and districts (see ProFI baseline
survey report). At the village level, LPD are the major provider of microcredit.
As of March 2000, the LPD industry served
Table 4.4
LPD Outreach (March 2000)
584,634 savings deposit customers, 37,470
time deposit customers and 211,270 Number of Desa Adat
1,371
borrowers. Considering that one household Avg. number of households
514
usually holds one loan account but more
Number of LPD
912
than one savings account, it had an
As % of Desa Adat
66.5
outreach to one third to half of the Balinese
641
households. With an average number of 641 Avg. number of deposit accounts*
As % of total population
19.1
savings deposit and 41 time deposit
Avg. amount per account (Rp. ,000)
283
accounts, the number of savings customers
ranges from some dozens to some Avg. number of loan accounts
232
thousands of customers. The average
As % of total households
30.0
amount per savings deposit account was
1,185
Rp. 211 thousands and the average time
Source: Regional Development Bank, Denpasar.
deposit amount was Rp. 3.3 million as of * Does not include time deposit accounts.
March 2000. The average LPD had 232
borrowers with an average loan amount outstanding of Rp. 1.2 million. The number of
borrowers ranges from about 10 to more than 1,000. The average loan size for all
25,222 loans disbursed by the 81 baseline survey LPD in 1999 amounted to Rp. 1.8
million, with half of the loans amounting to more than Rp. 500,000.
The ProFI baseline survey showed that the LPD market varies considerably with regard
to area and number of households as well as with regard to location and competition. A
direct dependence of LPD size on the number of households per Desa Adat does not
exist. Large areas and low population densities do not support LPD growth. Large LPD
flourish in relatively small areas with higher savings capacities and better investment
opportunities. Growing and large LPD operate in areas with mainly non-agricultural
sources of income, closer to urban centers, main roads and local markets. Large and
well performing LPD usually have much more diversified loan portfolios than others.
LPD managers regard cooperatives and BPR as their major competitors. Some LPD in
urban and growth centers experience competition from commercial banks. Competition
was not found to be a factor negatively affecting LPD growth and performance.
LPD image
The ProFI baseline survey included a survey on the image of 84 LPD, covering 396
savings customers and borrowers. Savings customers are attracted by door-to-door
services as well as easy and fast procedures. Interest rates are an important criterion
for a small minority of the customers. Borrowers are also attracted by easy and fast
procedures as well as by low collateral requirements. Low interest rates play a role for
one third of them. Beside its fast and easy procedures the comparative advantages of
the LPD are seen in the short office distance and in the Desa Adat ownership. There is
a generally high satisfaction with LPD services. The vast majority of customers
regarded their deposits as safe, and loan terms and amounts as adequate.
The respondents ranked different types of financial institutions with regard to several
aspects of financial services. In all aspects LPD were most frequently ranked first. The
total score for LPD was more than three times as high as for BRI units and BPR, which
were ranked second and third. LPD customers are ready to take disadvantages of LPD
as long as these are able to prove their management credibility, retain close customer
relationships and provide their customers with easy and fast access to financial
services. While the image and competitive position of LPD is generally good, part of the
industry may improve its position through better office management, higher operating
efficiency in order to lower the gap between deposit and loan interest rates, and by
developing credit products tailored to the needs of customers presently seeking loans
from other financial institutions.
As of March 2000, the average LPD had assets amounting to Rp. 412 million. The LPD
world, however, is a highly differentiated one. The high variance in organization,
management and outreach is reflected in highly varying assets sizes, ranging from
some million to billions of Rupiah. 68% of the 81 LPD included in the ProFI baseline
survey had assets smaller than Rp. 400 million, while in 19% of the cases assets
exceeded Rp. 1 billion. The latter LPD are mainly located in southern urban and growth
centers, whereas assets sizes below the overall average may already be large in some
rural and more remote areas.
Table 4.5:
LPD Consolidated Balance Sheet (March 2000)
Assets
Million Rp.
%
7,959
2.1
Savings deposits
165,459
44.1
Inter-bank assets
112,242
29.9
Time deposits
125,504
33.4
Loan portfolio
250,335
66.7
Inter-bank liabilities
(4,751)
(1.3)
Loans received
Fixed assets and inventory
10,366
1.9
(-) Depreciation allowance
(3,348)
Cash
(-) Loan loss provisions
Other assets
TOTAL
Other liabilities
Equity*
2,470
0.7
375,273
100.0
Profits in current year
TOTAL
Million Rp.
%
548
0.1
2,276
0.6
5,060
1.3
67,660
18.0
2.3
100.0
Source: Regional Development Bank, Denpasar
* Includes reserves and accumulated profits not yet allocated.
The structure of assets is highly dominated by performing assets. Depending on scale
of operation, higher proportions of non-performing assets can be found in newly
established and small LPD. On average, the loan portfolio contributes 65% (net of loan
loss provisions) and BPD placements 30% to total assets. As shown in the ProFI
baseline survey, the assets structure varies significantly depending on two opposite
financial situations. Large LPD with high levels of deposit mobilization are
characterized by under-investment in the loan portfolio, when eligible borrowers cannot
be found for their loanable funds. The placement of large proportions of assets in BPD
accounts has become a source of inefficiency and affects earnings negatively. LPD
with low levels of deposit mobilization or difficulties to incur additional debts at
reasonable costs are often characterized by over-investments in their loan portfolios, a
source of both liquidity and credit risks.
The structure of liabilities and equity depends on deposit mobilization. As of March
2000, savings (44%) and time (33%) deposits contributed 77% to the total liabilities and
equity of the LPD industry. Paid-up capital, reserves and profits accumulated prior to
the current financial year made up 18% of total LPD funds. Small and newly
established LPD depend on capitalized earnings to a much higher degree. LPD are
generally successful in mobilizing voluntary savings. Time deposit accounts are the
fund mobilization instruments enabling LPD to grow to sizes that are often not achieved
by BPR. In some areas of operation and times of high inflation rates, however, many of
these LPD have been experiencing difficulties in placing time deposits mobilized to
eligible borrowers.
Table 4.6:
LPD Consolidated Income Statement (March 2000)
Income
%
Costs
Bank interests
Million Rp.
2,657
12.0
Interests to banks
Credit income
16,347
73.6
3,193
14.4
Other operating income
Million Rp.
0.3
Interests on deposits
8,181
60.8
Personnel costs
3,730
27.7
Loan loss provisions
Other operating costs
TOTAL
22,197
%
38
100.0
TOTAL
Profits
134
1.0
1,369
10.2
22,197
100.0
8,746
The structure of income is highly dominated by credit income, contributing 74% to the
total income of the LPD industry as of March 2000. Depending on assets structure,
LPD with high loan portfolio investments earn close to 90% of their income from
lending. The fact that BPD placements made up 30% of total assets but only 12% of
the total income of the LPD industry indicates the negative effect of these placements
on profitability. This situation is particularly given for LPD with high investments in BPD
accounts. In these cases income from BPD placements do not seldom contribute more
than 30% to total income.
LPD costs mainly consist of interest paid on deposit accounts and personnel costs.
Interest paid on savings and time deposit accounts made up 61% of the total costs
incurred by the LPD industry between January and March 2000. Depending on the
structure of liabilities and equity, this share is even higher for LPD with high levels of
time deposit mobilization. The role of personnel costs, contributing 28% to total costs
as of March 2000, usually decreases with scale of operation and degree of deposit
mobilization. In 1999, they contributed 45% to the total costs of small LPD but only
25% to the total costs of large LPD included in the ProFI baseline survey. Operating
expenses such as for supplies, maintenance and depreciation of fixed assets, loan loss
provisions and write-offs contributed 11% to the total costs of the LPD industry as of
March 2000. It has, however, to be considered that many LPD do not fully account for
loan loss provision costs in their income statements and tend to delay writing off loans.
In accordance with the structure of funds, costs incurred from inter-bank liabilities do
not play a significant role in LPD operations.
The LPD supervision system as applied by the BPD examines assets quality by two
ratios. The first ratio divides classified assets to performing assets. Classified assets
include 50% of sub-standard assets, 75% of doubtful assets, and 100% of loss. The
second ratio divides loan loss provisions made by provisions required. The latter
include 0.5% of standard loans, 10% of sub-standard loans, 50% of doubtful loans and
100% of loss. Note that both ratios are based on the standard loan classification
system of Bank Indonesia that was developed for commercial banks and provides high
tolerances. I.e., monthly installment loans in arrears for less than three months are
classified as standard. These loans have to be classified as loss only after 27 months.
As of March 2000, the classified assets
Table 4.7
ratio was 4.2%, thus indicating a LPD Assets & Loan Portfolio Quality (March 2000)
generally sound assets quality of the
Classified to performing assets ratio (%)
4.2
LPD industry. This ratio, however, hides
Loan loss reserve ratio (%)
56.2
much of the loan portfolio at risk. It only
covers weighted assets, and performing Loan portfolio classification
Standard (%)
91.1
assets include bank placements. A
Sub-standard (%)
4.9
more appropriate measurement for loan
portfolio quality is the loan portfolio at
Doubtful (%)
1.6
risk ratio, covering the entire outLoss (%)
2.4
standing balance of loans with one or Loan portfolio at risk (%) *
8.9
more past due payments. Data
Number of loans at risk (%) *
17.8
necessary to calculate this ratio were
not
available
from
the
BPD. * Includes loans not classified as "standard".
Considering the part of the loan
portfolio that is not classified as standard at risk, the loan portfolio at risk ratio was
8.9% as of March 2000, thus double as high as the classified assets ratio. Loans
classified as doubtful and loss made up 4% of the aggregated loan portfolio of the LPD
industry. The ProFI baseline survey pointed to the high variance in these ratios. The
majority of LPD shows an excellent performance. There is, however, also a
considerable part of the LPD industry that suffers from poor loan portfolio qualities.
The reserve ratio reveals a major management weakness of the majority of LPD. On
average, loan loss provisions made covered only 56% of the provisions required. Only
35% of the LPD included in the ProFI baseline survey were found to have made full
provisions. This unprudential management practice over-states the real value of the
loan portfolio and, as loan loss provisions are not fully accounted for in the income
statement, over-states the profitability of LPD (see below).
Profitability and financial sustainability
The LPD industry is highly profitable according to the ratios and calculation methods
applied by the LPD supervision system. The ProFI baseline survey showed that
average return on assets (1999) decreases from 8.6% to about 4% for the sample
LPD, if full loan loss provision costs are included in adjusted income statements. Note
that this does not yet consider inflation costs.
Without taking into account full loan
Table 4.8
LPD Financial Sustainability (March 2000)*
provision and inflation costs, the LPD
2.5
industry had a return on assets of 2.4% Return on assets (%)
(based on aggregated data) in the first Yield on performing assets (%)
6.5
quarter of 2000. To assess whether the (-) Financing cost ratio (%)
2.4
industry generates sufficient income to (-) Operating cost ratio (%)
1.5
cover costs table 4.6 calculates the net
(=) Operating margin (%)
2.6
margin by subtracting financing costs,
(-) Loan loss provision gap ratio (%)
2.4
operating costs and full loan loss provision
0.2
costs from the average yield on performing (=) Net margin (%)
assets, the financial income divided by * Note that these ratios are based on averages for the
first quarter of 2000 only. Ratios for an entire financial
average performing assets. According to
year are higher as income and costs grow faster than
assets. For more detailed information see LPD
this calculation the LPD industry had an
Baseline Survey of ProFI.
average yield on performing assets of
6.5%, which, after deducting financing and operating costs results in an operating
margin of 2.6%. The tentative “loan loss provision gap ratio” is used to indicate the
difference between provisions required and provisions that are not accounted for in the
income statement. This method shows that the overall profitability of the LPD industry
is not as high as may be suggested by unadjusted balance sheets. Considering the
high inflation rates during the second half of the 1990s the industry has not been able
to maintain the real value of its capital. Including imputed capital costs, the ProFI
baseline survey showed that the average net margin of the sample LPD was negative
in 1999, although they generated an average yield on performing assets of 27%. While
the vast majority of the LPD were found to be profitable institutions, almost one third of
them incurred net losses (note that the survey sample with an equal share of well and
poorly performing institutions is not representative for the entire LPD industry).
Classification of LPD soundness
The LPD supervision system includes a
Table 4.9
CAMEL rating similar to that applied by
LPD CAMEL Rating (December 1999)
Bank Indonesia in supervising BPR. At Classification of LPD
Number
%
the end of 1999 the BPD classified 84% Sound
625
68.5
of the 912 LPD as sound or fairly sound.
Fairly sound
143
15.7
Detailed CAMEL reports for September
Less sound
75
8.2
1999 show that assets quality is the
69
7.6
major factor predicating less sound and Unsound
unsound ratings. As measurements for Source : Regional Development Bank,Denpasar.
assets quality are weak because of the
reasons mentioned above, alternative CAMEL ratings arrive at higher percentages of
LPD classified as less sound and unsound (see ProFI baseline survey report).
However, it has also to be considered that the loan portfolio quality of the LPD industry
has been considerably improving during the last year. Therefore, it may be assumed
that the CAMEL rating presented in table 4.7, approximately describes the present
state of the LPD industry.
Between December 1993 and December 1999 the total assets of the LPD industry
grew by an average annual growth rate of about 50%. During the first three-years
period until the end of 1996 this growth was partly due to the establishment of 206 new
LPD, while during the second period the number of LPD increased by only 56 from 856
as of the end of 1996 to 912 as of the end of 1999. As of March 2000, total assets had
grown by 7 times and average assets per LPD by 5 times compared to 1993.
Table 4.10:
LPD Development December 1993 – March 2000 (in Rp. Million)
Growth
Growth
Dec 1993 Dec 1996 12/93-12/96 Dec 1999 12/96-12/99 Mar 2000
ASSETS = LIABILITIES & EQUITY
53,764
132,771
147%
336,679
154%
375,273
Cash & inter-bank assets
18,806
33,293
77%
117,633
253%
120,201
Gross loan portfolio
39,586
95,519
141%
215,774
126%
250,335
73.6
71.9
39,508
94,007
172%
290,963
Deposits
Average assets per LPD
64.1
138%
256,086
66.7
73.5
70.8
82.7
155.1
88%
369.2
76.1
138%
411.5
77.5
Loan accounts
Total number
144,900
207,000
43%
204,842
(1%)
211,270
Average number per active LPD
223
244
9%
225
(8%)
232
Average amount (Rp. ,000)
273
461
69%
1,053
128%
1,185
Savings & time deposit accounts
Total number
324,800
417,800
29%
611,531
46%
622,104
Average number per active LPD
500
488
(2%)
671
38%
682
122
225
84%
419
86%
468
The major motor of assets growth has been deposit mobilization. Between 1997 and
1999 deposits grew above average, mainly because of a general loss of confidence in
the crisis-ridden banking sector and the financial crisis, when LPD customers faced
difficulties in investing their funds in profitable businesses. The same situation was
responsible for the fact that liquidity and bank placements grew by 253% but the total
loan portfolio of the LPD industry grew by only 126% during the same period. As LPD
had difficulties to find borrowers with profitable investment opportunities, the share of
the gross loan portfolio in total assets decreased from 72% to 64%, while the share of
liquidity and inter-bank assets increased from 25% to 35%. With the economy
recovering, this trend has been reversed since 1999. While deposits continued to grow,
the growth rate of the loan portfolio (16%) was higher than that of deposits (14%) in the
first quarter of 2000, and the loan to assets ratio increased again to 67%.
Loan portfolio growth was due to increasing loan sizes rather than market expansion.
While the average number of loan accounts did almost not change during the last
years, the average loan amount outstanding per borrower increased by 2.5 times since
1996. Operating under highly competitive conditions in Bali and with an outreach to one
third to half of the households in their area of operation, well-established LPD, in terms
of the number of borrowers served, have approached limits of expansion. Provided the
LPD industry continues to improve its soundness and to sustain its image as a safe
place to save, these limits may not yet be given with regard to the number of savings
customers. Attractive savings products, convenient services and the fact that all family
members in Bali tend to open their own savings accounts has been enabling LPD to
expand their outreach to above the average number of households per Desa Adat.
Table 4.11:
LPD Loan Portfolio Quality and Soundness: December 1995 – March 2000
Dec 1995
Dec 1997
Dec 1999
Mar 2000
Change
Standard (%)
85.5
85.7
90.2
91.1
7%
Sub-standard (%)
8.8
8.0
5.3
4.9
(44.3)
Doubtful (%)
2.8
2.9
1.8
1.6
(42.9)
Loss (%)
2.9
3.4
2.7
2.4
(17%)
14.5
14.3
9.8
8.9
(39%)
Sound (%)
47.8
61.7
68.5
43%
Fairly sound (%)
26.2
21.3
15.7
(40%)
Less sound (%)
23.9
11.5
8.2
(66%)
2.0
5.5
7.6
280%
Loan portfolio at risk (%) *
CAMEL classification
Unsound (%)
* Percentage of loan portfolio not classified as “standard”. Note than loans classified as standard include
loans in arrears (i.e., up to 3 months for monthly installment loans).
During the second half of the 1990s the number of LPD grew slowly. The Balinese
government re-orientated its support from expansion to consolidation and improving
the soundness of the LPD industry. By and large, this move has been successful.
Between December 1995 and March 2000 the loan portfolio quality improved
considerably, with the loan portfolio at risk decreasing from 14.5% to 9%. Most
remarkably, this improvement was achieved during times of adverse economic
conditions and despite the financial crisis. The share of LPD classified as sound
increased from 48% as of December 1995 to 68.5% as of December 1999. The share
of LPD classified as less sound and unsound decreased from 26% to 16%.
In spite of these positive trends, the number of unsound LPD increased from 15 to 69
during the same period. The results of the baseline survey indicated that at least part of
them is financially not sustainable. This situation has been caused partly by economic
and internal management factors. Many of these LPD also suffer from lacking support
by their Desa Adat and from weak social control exerted by customary law, factors
which have proved to be decisive predicators of LPD performance.
Strength and Weaknesses
The LPD in Bali are probably the most successful small financial institutions in
Indonesia. Contrary to BKD and most of the other LDKP, they are effective financial
intermediaries placing many small savings to productive loan uses. Contrary to most
other financial institutions, they sustained their growth and even improved their
performance under adverse economic conditions in the late 1990s. The vast majority of
LPD has evolved into competitive financial institutions in a province that has the
highest density of financial institutions in Indonesia. A considerable part of the LPD
industry has reached scales of operation comparable to or larger than those of BPR,
particularly LDKP that converted to BPR.
The strength and comparative advantage of LPD is based on their character as
community-owned financial institutions, in general, and their integration into the
organization and value system of the Desa Adat, in particular. Owned, controlled and
operated by community members the LPD is able to inspire the trust necessary for
mobilizing deposits and achieving self-reliance. LPD managers are well-known
community members who maintain continuous and close customer contact. Readily
available information necessary for prudential credit management reduces transaction
costs for the LPD. Low distances to LPD offices and door-to-door services reduce the
transaction costs of LPD customers. These comparative advantages are further
strengthened when social integration and control based on customary law provide the
LPD with effective means of enforcement.
Part of the LPD industry has been facing low growth rates and deteriorating loan
portfolio qualities despite this generally successful development and favorable
environment. This has also been due to external factors such as unfavorable economic
conditions and socio-cultural conditions that deviate from the comparative advantages
mentioned above. The ProFI baseline survey, however, has also pointed to
considerable internal weaknesses. LPD managers often lack clear rules for prudential
financial management. A major weakness is insufficient loan loss provisioning and
inconsequent writing off of bad loans. Loan appraisal and management capabilities are
often not sufficient for larger loans and investments of borrowers in businesses
exposed to higher risks. Rules for lending to related parties have not been established.
LPD risk management often lacks necessary instruments such as the aging of arrears.
The financial administration of weaker LPD suffers from inadequate office space and
facilities. These LPD lack also transport facilities required for door-to-door services.
Supervisory boards, decreed by the government in 1998, do often not yet exist or
function properly.
LPD operating in large Desa Adat face difficulties in maintaining continuous and close
contact to their customers. For doing so and extending their outreach to remoter areas,
the LPD industry has not yet developed a network of service posts or contact persons
at the Banjar (hamlet) level. This would also be appropriate because the Banjar Adat is
the focal point of customary law and practice.
The LPD industry lacks a system financially intermediating between LPD. As shown
earlier, the LPD industry has been experiencing opposite financial situations. Part of it
lacks the loanable funds necessary to expand its business, whereas another part is
highly over-liquid and places large parts of assets in bank accounts. The most logical
solution to this problem would be to develop a LPD inter-lending market, through which
they are able to access loans at reasonable costs and to place excess funds to uses
with returns higher than earned from BPD placements.
The LPD industry is an indispensable sub-system of the financial system in Bali. The
future potential of the industry lies in its expansion to areas not yet served, through
both service posts and new establishments, and in developing LPD networks with
functions such as inter-lending, deposit protection, supervision and technical support.
With regard to individual LPD well performing and poorly performing LPD have to be
distinguished. Part of the first group has exhausted its growth potentials in terms of
area and number of customers served. Most of them will continue as is and grow in line
with their customers’ businesses. Fewer LPD tend to grow beyond the boundaries of
the Desa Adat and may convert to BPR. The group of poorly performing LPD consists
of two sub-groups. The first one with the potential to improve management practice and
grow in sustainable ways will have to undergo a phase of consolidation. This requires
adequate systems of support and supervision. The second one may not have the
potential to recover because of structural problems in their Desa Adat. In these cases it
seems to be advisable to clean up unviable institutions and, at a later point in time,
initiate new start-ups based on deliberations of each Desa Adat concerned.
There are several constraints for achieving these objectives. The first is the Desa Adat
system itself. Though it is ideally a place of social integration, it has not been free of
communal conflicts. Some Desa Adat lack written customary laws required for making
enforcement effective. The enforcement capacity well-functioning Desa Adat is limited
in cases where LPD provide financial services beyond its boundaries.
The second constraint is the structural weakness of the support system available to
LPD in need of technical assistance. While the BPD cannot provide the required
number of trainers and consultants, the PLPDK staff is often not capable of providing
the assistance required. Training provided to LPD is seldom based on an adequate
assessment of training needs and training impact. Training provided does not appear to
have a significant positive impact on performance. The transformation of individual
learning into institutional practice requires a comprehensive training and consultancy
system that is able to respond to the specific problems and needs of individual LPD.
The third constraint lies in the present state of the supervision system. It lacks a clear
distinction from technical assistance functions and involves too many parties. The
system also lacks the capacity to carry out on-site supervision adequately and has not
been enforcing compliance with existing regulations. The ProFI project recommended
the restructuring and improvement of LPD supervision and technical assistance and
presently cooperates with the Balinese government and the BPD in preparing new LPD
regulations and new systems of supervision and support.
The fourth constraint has to be seen in the lack of a consistent national regulatory
framework. The requirement to convert LDKP to BPR has not been reflecting the needs
of institutions such as the LPD. This led Bank Indonesia to temporarily allow LPD
operating as non-banks. Presently, Bank Indonesia and the ProFI project are preparing
a new enabling regulatory framework for non-bank microfinance institutions. As BPR
have generally not been able to achieve a broad outreach to the village level, this is
especially important for the development of microfinancial institutions outside of Bali.
The LPD industry provides a valuable learning case for initiatives with such an aim.
4.4 Lumbung Pitih Nagari (LPN) in West Sumatra
4.4.1 Historical background
The Lumbung Pitih Nagari (LPN) in West Sumatra is the second type of LDKP
operating at the village level. Predecessors of the LPN, the Bank Nagari, were already
established in colonial times but seem not to have operated for long (see chapter 5). In
1972, the provincial government initiated the establishment of new LPN with the aim to
strengthen the local economy and village development. In 1987, the number of
registered LPN had grown to 580 of which, however, only 40% were reported to be
operational.70 71 LPN were converted to BPR during the 1990s. As of June 2000, the
Regional Development of West Sumatra reported that only 122 of the previously some
600 units had sustained their operations as LDKP.
4.4.2 Regulation, Supervision and Organization
As in the cases of other LDKP, the provincial government is responsible for regulating
and supervising LPN. The first institutions were established on the basis of
governmental decree No. 85 of 1972. Presently, LPN are operating on the basis of
governmental regulation No. 1 of 1982. The LPN supervision system is similar to that of
the LPD in Bali. The overall authority for supervision lies in the hand of the provincial
government and its LPN guidance boards, while the Regional Development Bank
(BPD) carries out supervision technically. The BPD carries out supervision on the basis
of monthly, semi-annual and annual LPN reports.
The organizational environment of the LPN resembles that of the LPD. It is owned by
the custom village, in West Sumatra known as nagari, and established by decision of
the village assembly. The LPN operates in the legal form of a village-owned enterprise
(Badan Usaha Milik Masyarakat Desa - BUMD). Contrary to the LPD, the LPN
organization was modeled on the cooperative organization model. Community
members have to register and become members of the LPN by depositing an entry fee
or share as well as obligatory savings. The LPN management is recruited from
members of the village community. Internal control is carried out by the LPN
management board, while supervisory boards of the village seem not to be part of the
LPN system.
As of June 2000, the 122 LPN operated with average assets of Rp. 20.5 million only.
They had 77% of total assets placed in their loan portfolios. They are self-financed
institutions with equity contributing 41% and savings mobilized from members
contributing 34% to their total funds. They effectively intermediate between savings
customers and borrowers, but their average outreach, the lowest of all LDKP, is limited
to 182 savings customers and 90 borrowers only. The low degree of savings
mobilization appears to considerably restrict credit services. The average savings (Rp.
38 thousands) and loan (Rp. 176 thousands) amounts per account are the lowest
found for all LDKP.
70
See Infobank No. 115/1989, p. 25.
Table 4.12:
LPN Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
Inter-bank assets
Loan portfolio
Other assets
TOTAL
%
286
11.4
Savings
839
33.5
1,929
77.1
Other liabilities
490
19.6
1,036
41.4
(6)
(0.3)
Equity*
294
11.8
2,503
100.0
Million Rp.
TOTAL
%
138
5.5
2,503
100.0
Source: Regional Development Bank, Padang.
The loan portfolio quality of the LPN industry as of June 2000 was poor. 22% of its total
loan portfolio, or about half its equity, was classified as loss. The loan portfolio at risk
ratio was 36% and the classified to performing assets ratio 27%. Based on the loan
portfolio classification available from the BPD and the calculation method described for
LPD, the LPN industry would have had to provide loan loss provisions equivalent to
21% of its total funds or 27% of its total loan portfolio. With a ratio of 1.2% between
loan loss provisions made and required the industry was extremely under-provisioned.
Considering that loan loss provision costs are not accounted for (total costs recorded in
the income statement are almost three times as low as the amount required for loan
loss provisions), it is safe to argue that the industry operates at a high loss.
The data available for this report are not sufficient to come up with a comprehensive
assessment of the LPN industry. While national statistics of Bank Indonesia still report
the existence of some 500 LPN, the overall outreach of the industry appears to have
been by far lower already since the 1980s. The industry was further weakened in the
1990s, when almost 40% of the active and
Table 4.13
best performing LPN obtained BPR licenses.
LPN Performance Indicators (June 2000)
As of June 2000, the LPN industry had an
Number of LPN
122
outreach to not more than 2% of the
Avg. number of savings accounts
182
households in West Sumatra.
In terms of average assets LPN are tiny
institutions that resemble small savings and
credit groups rather than well-functioning
financial institutions at the village level. The
lack of voluntary savings mobilization, its low
loan portfolio quality and its low profitability
caused by high loss and inflation costs have
been de-capitalizing the LPN industry. Taking
additionally into account that they have been
operating for a long time, it seems not to be
probable that the many of these institutions will
be able to develop into viable institutions that
provide sustainable financial services.
Avg. amount (Rp. ,000)
38
Avg. number of loan accounts
90
176
Avg. assets per LPN (Rp. million)
20.5
Standard (%)
64.4
Sub-standard (%)
6.1
Doubtful (%)
7.3
Loss (%)
22.2
35.6
Classified assets ratio (%)
26.7
1.2
Source: Regional Development Bank, Padang.
* Includes loans not classified as "standard".
4.5 Badan Kredit Kecamatan (BKK) in Central Java
The Badan Kredit Kecamatan (BKK) in Central Java operate at the sub-district level
and are owned by the provincial government. The first BKK were established in 1970.
With considerable assistance by the government and donors the BKK system
developed into a large network of 511 units and about 3,500 service posts until the mid
1990s, when the first BKK were converted to BPR. As of June 2000, there remained
160 BKK still operating as LDKP, while 351 units had acquired BPR licenses.
The development of the BKD industry is relatively well documented until the mid 1990s
because, supported by international technical assistance, it was regarded as one of the
most successful models for microfinancial institutions.71 As Patten and Rosengard
(1991) pointed out, the BKK program was borne in 1970 as part of political stabilization
efforts in order to promote off-farm economic opportunities for low-income groups.
Fiscal constraints led the government aiming at developing the BKK industry into a selfsustaining system.
During the first half of the 1970s BKK were established in all but 6 of the then 492 subdistricts in Central Java. The establishment of these BKK was initiated with a
government loan amounting to Rp. 1 million for each of them. During the second half
the 1970s the program was not expanded. Without further injection of funds two thirds
of the BKK were able to prove their financial self-reliance, whereas the other third did
either collapse or stagnate at very low scales of operation. Until the early 1980s the
program focused on rehabilitating the poorly performing part of the industry and
improving BKK supervision by the Regional Development Bank (BPD). These activities
received support from the USAID-sponsored Area Development Project incepted in
1979, especially through a revolving fund established at the BPD to provide continuous
access to funds for 65 BKK in the project areas.
In 1981 the provincial government transformed the BKK system from a project into a
government-owned enterprise and the Ministry of Finance provided a Rp. 3 billion loan
for the further rehabilitation and expansion of the BKD industry. In the following the
industry experienced an outstanding growth and improvement of its performance. The
total loan portfolio grew by almost five times from Rp. 2.5 billion at the end of 1980 to
Rp. 11.9 billion at the end of 1985, while the number of BKK increased by only 10 units.
During the same period the number of non-active or very poorly performing BKK could
be reduced from 184 to 80 institutions.72
71
72
See, i.e., Susan Goldmark and Jay Rosengard: Credit to Indonesian Entrepreneurs. An
Assessment of the Badan Kredit Kecamatan Program, Development Alternatives, Inc.,
Washington 1983; Richard H. Patten and Jay K. Rosengard: Progress with Profits. The
Development of Rural Banking in Indonesia, ICS Press, San Franscisco, 1991; J. Yaron:
Successful Rural Finance Institutions, World Bank Discussion Papers, Washington 1992;
Jeffrey M. Riedinger: Innovation in Rural Finance: Indonesia's Badan Kredit Kecamatan
Program, World Development, Vol. 22, No. 3, 1994.
The BKK supervision system includes a classification system that uses six weighted criteria
to divide the BKK industry into five performance classes (see also part on supervision). The
number of BKK referred to fall into the fifth class.
Patten and Rosengard (1991) described the second
Table 4.14
Number
of
BKK 1972 – 2000
half of the 1980s as a phase of consolidation and
200
diversification that was supported by the USAID- December 1972
sponsored Financial Institutions Development Project. December 1976
486
In order to respond to the changing demand of December 1981
486
customers major adjustments were made with regard December 1985
496
to the design and diversification of BKK products. In
December 1989
499
1987, based on a permission granted by the Ministry
June 1995
510
of Finance in 1984, the provincial government started
160
to introduce a voluntary savings scheme in well June 2000
performing units. This move enabled the BKK to Sources: Patten and Rosengard 1991.
Regional Development Bank, Semarang.
attract new customers and opened the opportunity to
reduce dependence on government funds and to develop into financial intermediaries.
As of December 1989, 499 BKK with 3,440 village posts provided financial services to
41% of the villages in Central Java. Total assets of the industry amounted to Rp. 27.8
billion with 85% of assets placed in its aggregated loan portfolio. Retained earnings
and current profits contributed 45%, government loans 24% and savings 17% to total
funds mobilized. 78% of these savings, however, consisted of compulsory savings
collected from borrowers. The BKK industry had 509,584 loan accounts, 439,964
compulsory savings accounts and 60,599 voluntary savings accounts.
Pointing to the substantial profits generated and the low long-term loss ratio of 2.1%
(the total amount overdue compared to the total amount due), Patten and Rosengard
(1991) described the BKK performance as "remarkably good". To understand the
present state of the industry it is useful to paint a partly different picture. As of
December 1989, 19.7% of the industry’s loan portfolio value was classified as doubtful
or loss and a further 7.4% was deliquent for less than 6 months. Neither the
uncollectible loans nor the entire loan portfolio at risk (27%) were reflected in financial
statements. With recorded profits of Rp. 1.7 billion and a loan amount of Rp. 4.6 billion
classified as doubtful or loss (more than one third of retained earnings and current
profit) the industry was operating at a loss. The BKK program was successful in
reducing the number of poorly performing BKK from 120 in 1985 to 47 in 1989.73 It,
therefore, can be said that the BKK industry consisted of a large part of well-performing
institutions and a smaller less viable part when LDKP became required to convert to
BPR in 1992.
In the second half of the 1990s the provincial government actively pursued the
conversion of BKK to BPR by providing the paid-up capital required for BPR licenses
from the regional government budget. As of July 1996, already 202 BKK had converted
to BPR. This number increased to 351 until June 2000, while 160 of the 511 BKK
existing in the mid of the 1990s have been continuing as LDKP. As the 70% of the BKK
converted to BPR were the best performing ones, it can be assumed that this change
has considerably weakened the remaining part of the BKK industry.
73
These numbers refer to the BKK classified in the two last performance classes of the BKK
classification system. See also previous footnote.
4.5.2 Regulation, Supervision and Support System74
During the first program phase BKK were established on the basis of decrees issued
by the governor of Cental Java.75 In 1981, the BKK system was transformed from a
project into a government-owned enterprise by means of a provincial government
regulation that was ratified by the Ministry of Home Affairs on December 17, 1981.
Since then the BKK industry has become incorporated into the hierarchical government
structure. The governor, assisted by the provincial guidance board, has the overall
authority and responsibility for BKK policies, coordination, supervision and support.
Administrative authority is delegated to the heads of district and sub-district
governments. As a regional government enterprise and a source of income and costs
for the regional budget the BKK has also been subject of political accountability to local
parliaments, particularly in cases of mis-management and fraud.
The government-owned Regional Development Bank (BPD) plays a three-fold role in
the BKK system. First, it functions as a financial intermediary by managing the liquidity
of and providing loans to the BKK. Second, it provides training, technical support and is
responsible for developing the products and administrative instruments of the industry.
Third, it carries out supervision through its BKK supervision department that consists of
three sections responsible for administration, reporting and on-site supervision.
Full-time BPD field supervisers ideally visit each BKK once a month to provide
technical support and carry out on-site supervision on the basis of inspection
guidelines. Off-site supervision is carried out through a monthly reporting system. To
measure BKK performance the BPD has been using a classification system that groups
BKK into five performance classes on the basis of benchmarks and relative weights for
six factors. The absolute amount of equity is weigthed by 50% and the remaining
factors (village to village posts ratio, number of new borrowers, 6-months repayment
rate, savings, capital circulation) by 10% each. The classification system measures the
volume and outreach rather than the soundness of BKK. The high weight of equity
dominates the overall rating, while typical CAMEL measurements are not applied.
Similar to other government-owned non-bank microfinance institutions, the system
lacks clear governance and functional differentiation. The owner functions as policymaker, manager, consultant, and owns the institution that is in charge of supervision.
