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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
THE PROMISE AND THE PERIL OF MICROFINANCE
INSTITUTIONS IN INDONESIA
Jay K. Rosengard , Richard H. Patten , Don E. Johnston Jr & Widjojo
Koesoemo
To cite this article: Jay K. Rosengard , Richard H. Patten , Don E. Johnston Jr & Widjojo
Koesoemo (2007) THE PROMISE AND THE PERIL OF MICROFINANCE INSTITUTIONS
IN INDONESIA, Bulletin of Indonesian Economic Studies, 43:1, 87-112, DOI:
10.1080/00074910701286404
To link to this article: http://dx.doi.org/10.1080/00074910701286404
Published online: 08 Nov 2007.
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Date: 18 January 2016, At: 20:02
Bulletin of Indonesian Economic Studies, Vol. 43, No. 1, 2007: 87–112
THE PROMISE AND THE PERIL OF
MICROFINANCE INSTITUTIONS IN INDONESIA
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Jay K. Rosengard*
John F. Kennedy School of Government, Harvard University
Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo*
Independent Consultants, United States and Indonesia
After the 1997 East Asian crisis, central banks throughout the region tried to reduce
the risk of future bank failures by promulgating regulatory reforms. The results
in Indonesia have been to concentrate rather than mitigate banking risks, and to
decrease the access of low-income households and enterprises to formal financial
services, especially in rural areas. The most severe casualties of the ‘reforms’ have
been local government-owned microfinance institutions. In the provinces where
these institutions have functioned best, they have addressed a market failure by extending coverage to areas not served by conventional financial institutions. Understanding the past performance and potential for replication of these success stories
continues to be important because of the substantial gaps that remain in the access
of rural Indonesian households and microenterprises to financial services.
INTRODUCTION: THE UNINTENDED
CONSEQUENCES OF REGULATORY REFORM
After the 1997 monetary and economic crisis in East Asia, central bankers throughout the region tried to reduce the risk of future bank failures by promulgating
a series of regulatory reforms. The main assumptions behind the reforms were
that bigger financial institutions were safer than smaller ones, and that traditional
banking practices were less risky than non-conventional financial services.
Indonesia was no exception to the trend of financial sector re-regulation.
This meant that relatively small, community-based financial institutions were
instructed to merge into larger, centralised entities, and that innovative microfinance services were viewed with suspicion and hostility.
* The research for this article was commissioned by the German aid agency GTZ GmbH.
The authors thank Dr Alfred Hannig, Dr Dominique Gallman and Ibu Aimee Patalle for
their kind support of this work; the managers and staff of the regional offices of Bank Indonesia for their insights and for their assistance in arranging interviews with local financial
institutions; and the management and staff of provincial development banks and microfinance institutions for their time and patience. Finally, the authors wish to express their
appreciation to the editor and two anonymous referees for their helpful comments. We
retain full responsibility for any remaining errors.
ISSN 0007-4918 print/ISSN 1472-7234 online/07/010087-26
DOI: 10.1080/00074910701286404
© 2007 Indonesia Project ANU
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
The results have been to concentrate rather than mitigate banking risks, and to
decrease the access of low-income households and enterprises to formal financial
services, especially in rural areas. Among the casualties of the regulatory reforms
have been two broad categories of microfinance institutions, the first owned by
local governments and operating at both the sub-district (kecamatan) and village
(desa) levels, and the second owned by villages and operating at the village level
only.1 The generic terms for these are, respectively, village credit institutions (lembaga dana kredit pedesaan, LDKPs) and village credit bodies (badan kredit desa, BKDs).
But these institutions go by a variety of names in different parts of the archipelago, resulting in a bewildering array of acronyms (see appendix). To avoid confusion, in this paper for the most part we shall use the term ‘GMFIs’ to refer to local
government-owned microfinance institutions operating at the sub-district and
village levels, and ‘VMFIs’ to refer to village-owned microfinance institutions.2
The unintended consequences of the reforms are especially important because,
although Indonesia is recognised as a world leader in commercial microfinance,
it is also unique among developing countries in that its most successful microfinance institutions to date are public sector institutions such as the GMFIs and
VMFIs. In fact, the best-known microfinance provider in Indonesia is Bank Rakyat
Indonesia (BRI), a full-service commercial bank that was owned entirely by the
central government until the end of 2003, and whose majority owner is still the
state. But because BRI has been written about extensively elsewhere, it will not be
reviewed here.3
The purpose of this article is to offer suggestions on how the lessons from past
GMFI and VMFI accomplishments and failures can be utilised to guide current
efforts to expand the coverage of formal financial institutions, particularly in
provinces that do not yet have such institutions. In the provinces where they have
functioned best, GMFIs and VMFIs have proven to be sustainable, and have made
a significant contribution to increasing the access of low-income households and
microenterprises to microfinance, particularly in rural areas.