The BPD faces a conflict of interest being responsible for both technical assistance and
supervision. The latter function requires enforcement power that appears to be lacking,
especially when it comes to personnel and sensitive management issues. Prudential
banking practice is difficult to enforce, if compliance with benchmarks such as those of
CAMEL systems are not comprehensively regulated.
74
75
The following description is mainly based on: Patten and Rosengard (1991) and Legislation,
Regulation and Supervision of Microfinance Institutions in Indonesia. Joint Paper by Bank
Indonesia and GTZ, Project Promotion of Small Financial Institutions (ProFI), Presented at
Seminar “How to regulate and supervise microfinance?”, Kampala, Uganda, 22-26
November 1999. Note that information provided mainly dates from the early 1990s. The
author had no information on possible changes in the course of the restructuring of the BKK
industry in the second half of the 1990s.
Keputusan Gubernur Propinsi Jawa Tengah, 4 September 1969, and Keputusan Gubernur
Propinsi Jawa Tengah No. 323/1970/12/19/24 Tanggal 19 Nopember 1970.
In terms of ownership, legal form and organization the BKK differ considerably from the
LPD in Bali and the LPN in West Sumatra. The BKK units are part of a single system
and legal entity that is owned by the provincial government and registered as a regional
government enterprise. The entire system from policy-making, regulation and
supervision to management, staffing and product design are under government control,
with administrative responsibilities being delegated to the district and sub-district levels.
Historically, the BKK were established to strengthen government control over local
development, while the LPD in Bali have been promoted to strengthen the custom
villages. The autonomy of the BKK units has been much lower and their exposure to
intervention from government officials much higher.
Financially, each BKK unit is a relatively independent profit and loss center, and
operational decisions are usually taken by local staff. Loans are approved based on
recommendations of village heads. The head of the sub-district is responsible for the
performance of the BKK in his area of administration. These features of local
administration have led Patten and Rosengard (1991) to argue that the BKK system is
characterized by in-built local accountability and incentives on local performance. This
has not necessarily been true. It has to be taken into account that local officials have
considerable control on personnel and operational decisions. Both BKK staff and local
officials have not always been subject to public accountability. Nowadays, as an impact
of the political reform process, public accountability is exerted by local parliaments and
the press. A series of newspaper articles has currently been pointing to mismanagement and fraud of government officials as a major cause for BKK losses (see
below).
The BKK system is organized into units operating at the sub-district level and their
village posts at the village level. The village posts do not consist of permanent offices
but are run by mobile staff who visits villages most usually on market days once a
week. A typical BKK unit has five to ten employees who run five to seven village posts.
The units usually operate from small buildings equipped with simple furniture and have
motorcycles for their mobile services.
BKK products and services are standardized, but important adjustments made in
response to the changing customer demand and banking environment have
significantly changed the character of BKK as financial intermediaries. Until the late
1980s, compulsory savings as a percentage of loan amounts approved were the single
savings instrument. When BKK were allowed to mobilize savings from the public and
recognized both the savings capacities and need for flexible savings instruments of
their customers, the government introduced a voluntary savings instrument in 1987.
The Tamades product provides market interest rates, flexible access and is guaranteed
by the provincial government. After a slow start the BKK developed into savings-led
financial intermediaries. The share of savings in total liabilities and equity increased
from 17% at the end of 1989 to 63% as of June 2000. The fact that the savings to loan
ratio increased from 20% to 84% indicates that Tamades has become the major fund
mobilization instrument.
The BKK credit system was also modernized and diversified in the late 1980s. The
system comprises five loan types further differentiated according loan terms. ‘Daily
loans’ are provided for 22 days. ‘Weekly loan’ terms range from 12 to 52 weeks and
‘monthly loan’ terms range from 3 to 12 months. Seasonal loans are offered for 6
months and market loans with terms ranging from 60 days to 300 days. All loan types
do not require collateral but borrowers are required to deposit compulsory savings of
up to 20% of the loan amount approved. Compulsory savings are usually repaid and a
rebate is granted after successful loan repayment. Interest rates have been varying
according to loan types and market conditions, with annual effective interest rates
approximately ranging between 24% for seasonal loans and 120% for daily loans. The
BKK system is well known for its easy and fast loan procedures that ideally take not
more than one week from application to disbursement.
As of June 2000, the 160 BKK units had an
outreach to approximately 30% of the subdistricts in Central Java, while most of the
other areas are now being served by BKK
already converted to BPR. The average BKK
had 1,123 savings and 817 loan accounts.
Assuming one savings and loan account per
household, it served about 5% to 10% of the
households in its sub-district.
Table 4.15
BKK Outreach (June 2000)
Number of BKK
160
Coverage of sub-districts (%)*
29.0
Avg. number of deposit accounts**
As % of households/sub-district*
1,123
8.0
Number of accounts < 500 (%)
25.6
Avg. Amount per account (Rp. ,000)
239
817
The average loan amount outstanding per Avg. number of loan accounts
5.8
borrower increased by nine times since
29.4
1989, but it remained relatively small (Rp.
239,000), i.e., compared to the LPD in Bali.
394
From studies conducted in the 1980s it is Source: Regional Development Bank, Semarang.
known that BKK borrowers were mainly *
Calculation based on the
female petty traders with fast turnovers and number of households (7.6 million) and
need for very short-term loans. More recent
b di t i t (544) i C t l J
studies are not available. It is, therefore, difficult to say whether the average loan
amount outstanding points to a specific clientele or to a lacking capacity to meeting the
demand for increasing loan amounts.
There was a high variance of individual loan amounts outstanding that may support the
second argument. Average loan amounts were less than Rp. 250,000 in 29%, but they
exceeded Rp. 500,000 in 35% of the BKK. In 9% of the cases average loan amounts
outstanding per borrower were even larger than Rp. 1 million. Higher amounts are
typically found in larger BKK with high degrees of savings mobilization. Loan amounts
outstanding averaged Rp. 547,000 in BKK with savings financing more than two thirds
of assets, but only Rp. 204,000 in BKK with a savings to assets ratio of less than 33%,
whereas the average number of borrowers did not vary significantly between these
groups. A similar variance can be found with regard to the number of savings
customers and borrowers. The number of savings customers ranged from below 100 to
12,420, with 26% of the BKK serving less than 500 and 44% more than 1,000 savings
customers. The number of borrowers ranged from below 100 to 2,538, with 29% of the
BKK serving less than 500 and 28% more than 1,000 borrowers.
As of June 2000, the average BKK had assets amounting to Rp. 424 million. The high
variance in outreach is reflected in varying assets sizes, ranging from only Rp. 60
million to Rp. 2.1 billion. 27% of the 160 BKK had assets smaller than Rp. 250 million,
and in 24% of the cases assets exceeded Rp. 500 million. In eight cases assets and in
six cases even deposits were larger than Rp. 1 billion.
Table 4.16:
BKK Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
%
Million Rp.
%
Inter-bank assets
10,887
16.0
Savings
43,039
63.4
Loan portfolio
51,529
75.9
Other liabilities
17,548
25.8
(1,250)
(1.9)
Equity*
4,970
7.3
6,745
10.0
67,912
100.0
Other assets
TOTAL
TOTAL
990
1.5
67,912
100.0
Source: Regional Development Bank, Semarang.
The BKD industry had 74% (net of loan loss provisions) of its assets invested in the
aggregated loan portfolio, while BPD placements contributed 16% to total assets.
Savings were the major source of funds and financed 84% of the total loan portfolio.
Considering that compulsory savings may not make up more than 20% of loans
outstanding, it can be concluded that the promotion of voluntary savings during the
1990s has transformed the BKK from an institution dependent on equity and loans to a
savings-led financial intermediary.
The extent to which BKK succeed to mobilize voluntary savings appears to have been
a major factor predicating their growth. This is indicated by the high variance in the
structure of their sources of funds in relationship to assets size. In 23% of the BKK
savings contributed less than one third and in 39% of the BKK more than two thirds to
total liabilities and equity. The first group of BKK had assets amounting to Rp. 204
million, and the second group had assets amounting to Rp. 547 million, on average.
The savings to assets ratio was 32% for BKK with assets smaller than Rp. 250 million,
compared to 71% for BKK with assets larger than Rp. 500 million.
The overall loan portfolio quality of the BKK industry indicates that a great part of the
BKK experienced considerable loan collection problems. 12% of the aggregated loan
portfolio was classified as loss, 8% as doubtful and 6% as sub-standard, thus 26% of
the total loan portfolio being at risk. Based on the BPD loan classification and
calculation methods described in the LPD chapter, the classified to performing assets
ratio was 17%. The assets quality was also unsound with regard to loan loss
provisioning. According to loan classification mentioned above only 15% of loan loss
provisions required were made as of June 2000.
BPD data made available for individual
Table 4.17
BKK
Assets
&
Loan
Portfolio Quality (June 2000)
institutions show that about half of the
17.2
160 BKK are unsound. More than one Classified to performing assets ratio (%)
quarter of their loan portfolios was at Loan loss reserve ratio (%)
14.6
risk in 49% and classified as loss in
100% ratio (% of BKK)
2.5
17% of the cases. The ratio of loan loss
< 10% ratio (% of BKK)
42.5
provisions made to provisions required
was higher than 50% in only 11% of the
Standard (%)
74.1
cases. 43% of the BKK had reserves
Sub-standard (%)
6.2
ratios lower than 10%. The BKK with
Doubtful (%)
7.8
extremely high loan portfolio at risk
ratios (>25%) were also the ones with
Loss (%)
11.9
extremely low loan loss provisioning. Loan portfolio at risk (%) *
25.9
While an average 44% of their loan
< 15% (% of BKK)
25.0
portfolios was at risk, they had made
> 25% (% of BKK)
49.4
only 8% of provisions required.
Source: Regional Development Bank, Semarang.
According to balance sheets available, * Includes loans not classified as "standard".
37% of these institutions were operating
with negative capital and 23% of them with negative returns. Taking further into
account their extreme under-provisioning and the fact that the value of uncolletible
loans exceeded by far the equity of this BKK group, it can be concluded that the
financial sustainability of up to half of the 160 BKK is at risk.
Both internal mismanagement and external intervention have greatly contributed to this
situation. A series of recent newspaper articles76 reported such cases from, i.e.,
Banyumas, Pekalongan, Solo and Cilacap districts. The BKK in the Cilacap district
alone reported a total loan loss of Rp. 2.4 billion, equivalent to 27% of their loan
portfolios. Half of the loan amount was found to be in the hands of government officials
and former BKK staff. Half of the loans concerned consisted of fictitious loans.
Strengths and Weaknesses
In 1996 the BKK industry was described as “a self-sustaining system of rural financial
institutions”.77 Since then, 351 BKK units converted to BPR, with 160 institutions
remaining as of June 2000. LDKP applying for a BPR license are required to have
been operating without loss during the preceding three years. As the BKK industry lost
70% of its best performing institutions, its assessment as a self-sustaining system has
to be revised.
The information available for this report indicates both strengths and weaknesses of
the BKK industry. A major strength is to be seen in the fact that the remaining BKK still
76
77
See, i.e., Suara Pembaruan Daily, 12 June 2000; Pikiran Rakyat, 26 June, 22 August 2000;
Suara Merdeka, 21 September 2000.
David C. Cole and Betty F. Slade. Building a Modern Financial System. The Indonesian
Experience. Cambridge University Press, 1996, p. 128. Also other publications until the mid
of the 1990s and international organizations such as the World Bank praised the BKK as
profitable and sustainable institutions.
cover of up to one third of the sub-districts in Central Java with an outreach to around
200,000 customers. With their large network of mobile posts they have an outreach to
the village level usually exceeding that of BPR and BRI units operating at the subdistrict level. A second strength is their ability to respond to the needs of rural
households and microenterprises with easy, fast and mobile services. Contrary to the
BKD, which operate in about 20% of the villages in Central Java, the BKK industry
adjusted its loan products to the changing and varying needs of its clientele. In
comparison to the BKD, BKK units usually have a much higher management capacity
and competence in serving their customers. Savings mobilization has become a third
strength of the BKK industry. With the introduction of the voluntary savings product,
they were able to develop into savings-led financial intermediaries.
In terms of geographical outreach through its units and village posts the BKK industry
is still strong. The current state of the industry is less inspiring with regard to customer
outreach per BKK unit, with less than 10% of the households covered in its area of
operation and an apparently limited capacity to meet the increasing credit demand of
its clientele. The major weakness inhibiting the growth of BKK units is their bad loan
portfolio quality and the resulting deterioration of their financial sustainability. Prudential
banking practice suffers from intervention of local officials and weak internal control.
The BKK supervision system is weak in its capacity to improving this situation. It lacks
functional differentiation from the BKK owner and support system, it lacks focus on
assets quality and management factors, and it lacks enforcement power.
The BKK industry is highly differentiated with regard to both strengths and
weaknesses. It can be estimated that the strengths described above predominate in up
to one third of the BKK units, whereas the weaknesses described above may have
jeopardized the viability of up to half of the BKK units.
Constraints and potentials
An assessment of constraints and potentials has to take into account the highly varying
performance of the BKK units and the conversion of BKK units to BPR. The current
development of the industry may be described as the survival of the second fittest. The
fittest units were converted to BPR before the high capital requirements for new BPR
establishments were established by Bank Indonesia in 1999. As these requirements
are too high for almost all still operating units, the fittest among them may be integrated
into the BPR-BKK system, i.e., through mergers with existing BPR. The second group
of less performing but still viable units may have the option to become outlets of
existing BPR-BKK or, with some efforts of rehabilitation, to continue as is.
The third group of apparently unviable institutions will most probably not be able to
sustain their operations. New start-ups with reliable personnel and improved
governance rather than rehabilitation may be an option in these cases. Externally,
these prospects depend on the policies taken by the provincial government, on the one
hand, and the legal and regulatory framework available for non-bank microfinance
institutions in the future, on the other hand. Another factor that has to be considered is
competition. BKK as independent units may have a future place in local finance only, if
BRI units, BPR networks and village-level financial institutions such as the BKD prove
to be incapable of covering the financial market at the village level.
4.6 Lembaga Perkreditan Kecamatan (LPK) in West Java
The Lembaga Perkreditan Kecamatan (LPK) in West Java, along with the BKK in
Central Java, belong to the oldest LDKP that were established by provincial
governments at the sub-district level since the early 1970s. Before the Banking Act of
1967 closed the entry for new banks, district governments had established so-called
old-style people’s credit banks (see chapter on BPR) in 13 of the districts of West Java.
After Bank Indonesia had allowed provincial governments to set up non-bank financial
institutions in 1970, the LPK program was developed to expand the outreach of
government-owned local financial institutions to areas not yet serviced by “old-style”
BPR. During the 1970s, 114 LPK were established in 18 districts. The number of LPK
increased to 146 units in 1988 and to 161 units until the mid of the 1990s.
When the new banking regulations of 1992 required LDKP to convert to BPR until
October 1997, the provincial government supported this move by making available the
required capital through government regulation No. 5 of 1996.78 According to this
regulation the provincial government had to contribute 45%, the district governments
40%, and the Regional Development Bank (BPD) 15% to the paid-up capital required.
Until Bank Indonesia increased capital requirements in May 1999, 62 LPK were able to
obtain BPR licenses. Since then, no other LPK was able to fulfill the licensing
requirements. As of June 2000, 82 of the remaining 99 LPK were still active.
The first LPK were established by governmental decree No. 446 of 1973.79 Since then
several other regulations were issued dealing with the LKP organization, supervision
and support system.80 The LPK operates in the legal form of a regional government
enterprise and is owned by the provincial government (55%) and the district
governments (45%).
The government has established a hierarchical support system comprising so-called
guidance boards at the provincial, district and sub-district levels, which are made up of
government officials. Governmental LPK inspectorates were set up at the provincial
and district levels to take over the day-to-day task of the guidance boards. The BPD
was made responsible for providing technical assistance to the LPK. The BPD receives
and examines the financial reports of the LPK, but does not appear to have supervision
authorities as in the case of other LDKP systems. Supervision is carried out by local
supervision boards, which are assisted and coordinated by a secretariat at the
provincial level. The supervision boards are responsible for five LPK each and consist
of two to four members, including the BPD. They are supposed to carry out on-site
inspections at least once a year for each LPK.
78
79
80
Peraturan Daerah Propinsi Jawa Barat Nomor 5 Tahun 1996 Tanggal 13 Pebruari 1996
tentang PD. BPR LKP Jawa Barat.
Surat Keputusan Gubernur Propinsi Jawa Barat Nomor 446/A.III/SK/1973 Tanggal 17
Desember 1973 Tentang Pendirian LPK di Wilayah Jawa Barat.
See, i.e., Surat Keputusan Gubernur Propinsi Jawa Barat Nomor 46 Tahun 1990 Tanggal
30 Oktober 1990.
As a non-bank financial institution the LPK have not been allowed to mobilize deposits
from the public. In the information made available by the BPD, LPK are referred to as
savings and credit institutions providing financials services to members. As the LPK are
restricted in mobilizing savings, they have been using compulsory savings as a source
of funds. Lapenu (1998), however, reports that part of the LPK has placed savings
boxes in the houses of borrowers in order to collect installments and mobilize excess
cash. LPK usually provide collateral-free loans with first loan approvals requiring
recommendations of the village or sub-district head. Sanctions are inflicted on late
payments.
As of June 2000, the 82 LPK had average assets of Rp. 195 million of which 68% (net
of loan loss provisions) were placed in their loan portfolios. Equity, reserves and
retained profits were the major sources of funds and made up 40% of total liabilities
and equity. Savings contributed only 31%, while other liabilities such as loans from the
government and BPD contributed 30% to their total funds. The entire LPK industry was
operating at a loss in the first half of 2000.
Table 4.18:
LPK Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
%
818
5.1
Savings
4,926
30.9
11,167
70.0
Other liabilities
4,702
29.5
(256)
(1.6)
Equity*
6,358
39.8
Other assets
4,230
26.5
(27)
(0.2)
15,959
100.0
15,959
100.0
Inter-bank assets
Loan portfolio
TOTAL
TOTAL
Million Rp.
%
Source: Regional Development Bank, Bandung.
With an average number of 302 savings customers and 203 borrowers the LPK had a
rather low outreach for a non-bank microfinance institution operating at the sub-district
level. The average loan amount outstanding per account (Rp. 671,000) was the highest
of all LDKP and more than three times as high as the average amount of savings per
account (Rp. 199,000). The ratio between savings and loan amounts indicates that the
LPK have been mobilizing savings other than compulsory savings as a percentage of
loan amounts disbursed. The absolute number of savings customers and the share of
savings in total funds, however, do not indicate that the LPK has become attractive for
savings customers. Contrary to other LDKP such as the BKK in Central Java and the
BUKP in Yogyakarta, the LPK has used scarce funds to serve fewer borrowers with
higher loan amounts.
The lacking profitability of the LPK industry has been due to high loan losses. As of
June 2000, it had the worst loan portfolio quality of all LDKP with half of the aggregated
loan portfolio being at risk. According to the BPD loan classification system, 12% of the
loan portfolio was classified as sub-standard, 16% as doubtful and 23% as loss. The
classified to performing assets ratio was 38%.
Based on the BPD loan classification and the
calculation method described for LPD, the LPK
industry would have had to make loan loss
provisions equivalent to 23% of its total funds
or 32% of its loan portfolio, and 57% of its
equity. Despite or because of this situation the
LPK were extremely under-provisioned, with
loan loss provisions made making up only 7%
of loan loss provisions required. Considering
this low ratio and the fact that total costs
accounted for in the first half of 2000 were
more than three times as low as the amount
required for loan loss provisions, it can be
assumed that the LPK industry operated at a
much higher loss than indicated by the
balance sheet. Taking into account these
findings it can be concluded that, according to
Bank Indonesia CAMEL standards and by any
standards, a great part of the LPK must have
been unsound.
Table 4.19
LPK Performance Indicators (June 2000)
Number of LPK
Avg. number of savings accounts
82
302
199
203
671
Avg. assets per LPK (Rp. million)
194.6
Standard (%)
49.8
Sub-standard (%)
11.5
Doubtful (%)
15.7
Loss (%)
23.0
50.2
37.7
7.1
Source: Regional Development Bank, Bandung.
Lapenu (1998) stated that non-bank microfinance institutions in West Java, including
the LPK, “appeared to have been by-passed by the transformation process of the rural
financial system”. She concluded that a vicious circle of low salaries, lack of motivation
and professionalism and the relative absence of supervision “relegated them to a very
secondary role within the rural financial system.”81 While information available for this
report does not allow coming up with final conclusions, the findings presented above do
also not disprove Lapenu’s conclusion.
It can be assumed that the LPK industry has considerably suffered from the conversion
of 62 of its best institutions to BPR. Most of the remaining LPK have not achieved a
significant outreach for sub-district institutions. The extremely low loan portfolio quality
and the resulting lack of profitability tend to de-capitalize the industry. According to
recent newspaper reports, corruption cases involving LPK management, government
officials and even officials of the governmental inspectorates have greatly contributed
to this situation.82 Information made available by the BPD indicated that internal control
has been functioning very poorly. As the outstanding credit collection problems, in
general, and corruption cases, in particular, must have negatively affected the
credibility of LPK, they have not been able and most probably will not be able to attract
savings to a significant extent. Thus, it will be more than difficult to improve this
situation and sustain the financial services of many, if not most, of the still operating
institutions.
81
82
Cécile Lapenu, Indonesia's Rural Financial System: The Role of the State and Private
Institutions, Report for the World Bank Project “Sustainable Banking with the Poor”, 1998.
See, i.e., Pikiran Rakyat, 27 June and 17 July 2000.
4.7 Badan Usaha Kredit Pedesaan (BUKP) in Yogyakarta
The Badan Usaha Kredit Pedesaan (BUKP), or rural credit institutions, in Yogyakarta
operate at the sub-district level and are owned by the provincial, district and the village
governments. The provincial government and the Regional Development Bank (BPD)
initiated the BUKP program as a pilot project in 1987 in order to broaden the access to
cheap, fast and collateral-free credit for economically weak groups. The provincial
government regulation of 1989 formalized the program and obliged the local
governments to establish a BUKP in each sub-district. The 75 BUKP, established
between 1987 and 1996, were still operational as of June 2000.
The establishment, ownership, organization and operations of BUKP are regulated by
the provincial government regulation No. 1 of 1989 and the governor’s decree No. 273
of 1990.83 The establishment of a BUKP requires a paid-up capital of Rp. 5 million of
local government assets. The provincial and district governments are the BUKP owners
in district municipalities. The first had to contribute 70% and the second 30% to paid-up
capital. Village governments are an additional BUKP owner in rural areas and had to
contribute 40% to paid-up capital, while the provincial government contributed 40% and
the district government 10%.
The ultimate responsibility for policy-making, supervision and technical support lies in
the hand of the governor of the province. The governor has also the right to liquidate
unviable institutions with the consent of the provincial parliament. The head of the subdistrict is given the overall responsibility for the operation and performance of the
BUKP in his area of administration. The governor and district heads are assisted by
provincial and district BUKP guidance boards, which are responsible for carrying out
general supervision and technical support. The economic bureau of the provincial
government is responsible for internal supervision, while the BPD is given the task to
technically supervise and assist the BUKP.
The BUKP have a standardized organizational structure and administration that was
determined by government decree. The provincial guidance board selects, while the
governor has the right to appoint and dismiss BUKP staff. The head of the BUKP is
given autonomy in taking credit decisions in accordance with valid stipulations.
Outreach
As of June 2000, the 75 BUKP had an outreach to approximately 5% of the households
in the province. The average BUKP had 435 deposit accounts and 362 loan accounts.
This is not too impressing for an institution operating at the sub-district level. There is,
however, a considerable variance in customer outreach, with the number of deposit
83
Pemerintah Daerah Tingkat I Daerah Istimewa Yogyakarta Nomor 1 Tahun 1989; Surat
Keputusan Gubernur Kepala Daerah Istimewa Yogyakarta Nomor 273/KPTS/1990 Tahun
1990.
accounts ranging from below 100 to 1,118 and the number of loan accounts ranging
from 100 to 1,382. 27% of the BUKP had less than 250, while 35% of the BUKP served
more than 500 savings customers. 39% of the BUKP had less than 250, whereas 19%
served more than 500 borrowers with loans outstanding. In three cases the number of
savings customers and in two cases the number of borrowers exceeded 1,000.
The average amount of savings per account
Table 4.20
was Rp. 91,000 and the average amount of
BUKP Outreach (June 2000)
loans outstanding per account was Rp. Number of BUKP
75
324,000. These averages may indicate that
Avg. number of deposit accounts*
435
the BUKP mainly serves low-income groups,
As % of households/sub-district**
4.8
or it may point to weaknesses in savings
26.9
mobilization and capacity to meet a higher
Avg. amount per account (Rp. ,000)*
91
credit demand. The variance in average
362
savings and loan amounts shows that these Avg. number of loan accounts
averages do not only reflect a specific
As % of households/sub-district**
4.0
clientele but also weaknesses of the BUKP
38.7
industry. Average savings amounts per
324
BUKP ranged from Rp. 17,000 to Rp.
Source: Regional Development Bank, Yogyakarta.
262,000, with 27% of the BUKP having * Based on data available for 52 BUKP.
mobilized less than Rp. 50,000 per savings ** Calculation based on the number of households
(0.74 million) in Yogyakarta.
customer. As these amounts are much lower
than low-income customers usually deposit with small financial institutions, it can be
assumed that most BUKP have not yet fully developed into savings mobilizing
institutions. Average amounts of loans outstanding per BUKP ranged from Rp. 102,000
to Rp. 867,000, and were higher than Rp. 400,000 in 28% of the BUKP. Based on
these findings, it may be assumed that lacking savings mobilization has considerably
restricted the growth of BUKP loan portfolios.
As of June 2000, the BUKP had average assets of Rp. 124 million. BUKP are generally
tiny institutions with assets not exceeding Rp. 250 million in 92% of the cases. 49% of
the institutions had assets even smaller than Rp. 100 million. The largest BUKP had
assets (Rp. 339 million) lower than the average assets size of the village-level financial
institutions in Bali.
Table 4.21:
BUKP Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
%
730
7.9
Savings
2,477
26.7
Loan portfolio
8,670
93.5
Other liabilities*
3,153
34.0
(485)
(5.2)
Equity**
3,326
35.9
353
3.8
9,268
100.0
Cash & Inter-bank assets
Other assets
TOTAL
Source: Regional Development Bank, Yogyakarta.
* 76% of other liabilities consist of loans.
** Includes reserves and accumulated profits not yet allocated.
TOTAL
Million Rp.
%
312
3.4
9,268
100.0
The BUKP had 88% (net of loan loss provisions) of its assets invested in the
aggregated loan portfolio, while inter-bank assets contributed only 8% to total assets.
Equity and retained profits, contributing 36% to total funds, were the major sources of
funds of BUKP. Together with loans provided by the government or the BPD, they
financed 62% of the total assets of the BUKP industry. Contributing only 27% to total
BUKP funds, savings played only a secondary role as a source of funds. In two thirds
of the BUKP savings financed less than 25% of their assets, while only 7% of the
BUKP were able to finance more than half of their assets by savings. Also these
findings may support the assumption that lack of savings mobilization has limited the
growth of BUKP. Institutions with assets larger than Rp. 250 million had four times as
many savings customers and savings to assets ratios double as high as tiny institutions
with assets smaller than Rp. 100 million.
With regard to assets and loan portfolio quality the BUKP showed, compared to the
BKK in Central Java and LPK in West Java, a better but still unsatisfying performance
as of June 2000. The ratio of classified to performing assets was 11.2% and the loan
portfolio at risk ratio was 22.5%. The large difference between the two ratios reflects
the lower extent to which BUKP were exposed to loan losses. 7% of the industry’s
aggregated loan portfolio was classified as loss, 7% as doubtful and 9% as substandard. Loan loss made up less than 10% of the loan portfolio in 81% of the BUKP.
However, 36% of the BUKP had more than one quarter of their loan portfolios at risk.
The profitability of part of the BUKP
Table 4.22
industry has apparently suffered from BUKP Assets & Loan Portfolio Quality (June 2000)
these loan collection problems. The Classified to performing assets ratio (%)
11.2
returns of 12% of the BUKP were
48.7
negative. As BUKP generally did not
100% ratio (% of BUKP)
20.0
meet loan loss provision requirements,
< 50% ratio (% of BUKP)
44.7
it can be assumed that real returns on
assets were negative for still a larger Loan portfolio classification
Standard (%)
77.5
part of the industry. The ratio of loan
loss provisions made to provisions
Sub-standard (%)
8.9
required was with 49% considerably
Doubtful (%)
6.7
higher as in the case of the BKK
Loss (%)
6.8
industry. However, 45% of the BUKP
22.5
had made provisions less than 50% of
< 15% (% of BUKP)
21.3
provisions required, and in 16% of the
> 25% (% of BUKP)
36.0
cases the loan loss provision ratio was
even lower than 25%. Only a fifth of the Source: Regional Development Bank, Yogyakarta.
institutions had made full loan loss
provisions. The loan loss provision ratio was found to be significantly higher for larger
and better performing BUKP. As loan portfolio quality also tends to be poorer in tiny
BUKP, it can be concluded that especially these institutions may become decapitalized through loan losses and may have difficulties to sustain their operations.
The BUKP program succeeded to expand its outreach to all sub-districts of the
Yogyakarta province. Its customer outreach, however, remained limited, especially
because the BUKP lack attractive savings instruments and, consequently, were not
able to expand their loan portfolios. The Regional Development Bank of the province
identified the lack of loanable funds as the major factor currently constraining the BUKP
industry. This situation is also expressed in the high loans to assets ratio (88%) of the
industry. Scarce loanable funds and an increasing credit demand may have led many
BUKP to over-invest in their loan portfolios and to depart from prudential banking
practice. Based on the data made available, at least one third of the BUKP experienced
serious credit collection problems and only a minority of the BUKP appears to be sound
with regard to CAMEL ratios usually applied for small financial institutions.
The BUKP supervision and support system is similar to and shares the weaknesses of
those of other LPDK programs. Established as a governmental top-down program,
functions such as policy-making, regulation, supervision, enforcement, techncial
assistance and operational authorities are not clearly differentiated and seem to lack
effectiveness. Information made available by the Regional Development Bank points to
the lack of authority and to bureaucratic obstacles faced in professionalizing the
system. As other bureuacracy-led microfinance programs have shown, this lack of
professionalism and effectiveness at the level of supervision and support systems often
corresponds to the lack of market-orientation and entrepreneurship at the institutional
level.
The Yogyakarta province has always been among the first areas selected for new
microfinance programs and has experienced a considerable growth of small financial
institutions during the 1990s. The BUKP were established as a governmental top-down
program in times when private people’s credit banks and non-governmental
microfinance initiatives such as Credit Unions and other forms of financial self-help had
already achieved a considerable outreach to rural areas and low-income clients. The
BUKP may have been attractive for customers in search for cheap credit, but they have
not been able to meet the increasing credit demand through voluntary savings
mobilization. Contrary to the BKK in Central Java the BUKP program failed to
recognize the demand for attractive and flexible savings instruments also among lowincome groups.
In order to improve BUKP management the BPD has recently forwarded a proposal to
the governor of the province that is supposed to restructure the BUKP supervision and
support system and to establish clear authorities under the coordination of the BPD.
The conditions of success for such an effort have considerably changed during the
1990s. The financial system of the province has become competitive and has extended
its oureach to rural areas. The BPD effort, therefore, may only succeed in part of the
province where well-managed BUKP with a good reputation are able to fill market
niches left by other institutions. Viable and growing BUKP may later have the
opportunity to convert to BPR, while others may not be able to survive.
4.8 Lembaga Kredit Usaha Rakyat Kecil (LKURK) in East Java
The history of the Lembaga Kredit Usaha Rakyat Kecil (LKURK) in East Java began in
1979 as part of a regional development project on the island of Madura.84 Until 1983
the project had established 362 institutions in each village of Madura. Based on a
governmental decree in 1984 the program was extended to other parts of the province.
Contrary to other LDKP, the KURK were established as part of the cooperative system
under control of the KUD (sub-district level cooperatives, which at that time had a
monopoly on village-level economic activities) in order to improve the credibility of the
cooperative system. With the village as the area of operation of the KURK, its members
were organized into small joint liability groups. In 1987 the status of the KURK was
changed from a village-level to a sub-district level institution, and from a KUD unit to a
regional government enterprise. Its name was changed into LKURK, adding „institution“
to the (literally translated) name „small people’s business credit“. A special feature of
the LKURK is that they are credit-only institutions and, contrary to other LDKP, have
even not been mobilizing savings in the form of compulsory savings.
Until the mid 1990s the government had established 223 of these sub-district level
institutions. When the new banking regulations required LDKP to convert to BPR, the
provincial government actively pursued the conversion of LKURK to BPR. After having
issued a regulation on the establishment of BPR-KURK in 199485, the government
succeeded to obtain BPR licenses for 67 LKURK. As of June 2000, the remaining 156
institutions were still operating as LDKP.
4.8.2 Regulation, Supervision and Ownership
The LKURK as non-bank microfinance institutions operating at the sub-district level
were established on the basis of provincial government regulation No. 5 of 1987.86 By
means of this regulation the LKURK were given the legal status of provincial
government enterprises (BUMD). The governmental decrees No. 275 and No. 276 of
1988 determined the organizational structure and internal control system of the LKURK
and assigned the tasks of technical assistance and supervision to the Regional
Development Bank (BPD).87 The BPD receives and examines monthly reports of each
LKURK and prepares combined monthly reports for the provincial government.
As of June 2000, the 156 LKURK had average assets of Rp. 72 million only. Their
aggregated loan portfolios made up 77% (net of loan loss provisions) of total assets. To
finance their credit activities LKURK do not rely on savings in any form. Equity,
84
85
86
87
See Infobank No. 115, 1989.
Peraturan Pemerintah Daerah Tingkat I Propinsi Jawa Timur Nomor 16 Tahun 1994.
Peraturan Pemerintah Daerah Tingkat I Propinsi Jawa Timur Nomor 5 Tahun 1987 tentang
Lembaga KURK Jawa Timur.
Surat Keputusan Gubernur Nomor 275 Tahun 1988 tentang Susunan dan Tata Kerja
Lembaga KURK (LKURK); Surat Keputusan Gubernur Nomor 276 Tahun 1988 tentang
Penunjukkan Direksi Bank Pembangunan Daerah Jawa Timur untuk melakukan Pembinaan
dan Pengawasan Tehnis Operasional Kegiatan Lembaga Kredit Usaha Rakyat (LKURK).
reserves and retained profits were the major sources of funds and made up 60% of
total liabilities and equity. Other liabilities such as loans from the government and BPD
contributed 30% to total funds.
Table 4.23:
LKURK Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
Inter-bank assets
510
%
4.5
Savings
Million Rp.
%
-
-
Loan portfolio
9,113
80.8
Other liabilities
4,433
39.3
(414)
(3.6)
Equity*
6,744
59.8
Other assets
2,065
18.3
96
0.9
11,274
100.0
9,268
100.0
TOTAL
TOTAL
Source: Regional Development Bank, Surabaya.
With regard to loan portfolio quality the LKURK did not show a better performance than
other government-owned LDKP. As of June 2000, the BPD had classified 5% of the
total loan portfolio as sub-standard, 3% as doubtful, and 19% as loss. The loan
portfolio at risk ratio was 27%, and the ratio of classified to performing assets was 21%.
The low difference between the two ratios reflects that 71% the loan portfolio at risk
were bad debts. Based on the BPD loan classification and the calculation method
described for LPD, the LKURK would have had to make loan loss provisions equivalent
to 22% of their total loan portfolio. With loan loss provisions made making up only 21%
of loan loss provisions required and provisions required exceeding their total income
during the first half of 2000 by 2.5 times, it can be assumed that the LKURK operated
at a much higher loss than indicated by the balance sheet. Data provided by the BPD
per district show that they had negative returns in 11 out of 31 districts.
As in the cases of other LDKP the LKURK industry has suffered from the conversion of
62 of its best performing institutions to BPR. The geographical outreach of the 156
LKURK is still considerable. The number of
Table 4.24
customers was not made available by the
LKURK Performance Indicators (June 2000)
BPD. Thus, it is not possible to assess the Number of LKURK
156
significance of this outreach. The information Avg. assets per LKURK (Rp. million)
72.3
provided on assets quality and losses made
during 2000 suggests that many institutions
Standard (%)
72.9
are financially not sustainable. Furthermore,
Sub-standard (%)
4.6
the lack of attractive savings instruments has
Doubtful (%)
3.2
undermined their competitive position. In a
Loss (%)
19.3
response to this situation and because of the
new BPR capital requirements, the provincial Loan portfolio at risk (%) *
27.1
government is presently planning to merge Classified assets ratio (%)
22.7
the existing BPR-KURK into one BPR
20.9
operating at the provincial level and to
Source: Regional Development Bank, Surabaya.
integrate the LKURK into this system as BPR * Includes loans not classified as "standard".
branches and service posts.
4.9 Badan Kredit Kecamatan (BKK) and Lembaga Pembiayaan Usaha Kecil
(LPUK) in South Kalimantan
There are two types of LDKP operating at the sub-district level in South Kalimantan.
The Badan Kredit Kecamatan (BKK) were modeled on the BKK system in Central Java
and initiated by the provincial government in 1985. The first 16 BKK were established
with support of the USAID-sponsored Financial Institutions Development Project. Prior
to the Banking Act of 1992 the provincial government established a further 18 units.
Since 1992 LDKP were required to convert to BPR until October 1997 or to refrain from
mobilizing savings from the public. In response to this situation the provincial
government stopped creating BKK and, instead, established 76 Lembaga Pembiayaan
Usaha Kecil (LPUK) in 1994 and 1995 in order to expand LDKP services to all subdistricts in South Kalimantan. As of June 2000, 14 BKK and the 76 LPUK were still
operational as LDKP, while 20 BKK had converted to BPR.
Raviscz (1996)88 found that the BKK and LPUK only differ in that the first accepted
deposits and the second did not so. After the deadline for converting BKK to BPR in
1997, however, the provincial government stopped deposit mobilization also in the
remaining BKK. Data provided by the Regional Development Bank (BPD) for June
2000 show that the BKK/LPUK system has become a credit-only system. The following
description, therefore, does not differentiate between the two types of institutions.
4.9.2 Ownership, Regulation, Supervision and Organization
The provincial government owns, regulates and supervises the BKK/LPUK units. The
BKK were established on the basis of governmental decrees issued in 1985 and
1993.89 The provincial government has established a support system similar to that
described for the BKK in Central Java. Governmental guidance boards are responsible
for general supervision and guidance, while the head of sub-district is made
responsible for BKK/LPUK in his area of administration.
The government delegated the tasks of techncial supervision and support to the BPD
as a member of the guidance boards. Supervision is carried out by the BPD braches at
the district level. BPD supervision staff is responsible for seven to eight institutions
each and are supposed to visit each unit at least once a month. BKK/LPUK prepare
monthly financial reports which are analyzed and aggregated by BPD supervision staff.
In addition to its supervision task the BPD has been responsible for the units’ product
development, financial administration system, personnel affairs and training.
BKK/LPUK managers and staff are assigned by the provincial government. A typical
unit consists of a manager, accountant, cashier, loan officer and one or two field staff.
The units are usually equipped with motorbikes used to provide mobile services to the
villages in their area of operation.
88
89
R. Marisol Raviscz: Searching for Sustsainable Microfinance: A Review of Five Indonesian
Initiatives. World Bank, Rural Cluster Development Economics Research Group, 1996.
Surat Keputusan Gubernur Daerah Propinsi Kalimantan Selatan Nomor EKU 09/85 Tahun
1985. Surat Keputusan Gubernur Daerah Propinsi Nomor 316 Tahun 1993.
The savings and credit products offered by BKK/LPUK resemble those described for
the BKK in Central Java. Loan terms range from 10 weeks to 18 months, and interest
rates vary based on loan size and repayment frequency. Loans over certain ceilings
may require collateral and may have to be approved by the head of the sub-district.
Contrary to the BKK in Central Java, BKK/LPUK have also been lending to small joint
liability groups, especially in the framework of the PHBK and microcredit programs of
Bank Indonesia. As they were prevented from mobilizing deposits even in the form of
compulsory savings, this enabled them to get access to additional loanable funds.
Since 1995 the BKK/LPUK system has an
Table 4.25
outreach to all sub-districts in South
BKK/LPUK Outreach (June 2000)
Kalimantan. With 20 BKK having obtained a Number of BKK/LPUK
90
BPR license, the system currently still Sub-districts covered (%)
83.0
covers 83% of the sub-districts. According to
220
Raviscz (1996) the units were able to reach
3.4
about half of the villages in a sub-district and
188
served customers as far as 15 to 25
kilometers away from offices. In terms of the Source: Regional Development Bank, Banjarmasin.
number of outstanding loans, customer * Calculation based on the number of
outreach was much less impressive as of households (0 71 million) in South
June 2000. With an average number of 220 loan accounts, the BKK/LPUK had an
average outreach to less than 4% of the households in their sub-district. The average
amount per loan account (Rp. 188,000) was considerably lower than for the LDKP in
Java. This does not only point to a different clientele or credit absorption capacity.
According to Raviscz (1996) the average loan size disbursed in 1995 was already Rp.
226,000. Though loan amounts outstanding are, of course, lower than loan amounts
disbursed, it can be assumed that the lack of deposits as a source of funds has
considerably limited the institutions’ capacity to meet the demand for larger loans.
As of June 2000, the 90 BKK/LPUK had average assets of Rp. 45 million only. Their
aggregated loan portfolios made up 87% (net of loan loss provisions) of total assets.
Equity, reserves and profits were the major source of funds and financed 52% of total
assets. As deposits were not available as a source of funds, other liabilities such as
government and bank loans contributed 48% to total liabilities and equity.
Table 4.26:
BKK/LPUK Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
%
166
4.1
Savings
Loan portfolio
3,725
91.3
(184)
(4.5)
Inter-bank assets
Other assets
TOTAL
375
9.1
4,082
100.0
Source: Regional Development Bank, Banjarmasin.
Million Rp.
%
-
-
Other liabilities
1,963
48.1
Equity*
1,828
44.8
TOTAL
291
7.1
4,082
100.0
The loan portfolio quality of the BKK/
Table 4.27
BKK/LPUK
Performance
Indicators (June 2000)
LPUK as of June 2000 was similar to that
45.4
of the LKURK in East Java. 4% of the Avg. assets per BKK/LPUK (Rp. million)
aggregated loan portfolio was classified Loan portfolio classification
as sub-standard, 5% as doubtful, and
Standard (%)
72.7
18% as loss. The loan portfolio at risk
Sub-standard (%)
4.2
ratio was 27%, and the ratio of classified
Doubtful (%)
5.0
to performing assets was 23%. Two thirds
Loss (%)
18.1
of the loan portfolio at risk was classified
27.3
as loss. Using the BPD loan classification Loan portfolio at risk (%) *
22.9
and the calculation method described for Classified assets ratio (%)
LPD, the BKK/LPUK would have had to Loan loss reserve ratio (%)
23.1
make loan loss provisions equivalent to Source: Regional Development Bank, Banjarmasin.
21% of their total loan portfolio. With a * Includes loans not classified as "standard".
loan loss provision ratio of only 21% and a total income making up only 82% of loan
loss provisions required, returns of the entire industry must have been negative. Profits
recorded in the balance sheet, therefore, do not reflect the high loan losses.
Raviscz (1996) described the BKK/LPUK as a relatively successful industry with
average assets of Rp. 148 million per institution and a significant outreach to the
villages in their sub-districts. The fact that average assets amounted to only Rp. 45
million as of June 2000 indicates that the industry must have suffered from the
conversion of 20 of its best units to BPR. The assets and loan portfolio quality of the
industry is far from satisfying and its high loan losses indicate that a considerable part
of the BKK/LPUK operate at a loss. Raviscz (1996) found that many institutions had not
been writing off bad debts and over-stating their profitability because of political
considerations.
While the geographical outreach of the BKK/LPUK system remained considerable, they
served only 220 borrowers, on average, with relatively low loan amounts. Provincial
governments responded in different ways to the new financial sector regulations issued
during the 1990s. The government of South Kalimantan responded by converting 20
BKK to BPR and making other BKK/LPUK to credit-only institutions. Already in 1996
Raviscz found that the lack of loanable funds had been a major constraint for meeting
the effective demand of the BKK/LPUK clientele. The current situation of the industry
shows that the inability to mobilize savings retarded the growth of its loan portfolio and
assets. The lack of savings instruments has deprived the units of an important means
for assessing the creditworthiness of their borrowers, a weakness that might have
contributed to their low loan portfolio qualities. Furthermore, the BKK/LPUK system has
become unattractive for customers who are in need of savings instruments that allow
managing their liquidity.
The example of the BKK/LPUK suggests a conclusion valid for the entire LDKP
industry. Without attractive savings instruments and active mobilization of savings it is
a non-growing industry. And, without creating a new regulatory framework that gives
LDKP this room to move it might be a dying industry.
4.10 Lembaga Kredit Pedesaan (LKP) in West Nusa Tenggara
4.10.1 Background
The Lembaga Kredit Pedesaan (LKP) in West Nusa Tenggara are owned by the
provincial government and were established as regional government enterprises in the
late 1980s and early 1990s.90 The LKP organization and functions as well as the
governmental supervision and support systems are similar to those of other
government-owned LDKP. An important difference is that the LKP have not been
stopped from mobilizing savings from the public. Since the conversion of the best 46
LKP to BPR, the 9 remaining institutions have not been playing a significant role. As of
June 2000, only 6 LKP were still active and the provincial government regarded only
one of these institutions as viable.
As of June 2000, the six active LKP had average assets of Rp. 128 million. 68% of total
assets were placed in their loan portfolios. The average LKP had 404 outstanding
loans with an average loan amount of Rp. 215,000.91 Equity, reserves and retained
profits contributed 32%, savings 30% and other liabilities such as government and
bank loans 41% to total liabilities and equity.
Table 4.28:
LKP Consolidated Balance Sheet (June 2000)
Assets
Million Rp.
Inter-bank assets
Loan portfolio
Other assets
TOTAL
0
%
0.0
Savings
Million Rp.
228
%
29.7
521
67.9
Other liabilities
317
41.4
(0)
(0.0)
Equity*
247
32.2
246
32.1
(25)
(3.3)
767
100.0
767
100.0
TOTAL
Source: Regional Development Bank, Mataram.
The assets and loan portfolio quality of the LKP industry was slightly better than that of
other government-owned LDKP. 6% of the aggregated loan portfolio was classified as
sub-standard, 4% as doubtful, and 10% as loss. The loan portfolio at risk ratio was
20%, and the ratio of classified to performing assets was 16%. Half of the loan portfolio
at risk was classified as loss. All LKP did not make loan loss provisions. Full loan loss
provisions would have made up 77% of their total income and 28% of their equity. The
fact that the LKP had no inter-bank assets suggests that most of them must have been
insolvent. The entire LKP industry was operating at a loss, although loan loss
90
91
The first LKP were established on the basis of a governmental decree in 1986: Surat
Keputusan Gubernur Daerah Propinsi Nusa Tenggara Barat Nomor 16 Tahun 1986 tentang
Pembentukan LKP. The currently valid regulation was issued in 1994: Peraturan
Pemerintah Daerah Propinsi West Nusa Tenggara Nomor 15 Tahun 1994.
Note that the aggregated information made available by the provicial government do not
clarify whether the three LKP that had suspended their operations are still included.
Averages presented here would be significantly lower, if they are calculated for 9 LKP
(assets: 85.2 million, number of loan accounts: 269).
provisions were not made and most
probably not fully accounted for in LKP
income statements.
Table 4.29
LKP Performance Indicators (June 2000)
Avg. assets per LPK (Rp. million)
127.9
The loan portfolio classification made Loan portfolio classification
Standard (%)
79.7
available may not reflect the real situation
Sub-standard (%)
5.7
of the 9 remaining institutions. The author
visited one of these LKP during an
Doubtful (%)
4.4
appraisal mission92. It operates with 5
Loss (%)
10.2
employees but assets amounted to only Loan portfolio at risk (%) *
20.3
Rp. 51 million, of which 90% were placed
16.3
in the loan portfolio. The LKP served 421
0.0
borrowers with an average loan amount
Regional Development Bank, Mataram.
outstanding of Rp. 116,000. Most of the Source:
borrowers live in the surroundings of the
office that is poorly equipped. Though salaries are low, 71% of the institution’s
expenses were personnel costs. The LKP experienced two breakdowns between 1996
and 1999. Two managers who had misappropriated LKP funds were replaced. A new
start was made in August 1999 with a remaining capital of Rp. 10 million only and a
local government grant of Rp. 5 million. As of June 2000, 53% of the loans and 30% of
the loan amount outstanding was categorized as loss. The loan portfolio at risk ratio
was 46%. Loans provided under the new management performed relatively well, but
the LKP faced considerable difficulties in regaining the trust of its customers. The LKP
staff looked into an uncertain future as they felt that the local government had
withdrawn its active support.
The provincial government obtained BPR licenses for 84% of the LKP, leaving only the
worst performing institutions behind. Representatives of the economic bureau of the
provincial government and the BPD appeared to have lost interest in further promoting
the LKP model and recovering the remaining LKP, of which only one was regarded as
viable. Respondents at the district and sub-district levels, however, pointed to the need
for establishing new LKP in sub-districts without BPR-LKP.
The LKP in West Nusa Tenggara appear to be a phase-out model. However, the BPRLKP system has also been too weak in achieving a significant outreach to rural areas
and the village level. It is, therefore, necessary to further examine the feasibility of
developing viable non-bank microfinance institutions at the village and sub-district
level. The appraisal carried out by ProFI presented various options. The option to
continue with the existing LKP system is not realistic. New approaches require marketorientation, credibility, accountability and enforcement of prudential banking. These
features have not been the strengths of the government-led and –staffed LKP system
as well as of other LDKP systems.
92
Detlev Holloh: Appraisal of the Proposal “Development and Upgrading of Microfinance
Institutions in Indonesia”, Sub-Report 2: West Nusa Tenggara, Project Promotion of Small
Financial Institutions, Denpasar, September 2000.
4.11 Other Lembaga Dana Kredit Pedesaan (LDKP) in Indonesia
Other LDKP than described above were established in the Aceh, Riau and Bengkulu
provinces. Bank Indonesia’s monthly financial statistics still report the existence of 7
Lembaga Kredit Kecamatan (LKK) in Aceh, 5 Badan Kredit Kecamatan (BKK) in Riau,
and 16 Badan Kredit Kecamatan (BKK) in Bengkulu.
Inquiries of the Bank Indonesia branch offices in these provinces were not able to
confirm that these LDKP are still operating. The BPD in Aceh had no data available on
LKK. The BPD in Riau did not refer to BKK in its response.
Chapter 5:
The Badan Kredit Desa (BKD) in Java
and the UED-SP Village Credit Institutions
Badan Kredit Desa (BKD) and UED-SP
5. The Badan Kredit Desa (BKD) in Java and the UED-SP Village Credit
Institutions
This chapter comprises village-level financial institutions other than those covered by
the chapters on LDKP and cooperatives. The chapter focuses on the Badan Kredit
Desa (BKD) in Java. BKD are tiny organizations with a long history and were often
described as profitable and sustainable financial institutions providing demand-oriented
financial services with a significant outreach to low-income groups. It is also suggested
that BKD are BPR (see chapter 3), which have sustained their operations since colonial
times and have been operating as licensed and regulated banks since the 1992
Banking Act. The following description and analysis challenges some of these views.
Unit Ekonomi Desa – Simpan Pinjam (UED-SP) or, literally translated, Village
Economic Unit – Savings and Credit are even smaller organizations, which have been
promoted by the Ministry of Home Affairs since 1995. They are only partly comparable
with the BKD but were included in this chapter because of three considerations, namely
a) the UED-SP organization was modeled on the BKD model; b) the UED-SP model is
the only national approach to expand village-level financial institutions such as the BKD
to areas outside of Java; c) despite the existence of BKD, and for reasons that are
difficult to understand, the UED-SP have also been promoted in Java.
5.1 The Badan Kredit Desa (BKD) in Java
5.1.1 History and the Political Economy of BKD Development
The Dutch colonial administration distinguished the commercial banking system owned
and managed by foreigners, on the one hand, from the “Volkskredietwezen” (popular
credit system) that was promoted for the indigenous population in the framework of the
colonial welfare policy, on the other hand.93 The popular credit system was made up of
“Afdeelingsbanken” (district banks) and “Dorpscredietnstelling” (village credit
institutions). The latter term was later translated into Badan Kredit Desa (BKD).
In the 1930s, the Dutch administrator Fruin referred to BKD as credit institutions of
village councils. The term covers two sorts of institutions. Lumbung Desa (paddy
banks) existed already before the Dutch administration started to promote them for
coping with periods of food shortages. The first Bank Desa (village banks) were
established in the first decade of the 20th century, when the village economy started to
monetarize and district banks started to establish village banks. The first district bank,
Bank Priyayi in Poerwokerto, was founded in 1895. This bank is now often referred to
as the first Bank Perkreditan Rakyat (BPR) or People’s Credit Bank in Indonesia.
The major issue of developing the popular credit system since these times has been
whether it should be organized through cooperatives or banks, whether it should
operate along commercial lines or follow welfare objectives. Both the district banks and
BKD rejected the intention of the colonial government to transform BKD into
93
The historical description is mainly based on: Pandu Suharto, 100 Tahun BPR Di Indonesia,
1895-1995, Penerbit InfoBank, Jakarta 1996. Klaas Kuiper (ed.), Provisional Manual for the
Credit Business of the General Popular Credit Bank by Th. A. Fruin, with A History of the
“Volkscredietwezen” (Popular Credit System) in Indonesia (1895-1935), The Hague 1994.
cooperatives and to make district banks
responsible for their development. This
controversy continued until Fruin succeeded
to establish the “Algemeene Volkscrediet
Bank” (AVB) and to bring the BKD system
under its control.
The colonial administration pushed the
development of Lumbung Desa especially
between 1905 and 1915 by making local
government officials responsible. The fast
growth under the pressure of the local
bureaucracy proved not to be sustainable.
The number of Lumbung Desa declined
from 12,542 in 1910 to 5,761 in 1930.
During the same period, the number of Bank
Desa increased from 585 to 5,986.
Table 5.1
Number of BKD 1905 - 1987
Year
Lumbung Desa
Bank Desa
5301
328
1910
12542
585
1920
9500
1987
1930
5761
5986
1940
5451
7443
1953
1711
2230
1958
3602
4587
1967
2854
3917
1975
2211
3556
1987
2063
3325
1905/1907
Source: Pandu Suharto, 1996
With the monetarization of the village economy Lumbung Desa commended to lend
money and increasingly converted to Bank Desa. In 1930, almost the entire Lumbung
Desa capital was made up of money. Bank Desa had evolved into fund mobilizing and
profitable institutions. This situation motivated popular credit banks to seek cooperation
with Bank Desa, to transform Lumbung Desa into Bank Desa, and to initiate the
establishment of Bank Desa as a source of funds and as their arm at the village level.
During the 1920s, village credit institutions reached more than 2 million clients from a
total of 8 million households. As they placed their liquidity and reserves in district
banks, the flow of money between them was rapidly growing. In 1933, they had
deposited 20.3 million guilders and the village councils a further 16.8 million guilders in
district banks, making up almost 80% of the latter’s resources.
These resources and the independet commercial relationship between village and
district banks, and the objection of both institutions to follow the cooperative path,
provided the background for the colonial government’s long-lasting efforts of breaking
up the relationship between village and district level financial institutions, and to bring
the village and district bank system under central control.
Attempts such as declaring the district banks as philanthropic or benevolent
organizations, transforming village credit institutions into cooperatives, or providing a
decentralized status to village credit institutions failed. A change in strategy, mainly
advocated by the colonial administrator Fruin, departed from the cooperative idea and
led to the establishment of the AVB Bank in 1934. Pointing to the fragmentation of
resources and the finding that credit requirements of small businesses were
insufficiently met by the district banks, Fruin argued that the “time was ripe for the
merger of the local popular credit banks to form a general bank.” (Kuiper 1994:10) The
village credit institutions and districts banks were joined into one popular credit system
owned by the government and controlled by the AVB Bank. The village credit
institutions were required to deposit their reserves in the AVB Bank and became
subject to the management and supervision of the AVB Bank.
Pointing to the large resources of village credit institutions as a “firm foundation for the
whole system”, Fruin argued that the AVB system “could be expressed more
purposefully, by linking them more closely in a financially stronger single organisation”,
in which the AVB branches provide larger loans and channel government credit, while
the village units provide micro loans. In 1934, he thus formulated the program for the
successor of the AVB, Bank Rakyat Indonesia (BRI) and its development into a broad
network of local units developed during the 1980s (see chapter on BRI).
The development of village credit institutions came to a standstill during the
independence war. The number of Lumbung Desa had dropped to 5,451 units in 1940
to 1,711 units in 1953. The number of Bank Desa had decreased from 7,443 to 2,230.
In the 1950s the Indonesian government put much effort in reviving the BKD system.
As it applied the same unsustainable top-down approach as the colonial administration,
however, the number of village credit institutions decreased continually since the
1960s. In 1987, 2,063 Lumbung Desa and 3,325 Bank Desa were still existent, though
it is not clear how many of them were operational. Total assets of the BKD industry
amounted to Rp. 51.2 million. Mainly compulsory savings collected as a percentage
(10%) of loan amounts disbursed contributed only about 10% to total assets.
Village Credit Institutions Outside of Java
The colonial administration was less successful in promoting village credit institutions in the less
densely populated areas outside of Java. 127 Lumbung Desa operated in West Sumatra in 1916, but
since 1918 the existence of these institutions were not anymore reported for provinces outside of Java.
Bank Desa were mainly established in Sumatra, Bali and Lombok. Bank Nagari in West Sumatra, the
historical predecessor of Lumbung Pitih Nagari (LPN, see chapter on LDKP) numbered 293 in 1912
and 364 in 1937. Similar institutions operated in Bengkulu (Bank Marga, 20 in 1937), Riau (80 in
1937), Bali and Lombok (55 in 1937). The total number of Bank Desa outside of Java during the 1930s
ranged from 450 to 518 institutions.
There is scattered evidence that Lumbung Desa have been operating outside of Java also in modern
times. It is known that the government of the East Nusa Tenggara province promoted these institutions
in the 1970s and 1980s in order to increase food security of vulnerable groups during the annual
famine season and natural disasters. For West Nusa Tenggara, the regional village development office
of the Ministry of Home Affairs reports the existence of nine Lumbung Desa with 2,048 members as of
September 1999. Their scale of operation was small, and they were mainly engaged in lending money.
Six of these institutions had loans outstanding averaging to Rp. 34 million. Four institutions had stored
2,400 kg and six institutions had outstanding 3,000 kg of unhulled paddy.
The policy to promote a standardized cooperative system for rural areas as well as the evolution of the
regulatory framework closed the market for formal and autonomous village credit institutions. In the
1990s the government embarked on two ambitious programs to fill the gap of financial services at the
village level. Both programs were designed on the basis of the BKD model. The Ministry of
Cooperatives has been promoting so-called Tempat Pelayanan Simpan Pinjam (TPSP) or savings and
credit service points under the umbrella of the KUD system (see chapter on cooperatives). The
Ministry of Home Affairs has been promoting the establishment of so-called Unit Ekonomi Desa –
Simpan Pinjam (UED-SP) or Village Economic Unit – Savings and Credit in each of the almost 70,000
Indonesian villages (see below).
Pandu Suharto (1996) argued that after having implemented the crash program the
government lost its interest in the BKD system, and that village credit institutions
became increasingly exposed to competition from other financial institutions. To put it
more clearly, the lacking interest in the BKD system was caused by the fact that the
New Order government finally realized the plan of the colonial administration to
establish a single general bank (BRI) with a broad network of local units responsible for
channeling government programs, and to transform village-level finance into a
standardized and instrumental cooperative system (KUD, see chapter 6). In the 1970s,
attempts of the government to convert village credit institutions into cooperatives failed
as they did during colonial times. The BKD system remained loosely linked to BRI (as
its supervisor and reserve manager), while the network of local BRI units was
developed independently from the BKD system.
In the early 1990s, BRI tried to revive part of the sleeping village credit institutions by
providing basic capital, improving the administrative system, and introducing new
savings instruments. The Banking Act of 1992, however, closed the opportunity to
expand the BKD system particularly outside of Java.
5.1.2 Evolution of the Regulatory and Supervisory Frameworks
Regulation
Until 1992, BKD derived their legal status from an ordinance issued by the colonial
government in 1929.94 This village credit institution act made provisions about BKD
organization, administration, capital and supervision. It prohibited villages from carrying
out credit activities without supervision of a central agency to be determined by the
government. Supervision costs had to be borne by the BKD themselves. The BKD
capital had to be separated from other village assets, and administration had to be
carried out by a secretary paid by the BKD. Excess funds had to be deposited with a
bank.
The Banking Act No. 14 of 1967 allowed Lumbung Desa, Bank Desa and popular credit
banks to continue operating as part of the banking system. Their status was to be
regulated by a separate law.95 As this law was not issued until 1992, the Ministry of
Finance started in 1970 to license popular credit banks (mainly market banks) that had
been established before August 1970 and were regarded as viable.96 Additionally, the
Ministry of Finance issued decrees providing business licenses to a list of village credit
institutions by district.
The banking reform in 1988 permitted the establishment of new secondary banks with
a paid up capital of Rp. 50 million. The low entry barriers together with the provision to
establish head offices at the sub-district level (operation through branch offices and
mobile cash units was allowed within one district) aimed at strengthening the rural
financial system through a new bank type, subsequently referred to as Bank
Perkreditan Rakyat (BPR) or People’s Credit Bank. “Old-style” BPR (mainly the market
94
95
96
Staatsblad No. 357 about Provisions for Village Credit Institutions in Jawa and Madura, 14
September 1929.
Article 41, Undang-undang Nomor 14 Tahun 1967 tentang Pokok Perbankan.
Surat Menteri Keuangan kepada Direksi Bank Indonesia Nomor B 331/MK/IV/8/1970.
banks licensed during the 1970s) were given two years to adjust to the new regulation.
Further reforms in 1989 removed this time limit indefinitely. These reform measures did
not deal directly with BKD.
The Banking Act No. 7 of 199297 recognizes two bank types: commercial banks or
primary banks permitted to offer the full range of banking services, and BPR or
secondary with their services limited to the provision of credit, and savings and time
deposit products. New BPR located outside of cities were allowed to open branches in
capital cities. Article 58 of the act states that Bank Desa, Lumbung Desa, old-style
BPR, and village-level and sub-district-level financial institutions (without a bank
license) will be given the BPR status with fulfilling the requirements and procedures to
be stipulated in a government regulation. The act declared the colonial village credit
institution act (Staatsblad No. 357/1929) invalid, while the government is expected to
further regulate licensing and operational requirements (explanation of article 58).
Government regulation No. 71 of 199298 determined that a BPR may operate only with
a license of the Ministry of Finance as a local government enterprise, limited liability
company or cooperative. Village credit institutions already in possession of a business
license were declared to be BPR. Other institutions were required to seek a license
until October 1997. BPR managers (including those of Bank Desa and Lumbung Desa)
were required to fulfill certain criteria to be stipulated by the Ministry of Finance. Decree
No. 221 of 199399 required licensed institutions to be named “BPR” or otherwise to
refrain from mobilizing deposits from the public. While the Banking Act made the BPR
status dependent on requirements still to be stipulated, the following regulations simply
declared BKD licensed in the 1970s to be banks though none of them has been able to
fulfill any requirement stipulated for BPR.
The new Banking Act No. 10 of 1998100 defined BPR as banks permitted “only to
accept deposits in the form of time deposits, savings, and/or equivalent forms” and
prohibited to “provide any services in payment transactions” (article 1). Any party
mobilizing deposits from the public was required to obtain a business license from
Bank Indonesia (article 16). Article 21 determined that BPR may operate only as a
legal entity (local government enterprise, cooperative, limited liability company, or
another form determined by government regulation). Its explanation states that the
latter provision accommodates Bank Desa, Lumbung Desa and other institutions
mentioned in article 58. Institutions with a business license were declared to have
obtained a license based on the new Banking Act (article 55). Article 58 remained
unchanged, thus Bank Desa, Lumbung Desa and other institutions still having to fulfill
requirements to be stipulated by government regulation in order to gain the BPR status.
Also the explanation of article 58 mentioned that requirements and procedures for
converting to the BPR status have still to be stipulated by government regulation.
97
98
99
100
Undang-undang Nomor 7 Tahun 1992 tentang Perbankan, 25 March 1992.
Rakyat, 30 Oktober 1992.
Keputusan Menteri Keuangan No. 221/KMK.017/1993 tentang BPR, 26 Februari 1993.
Undang-Undang Republik Indonesia Nomor 7 Tahun 1992 tentang Perbankan Sebagaimana Telah Diubah dengan Undang-Undang Nomor 10 Tahun 1998.
Government regulation No. 30 of 1999101 declared regulation No. 71 of 1992 invalid but
also qualified that its provisions remain valid, if they do not conflict with the Banking Act
No. 10 of 1998. The regulation was to become valid with a new BPR regulation that
was issued by Bank Indonesia on 15 May 1999.102 This regulation substantially
changed framework conditions for BPR and non-bank microfinance institutions. It
allows BPR to operate in urban areas and to open branches throughout one province.
The minimum paid up capital, however, was increased to Rp. 2 billion for the greater
Jakarta region, to Rp. 1 billion for provincial capitals, and to Rp. 500 million for other
areas (article 4). Existing BPR were required to hire two managers with at least a
diploma 3 level and two years banking experience.
Article 2 and 3 of the decree allowed a BPR to operate with a Bank Indonesia license
as a limited liability company, cooperative or local government enterprise (“other forms”
as mentioned by the Banking Act was omitted). The decree did not make any reference
to BKD. As it excluded institutions operating with other legal forms than determined, it
is not applicable to the organization and operation of BKD. Other Bank Indonesia
decrees such as decree No. 32/54 (14 May 1999) regulating de-licensing of BPR even
exclude BKD explicitly from provisions made.
Supervision
Until 1934 BKD operated as decentralized institutions often in close business
relationships with popular credit banks at the district level. In 1934, BKD came under
the supervision of the “Algemeene Volkscrediet Bank” (AVB). Bank Rakyat Indonesia
(BRI) as the AVB successor has been supervising BKD in modern times. Although
supervision responsibility shifted to the central bank in 1992 (BKD were declared
banks), BRI continued to supervise BKD on behalf of Bank Indonesia and is
reimbursed for this service.
The responsibility for BKD supervision lies in the hand of BRI branch managers who
are assisted by supervision staff. The BKD Mantri (junior supervisors) supervises 18 to
24 BKD and carries out on-site supervision based on an inspection manual at least
once a month. On-site inspection and completion of a 5-page standard inspection form
is usually carried out within one day. BRI aims at visiting BKD opening twice a week
two times a month, BKD opening once a week one time a month, and BKD opening
once in a Javanese month (36 days) one time every three months. BKD Mantri are also
responsible to arrange excess funds to be deposited with BRI, to organize BRI loans to
BKD, and to facilitate inter-lending between BKD.
Off-site supervision is carried out through a standardized reporting system. BKD
accountants (Juru Tata Usaha – JTU) prepare monthly reports for 5 to 10 BKD. The
reports consist of financial statements, details of certain accounts, and a loan portfolio
classification. The BRI branches compile monthly reports and forward them to their
101
Peraturan Pemerintah Republik Indonesia Nomor 30 Tahun 1999 tentang Pencabutan
Peraturan Pemerintah Nomor 70 Tahun 1992 tentang Bank Umum (…), Nomor 73 Tahun
1998, Peraturan Pemerintah Nomor 71 Tahun 1992 tentang Bank Perkreditan Rakyat, dan
Peraturan Pemerintah Nomor 72 Tahun 1992 tentang Bank Berdasarkan Prinsip Bagi Hasil,
7 Mei 1999
102
Bank Indonesia, Surat Keputusan No. 32/35/KEP/DIR tentang Bank Perkreditan
Rakyat, 12 Mei 1999.
regional head office on the10th of each month. The latter aggregates monthly reports
and forwards them to the BRI head office on the 20th of each month. BRI does not
apply sanctions for late reporting.
On-site and off-site supervision does not include a rating system for measuring BKD
soundness. To measure credit performance loan arrears are classified into two groups.
“Black” arrears are arrears of a loan that has not yet fallen due. “Red” arrears are
arrears of a loan of which the entire loan principal has fallen due. The classification
system applied in monthly reports provides better information on loan portfolio quality.
Loans without late payments of installments, interests and compulsory savings are
classified as standard. Loans with late payments within the loan period are classified as
sub-standard. Loans with late payments that have entirely fallen due for up to 6 months
are classified as doubtful. Loans with late payments that have entirely fallen due for
longer than 6 months are classified as loss.
The supervisory regime of BRI lacks enforcement power. BRI reports point to lacking
authority in imposing sanctions on BKD staff and responsible village heads found to
deviate from prudential banking and being involved in the misappropriation of funds.
BKD are usually described as village-owned financial institutions. It is useful to
distinguish village-level institutions that are owned and controlled by the village
community and those owned and controlled by the village government. The first model,
i.e., applies to the village credit institution (LPD) in Bali, for which the assembly of
village members is the highest organizational authority (see chapter on LDKP). The
BKD, being managed and controlled by the village bureaucracy, seems to belong to the
second model.
Village ownership of the BKD is not legally determined. The village credit institution act
of 1929 defining BKD as a financial unit of the village administration was declared
invalid in 1992, while it was not replaced with a new act specifying BKD ownership and
legal form. BKD licensed by the Ministry of Finance were declared to be BPR without
having to fulfill normal licensing requirements, although the Banking Act and following
regulations do not provide for banks operating without a clearly defined legal form.
The BKD organization has not much changed compared to colonial times. The BKD’s
place of operation is often not more than a table in the village government office. Most
BKD operate only once or twice a week. A so-called commission, consisting of the
village head as its chairperson and usually two other village officials as its members,
manages and controls the BKD. The village head has to approve all loans and installs
the other commission members who are responsible for loan disbursement and
collection. Commission members receive a percentage compensation of the loan
principle collected. The percentage applied seems to differ between regions. In East
Java it is set at 4% for weekly loans and 5% for other loans.
BKD administrators or accountants (Juru Tata Usaha – JTU) are appointed by the
district head based on recommendations of the BRI branch manager: They carry out
the administrative work for 5 to 10 BKD and are paid from BKD fees through BRI
branch accounts.
BKD do not have supervisory boards or boards of commissioners as it is required for
and known from licensed BPR and regionally regulated LDKP. It is not clear in how far
democratically legitimized village institutions can exert any control over BKD
operations.
5.1.4 Savings and Credit Products
The majority of BKD does not provide deposit services or is not significantly engaged in
savings mobilization, although their bank status would allow doing so. As of June 2000,
total savings made up only about 10% of total assets, and 87% of these savings
consisted of compulsory savings collected as a percentage (10%) of the loan amount
disbursed. Compulsory savings do not earn interest. BKD accept voluntary savings
deposits since 1992. These deposits are mobilized through a savings product
(Tabungan BKD) that is similar to and bears a similar interest rate as BRI savings
products. As of June 2000, 82% of the active BKD mobilized voluntary savings. These
savings, however, contributed only 2% to total assets.