Understanding the past performance and potential for replication of GMFIs and
VMFIs continues to be important because substantial gaps remain in the access of
Indonesian households and microenterprises to microfinance services—despite
the success of a number of such institutions to date and despite the strong desire
of some senior policy makers to reduce the current degree of financial exclusion.
Indeed, recent surveys indicate that nearly 50% of Indonesian households continue to lack effective access to microcredit, while the proportion of rural households who actively use savings accounts is still below 40%.4
We begin our examination of the relevance, effectiveness and potential of the
GMFI/VMFI approach by reviewing the origins and development of these insti-
1 The new regulations also failed to address critical ambiguities and uncertainties in earlier legislation, further constraining the strategic and operational options of these local
government-owned microfinance institutions.
2 See Holloh (2001) for a survey of microfinance institutions in Indonesia.
3 For further information on BRI and its village units, see Patten and Rosengard (1991:
ch. 5) and Patten, Rosengard and Johnston (2001).
4 See, for example, BRI Survey Team and CBG Advisors (2001: section IV).
The promise and the peril of microfinance institutions in Indonesia
89
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tutions. We then assess their potential contribution and identify the key factors
determining their performance. These findings are used to develop recommendations for the development of GMFIs and VMFIs, with special attention given to
provinces that do not yet have such institutions.
DEVELOPMENT OF VILLAGE-ORIENTED
MICROFINANCE INSTITUTIONS
The development of institutions delivering banking services at the village level
can best be understood if looked at in three phases: development to the late 1970s;
development during the 1980s and up to the passage of the Banking Law of 1992;
and development (and deterioration) from 1992 to the present.
Development until the late 1970s
Indonesia’s original microfinance institutions, the VMFIs, began life in the 1890s as
bank desa (village banks) and lumbung desa (paddy banks, or facilities to store rice
rather than cash). They were first set up in Java and Madura during the Dutch colonial period as community organisations, and were supervised by BRI. Although
they proved to be highly durable, most notably by surviving the Great Depression
in good condition, nevertheless two major economic dislocations—the Japanese
occupation during World War II and hyperinflation during the mid-1960s—
resulted in the need for some to be revived with loan capital from BRI.
In the early 1970s the governor of Central Java set up a new type of organisation,
the sub-district credit body (badan kredit kecamatan, BKK), to provide microfinance
in villages where VMFIs had ceased to operate. Each BKK was headquartered in
the sub-district, with the sub-district head assigned responsibility for oversight.
These institutions reached borrowers in the villages by sending a motorcycle team
to each village once a week, or on market day in the five-day market cycle based
on the Javanese calendar. They relied on the recommendation of the village head,
who affirmed that the loan applicant was a village resident, had an enterprise
as stated and was financially reliable; their credit terms were modelled on those
of the VMFIs. Each BKK received a loan of Rp 1 million as start-up capital, to be
repaid in three years. By 1977–78 they had learned how to make loans at the village level, but in the process many of them had lost much of their original capital
and were not operating on a sustainable basis.5
Development until the passage of the Banking Law of 1992
The VMFIs experienced no significant change in their operations during the 1980s.
They continued to make very small loans at the village level for petty trading,
agriculture and handicraft enterprises. In 1988, at the initiative of BRI, the supervision of market banks and other local banks that could potentially compete with
BRI village units (the microfinance offices of BRI) was transferred to the central
bank, Bank Indonesia (BI), to avoid any conflict of interest. Unfortunately, BI misunderstood the nature of the VMFIs and took over direct supervision of them as
well. This was quite unnecessary: there was virtually no overlap between VMFIs
5 For more on the origins and evolution of the BKKs, see Patten and Rosengard (1991:
ch. 4).
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
and BRI village units in the markets they served, so the potential for conflict of
interest was negligible.6 When it became clear that BI could not directly supervise
the more than 5,000 VMFIs, it instructed BRI to again supervise them on its behalf.
Beginning in the mid-1990s, BI paid part of the costs of such supervision; before
that, the VMFIs had covered all of these costs.
In 1978–79, the central government, with assistance from the United States
Agency for International Development (USAID), launched the Provincial Area
Development Program with the objective of testing ideas on how government
might reach the poor and assist them to improve their income-earning capacity.
The program was managed by a team from the Ministry of Home Affairs, the
National Development Planning Agency, the Ministry of Finance and BRI, and
operated in selected districts7 in six provinces: West Sumatra, West Java, East Java,
South Kalimantan, West Nusa Tenggara and (later) Bali. Local governments proposed projects to the provincial development planning agencies, where they were
cleared with the appropriate technical agency. A large percentage of the projects
proposed were for the provision of loans.