Loan products are standardized and similar to those already described by Fruin in
1934. Four loan products are distinguished:
a) Loans with weekly installments provided for 12 weeks, in which the interest is paid
in the first week, compulsory savings are paid in the second week, and 10 equal
installments of the loan principal are made during the following 10 months;
b) Loans with weekly installments provided for 24 weeks, in which interests and
compulsory savings are paid during the first 4 weeks, and 20 equal installments are
made during the remaining 20 months;
c) Loans with monthly (or each 35 days according to the Javanese calendar)
installments that are provided for 6 to 10 months (or 210 to 350 days according to
the Javanese calendar). Interest and compulsory savings are also collected before
installments of the loan principal are made;
d) Seasonal loans with a term of 5 to 6 months and repayment one months after the
harvest.
As of June 2000, the first loan product covered 63% of all loans and 46% of the total
loan amount outstanding. The second important loan product were loans with monthly
installment covering 26% of all loans and 32% of the total loan amount outstanding.
With a share of less than 1% in both respect the second loan product did not play a
significant role.
Maximum loan ceilings are set between Rp. 1 million and Rp. 1.5 million, though the
overall average loan size disbursed is much lower (Rp. 329,000 in June 2000). Larger
loans are usually required by farmers for seasonal loans, while petty trader with a fast
turnover borrow smaller amounts with usually weekly installments. Loan procedures
usually take one week from loan application to disbursement. Currently, the most usual
interest rate applied is 3% flat per month.
Note: The description above mainly applies to Bank Desa. It is not clear how many of
the active Lumbung Desa apply the same credit terms and procedures. When
Lumbung Desa provide paddy loans, they are usually disbursed at times of scarcity
about three months before the next harvest and repaid at the time of the next harvest.
5.1.5 Number and Outreach
According to BRI statistics, there were 5,373 BKD in Java of which 4,566 were
operational as of June 2000. More than half of the active BKD are located in East Java
and provide financial services in 28% of the villages in this province. A lower but still
considerable coverage of villages is reached in the provinces of Yogyakarta (26%) and
Central Java (20%). BKD services play a considerably lower importance in West Java,
where 9% of all BKD reach about 6% of the villages in this province.
Table 5.2:
BKD Outreach by Province (June 2000)
No. of villages
West
Java
Central
Java
Yogyakarta
East
Java
Total
24,585
7,197
8,531
438
8,419
10.0
7.6
0.7
9.0
27.3
No. of population (million)
42.3
31.0
3.1
35.2
111.6
Established BKD
655
1,967
189
2,562
5,373
Active BKD
414
1,709
114
2,329
4,566
5.8
20.0
26.0
27.7
18.6
90,951
240,277
12,647
381,972
725,847
0.9
3.2
1.8
4.2
2.7
220
141
111
164
159
15.8
15.8
6.9
15.3
14.3
% of villages covered
Loan accounts
Number
% of total households
Average number per active BKD
% of households per village
Average amount per account (Rp. ,000)
105
146
141
265
203
Average loan size (Rp. ,000, in June 2000)
211
219
294
423
329
57,320
310,646
24,283
207,483
599,732
138
182
213
89
131
21
30
21
62
40
Savings accounts
Number
Average number / active BKD
Average amount / account (Rp. ,000)
Sources: Bank Rakyat Indonesia, Ministry of Home Affairs (number of villages 1999), BKKBN, Family Welfare Data
(number of households, January 2000), Central Bureau of Statistics (population 1999)
As of June 2000 the entire BKD industry had almost 726 thousand loans outstanding.
Assuming that one household had not more than one loan outstanding at the same
time, the BKD industry reached less than 3% of the total number of households in
Java. The average active BKD had 159 loans outstanding and reached an average
14% of the households in villages with an own BKD. BKD in Yogyakarta, providing
loans to less than 2% of all households and to about 7% of the households in villages
with an own BKD, have the lowest outreach in this respect. The overall outreach of the
BKD industry in West Java is not significant, but the active BKD reach a similar
proportion of households in villages with an own BKD as in Central and East Java
(between 15% and 16%). The average number of loans outstanding per active BKD
ranged from 111 in Yogyakarta to 220 in West Java.
While other small financial institutions usually have more savings customers than
borrowers, the BKD industry has not achieved a significant outreach to voluntary
savings customers. As of June 2000, the average BKD had only 131 savings accounts
and two thirds of these accounts were made up of compulsory savings only. In
Yogyakarta and Central Java the number of savings accounts exceeded the number of
loan accounts, but the relevance of voluntary savings accounts and amounts in these
provinces was as low as in the other provinces.
In terms of outreach scope the average BKD is a tiny lending institution with a lower
level of savings mobilization than found in many savings and credit associations, and a
much lower credit outreach than found for comparable small financial institutions. The
village credit institutions in Bali (LPD, see chapter 4), for instance, cover about two
thirds of the Balinese Desa Adat (custom village) and reach about one third of the
Balinese households with their services. As of March 2000, the 912 LPD had more
savings accounts (584,634 savings deposit and 37,470 time deposit accounts) than the
4,566 active BKD in Java. The average LPD had 232 loan accounts, covering almost
half of the average number of households (481) per custom village.
Average loan size or the average loan
amount outstanding is often used as
indicators of outreach depth. This
may not be appropriate in the BKD
case. The average loan size was Rp.
329,000 in June 2000, ranging from
Rp. 211,000 in West Java to Rp.
423,000 in East Java. The average
loan amount outstanding was Rp.
302,000 as per June 2000 and
ranged from Rp. 105,000 in West
Java to Rp. 265,000 in East Java.
These amounts are generally lower
than those of other small financial
institutions and also of some povertyoriented micro-finance programs.
They may point to low levels of
capitalization
and
savings
mobilization that restrict the ability of
BKD to meet their customers’ credit
demand rather than to their outreach
to a particular clientele. With the
extremely high inflation especially in
1997/98, the average loan size did
not increase in real terms since 1996
(Rp. 173,776). Recent assessments
of credit demand indicate that loan
amounts below Rp. 500,000 seldom
Note: Data Availability and Lacking Differentiation
between Bank Desa and Lumbung Desa
The BKD statistics available from BRI do not
differentiate between Bank Desa and Lumbung
Desa. Bank Desa is the BKD type developed to meet
the increasing demand for money credit. In the
course of the BKD history Lumbung Desa were
converted into or were increasingly operated as Bank
Desa. In many cases only the name remains making
a difference between both types of organizations. It is
not known, however, for how many cases this is true.
According to information of the BRI branch in
Surabaya, BKD statistics in East Java include only
active Bank Desa. The BRI head office could not
confirm this information. Also a closer examination of
BKD statistics at the district level in East Java did not
reveal that they do not cover Lumbung Desa. This
analysis uses the number of active BKD reported in
order to calculate averages per BKD. Note that these
averages
would
considerably
understate
BKD
performance, if Lumbung Desa are not included in
aggregated BRI statistics. It can be estimated that up
to one third of the active BKD are Lumbung Desa.*
For instance, average assets per BKD would
increase from Rp. 56 million to Rp. 85 million, and
the average number of loans outstanding would
increase from 159 to 241 in this case.
*
BRI prepared a BKD inventory as per June 2000, but
could not make available differentiated data of active
Bank Desa and Lumbung Desa. Data available from
different sources before this inventory was made provide
a clue but are not consistent.
are adequate amounts for also poorer microenterpreneurs.103
Assets size and balance sheet structure
As of June 2000, the average active BKD had assets amounting to Rp. 56 million. The
average size of assets ranged from Rp. 22 million in Yogyakarta to Rp. 74 million in
East Java. These amounts are similar to assets of informal savings and credit
associations and much lower than average assets of other village financial institutions
such as the LPD in Bali (Rp. 412 million). BKD assets were even smaller in real terms,
when their inadequate loan loss provisioning (see below) is taken into account. Based
on the adjusted balance sheet, net assets average to Rp. 50 million only.
Table 5.3:
BKD Consolidated Balance Sheet (June 2000, in Million Rupiah)
Cash
West
Java
Central
Java
Yogyakarta
East
Java
Total
88
256
35
398
777
Inter-bank assets
3,096
31,054
746
61,458
96,354
Loan portfolio
9,507
35,102
1,783
101,256
147,648
(-) Loan loss provision
(123)
(824)
(55)
(2,522)
(3,525)
13,939
Fixed assets and inventory
(-) Depreciation allowance
Other assets
TOTAL ASSETS = LIABILITIES & EQUITY
827
3,710
30
9,372
(213)
(568)
0
(43)
(824)
614
599
1
1,329
2,543
13,796
69,330
2,539
171,247
256,912
Savings
1,186
9,416
521
12,880
24,003
Inter-bank liabilities
1,953
3,194
68
1,939
7,154
Loans received
17
379
21
833
1,250
Other liabilities
50
375
3
828
1,255
9,925
53,839
1,859
147,562
213,185
666
2,127
68
7,205
10,066
Equity
Source: Bank Rakyat Indonesia
Regarding the structure of assets it is most striking that the BKD industry placed only
56 % (net) of its assets in the loan portfolio, while 38.5% were invested in inter-bank
assets, mainly BRI savings accounts. In Central Java the ratio between loan portfolio
and inter-bank investments was close to one to one, whereas the BKD in West Java
and Yogyakarta placed about 70% of assets in their loan portfolios. Net investments in
fixed assets and inventory per BKD amounted to only Rp. 3 million or 5% of its assets.
The liability side of the balance sheet is characterized by the high dominance of equity
as a source of funds. Excluding current profits, 83% of total assets were funded by
equity. This share ranged from 72% in West Java to 86% in East Java. Savings
contributed only 9% to the funds of all BKD. The importance of savings was most
pronounced in Yogyakarta (20.5%), whereas savings did not play an important role in
103
See part on microfinance/poverty alleviation programs, and the recent ProFi appraisal on
the “Development and Upgrading of Microfinance Institutions in Indonesia”, Denpasar 2000.
West Java (9%) and East Java (7.5%). Except for the BKD in West Java, BRI loans
and loans from other BKD were not an important source of funds. Inter-bank liabilities
funded less than 3% of the total assets of the BKD industry, but contributed 14% to
total assets of the BKD in West Java.
Structure of income and costs
Almost the entire income of the BKD industry is derived from credit income. As of June
2000, 86% of its total income was made up of credit income. This share ranged from
80% in Central Java to 93% in West Java. Interest income earned from inter-bank
assets contributed only 12% to total income, although 38.5% of BKD funds were placed
in mainly BRI accounts. As these placements were not financed through voluntary
savings, they did not negatively affect the profitability of BKD. The high spread between
credit interest rates and interest rates on BRI savings accounts, however, points to
considerable opportunity costs incurred by these placements. Non-operational income
does not play a significant role in BKD operations.
Table 5.4:
BKD Consolidated Income Statement (June 2000, in Million Rupiah)
West
Java
Central
Java
Yogyakarta
East
Java
Total
INCOME
Interests on savings
94
1,097
25
1,790
3,005
1,465
5,319
200
15,196
22,180
Other operational income
3
133
5
236
378
Non-operational income
0
82
0
14
96
1,563
6,631
229
17,236
25,659
Credit income
TOTAL INCOME
COSTS
Interests on savings
9
64
3
32
109
Interests on loans
3
33
0
43
79
Personnel costs
623
3,100
127
6,999
10,848
Loan loss provision
113
491
18
1,244
1,865
Other operational costs
149
779
14
1,708
2,650
0
36
0
6
42
896
4,503
161
10,032
15,593
666
2,127
68
7,205
10,066
Non-operational costs
TOTAL COSTS
The structure of costs incurred by BKD is highly dominated by personnel costs that
made up 70% of total costs as of June 2000. As savings were mainly mobilized in form
of compulsory savings on which no interest is paid, interest paid on savings was not an
important cost item. In both respects there is no significant variance between the
provinces. Another important cost item were loan loss provision costs. Its share (12%)
in total costs, however, does not reflect real costs for loan risk and loss that are not
fully accounted for in the income statement.
Based on the unadjusted financial statements, profits made during the first half of 2000
were equivalent to 39% of total income and almost 4% of average assets during this
period. These figures, however, over-state the profitability of the BKD industry because
of lacking loan write-offs and the lack of provisions made for potential loan losses. In
the following the profitability and financial sustainability of the BKD industry will be
examined by taking into account its loan portfolio quality and full loan loss provisions
required based on a loan portfolio classification system.
Loan portfolio and assets quality
The BKD supervision system does not include a CAMEL rating as usually applied by
Bank Indonesia in supervising the soundness of bank operations. BRI measures loan
portfolio quality by a classification system that is stricter than that applied in the Bank
Indonesia supervision system. Loans without late payments of installments, interests
and compulsory savings are classified as “standard”. Loans with late payments within
the loan period are classified as “sub-standard”. Loans with late payments that have
entirely fallen due for up to 6 months are classified as “doubtful”. Loans with late
payments that have entirely fallen due for longer than 6 months are classified as “loss”.
This loan classification, however, is not used as a basis for measuring the risk
exposure of assets and the adequateness of loan loss provisioning. This is highly
problematic because BKD tend to refrain from writing off loans and do not fully account
for loan loss provision costs in their income statements.
Table 5.5:
BKD Loan Portfolio and Assets Quality (June 2000, in Million Rupiah)
West
Java
Central
Java
Yogyakarta
East
Java
Total
9,508
35,102
1,782
101,255
147,647
Standard
2,555
16,552
878
66,638
86,623
Sub-standard
2,536
7,410
362
13,885
24,193
Doubtful
1,020
1,958
240
3,883
7,101
Loss
3,397
9,182
302
16,849
29,730
Total loan portfolio
Loan portfolio at risk*
Number (%)
85.8
70.0
46.3
50.2
61.2
Amount (%)
73.1
52.8
50.7
34.2
41.3
36.6
Loan loss
Number (%)
58.7
42.4
17.4
28.3
Amount (%)
35.7
26.2
16.9
16.6
20.1
43.1
21.7
26.2
16.4
19.3
3.3
8.2
15.8
13.5
7.7
Classified to performing assets ratio
Loan loss reserve ratio
* Loans not classified as “standard”
Table 3.4 reveals the poor loan portfolio quality of the BKD industry as of June 2000.
Only 39% of all loans outstanding and 59% of total value of the loan portfolio was
classified as standard. 37% of all loans and 20% of the loan portfolio was classified as
loss. The BKD in East Java showed a considerably better performance than those in
the other provinces, but their loan portfolio quality has still to be regarded as poor, with
50% of all loans and 34% of the portfolio value being at risk (non-standard). The BKD
in West Java performed worst. Only 14% of their loans outstanding and 27% of their
loan portfolio value was classified as standard. Almost half (47%) of their aggregated
loan portfolios was classified as either doubtful or loss. Their loan losses were
equivalent to one quarter of their total assets.
The classified to performing assets ratio, as applied in the Bank Indonesia supervision
system for People’s Credit Banks, is a risk-based ratio that divides classified assets
(here: loan portfolio) weighted according to collectibilty by performing assets (here:
inter-bank assets and loan portfolio). Classified assets include 50% of sub-standard
assets, 75% of doubtful assets and 100% of loss. With a ratio of more than 19%, on
average, the BKD industry would be rated unsound according to the Bank Indonesia
rating system. The lowest but still unsound ratio (16%) existed for the BKD in East
Java, while the assets quality of BKD in West Java, with a classified to performing
assets ratio of 43%, was extremely poor.
The loan loss reserve ratio is the second ratio used by Bank Indonesia to measure the
quality of assets. The ratio divides loan loss provisions made by provisions required.
The latter include 0.5% of standard loans, 10% of sub-standard loans, 50% of doubtful
loans and 100% of loan loss. A ratio of less than 51% would be rated unsound. The
comparison of loan loss provisions made and required shows that BKD neglect the
necessity to provide for reserves. With an overall ratio of only 8% and the highest ratio
of 16% found for the BKD in Yogyakarta, the BKD industry reveals unprudential
banking practice in this respect.
Note that these CAMEL ratios and ratings are most useful to measure the soundness
of individual institutions. The available data do unfortunately not allow classifying the
4,566 BKD into sound, fairly sound, less sound and unsound institutions. This is a
major weakness of the BKD supervision system that is founded in the lacking
regulation of requirements BKD would have to comply with. Although it is not possible
to analyze the individual soundness of BKD, the high average ratios indicate that a
considerable part of the BKD industry does not only experience a poor assets quality
but also a severe threat to its financial sustainability.
Profitability and financial sustainability
According to balance sheets aggregated by BRI the BKD industry has been highly
profitable with returns on assets of about 10% during the last years. With about 4% in
the first half of 2000 return on assets was lower but still considerably high. This has led
many observers to speak of BKD as financially sustainable institutions. The contrary
can be demonstrated when financial sustainability is examined on the basis of adjusted
balance sheets and loan loss provision costs not accounted for in BKD income
statements are included. Table 3.5 shows that the financial sustainability of the BKD
industry is at stake because of its low loan portfolio quality. The seriousness of this
situation is underlined by the fact that high inflation costs were even not included in the
calculation. To assess the financial sustainability of the BKD industry, the net margin is
calculated by subtracting financing costs, operating costs and full loan loss provision
costs from the average yield on performing assets, the financial income divided by
average performing assets during the first half of 2000.
BKD incur negligible debts in the form of voluntary savings and inter-bank liabilities.
This is expressed by an average financing cost ratio, the proportion of financing costs
in average performing assets, of 0.1% only. The average operating cost ratio, the
percentage average performing assets must yield to cover operating costs, was 6.3%.
With these costs yields on performing assets averaging to 10.6% the BKD industry
achieved an average operating margin of 4.2% before its inadequate loan loss
provisioning is taken into account. The “loan loss provision gap ratio” used here is a
tentative approach to account for the difference between provisions required and
made. The ratio divides this difference by average performing assets. The average
“loan loss provision gap ratio” of 12.7% results in negative net margins, ranging from
6% in East Java to 22% in West Java and averaging to 8.5% for the entire BKD
industry.
These figures are sufficient to point to the serious threat that the BKD industry is
exposed to because of its low loan portfolio quality. Additionally, its financial
sustainability is at stake because of high inflation rates in the second half of the 1990s.
The BKD industry has not been generating sufficient income to cover its costs and to
maintain the real value of its capital.
Table 5.6:
BKD Financial Sustainability (June 2000, in Million Rupiah)
ROA (half year)
Yield on performing assets (half year)
West
Java
Central
Java
Yogyakarta
East
Java
Total
4.7
3.1
2.7
4.3
3.9
10.6
12.0
10.1
9.2
10.7
Financing cost ratio
0.1
0.1
0.1
0.0
0.1
Operating cost ratio
6.8
6.6
6.4
6.2
6.3
Operating margin
Loan loss provision gap ratio
Net margin
5.1
3.3
2.7
4.5
4.2
27.5
14.5
13.2
10.8
12.7
-22.4
-11.2
-10.5
-6.3
-8.5
Between December 1996 and June 2000 BKD assets grew with an average annual
growth rate of 12%. This growth slowed down to 8% during the period from December
1998 to June 2000. The higher growth rate of average assets per BKD during this
period can be explained by the inventory of active BKD carried out by BRI in the first
half of 2000. It can be assumed that most of the 240 additional BKD found to be
inactive were also not operational prior to the new inventory.
Inter-bank assets grew above average when the financial crisis in 1997/1998 put a
break on profitable loan uses, whereas the loan portfolio grew three times as fast as
inter-bank assets during 1999 until June 2000. The relative share of inter-bank assets
and the loan portfolio did almost not change between December 1996 and June 2000.
The lack of structural change in assets points to the fact that the BKD industry has not
been able to expand its borrowing clientele. The number of loans outstanding
decreased by 7% between December 1996 and June 2000. Loan portfolio growth was
based on increasing loan sizes. The increase of the average loan amount outstanding
from Rp. 134 thousands to Rp. 203 thousands during this period, however, has not
been able to cope with the demand for higher loan amounts that evolved even among
poorer microentrepreneurs because of the drastically declining purchasing power of the
Rupiah since 1997/1998.
While the structure of assets did not show a significant change, the structural change
was considerable with regard to sources of funds. The share of equity (excluding
accumulated profits during current year) increased from 72% as of December 1996 to
83% as of June 2000. The share of deposits declined from 12% to 9% during the same
period. The growth of deposits between December 1996 and 1998 corresponded to the
overall growth in assets and reflected the lack of profitable credit investment
opportunities during the financial crisis. The decline of deposits by 13.5% in the
following period does not only point to changing economic conditions. It also points to
the inability of the BKD industry to support the local economy by expanding its loan
portfolio. Considering that most deposits consist of compulsory savings linked to credit
access, it can be assumed that BKD customers had to withdraw deposits because their
increasing demand for liquidity and credit was not matched with repeated and sufficient
access to credit. The decline in the number of loan accounts, therefore, corresponds to
the drastic decline (14%) of deposit accounts in 1999/2000, while the average amount
of deposit accounts did not grow during this period.
Table 5.7:
BKD Development December 1996 – June 2000 (in Rp. Million)
Growth (%)
Dec 1996
ASSETS = LIABILITIES & EQUITY
Inter-bank assets
Loan portfolio
Dec 1998 12/96-12/98
Jun 2000
Growth (%)
12/98-6/00
185,680
229,488
23.6
256,912
12.0
66,878
90,674
35.6
96,354
6.3
36.0
39.5
104,363
124,975
37.5
19.8
147,648
21.5
24,003
18.1
56.2
54.5
22,827
27,740
12.3
12.1
134,499
171,339
72.4
74.4
38.6
47.8
23.8
56.3
17.8
779,599
758,953
-3.8
725,847
-5.7
162
158
-2.5
159
0.6
134
165
23.1
203
23.0
% of total accounts
28.9
60.6
109.7
61.2
1.0
% of total amount
29.5
37.9
28.5
41.3
9.0
727,667
700,332
-2.6
599,732
-14.4
151
146
-3.3
131
-10.3
31
40
29.0
40
0.0
Deposits
Equity
as % of total assets
Average assets per active BKD
57.5
-13.5
9.3
27.4
213,185
24.4
83.0
Loan accounts
Total number
Loan portfolio at risk*
Savings accounts
Total number
* Loans not classified as “standard”
The quality of loan portfolios decreased drastically in 1997. The number of loans at risk
as a percentage of the total number of loans outstanding increased from 29% as of
December 1996 to 56% as of December 1997, and the loan portfolio value at risk
increased from 30% to 37%. As of June 2000 the number of loan accounts at risk had
further increased to 61% of all loan accounts and the loan portfolio at risk had
increased to 41%. As the financial crisis reached its heights only in 1998, it is not
adequate to explain the drastic decline in loan portfolio quality by economic factors
alone, though they have been an ongoing constraint for solving the problems incurred
also before the financial crisis unfolded. Internal monthly reports prepared by BRI
indicate that inadequate management structures, unprudential banking practice and the
misuse of BKD funds have greatly contributed to deteriorated loan portfolio qualities. A
major predicating factor that has to be mentioned in this context is the lacking
modernization of BKD management and operations in the context of rapidly changing
economic conditions and demand for financial services also in more remote areas and
among the poorer sections of the population.
In general, it may be argued that the BKD industry lacks dynamism. Efforts of BRI in
the early 1990s to instill a new dynamism by introducing voluntary savings schemes
failed. BKD limit their operations to extending credit to a small number of regular
customers and have not succeeded or actively pursued to expand their customer base.
The number of loans outstanding decreased continually and the number of savings
customers dropped sharply. The loan portfolio has been growing only because of
modestly increasing loan sizes. Already before 1998 the BKD industry had been slowly
de-capitalized. The high inflation during the monetary crisis (88% in 1997/1998) eroded
the real value of its capital to a great extent. The inflation of 12% from January 1999 to
June 2000 was as high as the overall growth of assets. With management structures
and practice almost not having changed over decades of dynamic economic
development, the BKD industry tends to loose its role in the local economy.
Strengths and weaknesses
It is difficult to identify strength and weaknesses of BKD institutions on the basis of
aggregated data. The BKD industry, in general, has comparative advantages. It
operates within a limited and familiar environment that allows keeping up close contact
with its clientele and easily acquiring information about this clientele. Being operated on
a part-time basis from existing village facilities, BKD incur low fixed and overhead
costs. The large number of existing BKD provides a good basis for developing a strong
network organization of village-level financial institutions. Scattered evidence from
individual institutions as well as the analysis of aggregated data does not show that
many BKD have made use of such comparative advantages. Why not?
The BKD industry lacks dynamism. Its organization, operations and products have
hardly changed since decades of changing demand for financial services. Access to
BKD services usually remained limited to one day per week. BKD have not become
effective financial intermediaries. Efforts of BRI in the early 1990s to encourage BKD to
expand their customer base and to attract new customers through a voluntary savings
product failed. Neither did BKD actively promote savings mobilization nor did they
succeed in gaining the trust of the village population. Credit services appear to remain
limited to a small number of regular borrowers. Lending decisions often seem to be
based on personal relationships and the borrowers’ standing in their villages rather
than on credit worthiness. Unprudential lending practice has contributed to the
deterioration of loan portfolio quality. Without savings mobilization and with a low loan
to assets ratio the BKD industry has not been able to grow and, finally in times of high
inflation rates, de-capitalized to a great extent. Why?
The situation described above does not have a simple explanation and requires further
studies, particularly on the institutional development of individual BKD. Both internal
and external factors may have contributed to this situation.
Externally, BKD have been tolerated as a historical legacy, while significant efforts of
transforming them into independent and viable financial institutions have not been
made. Until recently the government discouraged the growth and expansion of the BKD
industry in order to strengthen an uniform cooperative system and protect this system
from competition. As a historical legacy BKD were acknowledged as BPR in word.
However, adequate support systems for transforming them into functioning banking
institutions, and stengthening their management capacities and human resources were
not developed. BKD remained unregulated institutions with an unclear legal status, for
which compliance with BPR regulations cannot be supervised and enforced. BKD
supervision by BRI is not carried out according to currently valid standards for people’s
credit banks and lacks enforcement power. While the development of viable villagelevel financial institutions has not been a priority objective, poverty alleviation and
social safety net programs have been distributing huge amounts of easy and cheap
money, thus taking much of the potential market for village-level financial institutions.
This constraint is also mentioned in BRI’s monthly BKD report of June 2000.
Internally, BKD lack market-oriented management and the human resources required
for small banks. They are usually managed by persons who lack entrepreneurship,
motivation, and independence from the village bureaucracy. As ownership and legal
form are vague, and management and control functions are not clearly separated, they
lack effective internal control and supervision by owners. Their financial administration
depends on external accountants who are responsible for several institutions. This
does not support developing effective self-reliance and self-responsibility. These
factors have apparently also contributed to the lacking sense of ownership and trust
among the village population. The analysis of aggregated financial data cannot
contribute to improving the knowledge about such internal factors. For this purpose it is
necessary to come up with more thorough studies on the institutional development of
individual BKD and their local development conditions.
The analysis of the BKD industry on the basis of aggregated data provides some
insight into general factors constraining its present and future development. It does,
however, not allow assessing the soundness and development potential of individual
institutions of which many might perform well and play a significant role in the village
economy. A short examination of the BKD industry at the BRI branch office level in
East Java showed a high variance in growth and performance. The more thorough
analysis of other small financial institutions carried out by the ProFI baseline surveys
shows that, generally speaking, these institutions show either a very excellent or poor
performance.
When framework conditions and management factors are right, village-level financial
institutions are able to develop into successful institutions that play an important role in
the local economy. The vision of transforming BKD into well-managed and sustainable
financial intermediaries at the village-level is presently missing. The BKD system
seems also to suffer from poverty alleviation and microcredit programs (see chapter 1),
which target the same clientele and usually channel credit at lower interest rates..
BKD operate within an ambiguous legal and regulatory framework. They are
acknowledged as people’ credit banks but they are neither regulated nor supervised as
banks. Regarding their functions and operations, it is rather ridiculous to speak of them
as banks and there is also no real foundation for developing BKD into people’s credit
banks. Nonetheless, BKD may provide a starting point for developing viable non-bank
microfinance institutions at the village-level. The realization of this objective would
require getting framework conditions right, getting adequate training and support
systems in place, reforming the BKD organization and management system, and
developing innovative and adequate services in accordance with the real demand of
the potential BKD clientele.
The evolution of BKD regulation has resulted in a strange and contradictory situation of
the BKD industry. BKD are licensed but unregulated banks. Improving this situation
first of all requires to abandon the generic “BPR” term under which BKD are usually
classified and to distinguish people’s credit banks (BPR) as licensed and regulated
(micro) banks from BKD as non-bank microfinance institutions. Furthermore, it requires
recognizing non-bank microfinance institutions as a third category of financial
institutions beside commercial banks and people’s credit banks through enabling legal
and regulatory frameworks that contribute to deepening the outreach of the financial
system. Finally, it requires a comprehensive supervisory framework that allows
enforcing prudential banking practice also of non-bank microfinance institutions.
Need for further studies
The perspective of transforming BKD into viable and growing non-bank microfinance
institutions is only one option available for developing a rural financial system with a
significant outreach to the village level. Whether this option is applicable is a question
that cannot be answered for the entire BKD industry and that goes beyond the BKD
industry in Java. Its answer requires decentralized and more intensive research on
individual institutions and their varying local development conditions. Presently, there
are approaches such as the UED-SP (see below) and the TPSP (see chapter 6) that
try to build on the BKD model. Which kind of institution is appropriate to close the gap
of sustainable financial services left by the banking sector is a question especially
important for less densely populated and economically favorable areas outside of Java.
The ongoing government and donor initiatives show that the establishment of villagelevel financial institutions may become the next wave of microfinance in Indonesia. It is,
therefore, advisable to come up with a thorough study on the institutional development
of BKD and similar institutional approaches in the context of varying local development
conditions and potentials.
5.2 Unit Ekonomi Desa – Simpam Pinjam (UED-SP)
5.2.1 UED-SP Promotion by the Ministry of Home Affairs
The Direktorat Jenderal Pemberdayaan Masyarakat Desa (PMD)104 or Directorate
General for the Empowerment of Village Communities of the Ministry of Home Affairs is
currently responsible for the UED-SP program. It has a new sub-directorate called
Usaha Ekonomi Masyarakat or directorate for people’s economy, which implements the
program in cooperation with the provincial and district offices of the directorate. The
recent and current reorganizations of the ministry and directorate reflect the new
decentralization efforts giving more power and financial authority to the district and
village levels.
The Ministry of Home Affairs has been involved in financial sector development since
the 1970s, when provincial governments started to establish various LDKP (see
chapter 4) that, as non-bank financial institutions, required some sort of legalization
other than the banking act. With the higher emphasis on village development and
‘empowerment’ since the 1990s, the ministry made the establishment of village-level
financial institutions its own task. The UED-SP program started by means of the
Presidential Instruction on Village Development Assistance (Inpres Bantuan
Pembangunan Desa) in the financial year 1995/96. The annual financial budget
allocated Rp. 1.5 million to each village for on-lending to microentrepreneurs. The
budgets of the following two financial years included further subsidies, which were
increased to Rp. 2.5 million per village, to be managed and channeled by newly
established UED-SP. The ministry claims to have established 40,622 UED-SP in two
thirds of the Indonesian villages during these first three financial years (see following
footnote).
In 1998, the Ministry of Home Affairs issued national guidelines for the establishment
and strengthening of UED-SP.105 Together with these guidelines the ministry informed
all provincial governors and district heads that village development subsidies are
further available for continuing the UED-SP program and asked to support the program
with funds from the provincial and district budgets. Since the financial year 1999/2000
village development subsidies have to be used for strengthening village infrastructure
and institutions, thus limiting its use for UED-SP development to training and technical
assistance. In 1999, the ministry issued guidelines for classifying the performance and
soundness of UED-SP. 106
104
105
106
The directorate’s former name was Pembangunan Masyarakat Desa or Village Community
Development. Its offices at the provincial and district level often still use the old name.
Departemen Dalam Negeri Republik Indonesia, Surat Menteri Dalam Negeri Nomor
412/2440/SJ tentang Pedoman Pembentukan dan Pemantapan Pengelolaan Usaha
Ekonomi Desa Simpan Pinjam (UED-SP), Ditjen Pembangunan Masyarakat Desa
Departemen Dalam Negeri, 1998.
Departemen Dalam Negeri Republik Indonesia, Pengklasifikasian Kinerja Usaha Ekonomi
Desa Simpan Pinjam, Kerjasama Direktorat Jenderal Pembangunan Masyarakat dengan
Lembaga Pengabdian Masyarakat Institut Ilmu Pemerintah (IIP), Jakarta 1999.
5.2.2 Guidelines and Regulations
Objectives. According to the national guidelines for the establishment and
strengthening of UED-SP, the UED-SP program aims at providing easy and cheap
credit to low-income groups in need of small business capital as well as at increasing
the role of village communities in absorbing and managing financial assistance from
the government and other sources of funds.
Ownership and establishment. The UED-SP is described as an organization owned
by the village community and, at the same time, as an organization consisting of
members who pay a membership fee (simpanan pokok) at the time they are registered
as members. The decision of establishing an UED-SP is taken by the village head by
means of a village decree and based on deliberations of the LKMD (body of village
officials and representatives assisting the village head) meeting. Further approval is
required from the next higher administrative levels. The meeting is also responsible to
prepare UED-SP statutes based on a centrally designed standard format, select the
UED-SP management and identify member candidates. UED-SP statutes and
managers require approval of the village head.
Note: contrary to the description of UED-SP as a member organization owned by the
village community, the UED-SP is better understood as an organization, established,
owned, managed and controlled by the village government and bureaucracy. On the
one hand, village and member ownership cannot be integration in one and the same
organization. On the other hand, neither the village community nor the ‘members’ have
a say in the establishment and control of the institution. Clients targeted by the village
bureaucracy are called members because each targeted client participates in the
organization with an initial fee handled as equity capital, and financial institutions other
than member-based ones are legally prohibited from mobilizing savings.
Organization and management. The UED-SP staff consists of a chairperson, cashier,
and an accountant, who are selected from the village population and appointed by the
village head. The chairman is responsible for approving loans on the basis of
recommendations of the village head or LKMD. All staff members are responsible for
loan collection. Members of the management committee have to be trustworthy village
residents, must have an education equivalent to at least the high school level,
capabilities or experience required for managing the UED-SP, and must be willing to
participate in training programs. The compensation paid to UED-SP staff is equivalent
to 2.5% of the loan principal collected each month. The chairperson receives 35%, the
cashier 30%, the accountant 25% of the amount. The remaining 10% may be paid to
an additional bookkeeper.
Functions, services, and capital. The functions of the UED-SP, as determined by the
guidelines, are to provide credit for productive purposes, to collect savings community
members registered as members, to provide business advise to borrowers, and to
establish business relationships with other financial institutions. Voluntary savings may
be collected from members with a maximum annual interest rate of 12%. They require
a minimum balance of Rp. 2000 and can be withdrawn after one month. Credit services
may be provided to community members, non-community members living in the village
and other customers from villages without an own UED-SP. Loans provided are
installment loans with 12 weekly or 6 monthly installments. The maximum loan amount
is Rp. 500,000. The borrower is required to deposit part (usually 10%) of the loan
approved as compulsory savings.
The UED-SP capital consists of government subsidies, equity contributions of
members, voluntary savings, loan capital and retained profit. Initial loanable funds are
provided by the government’s village development funds. Operating costs such as for
the procurement of office equipment and supplies are also borne by theses funds.
Equity contributions comprise a membership fee (simpanan pokok) paid upon
registration and compulsory deductions from loans disbursed (simpanan wajib
pinjaman). The latter contributions are partly equity contributions and partly compulsory
savings. A maximum 50% of the amount may be withdrawn once a year, while the
other 50% can only be withdrawn with the termination of the membership. The
guidelines determine a standard profit allocation ratio. 25% of the annual profits are to
be retained as capital reserves and 10% are paid as dividends to members. The
remaining amount is distributed to funds available for management (20%), the village
administration (20%), guidance costs (20%), and management training (5%).
The guidelines point to the negative impact of subsidized credit channeled by social
safety net programs since the financial crisis. The lack of capital is regarded as the
major constraint development of UED-SP. This was aggravated by the fact that since
the financial year 1999/2000 village development subsidies can no longer be used as
working capital. Though the guidelines concede that UED-SP lack savings mobilization,
the solution is sought in accessing governmental credit programs, thus giving UED-SP
the function of channeling subsidized credit.
Guidance, training, supervision and reporting. Technical guidance and supervision
have to be carried out by officials and staff of the PMD directorate of the Ministry of
Home Affairs. Guidance teams are hierarchically organized from the national to the
sub-district level. The national guidance team is responsible for formulating general
policies and guidelines, and carrying out program monitoring and evaluation. The
implementation of these policies and guidelines lies in the responsibility of government
officials and guidance teams at the provincial, district, sub-district and village levels.
Technical assistance staff of the local PMD offices, which is trained on the basis of
detailed training guidelines, is responsible to guide and supervise between four and six
UED-SP. This staff receives 10% of the annual UED-SP profits.
Training is provided to technical assistance staff and UED-SP staff on the basis of
detailed procedures stipulated in the national guidelines. The planning and organization
of training lies in the responsibility of a special training committee at the provincial level.
Training plans and budgets have to be submitted for approval to the PMD head office.
Trainers are selected from PMD staff and related institutions such as banks. Training
workshops take 4 days. The national PMD office prepared standard training
materials107, which include modules dealing with policies, administration and financial
management, and follow-up planning. The training materials are used for both technical
assistance staff and UED-SP staff.
107
Departemen Dalam Negeri Republik Indonesia, Modul Pelatihan Bagi Tenaga Asistensi dan
Pengelola UEDSP. Direktorat Jenderal Pembangunan Masyarakat Desa, Jakarta 1999.
The local PMD offices are supposed to carry out on-site and off-site supervision in
cooperation with local banks. On-site supervision includes the inspection of financial
statements, management capability and reliability, and control of compliance with
existing regulations. Off-site supervision is carried out on the basis of standardized
reports, which include financial statements and statements on fund mobilization and
supervision costs. The UED-SP has to submit monthly reports, signed by the village
and LKMD heads, to the head of the sub-district who passes them on to the district
head. The PMD district office is responsible to prepare consolidated monthly reports.
Consolidated quarterly reports are submitted to the provincial governor and PMD office.
The national PMD office receives semi-annual reports.
The national PMD office developed a sophisticated system for measuring the
performance and rating the soundness of UED-SP. The system includes 5 indicators
for institutional development, 6 indicators for management, 3 indicators related to office
facilities, 3 indicators related to work planning, 5 financial ratios, 6 indicators related
effectiveness, and 4 impact indicators. Effectiveness is measured in terms of loans
disbursed, the number of members, and the members’ business activities and income.
The system applies a modified CAMEL version that measures capital adequacy, the
collectability of loans and other performing assets, solvability, profitability, and liquidity.
The rating system mingles CAMEL factors with indicators that are not crucial for the
soundness and viability of UED-SP. CAMEL factors contribute only a 175 to the
maximum 1,000 points of the rating system. The rating system classifies UED-SP into
five performance groups: excellent (only to be achieved with ‚optimal’ impact on the
community), sound, developing, start-up (not yet growing), and unsound.
5.2.3 Statistics and Findings
The national PMD office was only able to provide data for the financial year 1998/1999,
which are supposed to describe the situation of the UED-SP program as of March
1999. The report, however, does not follow the standards as determined in the UEDSP guidelines and includes information on the number of UED-SP, their members and
the amount of loans outstanding only. Data were found to be extremely inconsistent,
incomplete and unreliable. The ProFI microfinance appraisal mission carried out in
South Sulawesi, West Nusa Tenggara and East Nusa Tenggara collected additional
information.108 Visits to local PMD offices and some UED-SP confirmed the striking
weakness of the information system.
The national PMD statistics claim that 52,222 UED-SP had been established until
March 1999. This number is equivalent to 77% of all Indonesian villages and must be a
result of either typing errors or politically motivated reporting. Information and evidence
obtained in the three provinces of the appraisal mission could not confirm this high
coverage. The number is especially unrealistic for Java and Bali, where some 6,000
other long existing village-level financial institutions have not left much room to move
for UED-SP. The data provided in Table 5.8 are more or less useless because the
PMD has no information on the number of UED-SP that do really operate. Based on
108
See: Flora Giassemi, Wolfram Hiemann and Detlev Holloh, Appraisal of the Proposal
“Development and Upgrading of Microfinance Institutions in Indonesia”, Project Promotion of
Small Financial Institutions, Denpasar, September 2000.
the statistics made available, the average UED-SP would have had 7 members and
loans outstanding amounting to Rp. 2.2 million only.
Table 5.8
Unit Ekonomi Desa – Simpan Pinjam (UED-SP) as of March 1999
Indicator
Sumatra
Java &
Kalimantan
Bali
Sulawesi
Other East
Indonesia *
Total
Number of villages
21,508
25,508
6,059
7,368
7,251
67,694
Number of UED-SP
16,815
23,226
2,988
6,852
2,331
52,222
As % of villages
78.2
91.1
49.5
93.0
32.1
77.1
134,633
114,832
12,717
74,923
7,759
344,864
8
5
4
11
3
7
70,820
15,696
3,811
24,246
1,418
115,991
4.2
0.7
1.3
3.5
0.6
2.2
Number of members
Average per UED-SP
Loan portfolio (Rp. million) **
Avg. per UED-SP (Rp. million)
Source : Ministry of Home Affairs, Directorate for the Empowerment of Village Communities (PMD), Jakarta.
* West & East Nusa Tenggara, Maluku, Irian Jaya.
** The header of the report column is ‘revolving capital’.
The PMD office in South Sulawesi made available data on 27 UED-SP. Each UED-SP
had received a start-up capital of between Rp. 2.5 million and Rp. 6.5 million. As of
December 1999, these institutions had average assets amounting to Rp. 19.2 million,
of which 15.6 million were outstanding to 93 borrowers. Only 3 of the 27 UED-SP had
assets larger than Rp. 20 million. The average loan amount outstanding per borrower
was Rp. 168,000. It has to be considered that the PMD regarded these institutions as
successful UED-SP. One UED-SP visited had 40 members and assets amounting to
Rp. 13.5 million as of June 2000. 94% of assets were placed in the loan portfolio. 63%
of its total liabilities and equity consisted of government grants, whereas voluntary
savings mobilized from 6 members amounted to only Rp. 151,000. During the first half
of 2000, the UED-SP made a profit of Rp. 1.1 million. Note that the profit allocation
system includes hidden operating costs not accounted for in the income statement.
In West Nusa Tenggara, the appraisal mission found 6 UED-SP in the East Lombok
district, which had been established in March 1996 with an initial capital grant of Rp.
6.5 million each. As of May 2000, these institutions had 144 members and assets
amounting to Rp. 26 million, on average. 44% of their total liabilities and equity
consisted of government funds. Savings mobilization was not a priority. In East Nusa
Tenggara, less than 20% of the UED-SP was found to report monthly transactions.
One UED-SP visited in Flores was the only one still operating in the sub-district. It had
disbursed only Rp. 4 million to 14 borrowers from its own funds, but it was also
involved in channeling funds of a social safety net program (Rp. 40 million to 132
borrowers). A second UED-SP in the Timor district used funds provided by the
government mainly to finance school dropouts and school fees of poor families. Only
10 persons had deposited savings. Another urban UED-SP had disbursed Rp. 60
million, of which only Rp. 30 million could be recovered. Financial intermediation had
come to a standstill, as the recovered money was placed in a BRI account. Nobody
deposited money with this UED-SP. Generally, loan portfolio qualities were found to be
poor, records were in a poor state and the use of funds lacked transparency.
The UED-SP program makes the impression of another top-down program of the
government. The emphasis on quantity and credit channeling has not resulted in the
development of viable village-level financial institutions. The UED-SP cannot be
regarded as a financial institutions owned and controlled by the village community.
Only a small minority of community members are UED-SP members. The institutions
have the size of small credit groups and would be superfluous, if they are intended to
replace or formalize the already existing groups with financial activities. The UED-SP
are often managed and controlled by village officials, who have little banking expertise
and see their role in implementing a government program rather than in developing a
viable financial institution. The prevailing orientation to use the UED-SP for managing
and channeling program funds reflects neither lacking management capacities nor its
incompatibility with the aim to develop sustainable financial services at the village level.
The UED-SP supervision and information systems show the usual weaknesses of large
and hierarchically structured government programs. The systems were designed at the
central level and are too sophisticated to be transformed into practice with the human
resources available at the local level. Timely and crucial information necessary to
assess UED-SP performance and soundness is not available. The supervision system
applied, especially for rating UED-SP performance and soundness, is not only too
sophisticated but also inappropriate for supervising small financial institutions
effectively and efficiently. It gives only limited weight to factors determining the
soundness of such institutions, while it introduces many other factors that are better
examined by means of special studies. The system confuses program monitoring and
evaluation with supervision of financial institutions. While government staff may carry
out program monitoring, supervision and enforcement authority must be in the hands of
an independent and specialized institution to be effective.
The current financial system has only a limited outreach to the village level. Village
banks as non-bank financial institutions in the ownership and under control of the
village community are one alternative for developing sustainable financial services at
the village level. This, however, requires focusing on savings mobilization and
institution building rather than on credit channeling. Highly problematic is the prevailing
confusion of a financial institution’s intermediation function with the function to channel
government funds available for village development. Also the top-down and
government-centered approach to the development of village banks is not feasible.
Chapter 6:
The Cooperative Sector
and its Microfinance Windows
159
6. The Cooperative Sector and its Microfinance Windows
The cooperative sector in Indonesia has been characterized by the dualism of formal
cooperatives and a variety of informal organizations that work according to cooperative
principles but refrained from adopting the legal status of cooperatives. This chapter
focuses on cooperatives, which are licensed, regulated and supervised by the Ministry
of Cooperatives.109
Special attention is given to the Swamitra microfinance cooperation model between
Bank Bukopin and cooperatives. A description of the Credit Union movement is
included in this chapter because Credit Unions have been increasingly adopting the
legal status of cooperatives after the recent liberalization of the regulatory framework.
Furthermore, the chapter also covers Tempat Pelayanan Simpan Pinjam or savings
and credit service posts, which are independent village-level units of cooperatives but
are supervised by BRI. Chapter 3 (Bank Perkreditan Rakyat) and chapter 7 (Baitul
Maal wat Tamwil) cover other types of financial institutions that partly operate as
cooperatives.
6.1 The Political Economy of Cooperative Development in Indonesia
Government intervention into the development of cooperatives has been legitimated
with reference to article 33 of the 1945 constitution, which stipulates that the economy
has to be organized according to cooperative and family principles. Already during the
‘guided economy’ (1957-1966) era cooperatives were instrumentalized for marketing
purposes and channeling farm inputs and credit. The active role of the state in the
formation and control of cooperatives was underlined by the establishment of the
Ministry of Cooperatives in 1958. The cooperative law of 1967 re-emphasized the
protective and controlling functions of the state.
In the framework of the integrated rural development strategy in the early 1970s farmer
cooperatives were merged into sub-district cooperatives under the new name of
Koperasi Unit Desa (KUD), which had the double function as agricultural production
and crop purchase units. Presidential instruction No. 2 of 1978 provided the KUD with a
monopoly status in rural areas, thus formally disallowing the establishment of
independent cooperatives and requiring savings and credit organizations to merge with
the KUD. Especially the oil price boom until the early 1980s allowed the government to
heavily subsidize the KUD and to develop it into a ‘village conglomerate’110 that
monopolized the entire range of economic activities in rural areas. KUD were made the
channeling agencies for various subsidized credit packages.
Managed by government employees and without effective internal control, the KUD
became a major field of appropriation for local officials and richer farmers. In the late
109
110
Note that during the last years the Ministry of Cooperatives used four different names. 1994:
Departemen Koperasi = Ministry of Cooperatives. 1996: Departemen Koperasi dan
Pembinaan Pengusaha Kecil = Ministry of Cooperatives and Guidance of Small
Entrepreneurs. 1998: Departemen Koperasi dan Pengusaha Kecil dan Menengah =
Ministery of Cooperatives and Small and Medium Entrepreneurs. 1999: Menteri Negara
Koperasi dan Pengusaha Kecil Menengah = State Minister for Cooperatives and Small and
Medium Entrepreneurs.
“Konglomerat Desa”, Infobank No. 138, 1991.
160
1980s and early 1990s, the widespread corruption and high losses incurred by
subsidized credit programs had become a major issue of public debate. The vast
majority of KUD would have had to be liquidated, if they were stripped of subsidies and
preferential access to business deals with the government. 30% of the subsidized
farmer credit channeled through KUD between 1985 and 1991 was classified as loss.
The Ministry of Cooperatives had to acknowledge that one third of the loss had been
appropriated by government officials.111
Despite this situation, the cooperative sector was virtually exempted from the marketoriented reforms implemented since the late 1980s. While financial sector reforms had
reduced existing distortions, new ones were added by reinforcing the protection and
subsidization of cooperatives. The government instructed the Ministry of Cooperatives
to speed up the establishment of KUD and the central bank to increase the volume of
subsidized cooperative credit. Commercial banks were obliged to allocate 20 % of their
loan portfolios to small and medium enterprises, and state enterprises were instructed
to allocate 1% - 5 % of their profits to small enterprises and cooperatives. Some 160
private companies were urged to sell about 55 million shares to 1,200 cooperatives
though interest free loans. KUD were granted various marketing monopolies such as
for the purchase and sale of the entire clove crop at fixed prices, and they were even
instructed to participate in the national family planning program.112
The preferential treatment and subsidization of the cooperative sector has not been
abandoned until today. The crucial question is: why have different governments
continued to accept the high-cost-economy of the cooperative sector, although it has
failed to achieve its economic and social objectives? The answer lies in the fact that 30
years of the policies described above have created strong strategic alliances reaching
from the top bureaucracy down to the village level, which have been an important
stabilizing and may become a de-stabilizing factor for the political system. Voices
demanding the deregulation of and the withdrawal of the state from the cooperative
system have become stronger during the last years. Especially at local levels, however,
government and cooperative officials have not changed their interest in sustaining the
cooperative system as their field of appropriation.
The political reforms and the liberalization of cooperative regulations in the 1990s gave
a new impetus for the development of independent cooperatives. The transformation of
the cooperative system from a state-controlled to a self-controlled system, however, is
a long-term project in which the entire cooperative system and culture has to be turned
upside down.
111
112
See, i.e., “Mencuci Kredit Macet”, Infobank 138, 1991; “Bank vs. Koperasi”, Infobank No.
139, 1991; “Corruption looms in West Java cooperatives”, Jakarta Post, 22 February1992;
“Dilemma KUT” and “KUT Bagai Buah Simalakama KUD”, Kompas, 21 August 1992.
The number of subsidized credit programs was reduced from 23 to 4 in 1990. Direct credit
channeled through cooperatives increased from Rp 0.4 trillion as of March 1990 to Rp 2.5
trillion as of March 1993. (Bank Indonesia Financial Statistics) Other sources of information
are various newspaper articles published between 1990 and 1992; see: Detlev Holloh,
Microfinance in Indonesia Between State, Market and Self-Organization, LIT-Verlag and
Transaction Publishers, Hamburg 1998.
161
6.2 The Current Regulatory and Supervisory Framework
6.2.1 Regulation
The cooperative law No. 25 of 1992 makes general provisions for the cooperative
sector, while savings and credit cooperatives and savings and credit operations of
cooperatives are regulated by government regulation No. 9 of 1995 and ministerial
decree No. 351 of 1998.113
The cooperative law follows international cooperative principles (voluntarism,
transparency, democracy, self-reliance and independence), but it differs in making the
cooperative system responsible for national economic development and accountable to
the “family spirit” of the 1945 constitution (articles 3 and 4). This has been the basis for
the preferential treatment of cooperatives and the government’s direct involvement in
their organization and development. Article 60 of the law explicitly requires the
government and government officials at all levels to create favorable conditions for the
growth of cooperatives and to provide ‘guidance’, protection and preferential treatment.
Article 62 stipulates that cooperatives will be supported with regard to capital
accumulation and access to credit. Article 63 gives the government the right to
determine economic sectors that may be entered only by cooperatives.
The law distinguishes between primary cooperatives with a minimum of 20 individual
members and secondary cooperatives established by at least 3 cooperatives (articles 1
and 6). Types of cooperatives are defined by common economic activities and interest
(article 16). The organizational structure comprises the members’ assembly as the
highest authority, a management and a supervisory board, elected by and responsible
to the members’ assembly. The management board may appoint a professional
manager and, in this case, assume supervisory functions (articles 21 to 36).
Cooperatives are allowed to serve extraordinary members without the right to vote
(article 18). Article 43 stipulates that excess funds may even be used for serving nonmembers, and article 44 states that financial services may be provided to members, to
other cooperatives and their members as well as to member candidates. These
provisions obviously contradict the banking law, which restricts the mobilization of fund
from the public to licensed banks.
Government regulation No. 9 stipulates that savings and credit activities may only be
carried out by primary and secondary savings and credit cooperatives (KSP), and
savings and credit units (USP) separated from other business units of primary or
secondary cooperatives (articles 2 and 12). KSP/USP are allowed to establish branch
offices, assistant branch offices, and cash offices. Branch offices have to be approved
by the ministry (articles 6 and 7). The KSP/USP management board or professional
manager, who may be a qualified individual or institution are required to sustain the
institution’s soundness (articles 8 and 14).
113
Undang-Undang Republik Indonesia Nomor 25 Tahun 1992 tentang Perkoperasian
(cooperative law); Peraturan Pemerintah Republik Indonesia Nomor 9 Tahun 1995 tentang
Pelaksanaan Kegiatan Usaha Simpan Pinjam oleh Koperasi, Departemen Koperasi dan
Pembinaan Pengusaha Kecil (government regulation); Keputusan Menteri Koperasi,
Pengusaha Kecil dan Menengah Republik Indonesia, No. 351/KEP/M/XII/1998 tentang
Petunjuk Pelaksanaan Kegiatan Usaha Simpan Pinjam oleh Koperasi (ministerial decree).
162
Financial services may be provided to members, member canditates, other
cooperatives and their members. Member candidates have to become full members
not later than 3 months after having deposited their equity shares or simpanan pokok
(article 18). Loans to members of other cooperatives have to be made through their
cooperatives (article 20).
Article 38 states that the ministry, in order to strengthen the cooperative sector, guides
community groups with savings and credit activities to adopt the legal status of a
cooperative.
Ministerial decree No. 351 aimed at motivating the establishment of new KSP/USP
and improving the performance of the industry.114 The establishment of new KSP/USP
requires a paid-up capital of only Rp. 15 million for primary cooperatives and Rp. 50
million for secondary cooperatives. The establishment of branches requires a paid-up
capital of Rp. 15 million. The paid-up capital has to be deposited in a state bank
account. Note: The decree states that KSP/USP that have not yet fulfilled capital
requirements will nevertheless be legalized, while they have to limited financial
services to members! The establishment of primary KSP requires at least 20 members
and the establishment of secondary KSP at least 3 cooperatives. The operation of KSP
is geographically not restricted. Financial services may be provided to members,
member candidates and other cooperatives and their members.
The managing board of KSP has to consist of full-time managers or it may appoint a
professional manager or a board of directors. In this case the former managing board
has to assume the functions of a board of commissioners. At least one manager or
50% of the members of the board of directors must a training certificate or financial
management experience. Managers may be individual persons or institutions with
appropriate financial capacities and skills. Family relationships between managers are
prohibited. USP operations have to be separated from other units of the cooperative.
The decree confirms that community groups with savings and credit activities will be
directed to establish or join a cooperative. Groups that are not yet able to meet
requirements for establishing a KSP are obliged to register with the ministry.
6.2.2 Supervision
Supervision is not subject of the cooperative law. General provisions on KSP/USP
supervision are made in government regulation No. 9 under the header of ‘Guidance’
(articles 24 to 28). Guidance and supervision of KSP/USP are to be carried out by the
Ministry of Cooperatives. The ministry is given the authority to carry out inspections, to
provide advise with regard to capital requirements, change of management, mergers
with other cooperatives, and sale of fixed assets, and to liquidate KSP/USP when
problem cannot be resolved. The ministry is required to make provisions on the
soundness and prudential business practices of KSP/USP. Annual financial statements
have to be audited by a public accountant. Ministerial decree No. 351 stipulates that
guidance and supervision has to be carried out by officials at all government levels with
114
The decree reflects Presidential Instruction No. 18 of 1998 (Inpres Nomor 18 Tahun 1998
tentang Peningkatan Pembinaan dan Pengembangan Perkoperasian), which allows the
registration of new rural cooperatives without having to merge with KUD.
163
the aim to sustain the soundness of KSP/USP. Supervision has to comprise off-site
supervision based on financial reports, on-site inspections, and an assessment of
KSP/USP soundness. KSP/USP have to make available quarterly reports at latest one
month after the calendar quarter and annual reports at latest in June of the following
year. Financial reports have to include statements on cash and inter-bank assets, loan
portfolio, deposits and other liabilities, and equity.115 Audits by public accountants or
audit cooperatives are required for KSP/USP with annual business volumes (loan
disbursement) of one billion and more Rupiah.
More detailed provisions on the functions and organization of supervision
(pengendalian = control) were made by ministerial decree No. 9 of 1999.116 The
decree stipulates that control of primary and secondary KSP/USP operating at the
district level has to be performed by the district offices of the ministry. The provincial
offices are responsible to control primary and secondary KSP/USP at the provincial
level. Secondary KSP/USP operating at the national level have to be controlled by the
ministry’s head office.
The objective of control is defined as sustaining the soundness of KSP/USP. Control
functions specified are: a) guidance on internal control, b) monitoring of financial,
management and operational aspects, c) assessment of KSP/USP soundness, and d)
KSP/USP inspections, especially with regard to funds mobilized from non-members.
The guidelines stress the need for guiding, analyzing, monitoring, assessing and
inspecting KSP/USP that serve non-members, but they do not deal with enforcement.
Emphasis is given to the protection of assets rather than to deposit protection.
The assessment of KSP/USP soundness is to be carried out at the end of each
financial year. However, the decree limits this assessment to KSP that have already
operated for at least two financial years and to USP that are already operated as a
separate unit and prepare separate financial reports. This is surprising as it is most
problem that the course for an institution’s soundness is set during the first two years
and major problems may be caused by the lacking separation of the banking function
from other functions of multi-purpose cooperatives. With regard to inspections priority
shall be given to KSP/USP that accept deposits from non-members, have assets of at
least Rp. 1 billion, and/or were found not to comply with valid regulations.
Ministerial decree No. 194 of 1998 provides the Camel instrument to be used for
rating the soundness of KSP/USP.117 The instrument consists of 9 financial ratios and
25 questions in 5 management fields. The overall rating weighs capital by 20%, assets
quality by 30%, management by 25%, earnings by 15%, and liquidity by 10%.
Capital adequacy is measured by two ratios with a 10% weight each: the equity capital
to assets ratio (maximal score with 10%) and a risk-based equity capital to loan
115
116
117
Provisions on the contents of financial reports seem to be made in a separate decree (No.
352 of 1998) that, however, was not available.
Keputusan Menteri Koperasi Pengusaha Kecil dan Mengenah Republik Indonesia, Nomor
09/KEP/M/I/1999 tentang Petunjuk Pelaksanaan Pengendalian Simpan Pinjam, Biro Hukum
dan Organisasi Departemen Koperasi, Pengusaha Kecil dan Mengenah 1999.
Keputuasan Menteri Koperasi, Pengusaha Kecil dan Menengah Republik Indonesia, No
194/KEP/M/IX/1998 tentang Petunjuk Pelaksanaan Penilian Kesehatan Koperasi Simpan
Pinjam dan Unit Siman Pinjam.
164
portfolio ratio (maximum score with 100%). The quality of productive assets is
measured by three ratios with a 10% weight each: the ratio of outstanding loans to total
loans disbursed (maximum score with 60%), the ratio of classified loans to outstanding
loans (maximum score with 0%), and the ratio loan loss reserves to classified loans
(maximum score with 100%). Management is assessed by 25 questions regarding
capital, assets, profitability, liquidity and management itself. Each positive answer gets
4 points. Profitability is measured by three ratios with a 5% weight each: the ratio
earnings to operating income ratio (maximum score with 5%), return on assets
(maximum score with 10%), and the ratio of operating costs to operating income
(maximum score with 90%). Liquidity is measured by a ratio dividing the loan portfolio
by total liabilities and equity (full score with less than 90%, otherwise no score).
The amount of classified loans includes 50% of sub-standard loans, 75% of doubtful
loans and 100% of loan loss. The classification depends on loan terms and installment
periods. Monthly installment loans, for instance, are classified as sub-standard when
they are in arrears for more than three months but less than six months. Loans are
classified as doubtful when they do not meet the criteria of non-standard loans, are still
collectable and collateral covers at least 75% of debts, or are not anymore collectable
but collateral covers 100% of debts. Loans are classified as loss when they do not
meet the criteria of doubtful loans, or when they are not repaid after being classified as
doubtful for 21 months.
KSP/USP with a score of 81 and more points are rated sound, KSP/USP with a score
between 66 and 80 points are rated fairly sound, KSP/USP with a score between 51
and 65 points are rated less sound, and KSP/USP with a lower score are rated
unsound. The rating may be corrected down by one level in cases such as noncompliance with internal and external regulations, wrong accounting, deviation from
credit procedures, missing audits for institutions with a business volume larger than Rp.
1 billion, and lacking authority of USP managers. The rating is automatically
downgraded to unsound in cases such as business collusion with external parties and
manipulated accounting.
6.3 Number of Cooperatives and Structure of the Cooperative Sector
Note on data quality and availability
The cooperative sector is the worst documented microfinance sub-system in Indonesia.
As the sector was systematically transformed into a “part of the government
machinery”118, both development research and practice lost interest in the system and
prioritized alternative approaches in microfinance and self-help promotion.
Furthermore, lack of supervision and unreliable reporting has been an integral
weakness of the system. Data available are not up-to-date and seldom reliable enough
to serve as a basis of analysis.
The data available for this report can only serve to provide a rough overview of the
cooperative sector, but they have a very limited value even for this purpose because of
several reasons. First, data for all provinces and types of cooperatives were available
118
M. Dawan Rahardjo: “Development Policies in Indonesia and the Growth of Cooperatives”,
in: Prisma No. 23, 1991, p. 6.
165
only for December 1998. Policy changes such as lifting the ban to establish rural
cooperatives independently from the KUD have considerably changed the cooperative
landscape. The regional office of the Ministry of Cooperatives in Central Java, for
instance, reported an increase of primary cooperatives (non-KUD) from 6,715 as of
December 1998 to 10,968 as of December 1999.
Second, the cooperative law (article 16) emphasized that types of cooperatives are
defined on the basis of common activities, and that cooperatives formed on the basis of
other criteria (functional, religious, gender etc.) are not acknowledged as separate
categories. The reporting system of the Ministry of Cooperatives, however, does not
follow this definition and does not allow identifying cooperatives that provide financial
services. Third, the reporting system aggregates the great variety of cooperative
activities, thus not giving attention to items important for assessing financial institutions,
such as loans outstanding, assets quality and the structure of liabilities.
Fourth, the new regulations issued in the 1990s stipulate that only single-purpose
savings and credit cooperatives or separate savings and credit units of multi-purpose
cooperatives are allowed to provide financial services. Both the practice and reporting
system of cooperatives have not yet consistently adjusted to this stipulation. Statistics
of local cooperative offices that used this classification were found to cover only part of
the cooperatives providing financial services. Fifth, statistics continue to distinguish
between KUD as rural cooperatives and other multi-purpose cooperatives as urban
ones. This legacy of the past is highly inadequate as KUD operate also in urban areas
and there is a range of other cooperatives offering financial services in rural areas.
Sixth, the quality of information obtained generally lacks analytical value because of
long and distorting reporting ways, on the one hand, and the lack of attention given to
information such as loan portfolio quality, soundness and management.
Types and business situation of cooperatives
As of December 1998, the Ministry of Cooperatives reported a total number of 59,441
cooperatives of which, however, only 46,420 with some 20 million members were
classified as “active”. 56% of the active cooperatives were cooperatives of civil
servants, military and police personnel, white-collar workers and various professions.
The 7,342 KUD made up 16% of all cooperatives but contributed 50% to all persons
registered as members of cooperatives. In this context, it has to be considered that
persons without close relationship to KUD are registered as ‘members’ when they
receive credit or other facilities channelled through KUD. Other cooperatives known to
provide financial services are multi-purpose cooperatives (Koperasi Serba Guna) other
than KUD, market cooperatives, Pesantren (Islamic schools or training centers)
cooperatives, and women cooperatives. As of December 1998, these organizations
contributed 15% to all cooperatives and 7% to their members.
Cooperatives specialized in financial services are people’s credit banks (see chapter 3)
and savings and credit cooperatives (Koperasi Simpan Pinjam). The 942 savings and
credit cooperatives reported for December 1998 contributed only about 2% to all
cooperatives and their members. Considering the liberalization of cooperative
regulations in 1998, this number should have experienced a significant increase (see
also description of Credit Unions). Field evidence, however, shows that the rural
166
population, women in particular, tends to establish multi-purpose cooperatives that
allow for running small shops and other activities, although they focus on financial
services as their main business.
Table 6.1
Cooperative Sector by Type of Cooperative (December 1998, in Trillion Rupiah)
Type of Cooperative
Civil service, military, police
Number
1
Members
(‘000)
Assets
2
‘Own
3
capital’
‘Outside
3
capital’
Business
4
volume
Profit/
Loss
16,958
3,669
2,854
1,680
974
2,723
200
8,904
3,144
1,737
786
815
2,246
137
954
362
233
112
112
342
10
KUD
7,342
10,083
3,033
1,302
1,675
4,810
57
Market, multi-purpose coop.
4,237
844
336
153
169
446
14
Pesantren* cooperatives
2,164
342
116
57
56
63
2.5
Women cooperatives
765
255
79
49
24
88
5.1
Savings & credit coop.
942
547
179
86
85
534
7.2
People’s credit banks
26
10
15
5.6
9
25
0.6
3,620
873
629
392
214
1,089
23
45,912
20,128
9,211
4,622
4,133
12,365
455
508
22
751
500
198
587
54
46,420
-
9,962
5,122
4,331
12,952
509
White collar, professional
Service, trade, manufacturing
Other primary cooperatives
Sub-total
Secondary cooperatives
Total
Source : Ministry of Cooperatives. Figures include the East Timor province, which gained independence in 1999.
* Islamic schools or training centers.
1 Does not include inactive cooperatives (22% of the total number of cooperatives reported).
2 Assumes that the sum of ‘own’ and ‘outside’ capital plus profits is equivalent to the total value of assets.
3 ‘Own capital’ (modal sendiri) is not equity capital in the narrow sense ; it includes membership fees and compulsory
savings. ‘Outside capital’ (modal luar) is assumed to include all other liabilities.
4 The business volume (volume usaha) includes both loans disbursed and/or total sales during the year.
The reporting system provides information on the cooperatives’ business volume
(volume usaha), own capital (modal sendiri) and outside capital (modal luar), thus not
allowing analyzing aspects such as loans outstanding and the structure of liabilities.
The business volume is not equivalent to assets but stands for the accumulated
amount of sales and/or loans made during the year. ‘Own capital’ consists of
membership fees, compulsory savings, reserves and donations. ‘Outside capital’
includes both voluntary savings and loans. As of December 1998, the cooperative
sector’s own capital amounted to Rp. 5,122 trillion, or Rp. 110 million per cooperative,
and made up 51% of its total funds. Assuming that the sum of ‘own capital’, ‘outside
capital’ and profits is equivalent to the total amount of assets, the cooperative sector’s
assets amounted to Rp. 9,962 trillion, and the average cooperative’s assets amounted
to Rp. 215 million.
The KUD accounted for 30% of the cooperative sector’s assets. Excluding BPR
cooperatives, the average KUD had the largest assets (Rp. 418 million) and number of
members (1,366) of all types of cooperatives. Other multi-purpose cooperatives were
much smaller, with assets of Rp. 55 million and 199 members, on average. The
average savings & credit cooperative had 571 members and assets amounting to Rp.
188 million. Taking into account the high variance in membership, the financial
167
capacities of these types of cooperatives do not differ considerably. The average
amount of assets per member was Rp. 306,000 for the KUD, Rp. 276,000 for other
multi-purpose cooperatives, and Rp. 329,000 for savings & credit cooperatives.
Table 6.2
Multipurpose and Savings & Credit Cooperatives by Region (December 1998)
Sumatra
Java &
Bali
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
2,386
2,141
775
1,156
819
7,277
Avg. number of members
543
3,318
411
717
484
1,366
266
627
129
462
526
418
Number of active units
515
1,659
336
370
147
3,027
154
252
109
111
86
199
49
65
26
43
29
55
138
608
23
130
79
978
192
731
848
399
205
571
87
218
225
192
117
188
Indicator
KUD
Multi-purpose cooperatives **
Savings & credit cooperatives
Source : Ministry of Cooperatives. Figures do not include the East Timor province, which gained independence in 1999.
* West Nusa Tenggara, East Nusa Tenggara, Maluku, Irian Jaya. ** Koperasi Serba Usaha
The comparison with non-bank microfinance institutions such as the LDKP (see
chapter 5) or smaller BPR (see chapter 3) shows that these figures are not very
impressive, especially when the large outside funds available to cooperatives are taken
into account. Important factors predicating this situation is the dependence on outside
funds, lack of savings mobilization and the unattractiveness of most cooperatives for
deposit customers. Cooperatives involved in channelling subsidized credit provide
access to credit without the active participation of members. Almost daily news on
mismanagement and corruption in the cooperative sector has made even members of
cooperatives to consider other financial institutions as safer places to save.
More recent data available for cooperatives with savings and credit activities in the
West Nusa Tenggara province119 support the latter argument. Both savings & credit
cooperatives and multi-purpose cooperatives with savings and credit activities were not
able to finance more than 20% of their assets by deposits mobilized from members.
Considering that deposits consist mainly of compulsory savings and membership fees,
this low level of savings mobilization is even more evident. The extremely low average
amount of deposits per member (Rp. 10,000) in KUD savings and credit units indicates
that this amount consists mainly of the fee or share each person has to pay for being
registered as a member.
119
See also: Detlev Holloh, Appraisal of the Proposal “Development and Upgrading of
Microfinance Institutions in Indonesia”, Sub-Report 2: West Nusa Tenggara, Project
Promotion of Small Financial Institutions, Denpasar, September 2000.
Similar findings were also
made during an appraisal
mission carried out in East
Nusa Tenggara and South
Sulawesi.120 It was revealing
that both cooperative officials
and managers met during the
mission emphasized the need
for cheap funds rather than
reflecting the weakness and
constraints of cooperatives in
mobilizing savings.
168
Table 6.3
Multipurpose and Savings & Credit Cooperatives
in West Nusa Tenggara (May 2000)
KSP *
USPKUD *
USPKopta *
Number of units
13
129
529
2.4
105.2
81.1
186
816
153
2.4
5.6
64.7
187
43
122
2.1
4.5
51.1
As % of assets
87.5
80.4
79.0
Deposits (Rp. billion)
0.4
1.1
4.9
Indicator
Average number of members
Average per unit (Rp. million)
Loan portfolio (Rp. billion)
Single-purpose savings &
As % of assets
18.5
19.6
7.6
credit cooperatives succeeded
Average per member (Rp. ,000)
184
10
60
to
mobilize
considerable
higher amounts of deposits Source : Ministry of Cooperatives, West Nusa Tenggara regional office.
* KSP = Koperasi Simpan Pinjam = Savings & credit cooperative ; USP
per member and, in terms of
= Unit Simpan Pinjam = Savings & credit unit. Kopta = Koperasi
Perkotaan = ‘Urban’ cooperative.
assets, are usually larger than
savings and credit units of cooperatives. Often, however, they are urban businesses
founded by middle-class people who offer, in a moneylender-like fashion, easy access
to expensive loans. Mobilization of savings is usually not a priority. Officials and public
media make no secret out of the fact that some of these institutions have membership
lists only as a matter of form and operate as ‘black’ banks, not being subject to banking
regulations and enjoying the lax regulation and supervision of the cooperative sector.
There is a range of real member-owned cooperatives that have independently grown
‘from below’ through high participation of their members and reliance on their own
resources. One example is the Credit Unions, which will be described later in more
detail. Another example from West Nusa Tenggara is Koperasi Karya Terpadu in East
Lombok, which emerged from 13 women groups participating in the P4K Rural Income
Generating Project (RIGP-P4K), a microfinance and poverty-alleviation project
implemented by the Ministry of Agriculture and Bank Rakyat Indonesia. This
cooperative is a multi-purpose cooperative (Koperasi Serba Usaha), which focuses on
financial services as its main business but also runs a small shop with basic goods,
provides social funds for medical purposes and in the cases of births, marriage and
death. As of June 2000, the cooperative had organized 42 small groups with 501
members. Assets amounting to Rp. 151 million were larger than that of many
cooperatives with wealthier members and funded by cheap outside funds.
120
See: Flora Giassemi, Wolfram Hiemann and Detlev Holloh, Appraisal of the Proposal
169
6.4 Bank Bukopin and its Swamitra Model of Microfinance
6.4.1 Overview of Bank Bukopin
The history of Bank Bukopin (Bank Umum Koperasi Indonesia) commenced as the
banking arm of eight secondary cooperatives in 1970. The founding cooperatives were
the national army, air force, police and veteran cooperatives, the civil servants
cooperative, the fisheries cooperative and the association of batik cooperatives. In
1985, all cooperative banks were merged into Bukopin in order to strengthen the
financial arm of the cooperative movement. In 1989, after the banking reform of 1988
had increased the capital requirements for commercial banks, Bukopin was converted
into a limited liability company under the name PT. Bank Bukopin. Capital shares were
sold to the founding secondary cooperatives and its 2,287 primary cooperatives, to new
cooperatives, the Government, and national private enterprises. Since the mid 1990s
the member cooperatives hold only 28.1% of the shares amounting to Rp. 185.5 billion.
The other shareholders are the Foundation of the national logistic agency (Bulog,
31.8%), the Government (24.6%), and the business tycoon H.M. Hasan (15.5%).
Bank Bukopin maintains a network of 25 branches, 54 assistant branches and 45 cash
offices. All but 5 of the branches are located in Java and Sumatra, whereas there are
only 2 branches, 2 assistant branches and 3 cash offices (South Sulawesi and East
Nusa Tenggara) in the eastern parts of Indonesia. Bank Bukopin is organizationally
divided into five divisions. The Micro Banking Division handles the Swamitra program,
a special business partnership with currently 177 selected cooperatives (see below).
The Small-scale Business and Cooperatives Division is responsible for channeling
governmental program credit mainly through cooperatives and focusing on the
financing of agribusiness. The Individual Banking Division targets individuals with
stable sources of income with special deposit and consumer credit products, transfer
services, ATM service points and online banking services. The Treasury and
Investment Division is responsible for the bank’s assets and liability management.
While one of Bank Bukopin’s missions has been to support the development of
cooperatives and small businesses, it were the large loans disbursed to the
construction, manufacturing and transportation sectors that made Bank Bukopin one of
the private national banks that had to be recapitalized in 1998/1999. As of the end of
1998, 38.6% of the bank’s loan portfolio was classified as loss and a further 15.3% as
non-standard. The bank had to make loan loss provisions making up 38% of its loan
portfolio. The bank’s losses had accumulated to Rp. 893 billion. It had a negative equity
capital of Rp. 648 billion and the capital adequacy ratio had dropped from 9.2% as of
the end of 1997 to minus 20.3% as of the end of 1998. The bank had to transfer its
non-performing assets to IBRA, restructured its loan and was recapitalized with an
amount of about Rp. 476 billion. Between December 1998 and March 2000 the bank’s
assets increased from Rp. 4.8 trillion to Rp. 7.6 trillion, of which deposits funded 88%.
The capital adequacy ratio had recovered to 12.4% and the bank had started to make
profits again. The bank’s loan portfolio, however, did not grow significantly and made
up only 45% of its assets. New loans were mainly made in the form of subsidized loans
that were financed by Bank Indonesia’s credit liquidity programs.
170
Besides providing the entire range of banking services, a great part of Bank Bukopin’s
business is made up of its function as a channeling bank for governmental credit
programs such as the various schemes channeled through cooperatives to farmers and
small businesses. In 1998, this business arm contributed 45% to its annual profits
before tax. The bank’s own microcredit window is a two-step loan provided to its
Swamitra partners. The loan is used to provide working capital and investment loans to
group members and microbusinesses. The maximum individual loan amount is set as
Rp. 50 million and a self-financed contribution of 30% of the project financed.
6.4.2 The Swamitra121 Program
In 1985, Bukopin was involved in the development of Service Centers for Rural Credit
Cooperatives, a multi-tiered program implemented with financial assistance from the
Netherlands Government and the Rabobank Foundation in order to provide credit to
group members organized under the KUD, at that time cooperatives with a monopoly
status at the sub-district level. The new Swamitra model of microfinance is a
professionalized and business-oriented version of this program. The Swamitra program
was launched in 1998 in response to government regulations requiring commercial
banks to allocate 22.5% of their portfolios to small businesses and to the deteriorated
public image of government-led cooperatives.
Swamitra are cooperatives or other microfinancial institutions that, based on a
memorandum of understanding, have entered into a business relationship with Bank
Bukopin and are supported by the bank’s management and training systems. Swamitra
may also be regarded as independent outlets of Bank Bukopin, which are provided with
access to capital, effective liquidity management and inefficient financial transactions
through the bank’s online system.
The Swamitra organization consists of credit, fund mobilization, administration, and
internal control divisions, which operate under a commercial and an operating
manager. The initial Swamitra capital has to be deposited by the partner organization in
a Bank Bukopin account, which carries an interest rate 1.5% higher than the bank’s
highest interest rate on time deposits. In return, Bank Bukopin provides investment
loans for purchasing fixed assets and inventory, and refinance for the institution’s own
credit business.
Bank Bukopin has designed standard products for its Swamitra partners. The savings
deposit product requires a minimum balance of Rp. 10,000, allows unlimited
withdrawals, and offers attractive prices. Time deposit products are offered with
maturities between one and 12 months and require a minimum balance of Rp. 10,000.
Interests paid on accounts of both products are exempted from tax payments up to a
certain amount (1998: Rp. 144,000). Loan products comprise various types of
investment loans, working capital loans, and consumption loans, with loan amounts
ranging from Rp. 500,000 to Rp. 50 million, and loan terms ranging from 30 days to 3.5
years. Depending on the product, collateral is accepted in the form of movable and
unmovable assets, the borrower’s business and deposits.
121
Swamitra is the synonym for ‘Voluntary Partnership’.
171
6.4.3 Swamitra Outreach and Financial Situation
As of October 2000, Bank Bukopin had established 177 Swamitra, of which 83% were
operating in Sumatra, Java and Bali. In accordance with the outreach of the bank’s
branch network, Swamitra are under-represented in other regions, especially in the
eastern parts of Indonesia.
Table 6.4
Number and Outreach of Swamitra by Region (October 2000)
Sumatra
Jakarta
Java & Bali
Kalimantan
East
Indonesia *
Total
44
24
79
16
14
177
17,708
7,523
20,933
4,606
4,415
55,185
Average number
402
313
265
288
315
312
Avg. amount (Rp. million)
1.13
0.49
1.15
1.1
0.75
1.02
6,799
7,486
11,413
2,976
3,415
32,089
Average number
155
312
144
186
244
181
Avg. amount (Rp. million)
2.0
2.9
2.3
2.4
2.0
2.3
Indicator
Number of Swamitra
Number of deposit accounts
Number of loan accounts
Source : Bank Bukopin.
* South Sulawesi & East Nusa Tenggara.
The Swamitra had some 55,000 deposit accounts or 312 accounts, on average. The
average number of deposit accounts per institution was less than 250 in South
Sumatra, Central Java, East Java and South Kalimantan, whereas the number
exceeded 500 accounts in East Nusa Tenggara, Riau, Jambi and the Aceh province.
The average amount per deposit account was Rp. 1 million and, ranging from Rp. 0.5
million in Jakarta to Rp. 2 million in Aceh, showed a high variance.
The total number of some 32,000 loan accounts averaged 181 per Swamitra. The
average number of loan accounts, however, ranged from only 77 in South Sumatra to
331 in East Nusa Tenggara. The average loan amount outstanding of Rp. 2.3 million
was similar to that of the BRI unit system. Swamitra in Jambi (Rp. 1.2 million) had the
smallest and institutions in North Sumatra (Rp. 3.9 million) had the largest average
loan amount outstanding.
The Swamitra’s outreach in terms of deposit and loan accounts already indicates a
high variance in business volume. With total assets of Rp. 148 billion, the average
institution had assets amounting to Rp. 836 million, six times as low as for BRI units, as
of October 2000. Average assets per Swamitra varied between Rp. 423 million in East
Java and Rp. 1.4 billion in the Aceh province.
The Swamitra usually had more than 80% of their assets placed in the loan portfolio.
The loan portfolio to assets ratio was higher than 90% in West Java, North and West
Sumatra, and East Nusa Tenggara. The major source of funds was loans provided by
Bank Bukopin. On average, these loans made up 60% of all Swamitra funds, while
deposits contributed only 38% to these funds. The Swamitra in East Nusa Tenggara,
Bali, Jambi, and the Aceh province financed 60% and more of their assets from
deposits, whereas deposits made up less than one third of the institutions’ funds in
172
Jakarta, North Sumatra, South Kalimantan and South Sulawesi. The Swamitra in all
provinces appear to be considerably under-capitalized. The average capital to assets
ratio was only 1% and exceeded 2% only in East Java.
Table 6.5
Assets and Balance Sheet Structure of Swamitra by Region (October 2000)
Sumatra
Jakarta
Java & Bali
Kalimantan
East
Indonesia *
Total
958
1,120
715
788
709
836
Total assets (Rp. million)
42,161
26,870
56,496
12,601
9,932
148,060
Loan portfolio (Rp. million)
35,858
22,150
48,985
11,145
8,923
127,061
85.1
82.4
86.7
88.4
89.9
85.8
19,996
3,689
24,146
5,067
3,308
56,206
47.7
13.7
42.7
40.2
33.3
38.0
Equity (Rp. million)
346
236
878
346
73
15
Loans (Rp. million)
20,762
23,749
30,887
7,518
6,264
89,762
1,074
(207)
1,553
(85)
369
2,704
Balance Sheet Item
As % of assets
Total deposits (Rp. million)
As % of assets
Profit & Loss (Rp. million)
Source : Bank Bukopin.
* South Sulawesi & East Nusa Tenggara.
Information on loan portfolio quality was unfortunately not available. Some of the
findings mentioned above, however, may indicate that many institutions had been
performing less than satisfactory. The fact that the credit business of most institutions
depended highly on Bank Bukopin funds shows that Swamitra had been functioning as
credit channeling agencies rather than developing into independent financial
intermediaries. The generally high loans to assets ratios indicate that many Swamitra
were most probably exposed to both high credit and liquidity risks. As of October 2000,
the entire industry had made profits amounting to Rp. 2.7 trillion, but the institutions in
one third of the provinces operated at a loss. The Swamitra industry, in general, lacks
capital adequacy. In the six provinces, in which the institutions experienced negative
returns, losses came close to or exceeded the amount of equity capital.
High variance in outreach, assets size and performance
The institutions selected by Bank Bukopin as Swamitra partners differ extremely in
outreach, assets size and performance. They are institutions with few customers and
assets comparable to that of savings and credit association or they have hundreds of
customers and assets amounting to more than Rp. 1 billion. One large and profitable
market cooperative in Aceh had mobilized deposits amounting to Rp. 3.3 billion,
financing 92% of its assets. An unprofitable KUD in Central Java had assets of Rp. 326
million, only 2% of which were financed by deposits. A highly profitable KUD in Riau,
with assets amounting to Rp. 1.8 billion, had more borrowers (231) than deposit
customers (214). Another Swamitra in Riau, with only 92 borrowers but 673 deposit
customers, had incurred losses equivalent to 71% of its small loan portfolio (Rp. 136
million).
173
6.5 The Credit Union Movement
Credit Unions in Indonesia are known under the name Koperasi Kredit (Kopdit) and, in
terms of organizations and operations, do not differ from savings & credit cooperatives.
Until recently, however, they usually operated as informal savings and credit groups
because of the interventionist rationale of the cooperative system. Since the
liberalization of cooperative regulations an increasing number of Credit Unions and
their secondary structures adopted the legal status of savings & credit cooperatives.
Credit Unions have been promoted by a national non-government organization, first
established under the name Credit Union Counseling Office, since 1970.122 In 1980,
the organization’s name was changed into Badan Koordinasi Koperasi Kredit Indonesia
(BK3I) or Credit Union Coordination of Indonesia. After having been prevented from
doing so for many years, BK3I established the Induk Koperasi Kredit (Inkopdit), the
national secondary cooperative for its registered savings & credit cooperatives, in July
1998. Presently, the movement has 28 regional chapters (Badan Koordinasi Koperasi
Kredit Daerah – BK3D), of which 16 have already adopted the status of secondary
cooperatives (Pusat Koperasi Kredit – Puskopdit). At the primary level, the movement
consisted of 1,105 Credit Unions as of December 1999. Only one year after the
liberalization of the regulatory framework, 29% of these Credit Unions had adopted the
legal form of primary savings & credit cooperatives.
The mission of BK3I/Inkopdit and BK3D/Puskopdit is to strengthen the development of
autonomous and self-reliant Credit Unions. The movement has continuously demanded
that this emphasis on voluntary association, autonomy and self-reliance has to be
clearly stated in a revised cooperative law. A special feature of the movement has been
its high emphasis on education and participative decision-making, as expressed by its
motto: “Credit Unions are an economic movement through educational activities and an
educational movement through economic activities.” Other important pillars of the
movement are its credit insurance scheme and its inter-lending system. Training,
insurance, inter-lending and supervision are the major tasks carried out by the
secondary structures of the movement. As of the end of 1999, 89% of the Credit
Unions participated in the movement’s inter-lending system and 57% of the Credit
Unions participated in its credit insurance scheme. Credit Unions receive training
through their BK3D/Puskopit at the regional level. There are special courses for
beginners, for advanced staff and for managers. The Credit Unions have to pay part of
the training costs, while another part is subsidized from income of the secondary
cooperative and from donations.
122
The following description is based on data provided the Credit Union’s national apex
organization BK3I/INKOPDIT and the following publications: Credit Union Coordination of
Indonesia, “Peranan Gerakan Koperasi Kredit Bagi Masyarakat Ekonomi Lemah di
Indonesia”, CUCO, Jakarta 1987; Credit Union Coordination of Indonesia, “Credit Union
Movement in Indonesia”, CUCO, Jakarta 1987; CH Sukirman, “Koperasi Kredit sebagai
salah Satu Pilihan Dalam Pemberdayaan Ekonomi Rakyat”, Seminar dan Lokakarya
Memberdayakan Ekonomi Rakyat Melalui Keuangan Mikro, Bandung, September 2000;
Flora Giassemi, Wolfram Hiemann and Detlev Holloh, Appraisal of the Proposal
174
In 1998 and 1999, the Credit
Table 6.6
Credit Union Development 1998-1999
Union movement experienced
December December December
a period of consolidation and Indicator
1997
1998
1999
significant growth. The number
Number of CU
1,400
1,265
1,105
of units dropped from 1,400 to
Number of members
268,739 272,923 251,989
1,105. The movement lost also
Average per CU
192
216
228
a considerable number of
137.3
161.2
185.4
members, but the average Assets (Rp. billion)
number of members per unit
Average per CU (Rp. million)
75
127
168
increased from 192 to 228. Loan portfolio (Rp. billion)
104.9
120.5
134.3
Most remarkably, however, Deposits (Rp. billion)
85.4
104.4
117.7
average assets per unit grew
Reserves (Rp. billion)
11.8
13.7
16.3
by 124% during this two-years
Profits (Rp. billion)
n.a.
19.3
13.7
period. Despite the financial
Source : BK3I/Inkopdit, Jakarta.
crisis, the Credit Unions
sustained high growth rates in both savings and credit. The loan portfolio grew by 35%
and deposits by 38%, with deposits contributing 63% to their total liabilities and equity.
With reserves and profits equivalent to 16% of total assets, the Credit Unions appear to
be generally sound. Return on assets decreased from 13% in 1998 to 10% in 1999, but
remained at a remarkably high level.
67% of the Credit Unions are located on the major islands Sumatra, Java and Bali.
Contrary to the regional distribution of other financial institutions, however, the Credit
Union movement shows a high concentration in the eastern parts of Indonesia. This is
particularly true for East Nusa Tenggara, where 246 Credit Unions contribute 46% to
the total number (530) of Credit Unions, savings & credit cooperatives, and multipurpose cooperatives with savings and credit units. They are probably the major
microfinance institutions on the island of Flores, where 212 Credit Unions are located.
As of December 1999, the Credit Unions had 228 members and assets of Rp. 168
million, on average. The size of Credit Unions varied considerably between the regions.
With more than 1,000 members and assets of Rp. 868 million, on average, the Credit
Unions in (West) Kalimantan had the size of small secondary banks. The Credit Unions
in the eastern parts of Indonesia, with 138 members and assets of Rp. 79 million, on
average, resemble savings and credit associations.
Credit Unions operate in urban and rural areas, and they organize members of various
social strata. In urban areas they are often organizations with a high participation of
professions such as teachers. The vast majority of Credit Unions in the eastern parts of
Indonesia operate in rather rural areas. There are, however, also large urban
organizations such as a Credit Union registered as a savings & credit cooperative in
Flores, which had 1,485 members and loans outstanding amounting to Rp. 1.8 billion.
Another example for a large Credit Union that is registered as a savings & credit
cooperative is Koperasi Kredit Sejahtera operating in Cibinong, West Java. As of June
2000, it had 677 male and 1,140 female members. Assets amounted to Rp. 2.2 billion,
of which 79% were loans outstanding. The Credit Union was entirely self-financed, with
voluntary savings deposits contributing 62% and membership fees plus compulsory
savings contributing another 13% to total liabilities and equity.
175
Table 6.7
Credit Union Indicators by Region (December 1999)
Sumatra
Java &
Bali
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
254
484
29
54
284
1,105
18.1
41.9
34.5
5.6
19.7
28.8
71,475
102,858
31,015
6,033
40,608
251,989
Average per CU
281
213
1,069
112
143
228
41.4
92.0
25.2
3.3
23.5
185.4
163
190
868
61
83
168
33.1
59.4
19.5
2.8
19.6
134.3
As % of assets
80.0
64.5
77.5
83.9
83.2
72.5
Deposits (Rp. billion)
28.6
47.7
21.5
2.4
17.4
117.7
As % of assets
69.3
51.8
85.3
74.1
74.1
63.5
Average per member (Rp. ,000)
401
464
692
404
430
467
Indicator
Number of CU
Registered cooperatives (%)
Number of members
Average per CU (Rp. million)
Loan portfolio (Rp. billion)
Source : BK3I/Inkopdit, Jakarta. * Still includes East Timor.
Contrary to the vast majority of cooperatives, the Credit Union movement has been
emphasizing savings mobilization and the reliance on own resources. This is indicated
by the fact that average savings per member (Rp. 467,000 for the entire movement)
were 2.5 times as large as for savings & credit cooperatives in general and 47 times as
large as for KUD savings and credit units. As of December 1999, deposits made up
63% and reserves and profits 16% of the Credit Unions’ total liabilities and equity,
indicating that the movement has achieved a high degree of self-finance.
6.6 Tempat Pelayanan Simpan Pinjam (TPSP)
Tempat Pelayanan Simpan Pinjam (TPSP) are savings and credit service posts at the
village level, which operate under the umbrella of savings and credit cooperatives or
multi-purpose cooperatives with savings and credit units, while they are also
supervised and technically assisted by Bank Rakyat Indonesia. Due to the latter fact,
complete, reliable and updated data were available from the BRI head office.
TPSP have a simple organization with usually three part-time employees and operate
often only once a week from a small village office. Their organization and operations is
similar to that of the BKD in Java (see chapter 4). This has also historical reasons.
When the new banking regulation in the early 1990s prevented the expansion of the
BKD model, the Ministry of Cooperatives and BRI started to promote and establish
TPSP in 1994 as an alternative to the BKD model and as a project thought to replace
the terminated petty trader credit program (Kredit Candak Kulak – KCK).
The establishment of TPSP was initiated with grants provided by the National
Development Planning Agency (Bappenas) to KUD. As of 1996, Bappenas had made
available about Rp. 18 billion for the establishment of 975 TPSP. Each TPSP received
a one-time sum of Rp. 8 million as seed capital and Rp. 500,000 for the purchase of
equipment and supplies. BRI received some Rp. 3.1 million per TPSP for the training of
176
TPSP staff members, KUD and BRI supervisors. KUD received some Rp. 6.9 million
per TPSP as a compensation for technical support, monitoring, and other costs.
In contrast to BKD, TPSP are supervised by both BRI and the KUD system. Unlike
BKD supervisors, BRI’s TPSP supervisors are paid entirely on commission. They
receive 15 percent of the interest collected by the TPSP branches they supervise. The
supervisors and technical administrators of KUD receive monthly salaries.
According to the national BRI statistics,
1,582 TPSP were operational as of
April 2000. 1,381 TPSP operated under
the umbrella of KUD, and 201 units
operated under the umbrella of urban
cooperatives (Kopta).
Table 6.8
TPSP Outreach (April 2000)
Number of TPSP
1,582
Number of loan accounts
240,233
Avg. number per TPSP
157
153
The average TPSP had 153 loan Number of savings deposit accounts
78,183
accounts, 161 compulsory savings
49
accounts, but only 49 voluntary savings
39
deposit accounts. This and the low
254,022
average savings deposit amount of Rp. Number of comp. savings accounts *
161
39,000 per account already indicate
50
that savings mobilization has not been
the strength of these institutions. Source: Bank Rakyat Indonesia.
* Savings deducted from loan amounts disbursed.
Compulsory savings are exclusively
collected as percentage deductions from loan amounts disbursed. The average loan
size in April 2000 was Rp. 308,000, while the average loan amount outstanding per
account amounted to Rp. 153,000.
In accordance with the low level of savings mobilization, the average TPSP had assets
amounting to Rp. 28 million only. 82% of the total TPSP assets were invested in the
loan portfolio. The major source of funds was equity capital, which contributed 60%
(including profits) to their total liabilities and equity. Assuming that each TPSP had
received start-up funds of Rp. 8.5 million123, 50% of this equity capital consists of
grants. Savings contributed 35% to total liabilities and equity, but 80% of these savings
was compulsory savings deducted from loan amounts disbursed.
Table 6.9:
TPSP Consolidated Balance Sheet (April 2000)
Assets
Million Rp.
Cash
Inter-bank assets (BRI)
Loan portfolio
Other assets
%
535
1.2
Compulsory savings *
12,720
%
28.5
6,345
14.2
Savings deposits
3,197
7.2
36,797
82.4
Other liabilities
1,254
2.8
955
2.1
26,762
60.0
699
1.6
44,632
100.0
Equity **
TOTAL
Million Rp.
44,632
100.0
TOTAL
Source: Bank Rakyat Indonesia.
* Deducted as percentage of loan amount disbursed.
** Includes grants, reserves and profits not yet allocated.
123
Note that in many cases grants provided as start-up capital even reached Rp. 15 million.
177
As of April 2000, the aggregated TPSP loan
Table 6.10
TPSP
Loan
Portfolio
Quality (April 2000)
portfolio amounted to Rp. 36.8 billion.
36,797
According to BRI’s loan classification, half Loan portfolio (Rp. million)
of the entire loan portfolio was at risk. 27% Loan portfolio classification
of the loans and 20% of the total loan
Standard (%)
50.4
amount outstanding was classified as loss.
Sub-standard (%)
17.9
Doubtful loans contributed a further 13% to
Doubtful (%)
11.6
the number of loans and 12% to the loan
Loss (%)
20.1
amount outstanding. The consolidated
49.6
TPSP income statement does not show any Loan portfolio at risk (%) *
59.6
write-off costs and also loan loss provisions Number of loans at risk (%) *
costs (Rp. 83 million) are almost not Source: Bank Rakyat Indonesia.
* Includes loans not classified as ‘standard’.
accounted for. Thus, it can be assumed that
the TPSP industry operated at a high loss, although the balance sheet shows positive
returns for the first four months of 2000. Both the extremely bad loan portfolio quality,
the high dependence of grants, and the failure to mobilize significant amounts of
voluntary savings indicate that the TPSP generally have not succeeded to develop into
sound and sustainable institutions.
The ProFI microfinance appraisal mission to West Nusa Tenggara124 provided further
insight into the operation of TPSP. The 71 TPSP in this province operate under the
umbrella of 25 cooperatives and had average assets of only Rp. 6.6 million, though
they served 335 savings customers and 197 borrowers, on average. Both compulsory
and voluntary savings contributed 31% to their funds. 56% of their total loan portfolio
was at risk, and one quarter of the total loan amount outstanding was classified as loss.
The mission visited one KUD in the Bima district of Sumbawa, under which 5 TPSP are
operating. The KUD’s savings and credit unit served 2,217 customers from 9 villages.
The 5 TPSP were established in 1999 with a start-up grant of Rp. 15 million each. As of
June 2000, average assets amounted to Rp. 30 million, one third of which was
collected from members mainly through deductions from loans disbursed. The average
loan amount outstanding to 655 borrowers was Rp. 204,000. Without loan losses and
84% of the loan amount outstanding classified as standard, these TPSP performed
much better than the overall average.
The TPSP Ntonggo visited by the mission had 175 members and assets amounting to
Rp. 35 million. It operates from one desk in the village hall and opens once a week. Its
staff made a motivated impression. It performed very well. 90% of the loan portfolio
was classified as standard. Loans are provided for 12 weeks or 7 months with a
monthly interest rate of 2.8% flat. At the day of the visit the TPSP provided loans
amounting to Rp. 3.8 million to 8 borrowers. Scarce loanable funds did not allow
disbursing loans for more than once a week. Loan approvals are based on the
availability of funds and the number of loan application per day rather than on credit
demand.
124
See: Detlev Holloh, Appraisal of the Proposal “Development and Upgrading of Microfinance
Institutions in Indonesia”, Sub-Report 2: West Nusa Tenggara, Project Promotion of Small
Financial Institutions, Denpasar, September 2000.
178
The cooperative sector in general
Data and evidence produce three very different pictures of the cooperative sector. The
first picture shows small cooperatives and cooperative-like organizations, which have
grown ‘from below’, live on the participation and control of their members, and have
gradually expanded their financial capacities through reliance on own resources. They
are usually well performing financial intermediaries and have been able to provide
sustainable financial services without significant direct ‘guidance’, preferential
treatment and subsidies from the government. The Credit Unions are without any doubt
part of this picture.
The second picture shows the large number of cooperatives, which have been
managed by government officials and local influential persons without effective
participation and control of members. They have been flooded with targeted and
subsidized credit, and were not able or willing to rely on savings mobilization. The
prevailing mismanagement, corruption, interference and instrumentalization for external
purposes considerably deteriorated their performance and image. Most of these
cooperatives would not be able to sustain their operations, if preferential treatment and
subsidies are withdrawn.
The third picture shows moneylender-like savings & credit cooperatives, which are
privately owned ‘black’ banks rather than member-owned and –controlled
organizations. They are usually profitable organizations that provide easy and
expensive credit with strict credit collection procedures.
The number of some 50,000 cooperatives with some 20 million members and assets of
Rp. 10 trillion suggests a strong cooperative sector in Indonesia. The majority of these
cooperatives, however, are urban cooperatives, cooperatives of civil servants as well
as of white-collar workers and various professions. The more than 7,000 KUD do not
exclusively serve rural areas, and a large number of registered members do not
actively participate in these cooperatives. 30 years of government intervention,
preferential treatment and subsidies have eroded voluntarism, transparency,
democracy, self-reliance and independence as features of cooperative practice.
The political economy of the cooperative sector described above makes fast changes
in this situation improbable. Local officials have not yet changed their top-down
attitudes, are searching for new legitimations and sources of income, emphasize the
lack of cheap funds rather than the need for a sound and self-reliant cooperative
development. They are often not able or willing to carry out effective supervision and
enforce compliance with existing regulations.
The major constraint for a sound and self-reliant cooperative development is the
government-dependent system itself and the prevailing views of cooperative officials
rather than the lack of funds or human resources. Even policies aiming at developing
self-supporting savings & credit cooperatives125 focus on measures such as
125
See: Kebijakan bagi Koperasi dan PKM tentang Pembiayaan dan Pengembangan Koperasi
Simpan Pinjam (Policies of the Ministry of Cooperatives on Financing and Developing
179
cooperation with banks, revolving funds, access to liquidity credit, and training rather
than on measures required for increasing the autonomy, self-reliance and soundness
of cooperatives. Government support for a sound and self-reliant cooperative
development has to be appreciated. Direct intervention, preferential treatment and the
creation of fields of appropriation through subsidies and cheap credit, however,
undermine this development. The type of support required for enabling the
development of viable financial cooperatives is making rural financial markets
competitive, getting legal, regulatory and supervisory frameworks right, and strictly
enforcing compliance with regulations and prudential financial practices.
Regulation and supervision of cooperatives
The new cooperative regulations have increased the opportunity for cooperatives to
develop independently and in self-reliant ways. Provisions made on supervision and
financial soundness exist and can support the sound development of cooperatives.
However, there are still crucial problems with regard to both the regulations themselves
and their translation into practice.
Provisions made in the cooperative law legitimate direct government intervention into
the cooperative sector and even require the government to provide protection and
preferential treatment. The regulations also include provisions that tend to force small
informal groups with savings and credit activities into the formal cooperative sector.
Forced formalization should not be part of enabling regulatory frameworks. Small
village-level groups need time to learn managing their own funds, and often will not
develop into larger financial intermediaries. It is neither desirable nor realistic that the
state bureaucracy oversees some ten thousands of these groups.
A crucial problem of the existing regulations is that cooperatives are not prohibited from
mobilizing funds from the public, because they a) lack a clear definition of membership
and member candidates, b) allow providing financial services to members of other
cooperatives, and c) even explicitly speak of financial services to non-members. This is
also implied in the questionable provision that cooperatives will be licensed even
without having deposited the minimum paid-up capital provided that they render
services to members only. These provisions clearly contradict and undermine the
banking act. Together with the low capital requirements (Rp. 15 million compared to at
least Rp. 500 million for BPR), this has invited the establishment of moneylender-like
cooperatives. Managers of cooperatives that lack common bonds and internal control
are not used to prudentially handle money belonging to other persons. Loyalty to
relatives and influential local persons is often rated higher than protecting the interests
of deposit customers.
A further crucial problem is that existing regulations are not consequently translated
into practice and, most important, are not effectively enforced by the regional and local
offices of the Ministry of Cooperatives. Sanctions such as the withdrawal of the
business license are uncommon. While it is common that cooperatives do not report
according to schedule, the ministry’s offices appear usually not to take actions in such
Savings and Credit Cooperatives), Paper presented at a workshop on human resource
development, 24 June 2000.
180
cases. Consequently, reports and data available in these offices are often incomplete,
inconsistent and unreliable. The offices also appear to be over-burdened with the task
of carrying out on-site and off-site supervision for the large number of cooperatives.
Supervision and reporting instruments lack effectiveness and efficiency, and are
consequently not adequately applied. The major weaknesses of the cooperative
system are related to the lack of supervision and enforcement. The fact that these
functions have to be carried out by the same government organization that is also
responsible for providing guidance and channeling funds to cooperatives does not
contribute to improving this situation.
Bank Bukopin and its Swamitra partners
Bank Bukopin launched the Swamitra program only in 1998. Much of the high variance
in outreach and assets may be due to the short duration of many Swamitra
partnerships. The high losses incurred by some institutions may indicate that the
selection of Swamitra partners was not always carried out appropriately. The generally
low levels of savings mobilization and the high dependence of Swamitra partners on
Bank Bukopin funds seems to indicate that Swamitra have been understood as credit
channeling agencies rather than as independent financial intermediaries. Most
important appears to be that the findings described above do not show that Bank
Bukopin requires its partners to comply with prudential financial benchmarks such as
those applied in CAMEL rating systems for BPR and LDKP.
The vast majority of Swamitra partners are cooperatives; especially KUD that have
been used by the government to channel targeted and subsidized credit. Bank Bukopin
started the Swamitra program also to improve the public image of cooperatives by a
business-oriented and professionalized management system. As the cooperative
system lacks accountability, effective supervision and compliance with prudential
banking practice, the success of the Swamitra program depends highly on Bank
Bukopin’s own role in supervising its partners and enforcing sound management
practice. Furthermore, Swamitra partners would not be able to become successful and
growing financial intermediaries, if Bank Bukopin treats them as credit channeling
agencies, thus undermining the institutions’ own savings mobilization function.
Tempat Pelayanan Simpan Pinjam
The TPSP program is prudentially supervised by BRI. Reliable BRI data indicate that
the program suffers from typical weaknesses of programs aiming at setting up a large
number of institutions in short time. TPSP have been highly dependent on government
grants, and most of them have not been able to develop into sound and sustainable
institutions. The ProFI appraisal mission, however, found also well-functioning TPSP,
which meet the demand of villagers without access to other financial institutions. The
gap of sustainable financial services in rural areas exists at the village level. The TPSP
model may become a staring point for the development of village-level financial
institutions and deserves, as in the case of BKD and UED-SP (chapter 5), further
examination. The successful development of the model, however, requires wellmanaged and sound cooperatives as umbrella organizations as well as refraining from
using TPSP for channeling cheap government funds.
Chapter 7:
Banking and Microfinance
based on Syariah Principles
Syariah Banking and Microfinance
7. Banking and Microfinance based on Syariah Principles
7.1 Promotion and Development of Syariah Banking in Indonesia
The provision of financial services on the basis of Syariah principles (Islamic norms
and values) rejects the interest principle, as this principle is assumed to transfer the
entire risk to only one side of the creditor-debtor relationship. This argument is often
applied to credit interest and the transfer of risk to borrowers only. Syariah banking
aims at promoting justice and equality by sharing income or profit/loss in both lending
and deposit mobilization. Returns of loans depend on the income or profitability of the
borrower’s business, while returns on deposits are paid as a percentage of income or
profits of the financial institution. By bringing the viability of project proposals instead of
collateral into the focus of lending it is also expected that a broader range of the
population, including the poor, will get access to financial services.
Efforts to establish a dual financial system, which comprises both conventional and
Syariah financial institutions and services, were intensified in Indonesia in the early
1990s, when the financial system was being deregulated but a regulatory framework
for Syariah banking was not yet in place. The Banking Act of 1992 formalized the
objective of a dual banking system and authorized the establishment of profit-sharing
banks without, however, regulating their operations in detail. The Banking Act of 1998
and special regulations issued by Bank Indonesia in 1999 for both commercial banks
and people’s credit banks (BPR) operating on the basis of Syariah principles
substantially changed the regulatory framework. The latter regulations elaborate
operational aspects of Syariah banking in detail, but they do not differ from regulations
valid for conventional banks with regard to general requirements for establishing and
operating banks.126
The Banking Act of 1998 extended the definition of Syariah banks and made their
empowerment an explicit task of the government. Provisions are made for the
establishment of new Syariah banks, the conversion of conventional banks to Syariah
banks and the establishment of Syariah branches by conventional commercial banks.
All banks providing financial services based on Syariah principles are obliged to
appoint Syariah supervision boards with the task to ensure compliance with rules
determined by the National Syariah Board. Syariah banks are prohibited from providing
conventional financial services and from converting to conventional banks. Commercial
banks with Syariah branches have to separate the accounting of these branches from
the conventional activities of the bank.
Based on the Central Bank Act No.23 of 1999, which gives Bank Indonesia the
authority to develop Syariah banks, Bank Indonesia has been actively engaged in
promoting and strengthening the Syariah banking system through four strategies: 127
126
127
The two main regulations are: Surat Keputusan Direksi Bank Indonesia Nomor
32/34/KEP/DIR tentang Bank Umum Berdasarkan Prinsip Syariah Tanggal 12 Mei 1999 (for
commercial banks); Surat Keputusan Direksi Bank Indonesia Nomor 32/36/KEP/DIR
tentang Bank Perkreditan Rakyat Berdasarkan Prinsip Syariah Tanggal 12 Mei 1999 (for
people’s credit banks).
See: Bank Indonesia, The Policy and Progress of Sharia Banking Development, Jakarta,
August 1999.
a. strengthening and improving the legal and regulatory framework for the dual
banking system;
b. developing networks of Syariah banks to broaden access to Syariah banking
products and services, and creating an inter-Syariah bank market;
c. creating monetary instruments that support both monetary objectives at the
macro-level and operational objectives of Syariah banks;
d. promoting the Syariah banking concept to the public, and developing human
resources for Syariah banking.
Further support has been provided to small financial institutions operating according to
Syariah principles in the form of liquidity credit, first through Bank Indonesia and later
through PT. Permodalan Nasional Madani (PNM), the state-owned finance company to
which part of the liquidity credit programs was transferred in 1999/2000. PT. PNM
maintains a division for small and Syariah financial institutions, which finances and
places capital based on the income-sharing principle as well as managers and
commissioners in Syariah BPR, BMT (see below), Pesantren cooperatives (see
chapter 6), and secondary savings & credit cooperatives.128
Syariah commercial banks. Bank Muamalat was established in November 1991 and
was licensed as the first commercial Syariah bank by the Ministry of Finance in May
1992. In 1993, Bank Muamalat sponsored the establishment of the first Islamic
insurance company, Syarikat Takaful Indonesia, and became one of its shareholders.
In November 1999, Bank Susila Bhakti converted to Bank Syariah Mandiri, the second
Syariah commercial bank currently operating in Indonesia. As of September 2000, both
banks had 21 branches. Three conventional commercial banks (Bank Negara
Indonesia, Bank IFI and the Regional Development Bank in West Java) had
established 7 full-fledged Syariah branches. According to Bank Indonesia, also other
commercial banks (Bank Tabungan Negara, Bank Rakyat Indonesia, Bank Bukopin,
Bank Niaga) have shown interest in setting up Syariah branches.129
Syahriah BPR. In the early 1990s the Moslem mass organization Nahdlatul Ulama
started to set up Syariah BPR in cooperation with Bank Summa, which later was
liquidated as a result of one of the country’s biggest bank scandals. The objective of
establishing 2,000 new Syariah BPR130 could by far not be achieved. As of September
2000, only 79 of the 2,426 BPR in Indonesia operated on the basis of Syariah
principles. The number of Syariah BPR had increased only by 8 institutions since
March 1997. 47% of the 79 Syariah BPR are concentrated in West Java (17) and the
greater Jakarta area (20), and a further 28% are located in East Java (6), South
Sulawesi (6), Aceh (5) and North Sumatra. According to Bank Indonesia reports, 39 of
the 79 Syariah BPR operated at a loss as of March 2000.
128
129
130
See: T. Fauzan, PT. PNM, Konsep Permodalan Madani Dalam Pengembangan Lembaga
Keuangan Mikro, Seminar dan Lokakarya Memberdayakan Ekonomi Rakyat Melalui
Keuangan Mikro, Bandung, September 2000.
See: Bank Indonesia, Laporan Triwulan II and Laporan Triwulan III, 2000 (quarterly reports
of Bank Indonesia).
See: BPR dan Pelepas Uang, Kompas, 27 June 1990.
Apart from Syariah banks, there are also non-bank microfinance institutions and
microfinance programs providing financial services based on Syariah principles. The
most important non-bank microfinance institutions in this respect are the Baitul Maal
wat Tamwil (BMT), which are organized by the national non-government institution
Yayasan Inkubasi Bisnis Usaha Kecil (YINBUK) and its regional chapters. The
government of West Java in cooperation with its Regional Development Bank has
recently initiated a microfinance project (Dakabalarea) that works according to Syariah
principles. Both approaches as well as the microfinance activities of Bank Muamalat
will be described in the following.
7.2 Bank Muamalat Indonesia (BMI)
The establishment of Bank Muamalat Indonesia (BMI) was initiated by the Indonesian
Council of Ulamas (MUI) and realized in November 1991.131 After a phase of
preparation and training of executives and staff in cooperation with Bank Islam
Malaysia, the bank obtained a business license in May 1992 and started to operate
with an initial paid up capital of Rp. 106 billion. BMI received support from President
Suharto, the Association of Indonesian Muslim Intellectuals (ICMI), and the Muslim
business community. Among the 227 founding shareholders were ministers and exministers of the Suharto government as well as several business tycoons of or closely
related to the Suharto family.
BMI formulates its mission as to “assist in the development of the nation's economy,
primarily, by enhancing the role of the Muslim people and entrepreneurs and maximize
its economic value to its shareholders, while addressing its social responsibilities, in
line with Islamic teachings.” BMI also “strives to be a catalyst in developing viable
Islamic financial institutions.” BMI products were designed with emphasis on the
promotion and servicing of small and medium enterprises. BMI’s deposits and financing
products cover the entire range of banking services. BMI provides returns on
investments (deposits) as a percentage of its gross income. Time deposits below Rp. 2
million or USD 1,000 are rewarded with an income share of 60%. With regard to larger
time deposits the percentage income share varies according to deposit maturities. The
individual customer is rewarded in accordance with his/her share in the total amount of
funds mobilized from third parties.
BMI partnership with Syariah BPR and BMT (Muamalat-Net)
BMI’s concept of developing outreach to various population groups, small and micro
enterprises is called Muamalat-Net, a network between BMI, Syariah BPR, BMT and
Syariah cooperatives, and aims at supporting the economy of the Muslim community.
Within this network, BMI provides refinance to BMT and takes over financing contracts
(loans) exceeding Rp. 50 million. Syariah BPR are responsible for financing borrowers
with amount between Rp. 5 and Rp. 50 million, and BMT finance borrowers with
amount of up to Rp. 5 million. The concept includes the upgrading of customers to the
next higher level and institution.
131
The following information was mainly obtained from the BMI website and: Bank Muamalat
Indonesia, Peran Lembaga Keuangan Syariah Mitra (BPRS&BMT), Presentation of the
Mualmalat-Net Concept, without year.
Commercial financing is provided to developed small-scale enterprises by BMI or in the
form of two-steps loans through Syariah BPR. BMI and Syariah BPR function as sales
points or channeling agencies of subsidized financing programs such as those for
cooperatives and their members. Syariah cooperatives/BMT finance microenterprises
and target groups below the poverty line with funds obtained from poverty alleviation
and social safety-net programs. Furthermore, Syariah BPR and BMT function as
payment points for BMI services such as collecting phone and electricity payments.
7.3 Yayasan/Pusat Inkubasi Bisnis Usaha Kecil (YINBUK/PINBUK)
Yayasan Inkubasi Bisnis Usaha Kecil (YINBUK) or the Foundation for the Incubation of
Small Businesses is a non-government organization, which was founded by the
chairman of the Indonesian Council of Ulamas (MUI), the chairman of the Association
of Indonesian Muslim Intellectuals (ICMI), and the general director of Bank Muamalat
Indonesia in March 1995. Its founder board includes B.J. Habibie, the former president,
and its board of advisers consists of former central bank governors and directors,
former finance and other ministers, university professors, and business tycoons. The
objectives of YINBUK include developing human resources, the people’s economy, and
businesses in the field of finance, savings and credit; and the real sector. Its major
target groups are micro businesses (annual turnover less than Rp. 50 million) and
small businesses (annual turnover of Rp. 50 to Rp. 500 million).
Pusat Inkubasi Bisnis Usaha Kecil (PINBUK) are operational boards of YINBUK
operating at the national and provincial level. The national PINBUK is responsible for
formulating and promoting the BMT concept; designing BMT development models;
designing and implementing training; monitoring and evaluating BMT performance;
establishing links to various other institutions and resources; providing business
certificates to BMT and protecting the operations of BMT without legal status. Each
regional PINBUK has its own boards of founders and advisers, and is legally and
organizationally independent from the head office.
The promotion and establishment Baitul Maal wat Tamwil (BMT) as non-bank savings
and credit institutions based on Syariah principles was initiated in response to the
failure to rapidly expand Syariah bank networks and to the experience that the majority
of the Moslem population, especially low-income groups, had no access to financial
services based on Syariah principles.132
7.4 Baitul Maal wat Tamwil (BMT)
7.4.1 General Description
The term Baitul Maal wat Tamwil expresses the BMT’s social and business mission.
The social mission, traditionally known as baitul maal, consists of the cost-free use of
donations (zakat, infaq, shodaqah,) mobilized from the public. The business mission,
traditionally known as baitul tamwil, where deposits mobilized are commercially used
132
The following description refers to: Pusat Inkubasi Bisnis Usaha Kecil (PINBUK),
Pemberdayaan Ekonomi Rakyat Melalui Pembinaan Balai Usaha Mandiri Terpadu (B.M.T.)
Dalam Rangka Mempercepat Pengentasan Masyarakat Dari Kemiskinan. Pusat Inkubasi
Bisnis Usaha Kecil (PINBUK) Sulawesi Selatan, Sistem dan Prosedur Operasional BMT dan
Program Kerja PINBUK-BMT Sulawesi Selatan 2000-2003, Makassar, June 2000.
and placed to productive investments. Sometimes BMT is also used as the
abbreviation of Balai Usaha Mandiri Terpadu or Center for Self-reliant and Integrated
Business development, thus pointing to self-reliance and integrated assistance as
principles of services provided on the basis of revenue or profit sharing.
In December 1995, President Suharto declared the BMT program as a national
movement aiming at empowering the people’s economy through institution building and
small business development. In the same year, Bank Indonesia and YINBUK signed a
memorandum of understanding through which BMT were given the opportunity to
participate in the Linking Banks and Self-help Groups program.
The roles and tasks of BMT are seen in developing human resources and supporting
small businesses by identifying viable businesses and potential microentrepreneurs,
identifying their business needs and investment opportunities, assisting in preparing
business plans and providing business consultancy, mobilizing funds from the public,
providing or facilitating access to financial services and marketing channels,
disseminating information and providing training.
7.4.2 Organization and Supervision
BMT are modeled on cooperative principles, but not all BMT operate as a legal entity.
The establishment of a BMT has to be attested by a notary and, if not yet registered as
a legal entity, receive a business certificate from the regional PINBUK. BMT statutes
are standardized and include subjects such as identity, area of operation, objectives,
and business activities based on Syariah principles. Sources of funds are determined
as shares of the founding members, compulsory and voluntary savings, donations,
loans, and retained profits. The mobilization of voluntary savings, borrowing from other
sources of funds, and lending must be based on Syariah principles. 2.5% of annual
profits have to be donated (zakat), and a minimum 10% (after zakat and tax) each have
to be allocated to reserves and to compensation funds for management and
commissioners. The allocation of the remaining profits is subject to decisions of the
general meeting of members.
Membership is limited to the working environment of a BMT. In accordance with the
cooperative law, the establishment of a BMT requires at least 20 founding members.
Larger BMT split their members into sub-groups. BMT members must be willing to
deposit money as working capital and to accept the principles of joint liability. The
member assembly is the highest authority of the BMT organization and has to be
carried out at least semi-annually. Decisions are taken by the one-member-one-vote
principle. It is important to understand that a difference is made between founding and
other members, which are entitled to receive BMT services. It seems that only founding
members are involved in decision-making processes.
The (founding) member assembly elects a supervisory board or board of
commissioners, which represents the founding members and determines general
policies during meetings, which have to be carried out at least once a month. The BMT
management consists of at least three persons but, depending on BMT size, may
comprise the following six positions: 1) general manager, who is responsible for BMT
operations, work planning, operational policies, reporting and financing (loan)
approvals; 2) financing manager, who is responsible for servicing, guiding and
supervising borrowers as well as for planning, analysis and reporting in the field of
financing; 3) fund manager, who is responsible for the design of deposit products, fund
mobilization and administration; 4) accountant, who is responsible for the financial
administration and reporting, and the calculation of income and profit sharing; 5)
cashier, who is responsible for financial transactions and daily cash administration; and
6) real sector manager, who is responsible for marketing and dissemination market
information.
BMT operations are supported by detailed job descriptions, standardized administration
and procedures, and operating manuals, which describe the accountancy system,
explain each account and accounting procedures, and introduce financial statements
and reporting formats. The BMT are required to prepare monthly reports and forward
them to the regional PINBUK. PINBUK functions as the BMT regulator and supervisor.
On-site inspections should be carried out at least semi-annually. Transportation and
accommodation costs of supervisors have to be fully borne by the BMT. In South
Sulawesi all operating costs of PINBUK (Rp. 11.8 million per month) are covered by the
BMT depending on their net profits (from 27% of net profits up to Rp. 200,000 to 13%
of net profits of more than Rp. 2 million).
7.4.3 Number, Outreach and Financial Situation
The national PINBUK made available BMT data for November 2000. Information about
loan portfolio quality and the soundness of BMT was not available. The author had also
the opportunity to visit the PINBUK in South Sulawesi and two of its BMT.
PINBUK reports the outstanding number of 2,914 BMT, whereas only 879 BMT
reported to PINBUK and are included in the financial statistics. The information made
available by PINBUK does not clarify whether the remaining vast majority of BMT did
only fail to report or have terminated their operation. According to another source133
only 30% of the BMT established since the beginning of 1990s are still operating.
Furthermore, the national PINBUK reports a higher number of BMT for South Sulawesi
than the information made available by the regional PINBUK (see below). Therefore, it
is most likely that the national data considerably overstate the number of existing BMT.
The following description refers only to the 879 BMI, for which financial data were
made available.
BMT operate in all of the Indonesian provinces, but more than half of the 879
institutions BMT are located in Java (451) with a high concentration in West Java (154)
and Jakarta (100). BMT are also strongly represented in South Sulawesi (115). The
only other stronghold in East Indonesia is West Nusa Tenggara (54). This 70% of the
BMT are concentrated in Java and the latter two provinces.
As of November 2000, the average BMT had an outreach to 199 deposit customers
and 83 borrowers. These averages, however, vary considerably between the regions.
The BMT in Kalimantan had 454 deposit accounts and only 70 loan accounts, whereas
the BMT in the eastern parts other than Sulawesi had 220 loan accounts and 223
deposit accounts, on average. The ratio between loan and deposit accounts shows an
133
Tazkia Institute, BMT: Terus Maju atau Mundur, October 2000.
even higher variance between the provinces, ranging from 1:0.7 in Irian Jaya to 1:18 in
Bali. The average number of loan accounts per BMT ranged from below 10 in Riau and
Central Kalimantan to 1,328 in Irian Jaya. The average number of deposit accounts per
BMT ranged from below 10 in Riau to 943 in Irian Jaya.
Table 7.1
Number and Outreach of BMT (November 2000)
Sumatra
Java &
Bali
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
Number of BMT
427
2,061
64
225
137
2,914
Number of reporting BMT
141
466
26
163
83
879
17,331
79,483
11,814
47459
18,495
174,582
Average number per BMT
123
171
454
291
223
199
Avg. amount per acc. (Rp. ,000)
149
128
438
559
97
265
8,109
30,883
1,826
14,284
18,239
73,341
58
66
70
88
220
83
412
384
2,778
1,948
172
698
Indicator
Deposit accounts
Number of accounts
Loan accounts
Number of accounts
Average number per BMT
Avg. amount per acc. (Rp. ,000)
Source : Pusat Inkubasi Bisnis Usaha Kecil, Jakarta.
According to the data provided by the national PINBUK, BMT customers had deposited
an average amount of Rp. 265,000. Average deposit amounts were lower than Rp.
200,000 in 19 of the 26 provinces, whereas they were larger than Rp 1 million in
Central Kalimantan (Rp. 1.2 million) and Riau (Rp. 4 million). The average loan amount
outstanding was Rp. 698,000 for the entire BMT industry, while it ranged extremely
from Rp. 84,000 in Central Java to Rp. 27.5 million in Riau.
The interpretation of this extremely high variance in outreach scope and depth is not
easy. It is likely that the BMT industry consists of institutions that have operated for
many years as well as of institutions that were only recently established. BMT are
urban and rural institution, and operate in economically favorable or less favorable
regions. Apparently, they serve both low-income households and clients with rather
high savings and credit absorption capacities. The variance in loans to deposit ratios,
both in number and amount, points to different types of financial intermediation. There
are BMT with low degrees of savings mobilization and scarce loanable funds. Other
institutions collect many small savings from a large number of customers in order to
serve fewer borrowers with larger loans. And there appear to be BMT that collect large
deposit amounts from few customers to serve few borrowers with large loans.
It is necessary to point to a further possibility of this variance, namely the lacking
reliability of the national statistics. Calculations could only be made on the basis of
regionally aggregated data. These provincial data reveal some inconsistencies and
improbabilities that point into this direction. One example is the case of Riau where,
according to the national PINBUK data, 36 BMT had 2 borrowers with loan amounts
outstanding of Rp. 27.5 million, on average.
Table 7.2
Assets and Balance Sheet Structure of BMT (November 2000)
Sumatra
Java &
Bali
Kalimantan
Sulawesi
Other E.
Indonesia*
Total
5,390
19,156
6,872
54,887
4,532
90,836
38
41
264
337
55
103
3,338
11,846
5,073
27,820
3,142
51,219
As % of assets
61.9
61.8
73.8
50.7
69.3
56.4
Deposits (Rp. million)
2,589
10,194
5,170
26,511
1,790
46,254
As % of assets
48.0
53.2
75.2
48.3
39.5
50.9
Equity (Rp. million)
2,102
5,729
824
2,537
2,075
13,267
As % of assets
39.0
29.9
12.0
4.6
45.8
14.6
Indicator
Assets (Rp. million)
Average per BMT (Rp. million)
Loan portfolio (Rp. million)
Source : Pusat Inkubasi Bisnis Usaha Kecil, Jakarta.
The vast majority of BMT are tiny financial institutions, with average assets amounting
to less than Rp. 50 million in 16 provinces and exceeding Rp. 100 million in only 4 of
the 26 provinces. With average assets between Rp. 320 million and Rp. 465 million,
the BMT in East Kalimantan, Irian Jaya and South Sulawesi have reached a financial
volume comparable to that of smaller BPR.
As of November 2000, the 879 BMT had 56% of their total assets invested in the loan
portfolio. Loans to assets ratios per province usually ranged between 50% and 80%.
The BMT in Jambi, Bengkulu, East Java and Southeast Sulawesi, however, had placed
less than 40% in their loan portfolios. Information of loan portfolio quality was
unfortunately not available.
Deposits contributed 51% and equity capital 15% to the industry’s total liabilities and
equity. Information on loan capital and profits was not available. Based on the data
available it can be estimated that loan capital made up between 25% and 30% to total
BMT funds. In the provinces of Yogyakarta, Bali and West Kalimantan deposits
financed more than 70% of assets, whereas more than 70% of the BMT funds in Jambi
and Bengkulu were made up of equity. Loan capital contributed more than 50% to the
total liabilities and equity of the BMT in East Java and Southeast Sulawesi.
While more than half of the 879 BMT are located in Java, South Sulawesi is the
stronghold of the BMT industry in terms of financial capacity. It is striking that more
than 50% of the assets, deposits and loans outstanding of the reporting BMT is
concentrated in this province. With average assets of Rp. 465 million, the BMT in South
Sulawesi exceed average assets of the entire industry by almost 5 times, although their
outreach in terms of loan accounts is not higher than the overall average and their
outreach in terms of deposit account is only 1.5 times as high as the overall average.
The author visited the PINBUK in South Sulawesi and two of its BMT during a ProFI
appraisal mission. Some findings of this mission are presented below.134
134
See also: Flora Giassemi, Wolfram Hiemann and Detlev Holloh, Appraisal of the Proposal
7.4.4 BMT in South Sulawesi
The data made available by the PINBUK in South Sulawesi differ considerably from
those provided by the national organization. PINBUK South Sulawesi has been aiming
at establishing 368 BMT, but only 93 BMT were operating as of June 2000. These
institutions had a total amount of assets of Rp. 23 million or Rp. 247 million, on
average. Though the national statistics were prepared for November 2000, it is most
unlikely that the BMT in South Sulawesi experienced the outstanding growth indicated
by the national statistics within four months only. This questions the usefulness of the
national statistics. Also the regional report did not make a good impression. It did not
follow the standards determined in PINBUK/BMT manuals, were partly inconsistent and
incomplete. Data were up to date (June 2000) for only 37 of the 93 BMT, while other
information was derived from BMT reports dating back up to February 1999.
Nonetheless, the report and additional
information collected during the mission
provide a rough overview of the
structure of the BMT industry in South
Sulawesi. The vast majority of the BMT
are tiny institutions, which resemble
self-help groups rather than non-bank
financial institutions. 59% of the BMT
had assets smaller than Rp. 50 million,
and in a further 12% of the cases
assets did not exceed Rp. 100 million.
Table 7.3
BMT in South Sulawesi (June 2000)
Number of BMT
Average assets (Rp. million)
93
247
< Rp. 50 million (% of BMT)
59.1
Rp. 50 – < Rp. 250 million (% of BMT)
25.8
Rp. 250 – Rp. 500 million (% of BMT)
9.7
> Rp. 500 million (% of BMT)
5.4
Loan portfolio as % of assets
62.9
Average number of loan accounts
134
Small trading loans (%)
73.3
A large number of the tiny institutions
1.2
are Pesantren (Islamic schools) pre- Average amount per account (Rp. million)
cooperatives or cooperatives. These Deposits as % of assets
62.9
small group-like BMT often highly Loan capital as % of assets
25.9
depend on access to governmental
Equity as % of assets
9.8
credit programs as a source of funds.
Profits as % of assets
1.4
Sometimes they seem to have been
Source: Pusat Inkubasi Bisnis Usaha Kecil, Makassar.
established because of this opportunity.
Examples for this sort of BMT are two Pesantren pre-cooperatives, which had 20 and
31 members and assets of only Rp. 8 million each. 63% of their total funds consisted of
loans received from a governmental poverty alleviation credit program, whereas
deposits contributed only 5% to their total liabilities and equity. A similar situation was
found in three non-BMT Pesantren cooperatives, which had received Rp. 15 million
each from this credit program, while their assets amounted to between Rp. 15 million
and Rp 20 million only.
At the other end of the scale are a few BMT with assets comparable to that of BPR.
10% of the institutions had assets between Rp. 250 million and Rp. 500 million, and in
5% of the cases assets exceeded Rp. 500 million. The largest BMT in South Sulawesi
had assets amounting to Rp. 4 billion. It had reached this size mainly by an outstanding
success in savings mobilization. Deposits financed 79% of its assets. 58% of its assets
were loans outstanding to only 235 borrowers. With an average amount of loans
outstanding of Rp. 9.9 million, the institution seems to serve a clientele rather different
from that suggested by the poverty alleviation objective of PINBUK. Two other large
BMT with assets exceeding Rp. 1 billion served their borrowers with lower loan
amounts. The average loan amounts outstanding of Rp. 1.2 million in the first and Rp.
2.4 million in the second case, however, are still considerably higher than usually found
in microfinancial institutions. A major difference between the latter two BMT was the
degree to which they mobilized savings. Deposits contributed 75% to total liabilities and
equity of the first institution, whereas the second institution depended mainly on its
equity capital and loan capital as sources of funds. Deposits contributed only 3% to its
total liabilities and equity.
7.5 The Dakabalarea Program of the Government of West Java 135
Dakabalarea is the acronym of the development strategy formulated by the government
of West Java.136 The Dakabalarea credit program is intended to contribute to this
strategy, in general, and to empowering micro and small entrepreneurs through easy
access to financial services based on Syariah principles, in particular. The program
was launched in August 1999 and was a response to the ongoing financial and
economic crisis.
The Dakabalarea program is essentially a rotating fund (Rp. 12 billion) fully financed by
the government, with the Regional Development Bank (BPD) of West Java functioning
as the channeling agency. The rotating fund is accompanied by a support system
consisting of government agencies at various levels and university graduates, who
were recruited for this purpose and are responsible for the preparation of business
proposals and loan applications.
Finance is provided to groups of micro and small entrepreneurs (5 to 15 members)
through “People’s Economy Institutions” (cooperatives of Muslim organizations, BMT
and NGOs). Project proposals are assessed on the basis of business viability. 10% of
the loan principal has to be deposited as partial collateral. Group and member savings
are not required to access finance.
Loans usually have a term of one year, and the maximum loan amount is set at Rp. 2
million. The sharing of profit is agreed upon between the borrower and the bank, and is
limited to a maximum of 10% of the loan principal per year. The bank does not
participate in profit sharing. The government bears the entire risk and compensates the
bank with a fee equivalent to 1% of the loan amount disbursed. Loan loss provisions
are not made. The profit share received from borrowers is allocated to the groups and
“People’s Economy Institutions” (50%), to the technical guidance teams (25%), and to
the technical support staff (25%).
135
136
Sources: Pemerintah Propinsi Jawa Barat, Dakabalarea sebagai Program Pemberdayaan
Ekonomi Rakyat; Iwan Abdurrahim, Bank Jabar Tasikmalaya, Dakabalarea; Bambang
Sutrisno, Konsultan BI Bandung, Evaluasi Program Kredit Dakabalarea. The papers were
presented at the Seminar dan Lokakarya Memberdayakan Ekonomi Rakyat melalui
Keuangan Mikro, Kerjasama Bank Indonesia Bandung, Pusat P3R Yayasan Agro
Ekonomika, Bandung, Pemerintah Propinsi Jawa Barat, 7 - 8 September 2000.
The strategy consists of six objectives: sufficiency in food supply, increase of purchasing
power, improved quality of human resources, improved public services, continuous reform,
and development of productive businesses to alleviate poverty and increase welfare.
As of July 2000, the program had disbursed Rp. 9.3 billion to 10,113 borrowers in 714
groups. Loans outstanding amounted to Rp. 8.6 billion and arrears to Rp. 112 million.
The average loan size was Rp 13.1 million per group and Rp. 924,000 per member.
Between different program areas, individual loan amounts ranged from Rp. 237,000 to
Rp. 3 million.
A program evaluation carried out by a Bank Indonesia team in April 2000 stressed that
the Regional Development Bank will make a loss of about Rp. 132 million on the
rotating fund of Rp. 12 billion. Despite the high subsidies the program tends to become
decapitalized as costs exceed income derived from profit sharing. The program
operates with a technical support staff of 182 university graduates, while the evaluation
team regards a number between 64 and 96 persons as optimal. Other constraints
identified are the bureaucratic program organization involving too many parties to
ensure fast credit procedures. It is argued that the lacking incentive system has been
deteriorating motivation and quality. Groups do not have to mobilize savings internally,
thus often being established only for the purpose of getting access to finance.
An interesting observation made by both the evaluation team and the BPD branch in
Tasikmalaya is the difficulty of making the profit sharing principle acceptable to
intermediaries and borrowers. As people are used to calculate and compare costs of
borrowing in the form of interest rates, the costs of profit sharing are often thought to be
higher than comparable interest rates. Many groups have not yet understood the profit
sharing principle and find it too difficult to calculate profit, particularly because proper
records for their members’ micro businesses are not available.
The Indonesian Government and Bank Indonesia have been promoting banking and
microfinance on the basis of Syariah principles since the 1990s. This promotion was
also accompanied by the hope that a dual banking system and non-interest-based
financial services would contribute to alleviating systemic problems incurred during the
financial and economic crisis, such as high costs of funds, negative interest margins
and the standstill of financial intermediation.137 Various Moslem organizations have
been especially promoting Syariah BPR with the aim to establish several thousands of
these institutions. With regard to microfinance it was hoped that non-interest-based
financial services would be better able to reach microentrepreneurs and the poor as
well as to contribute to equitable development.
These objectives could not yet be realized. The development of Syariah banks, with
only 2 commercial banks and 79 BPR, is still in a rudimentary stage. The financial and
economic crisis has also adversely affected Syariah banks. There is no sign that
Syariah banks have been performing better than conventional banks. As mentioned
above, more than half of the Syariah BPR operated at a loss as of March 2000.
According to Bank Indonesia (see last footnote), the development of Syariah banking
has been suffering from three major problems, namely a) the problem that benefits
offered by Syariah banks have not been fully recognized by the public that is still used
137
See: Bank Indonesia, The Policy and Progress of Sharia Banking Development, Jakarta,
August 1999.
to conventional banking services, b) the lack of Syariah banking infrastructure such as
inadequate networking and the lack of liquidity and monetary instruments, and c) the
lack of human resources and expertise for Syariah banking.
The major argument used in Indonesia to promote financial services based on Syariah
principles has been that loan interests transfer the entire risk to the borrower. While
prudential Syariah financing can certainly claim certain advantages, the argument often
neglects the fact that all types of banks are exposed to the risk that the loan principle
may not be repaid in cases of business failures or moral hazard. This risk cannot be
transferred and has been experienced by both Syariah and conventional banks,
especially during the financial and economic crisis. The argument also tends to ignore
that both sides of financial intermediation have to be taken into account. In the case of
bank failures, unprudential lending and deteriorating profitability of Syariah banks, risks
are transferred from the bank to deposit customers.
These theoretical advantages or disadvantages, however, are not crucial for the
current development of Syariah banking and microfinance in Indonesia. Prudential
management practice and effective supervision given, it can be expected that Syariah
banking will grow in the future and become a viable alternative to conventional financial
institutions. A major problem, especially with regard to Syariah microfinance initiatives,
appears to be that fallacies of conventional microfinance have been continued.
The first fallacy is to focus on quantitative objectives, which are determined by
normative decisions taken at central levels without taking into account local conditions.
This has not resulted in a high growth of sustainable financial institutions. The
performance of Syariah BPR, BMT and the Dakabalarea program is less than
satisfying.
The second fallacy is the high emphasis on credit. Great parts of the microfinance
world in Indonesia have not yet discovered voluntary savings as the second side of
microfinance. Microfinancial institutions of any type will fail to grow and to sustain their
function as independent financial intermediaries, when they do not meet the demand
for various savings instruments and focus on savings mobilization.
The third and related fallacy is to understand microfinance as the channeling of credit
funds made available by the government. Many BMT highly depend on these funds or
even were established because such funds were available. The Dakabalarea program
focuses on quantitative credit targets, while ignoring profitability, viability and
sustainability. The author is not aware of examples where the long history of
channeling governmental credit funds, especially of targeted and subsidized credit, in
Indonesia has resulted in a sustained and growing access to financial services,
particularly for low-income groups. Instead, programs become decapitalized and the
development of viable institutions is undermined.
The fourth fallacy is that concepts and instruments are often well designed but in
practice not effectively applied. This is the case for the internal management of
programs and institutions as well as for external supervision. A major problem in this
context is the prevailing low quality of information systems or the bad quality of
information produced by such systems.
Chapter 8:
Towards a Microfinance Sector Strategy:
Major Issues and Elements
Microfinance Sector Issues and Strategy
8. Towards a Microfinance Sector Strategy: Major Issues and Elements
8.1 Major Microfinance Sector Issues
8.1.1 Demand for Microfinance Services
The demand for microfinance services varies between and within regions. Though
thorough studies are required to assess local conditions of developing viable
microfinance institutions, it is safe to argue that the existing demand is only partly met
by institutional microfinance and provides the opportunity to either expand the outreach
of existing microfinance institutions or to establish new microfinance institutions. This is
also reflected in the sustained role of informal credit and its high interest rates, the
rationing of scarce loanable funds often found in small financial institutions and credit
programs, the prevailing role of program credit, the difficulties of savings and credit
groups in meeting their members’ credit demand, the need of microfinance programs to
upgrade their clientele to more sustainable microfinance providers, and the high
transaction costs of households to access institutional microfinance in remote areas.
Demand for microfinance services is not a general demand but a demand of a
particular clientele in a particular location for a particular savings or loan product. This
is often not reflected by centrally designed credit programs and products of small
financial institutions. Low-income households first of all need savings instruments that
enable them to effectively manage their liquidity and finance special expenditures. This
demand for savings instruments is often confused with the demand for business credit.
The microfinance sector comprises borrowers with highly varying credit absorption and
repayment capacities. The microcredit clientele ranges from tiny family businesses
characterized by subsistence orientation, low productivity and high volatility to fastgrowing businesses with features such as entrepreneurship, differentiation from the
household economy, and the potential to graduate to the small enterprise sector.
At the bottom of this scale are households that are the typical target group of poverty
alleviation programs. Both the high credit risk and the non-financial needs of this
clientele require program interventions that include more than credit alone. At the top of
this scale are borrowers who have grown out of poverty and have access to BRI units.
In between are various sub-groups of low-income households and microentrepreneurs
that are potential customers of both microfinance programs and microfinance
institutions. The boundaries between these levels are fluid and microcredit may
contribute to upgrading clients to higher levels.
The crucial issue to which this rather theoretical model would like to point is the need
for a microfinance strategy that reflects the varying and dynamic local demand for
microfinance services, works with multiple and locally adjusted approaches to giving
different clienteles access to appropriate microfinance programs and institutions, and
focuses on upgrading clients from microfinance programs to viable microfinance
institutions, thus sustaining their access to microfinance services.
8.1.2 Supply of Institutional Microfinance
BRI Unit System. With its sound, profitable and self-sustained network of 3,700 units
and an outreach to some 25 million customers the BRI unit system is the backbone of
the rural financial system in Indonesia. Especially the units’ savings products allow a
large number of low-income households to effectively manage their liquidity. However,
the system’s outreach to the village level is limited, and BRI’s risk-averse lending policy
concentrates credit outreach to borrowers with sufficient collateral and fixed income.
The future challenge of the unit system is to increase outreach in breadth and depth,
while maintaining its financial self-sustainability. The high profitability and liquidity of the
system given, it is not unreasonable to expect BRI adopting a less risk-averse lending
policy and expanding the units’ credit outreach to rural low-income clients.
BPR. With almost 2,500 institutions the BPR industry has become an indispensable
financial sub-system in Indonesia. Besides BRI units, BPR are the only banks with a
significant outreach to the sub-district level. In some areas they account for one third of
the banking industry’s total loan amount outstanding. Nonetheless, the BPR industry
has not realized the idea of the 1988 banking reform to develop into a secondary
banking system with a nationwide outreach to rural low-income groups and the village
level. The industry is highly concentrated in Java and Bali, and has been mainly
operating in urban and business centers. At least a quarter of the industry is unsound,
and its unviable part still has to be cleaned up in order to overcome the industry’s
crisis. A considerable part of the remaining institutions face problems such as weak
management, low capitalization, lack of savings mobilization and market-orientation.
The expansion of the BPR industry through the establishment of new institutions,
particularly in economically less favorable areas, is almost impossible since the at least
tenfold increase in capital requirements in 1999.
LDKP. With only a few exceptions the development of LDKP remained limited to Java
and Bali, and they also lost must of their relevance in Java since LDKP were required
to convert to BPR. Currently, the Balinese LPD make up 57% of the 1,600 still active
LDKP, and they operate with 77% of their assets and 85% of their deposits. LDKP
other than the LPD have considerably suffered from the conversion of their best
performing units to BPR. The remaining LDKP industry outside of Bali is characterized
by low loan portfolio qualities, low profitability, lack of savings mobilization (except of
the BKK in Java), and bureaucratic governance. Their outreach to low-income groups,
particularly at the village level, is limited. The analysis of the LDKP industry showed
that it will a non-growing industry without the introduction of attractive savings
instruments and market-oriented strategies to expand outreach to the village level. It
will be an unsustainable industry without the enforcement of prudential banking
practice. And, it will be a dying industry without creating a new regulatory framework
giving non-bank microfinance institutions the necessary room to move and grow.
The Government of Bali has resisted converting LPD to BPR. The LPD system is the
most successful and the only viable system of village-level financial institutions in
Indonesia. The vast majority of LPD has evolved into competitive institutions in a
province that has the highest density of financial institutions in Indonesia. Their
character as community-owned, -operated and -controlled financial institutions as well
as their high emphasis on savings mobilization makes the difference to other non-bank
microfinance institutions. The LPD system can be regarded as a model, though not a
blueprint, for the development of non-bank microfinance institutions at the village level.
BKD. Though about 4,500 BKD operate in some 20% of the villages in Java, the BKD
industry lacks dynamism and tends to loose its role in the rural financial system. Its
organization, operations and products have not been adjusted to the changing local
economy and demand for financial services. Without savings mobilization, prudential
lending practices, and market-oriented management, the vast majority of BKD have not
been able to grow and to develop into effective financial intermediaries. Contrary to the
LPD in Bali, BKD depend on decisions of the village bureaucracy, lack effective internal
control and a sense of ownership and trust among the village population. BKD were
recognized as BPR, but they are neither regulated nor supervised as banks. Adequate
support systems for transforming them into functioning banking institutions do not exist.
A vision of transforming the BKD system into a network of sustainable financial
intermediaries is presently missing. The realization of such a vision would require
getting framework conditions right, getting adequate training and support systems in
place, strengthening community ownership, reforming the BKD organization and
management, focusing on savings mobilization, and developing innovative products in
accordance with the real demand of the potential BKD clientele. Above all, it would
require the political will to achieve this objective. This will is currently not reflected in
the preferential promotion of cooperatives and the high emphasis on credit channeling.
UED-SP. The UED-SP program has been a top-down approach to establishing or
decreeing the establishment of village-level institutions nationwide and in short time.
The UED-SP is not owned and controlled by the village community. This together with
the emphasis on credit channeling has not resulted in the development of a viable
system of village-level financial institutions. The information and supervision systems of
the program are weak. There is no reliable information about the number of still
operating UED-SP and their performance. Therefore, it is not clear whether existing
UED-SP can serve as a starting point for the development of non-bank microfinance
institutions at the village level. This development would require the same changes in
orientation as mentioned for the BKD system.
Microfinance cooperatives. The cooperative organization of microfinance has a great
potential in Indonesia. The Credit Union movement and other independently organized
savings and credit associations have demonstrated this. The state-centered promotion
and instrumentalization of cooperatives, however, has not produced a large number of
viable financial intermediaries with effective member participation and control. While
cooperatives are massively used to channel subsidized credit, the cooperative system
lacks effective supervision and enforcement of regulations. The prevailing
mismanagement and corruption, the unchanged ‘top-down’ and interventionist culture
of the local offices of the Ministry of Cooperatives, and the unchecked operation of
‘black’ banks operating under the name of savings & credit cooperatives, has
considerably deteriorated the cooperative image and often prevents grassroots
organizations from seeking the legal status of cooperatives.
Changing this situation is foremost a political question. It requires a new political
consensus about the role of the state in cooperative development. This role would have
to move from direct intervention, protection and preferential treatment to policy-making
required for making rural financial markets competitive, getting legal, regulatory and
supervisory frameworks right, and strictly enforcing compliance with regulations and
prudential financial practices. This would also require refraining from pressuring villagelevel savings and credit groups to seek a cooperative license. These groups need time
to learn managing their own funds, and often will not develop into larger financial
intermediaries. It is neither desirable nor practicable that the state bureaucracy or
another supervisory agency oversees some ten thousands of these groups.
TPSP. Microfinance cooperatives other than the credit unions and a number of
formalized savings and credit associations usually operate above the village level. One
effort to institutionalize cooperative microfinance at the village level is the TPSP
program. The TPSP has features similar to that of BKD and UED-SP and also shares
their weaknesses. TPSP may serve as a starting point for the development of
microfinance cooperatives at the village level. Presently, however, they suffer from the
program’s emphasis on channeling government funds and the weaknesses of those
cooperatives functioning as TPSP umbrella organizations. Changing this situation
requires similar efforts as mentioned for BKD and UED-SP.
BMT. Institutional microfinance on the basis of Syariah principles is primarily provided
by BMT, which are non-bank microfinance institutions, often with the legal status of
cooperatives. Only a minority of the BMT seems to have developed into financial
intermediaries with significant outreach and financial capacities. Most of them are
comparable to savings and credit groups. These small institutions often highly depend
on access to governmental credit programs as a source of funds. Syariah microfinance,
in general, has not yet lived up with the expectation that microfinance based on Syariah
principles would be better able to serve low-income groups. This is particularly due to
the fact that Syariah microfinance initiatives have not broken with major fallacies of
conventional microfinance, especially the high emphasis given to credit channeling
rather than to savings mobilization.
8.1.3 General Issues of Microfinance Supply
Outreach scope and depth of microfinance institutions. Despite the large number
of microfinance institutions, a great part of rural and low-income households does not
have sustainable access to institutional microfinance. Microfinance institutions are
highly concentrated in Java and Bali, and they are particularly scarce in the eastern
parts of Indonesia. Microfinance institutions such as BRI units, BPR, LDKP and
cooperatives operating at the sub-district level have only a limited outreach to rural
villages and their low-income groups. Village-level institutions such as the BKD and
UED-SP are weak financial intermediaries, which have not been able to grow and meet
the demand for microfinance services. Savings and credit groups provide basic
financial services, but they are not able to meet the credit demand of their members.
The major demand-supply gap in institutional microfinance exists at the village level.
Depending on local conditions, this gap may be closed by a) expanding the outreach of
existing BRI units, BPR, LDKP and cooperatives, b) establishing business relationships
between these institutions and financial intermediaries at the village level, c)
strengthening existing financial intermediaries to develop into viable non-bank financial
institutions at the village level, or d) establishing new non-bank financial institutions at
the village level. The LPD in Bali and the Credit Unions provide two successful models
for the latter two options.
Fund mobilization and financial cooperation of microfinance institutions.
Successful microfinance institutions such as BRI units, LPD and Credit Unions rely on
savings mobilization. These institutions have proved that satisfying the demand of lowincome groups for savings instruments is as important as satisfying their demand for
credit. They have also proved that savings mobilization is crucial for the sound and
sustainable growth of their loan portfolios. The majority of microfinance institutions,
however, lack this focus on savings mobilization. This has severely limited their growth
and outreach, and deprives them of an important means of screening their borrowers’
creditworthiness. Many of these institutions become unattractive for their customers
because they do neither meet the demand for flexible savings instruments nor their
increasing credit demand.
Success in savings mobilization also depends on savings capacities varying depending
on local economic conditions and the clientele of microfinance institutions. The ProFI
studies on BPR and LPD showed that these industries experience both the lack of
loanable funds and over-liquidity. An important issue in this context is that most
microfinance institutions lack institutionalized forms of financial cooperation through
which they are able to access refinance at reasonable costs or to place excess funds to
uses with returns higher than yielded on current bank accounts.
A related issue is that microfinance institutions such as BPR, LDKP and cooperatives
often depend on governmental credit programs as a source of refinance. These
programs are limited in time and amount, and they tend to reverse prudential banking
practice. Funds are often dropped before the microfinance institutions have identified
eligible borrowers. As fast disbursement is a major success indicator, these programs
suffer from inadequate loan appraisals and misallocation.
Alternative refinancing facilities in the form of regular business relationships with
commercial banks or finance companies, which can be used at the right time and on
the basis of identified demand, are not available for the vast majority of microfinance
institutions. A special form of financial cooperation is the linking banks and self-help
groups approach. While this approach enjoys a high reputation and there is
considerable demand for its continuation, it has been phased out as a program led by
Bank Indonesia and supported by GTZ. The approach needs new and strong
stakeholders to sustain its success.
Governance of microfinance institutions. Governance is a crucial issue particularly
for microfinance institutions owned by or facing high involvement of governments.
Local governments possess a large part of the BPR and LDKP. The ProFI baseline
survey found that government-owned BPR tend to be governed by bureaucratic
command and to lack management autonomy. This corresponds to the weak
entrepreneurship and market-orientation in these institutions, and has often negatively
affected their performance. LDKP outside of Bali are usually owned by local
governments, which at the same time function as policy makers, regulators,
supervisors, operators and providers of technical support. This lack of functional
differentiation has resulted in conflict of interests, weak supervision and enforcement,
interference of local officials and fraud. Weak entrepreneurship and market-orientation
correspond to bureaucratic governance also in these cases.
Microfinance institutions at the village level may be community-owned and communitycontrolled as in the case of the Balinese LPD or governed by village officials without
effective community control as in the case of BKD and UED-SP. The first institution is
usually a much better performer than the latter institutions. The cooperative sector,
especially those cooperatives entitled to channel subsidized credit, has been notorious
for the lack of effective member participation and control, corruption and high losses.
30 years of government intervention, preferential treatment and ineffective supervision
have eroded transparency and accountability. Local officials have sustained their
interest in using the cooperative system as their field of appropriation.
Governments can weaken the microfinance sector by bringing political considerations
into the operations of microfinance institutions, granting preferential treatment and
power to special sub-sectors, and failing to establish prudential regulatory and
supervisory frameworks. Improving governance of microfinance institutions requires
that governments terminate preferential treatments, limit their functions to policy
making and setting of prudential regulatory and supervisory frameworks, that managers
of microfinance institutions are autonomous and fully liable with respect to operational
decision-making, and that independent supervisory authorities strictly enforce
prudential regulations.
The role of microfinance programs. Expanding the outreach of viable microfinance
institutions is necessary to sustain the provision of financial services to a growing
number of low-income households. This implies long-term institutional development
processes that are not able to immediately close the gap between the demand for and
supply of institutional microfinance services. The role of program microfinance,
therefore, may be seen in closing the demand-supply gap in institutional microfinance.
Microfinance programs directly targeting the poor are able to reach clients who cannot
yet be served by financial institutions, and they can play an important role in upgrading
their target groups to regular clients of microfinance institutions, thus preparing the
market for rather than undermining the growth and viability of microfinance institutions.
This role of program microfinance is, by and large, successfully played by the
RIGP/P4K project of BRI and the Ministry of Agriculture. The project effectively targets
low-income groups without access to financial institutions and provides them with
immediate access to credit at commercial interest rates. Most important, however, it
has a longer-term strategy that allows microbusinesses to access increasing loan
amounts in accordance with gradually growing credit absorption capacities, and
prepares its target groups to become individual customers of microfinance institutions,
develop independent linkages between joint liability groups and financial institutions, or
to develop their own savings and credit associations or cooperatives. The RIGP/P4K
project is an example of a poverty alleviation program that is compatible with systemoriented and institutional microfinance sector development strategies. It is, however,
also an exception in this respect.
The prevailing features of poverty alleviation and crisis-related programs with
microcredit components are: a) bad targeting, thus resulting in over-lapping of and
competition between different programs and serving a clientele that has or could have
access to more sustainable microfinance providers; b) emphasis on channeling easy
and cheap credit; c) neglect of savings as the first side of microfinance; d) lack of viable
institution building for sustaining financial services; e) top-down program design and
implementation that neglect locally varying demand for financial services and
conditions to sustain these services; f) instant intervention, especially in the form of
block grants and subsidized credit, that neglect the need for longer-term and gradual
strategies for achieving objectives such as microenterprise development and poverty
alleviation; g) lack of prudential program monitoring and credit supervision; h) bad
repayment performance and decapitalization of loanable funds.
These features represent a break with recognized microfinance standards. They impair
rather than support low-income groups in getting access to sustained and growing
microfinance services, and they undermine rather than complement the development of
viable microfinance institutions. The flood of donor and government money directed at
alleviating poverty and mitigating the impact of the financial crisis has become part of
the problem rather than part of the solution in building up sustainable financial services
for a growing number of low-income customers.
Coordination and decentralization. The microfinance sector comprises of large
number of institutions and programs. Both institutional and program microfinance are
important for providing sustainable financial services to an increasing number of lowincome households. Wrong design and implementation of microcredit programs,
however, can undermine the viability of microfinance institutions and, therefore, the
sustained access to microfinance services.
The microfinance sector can also be weakened by incompatible approaches in
institutional microfinance or competition between microcredit programs. Evidence
shows that programs compete for target groups so that one and the same household
participates in various programs. As almost all programs operate with a group
approach, it is most convenient and usual for field staff to use groups established by
another project for the own one. A competitive environment is an important element of
institutional micro finance. The objective to provide an increasing number of lowincome clients with access to institutional microfinance, however, is not achieved when
one and the same clientele is served by this institution today and will be served by that
institution tomorrow.
Coping with these risks would require effective coordination within and between the
institutional and program microfinance sub-sectors. Such an effective coordination
between the various actors in the microfinance sector does not exist. A crucial problem
involved here is that effective coordination is only possible on the basis of a consensus
about the essentials of an overall microfinance sector policy. Also such a consensus
does not exist. This consensus is difficult to achieve because it is a political rather than
a technical question.
Working towards coordination and consensus requires also decentralized concepts
because of two reasons. First, socio-economic conditions as well as the existence and
potential of different types of microfinance institutions vary considerably between and
within regions. This situation requires local microfinance sector concepts that reflect
existing resources and potentials within the basic parameters of a general microfinance
sector policy. Second, the coming implementation of the decentralization laws
launched in 1999 will give decision-making and budgetary powers to district and village
governments. As these laws also aim at promoting community development and
making local governments responsive to the poor, they provide a new framework also
for both the development of local financial institutions and the design and
implementation of microfinance programs.
8.1.4 Legal, Regulatory and Supervisory Frameworks
Regulation
Since 1999, the licensing of BPR requires a paid-up capital at least ten times as high
as before. New BPR were not established since then. While this policy tends to change
the BPR character from a local secondary bank to a small primary bank, it practically
prevents the establishment of new BPR in rural and economically less favorable areas,
and it also severely restricts the upward mobility of non-bank microfinance institutions.
This is a far-reaching break with the mission of the 1988 banking reform, which
promoted the BPR model to expand the outreach of the banking industry to rural areas
and low-income groups. Thus, the BPR model has lost much of its relevance for the
future expansion of institutional microfinance.
If the currently valid capital requirements for rural areas will not be revised, the future
expansion of institutional microfinance would depend on the development of non-bank
microfinance institutions and the legal, regulatory and supervisory frameworks
available to them. The present and future status of LDKP needs clarification. According
to the banking act and regulations, LDKP are required to convert to BPR or refrain from
mobilizing funds from the public. The vast majority of LDKP that have not converted to
BPR are either not able or not willing to do so. Those that perform well are usually
successful savings mobilizers. Providing LDKP with an enabling regulatory framework,
which allows mobilizing savings in their area of operation, would offer them the
opportunity to develop into effective financial intermediaries for rural areas and lowincome groups. Prohibiting the mobilization of savings would most probably result in
stagnation and make the LDKP industry a dying industry. In the case of the Balinese
LPD this would kill one of the most if not the most successful community-owned
financial institution in the world.
Village-level microfinance institutions other than cooperatives generally lack a clearly
defined legal entity and a prudential regulatory framework for their establishment and
operation. Initiatives to establish such institutions, therefore, take the form of projects
(i.e., UED-SP) that grant room to move outside of regular frameworks available to
financial institutions. This situation is unsatisfactory because it does not guarantee
effective supervision and enforcement of prudential practice standards. The BKD
industry is a special case. The evolution of banking regulations has resulted in the
contradictory situation that BKD are licensed but not regulated as BPR. Their future
status is vague because they have neither the potential to develop into real secondary
banks nor are they required to comply with the regulations valid for BPR. The status of
village-level and village-owned microfinance institutions urgently needs to be clarified
because the development of ‘village banks’ is an important option for closing the
demand-supply gap in institutional microfinance.
The liberalization of its regulatory framework, which removed the entry barriers for rural
cooperatives, gave the cooperative sector fresh impetus. The cooperative law and
other regulations, however, include provisions that are highly questionable and conflict
with the banking act. Provisions made legitimate direct government intervention and
even require the government to provide protection and preferential treatment. Another
provision gives the government the task to pull small informal groups with savings and
credit activities into the formal cooperative sector. Small village groups need time to
learn managing their own funds, and often will not develop into larger financial
intermediaries. It is neither desirable nor practicable that the already overburdened
offices of the Ministry of Cooperatives oversee some ten thousands of these groups.
The currently valid regulations for cooperatives with an own savings and credit
business do not prohibit mobilizing funds from the public. They lack a clear definition of
membership and member candidates, allow providing financial services to members of
other cooperatives, and even explicitly speak of financial services to non-members.
This is also implied in the provision that cooperatives can be licensed before having
deposited the minimum paid-up capital provided that they render services to members
only.
Currently, there are two regulatory frameworks available for the establishment of new
microfinance institutions. However, as the high capital requirements for BPR exclude
the first alternative, all new establishments would have to obtain licenses as
cooperatives. This is a highly inadequate and much too narrow framework for the
development of viable microfinance institutions, but it corresponds with the strong
political tendency to organize the people’s economy within the government-controlled
cooperative sector.
Supervision and enforcement
Supervision requires reliable information systems. These are available for BRI units,
BPR, BKD and most of the LDKP. Information systems do also exist for other
microfinance institutions, but in practice they often fail to produce reliable information
required for their effective supervision. Unless banks such as BRI carry out microcredit
programs and their supervision, this is also true for many of the government programs
with microcredit components. Lack of reliable information and reporting has been a
structural, if not often a deliberate, weakness of the cooperative system.
Bank supervision by Bank Indonesia is independently organized and functionally
differentiated from the operation of banks. A major issue in this context is that the
Central Bank Law of 1999 mandates the transfer of supervisory functions to a new
supervisory agency, which has to be established not later than December 31, 2002.
The decision whether commercial banks and BPR will be supervised by the same
agency is still pending. The capability of this new agency and the smooth transfer of
supervision responsibility are of utmost importance for improving the soundness of the
BPR industry.
The lack of independency and functional differentiation of the supervision function is a
major issue with respect to non-bank microfinance institutions, which are usually
supervised by provincial governments or local offices of ministries. The same
government organizations are responsible to provide technical support, a function that
works from inside by means of communication rather than from outside by means of
enforcement as in the case of the supervision function. This lack of functional
differentiation is even more problematic in the case of most LDKP, which are not only
supervised but also owned and operated by provincial governments. The same
government offices that are responsible to allocate subsidized credit to cooperatives
are also responsible for their supervision, a situation that contributes to creating fields
of appropriation. Another issue related to the organization of supervision is that
supervisory agencies often lack enforcement powers. This is the case for BRI in its
function to supervise BKD and TPSP as well as for Regional Development Banks as
the supervisory agencies for LDKP. To improve the soundness of non-bank
microfinance institutions supervision and enforcement power must be in one hand, the
independency of the supervisory agency must be guaranteed, and the supervision
function must be separated from other, incompatible functions.
The designs of the BPR and LPD supervision systems are currently being improved
with support from the ProFI project. LDKP supervision systems are not standardized
and, as they were partly modeled on the instruments of bank supervision, do often not
reflect the particularities of microfinance services. Practicable supervision systems and
instruments for village-owned microfinance institutions other than the BKD are lacking.
The UED-SP program has a sophisticated system on paper, which is not effectively
applied in practice, probably because it is too sophisticated for both staff of the Ministry
of Home Affairs and the simple operations of UED-SP. Furthermore, the system
confuses program monitoring with the supervision of financial institutions by including
non-financial indicators that are not required for measuring the soundness of these
institutions. This confusion is typical also for microfinance programs, if at all they care
for the soundness of microfinance providers.
While design matters, the crucial issue rather is that existing supervision designs are
often not consequently applied and that supervision findings are often not followed by
sanctions and enforcement. This sort of ineffective supervision can be found in all
microfinance sub-sectors but seems to be most pronounced in the cooperative sector.
8.2 Essentials and Major Elements of a Microfinance Sector Strategy
The greatest difficulty in the world is not for people to accept new ideas,
but to make them forget about old ideas.
(John Maynard Keynes)
In the late 1980s and early 1990s the old idea of supporting rural development and
alleviating poverty by channeling subsidized targeted credit appeared to be replaced by
the new idea of financial systems development as an approach to microfinance. The
new idea was increasingly accepted, but the last decade has shown that the old idea is
not only forgotten but has regained its predominant role in microfinance policy and
practice. The findings presented in this report suggest that new efforts have to be
undertaken to make us forget about old ideas, to formulate a realistic microfinance
sector policy and strategy, and to identify prudential interventions for strengthening the
microfinance sector.
This report concludes with pointing to essentials and major elements of a microfinance
sector strategy. A comprehensive and effective strategy has to take into account the
high variety of local conditions, on the one hand, and can only be the result of a policy
dialogue between the stakeholders of microfinance sector interventions, on the other
hand.
Policy dialogue. The microfinance sector comprises a large number of stakeholders
with their own and often conflicting policies. This study indicated the need for
coordinating these policies. Strengthening a small financial institution with the aim to
expand the outreach of microfinance services to low-income households at the village
level, for instance, cannot succeed when cheap program credit undermines savings
mobilization and the potential market of these institutions. Effective coordination,
however, is only possible on the basis of a policy consensus between decision-makers
and microfinance sector stakeholders. Creating this consensus by means of a policy
dialogue must be an integral part of an effective microfinance sector strategy. A
minimal consensus formulates the objective of the microfinance sector strategy and
should provide basic guidelines for prudential microfinance sector interventions of
different stakeholders.
Core problem and objective. Microfinance is often brought into a too direct relation to
poverty alleviation. Poverty consists of various dimensions and poverty alleviation
requires a variety of interventions. Microfinance can contribute to poverty alleviation,
but it cannot achieve this objective alone. To formulate a realistic and an effective
microfinance sector strategy it is important to define the problems it can solve and the
objectives it can achieve directly. The core problem to which a microfinance sector
strategy can provide a solution is that low-income households and microentrepreneurs
with demand for microfinance services have only partly and limited access to
sustainable and growing financial services. The core objective of a microfinance
sector strategy, therefore, is that an increasing number of low-income households and
microentrepreneurs get access to sustainable financial services that meet their
demand.
Poverty alleviation and financial systems development. Microfinance is one
component of poverty alleviation, but is also more than this component, particularly
when poverty is not narrowly defined by an expenditure poverty line. Microfinance is
required to bring people out of poverty, but it is also required to keep people out of
poverty and sustain the growth of their microenterprises. The microfinance sector
consists of different market segments of low-income groups and microentrepreneurs,
which together comprise the majority of the population, and it consists of different
microfinance providers, which are necessary to serve the different segments of this
market. Keeping people out of poverty and contributing to the sustainable growth of
their income and microenterprises requires sustainable financial services provided by a
variety of financial institutions. A microfinance sector strategy, therefore, has to be a
financial systems development strategy that does not only contribute to poverty
alleviation but also to strengthening and integrating the total financial system.
Financial systems development does not necessarily exclude poverty lending as it was
sometimes suggested by the international microfinance debate. Microfinance programs
aiming at serving the poor or poverty alleviation programs with a microfinance
component are necessary to reach target groups that cannot yet be served by
microfinance institutions, and they can play an important role in upgrading their target
groups to more sustainable microfinance providers and expanding the market of
microfinance institutions. To be able to contribute to sustaining and increasing their
target groups’ access to financial services poverty lending programs must be demanddriven, have to refrain from replacing savings mobilization by subsidized credit, and
should apply indirect approaches through appropriate microfinance institutions,
including autonomously organized organizations of the poor.
Sustainable financial services provided to a growing number of low-income customers
requires viable microfinance institutions. The core elements of a financial systems
development approach to microfinance are strong microfinance institutions and an
enabling regulatory and supervisory framework that supports the sound growth of these
institutions. The microfinance sector comprises various types of institutions. The
findings of this study indicated that all of them will only be able to sustain and expand
their outreach to low-income groups if they are demand-driven, savings-driven and
adhere to the principles of prudential banking, if their regulatory frameworks give them
adequate room to move, and if their supervisory frameworks succeed to enforce their
compliance with prudential practice standards.
Basic guidelines for prudential microfinance sector interventions. Adhering to
basic guidelines could create synergy between microfinance sector interventions of
different stakeholders. Such guidelines are particularly important for integrating
program and institutional microfinance into an overall microfinance sector strategy.
Based on the findings of this study, the following guidelines appear to be important for
prudential program and institutional microfinance interventions.
Program microfinance
•
•
Microcredit should be separated from social safety net or emergency programs.
Short-term microcredit interventions should be replaced with longer-term
strategies that support the balanced growth of savings, investment and
repayment capacities.
•
•
•
•
•
•
•
•
Poverty lending should be organized indirectly through appropriate microfinance
institutions, and credit channeling should be replaced with demand-led refinance
of these institutions.
A demand-led approach should be applied in facilitating the development of the
target groups’ own organizations, thus refraining from forming instant groups for
project purposes.
Emphasis should be given to facilitating access to convenient and safe savings
instruments, which allow low-income groups to manage their liquidity and
accumulate funds for special expenditures.
Poverty lending should be limited to target groups that cannot yet adequately
served by microfinance institutions.
Supply-led subsidized credit should be replaced with demand-led credit and
interest rates that at least cover the costs of financial intermediation.
Upgrading target groups to microfinance institutions that provide programindependent access to sustainable financial services should be an integral part
of program design and implementation.
Increased savings, credit absorption, and credit repayment capacities rather
than credit disbursement, and the number of beneficiaries graduated from rather
than served by a program should be used as success indicators.
Microfinance programs should only be carried out, if effective supervision of
financial transactions and microfinance institutions can be guaranteed.
Institutional microfinance
•
•
•
•
•
•
•
•
•
•
Regulatory frameworks must be both enabling and prudential to facilitate
expanding the outreach of sound microfinance institutions to low-income
customers and areas without sustainable access to financial services.
Regulatory frameworks should not give preferential treatment and protection to
special microfinance institutions, and they should not conflict with each other.
Supervision systems must be prudentially designed and, above all, they must
have the resources and power required to enforce compliance with regulations.
Supervision agencies must be independent, and the supervision function must
be separated from technical and financial support functions.
Governments should not be owners, managers, and supervisors of microfinance
institutions at the same time, and they should not bring considerations other than
prudential practice standards into the operation of microfinance institutions.
Good governance of microfinance institutions requires management autonomy
and liability, on the one hand, and effective internal control by special units, staff,
members or the village community (depending on the type of microfinance
institution), on the other hand.
For the sake of sustainability and growth both the establishment of new and the
operations of existing microfinance institutions have to be demand-driven and
savings-driven.
Emphasis must be given to institution building by strengthening management
and market-orientation of existing microfinance institutions; facilitating the
establishment of new microfinance institutions that are demand-driven, savingsdriven and can fully cover operating costs; developing institutionalized
cooperation between microfinance institutions; and developing cooperation of
microfinance institutions with financial and technical service providers.
Governments and donors may subsidize these forms of institution building for a
limited time, but they should not subsidize credit.
Financial assistance provided to microfinance institutions should take the form of
demand-led commercial refinance rather than of supply-led and targeted
subsidized credit programs.
Components of a microfinance sector strategy in Indonesia. Besides facilitating
the microfinance policy dialogue and the formulation of a microfinance sector policy,
there are four broad components of a microfinance sector strategy: a) improving legal,
regulatory and supervisory frameworks for different sorts of microfinance institutions, b)
institutional strengthening of microfinance institutions, c) institutional innovations or
establishment of new microfinance institutions, and d) re-orienting poverty lending and
strengthening microfinance programs. The following sub-projects of these components
should be considered as elements of a future microfinance sector development
strategy in Indonesia.
Improving legal, regulatory and supervisory frameworks
•
•
•
•
•
•
•
Review the banking act and regulations with the objectives a) to clearly
distinguish BPR as microbanks from non-bank microfinance institutions such as
BKD, LDKP and cooperatives, b) to enable non-bank microfinance institutions
other than cooperatives to grow by mobilizing savings and time deposits from the
public within clearly defined limits (i.e., maximum balance, geographical), and c)
to allow for the upward mobility of non-bank microfinance institutions and the
downward mobility of BPR that are not able to sustain the BPR status.
Review the regulatory framework of the BPR industry with respect to capital
requirements for the establishment of rural BPR and other regulations that
prevent expanding the industry’s outreach to rural areas and low-income groups.
Provide non-bank microfinance institutions other than cooperatives with an own
regulatory framework that a) defines entry, management and operating
requirements for sub-district and village-level institutions, b) provides a menu of
legal entities available to them, c) allows them to offer certain savings products,
d) defines requirements for converting to BPR (i.e., maximum deposit balance,
savings mobilization outside of a defined area of operation), and e) establishes a
regulatory and supervisory framework for enforcing compliance with prudential
practice standards.
Design and institutionalize a supervision system for non-bank microfinance
institutions other than cooperatives, which is independent from ministries and the
local government bureaucracy, separates the supervision function from
ownership and other functions such as technical support, and gives enforcement
power to supervisory agencies.
Review the cooperative law and regulations for microfinance cooperatives with
the objectives a) to withdraw the government from the cooperative sector and
strengthen the institutional autonomy of microfinance cooperatives, b) to
terminate preferential treatment and protection, c) to strengthen participation of
and internal control by members, d) to limit savings mobilization and credit
extension to ordinary members, e) to establish an independent and effective
supervisory regime, and e) to abandon the explicit task of local officials to
‘motivate’ small informal groups at the village to convert to formal cooperatives.
Design and institutionalize an effective supervision system for microfinance
cooperatives, which is separated from financial and technical support functions
of the Ministry of Cooperatives and able to enforce compliance with prudential
regulations.
Focus on making supervision systems of all microfinance institutions effective by
detecting non-compliance and enforcing compliance with prudential regulations
at fast as possible.
Strengthening microfinance institutions
•
•
•
•
•
•
•
•
•
•
Review BRI’s risk-averse unit lending policy with the objective to place more
funds mobilized by BRI units to microborrowers and low-income households,
while maintaining the units’ profitability and soundness.
Clean up the unviable part of the BPR industry and strengthen viable BPR with
respect to governance and internal control, fund mobilization and entrepreneurial
marketing, credit analysis and supervision, deposit protection and association
building.
Clean up the unviable part of the LDKP industry and strengthen the different
LDKP systems by standardizing prudential regulations and effective supervision,
granting LDKP management autonomy, replacing bureaucratic governance with
market-oriented banking, introducing sound financial management practices and
internal control, improving their intermediation function by focusing on savings
mobilization, and association building.
Establish a reliable database of cooperatives with microfinance activities, assess
the viability of existing microfinance cooperatives, design and implement pilotprojects for strengthening the self-reliant capacities of microfinance
cooperatives, support savings and credit associations to adopt the status of
microfinance cooperative provided they are willing to do so and do not become
subject to external interventions by doing so, and strengthen the cooperative
movement in building up independent secondary support structures.
Assess the feasibility of transforming the BKD industry into a viable and growing
network of village financial institutions; if feasible, plan and implement (at best
with BRI as the lead agency) a program aiming at developing BKD into savings
mobilizing financial intermediaries that are owned and effectively controlled by
village communities.
Establish a reliable database of other microfinance institutions (such as the
UED-SP) that operate at the village level and assess whether these institutions
may serve as a starting point for the development of viable village financial
institutions; if yes, these institutions should be integrated into the BKD system
and its support program.
Facilitate independent business relationships and technical cooperation between
commercial banks and microfinance institutions.
Facilitate independent business relationships between capable microfinance
institutions and financial self-help groups.
Strengthen NGOs in their capacity to facilitate the development of self-reliant
savings and credit associations with and without the formal status of a
cooperative.
Assess feasibility of finance companies (national or local) specialized in
providing financial and technical services to microfinance institutions, including
savings and credit associations.
Establishing new microfinance institutions
•
•
•
Assess which types of microfinance institutions are locally appropriate and
feasible to close the demand-supply gaps in institutional microfinance,
particularly in the eastern parts of Indonesia and at the village level.
Develop models for viable village financial institutions and, if prudential
regulatory frameworks are in place, promote and support the development of
these institutions where demand and other prerequisites are given.
Strengthen or establish local support structures that are capable of promoting
and assisting the development of community-owned financial institutions,
savings and credit associations and/or microfinance cooperatives at the village
level.
Re-orienting poverty lending and strengthening microfinance programs
•
•
•
Change direct approaches to poverty lending to indirect approaches through
capable banks and microfinance institutions as independent financial
intermediaries, and revise program designs and implementation according to the
guidelines for prudential program microfinance interventions mentioned above.
Make the RIGP/P4K project the national program for poverty alleviation through
microfinance and complementary measures as included in the P4K approach.
Expand and strengthen systems-oriented microfinance programs such as the
Linking Banks and Self-help Groups approach, and support the development of
strong stakeholders for these programs.
The need for local microfinance sector strategies. There is no one and best
microfinance strategy. The elements of a microfinance sector strategy listed for the
strengthening of existing and the establishment of new microfinance institutions have to
be regarded as a menu from which the formulation of area-specific strategies can
depart. Effective microfinance strategies have to be developed and agreed upon locally
because a) local economies and socio-cultural conditions in Indonesia show a high
variance, b) the different types of microfinance institutions are distributed unevenly, and
part of them do even not exist in many regions outside of Java and Bali, and c) the
implementation of the law on local autonomy will make local governments a major
stakeholder also of microfinance sector interventions. The development of a national
microfinance sector strategy, therefore, will not become effective, if local resources and
particularities are not considered in future approaches.
The most important action that has to be commenced now is carrying out a series of
microfinance sector studies at the district level, which identify the local demand for
financial services, analyze the existing local resources, and assess the feasibility of
different options for strengthening the microfinance sector. This has also to include
creating a local policy consensus between the relevant stakeholders of a local
microfinance sector strategy.

Microfinance Institutions Study

Transcription

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