The Provincial Area Development Program tested 39 different methods of delivering loans at the local level, including through technical agencies, cooperatives
and special groups organised to rotate credit among their members. Although
expansion of the existing VMFI system to additional villages was not tested, of all
the credit delivery systems that were trialled, the only one found capable of delivering credit at the village level on a sustainable basis was that of a sub-districtlevel credit institution serving its constituent villages through motorcycle teams
operating village posts. These institutions needed to be supervised, trained, supported with simple asset and liability management facilities, and inspected by
a commercial bank such as a provincial development bank.8 At the start of the
program, additional capital was injected into the BKKs in five pilot districts in
Central Java. These institutions immediately expanded, began to make a profit
and became fully sustainable. This encouraged a similar injection of capital into
the remaining BKKs outside the pilot districts, with the same result.
In the early 1980s, the basic idea of a lending organisation located in the subdistrict, and sending motorcycle teams to villages to deliver credit services, was
expanded to test districts in other provinces participating in the Provincial Area
Development Program. These bodies included the credit institutions for smallscale activities (lembaga kredit usaha rakyat kecil, LKURKs) in East Java, the rural
credit institutions (lembaga kredit pedesaan, LKPs) in West Nusa Tenggara, and the
BKKs and small enterprise financing institutions (lembaga pembiayaan usaha kecil,
LPUKs) in South Kalimantan. They were successful in delivering credit at the vil-
6 Despite their name, BRI village units actually operate at the sub-district level, so do not
compete with the VMFIs. In contrast, the market banks operate at the sub-district or district
level, thus potentially competing with BRI branches and village units.
7 For brevity, in this paper the term ‘district’ should be taken to include kabupaten (districts) and kota (municipalities). Both are Level II governments directly under the Level I
provinces.
8 Each province had one provincial development bank (bank pembangunan daerah, BPD),
jointly owned by the provincial and district governments.
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The promise and the peril of microfinance institutions in Indonesia
91
lage level on a sustainable basis, and later became known collectively as LDKPs—
or GMFIs as we refer to them here.
It soon became apparent that supervision by a provincial development bank
was crucial to the success of these GMFIs; they succeeded best where there was an
authorised and competent provincial development bank to supervise them. The
system was less successful in delivering credit to villages on a sustainable basis
in places like West Java, where the local government decided to set up its own
supervision system and use the provincial bank only to monitor financial reports.
In West Sumatra, the local GMFIs, known as pitih paddy banks (lumbung pitih
nagari, LPNs), were located in the pitih, a traditional level of local government that
was no longer active. The Provincial Area Development Program encouraged the
provincial government to give responsibility for supervision and support services
to the West Sumatra provincial development bank, but by the time this actually
occurred, many of these institutions were barely operational.
In the mid-1980s, the USAID-funded Financial Institutions Development project
expanded the development of financial institutions to additional districts in the
provinces covered by the Provincial Area Development Program (West Sumatra,
West Java, East Java, South Kalimantan and West Nusa Tenggara). In the second
phase of this project in the latter part of the decade, Bali was added to these provinces. In Bali, the operations of the village credit institutions (lembaga perkreditan
desa, LPDs) were headquartered in the village, not the sub-district, so there was
no need for mobile teams to travel to the villages. The villages in question were
Bali’s traditional villages (desa adat) rather than the official villages (desa dinas) of
the formal government organisation, and therefore gained strength from being
tied into the island’s cultural traditions.
Development (and deterioration) from 1992 to the present
The GMFIs, along with the VMFIs, village banks and other institutions delivering
microenterprise credit at the village level, were recognised in article 58 of the 1992
Banking Law.9 The law’s implementing regulation again recognised these existing community and village-level financial institutions,10 but it also lumped them
together with all other people’s credit banks (bank perkreditan rakyat, BPRs—essentially, community banks), set a minimum capital requirement of Rp 50 million and
gave them five years to become fully licensed as BPRs. At the time, Rp 50 million
was far more than the capital required by a village-level credit institution. It was
possible that the best of the GMFIs organised at the sub-district level, including
many BKKs in Central Java, would be able to achieve this requirement within
the five-year period. However, the implementing regulation did not clarify what
would happen to institutions that did not become BPRs within this period. Since
that time, further large increases in the minimum capital requirement have only
strengthened the initial impact. The 1992 Banking Law became one of the two
defining events of the decade for VMFIs and GMFIs, the other being the Indonesian
monetary and economic crisis beginning in 1997. As microfinance institutions, the
VMFIs and GMFIs turned out to be in a far better position to deal with the monetary and economic crisis than with the effects of inappropriate regulation.
9 Law 7/1992 on Banking (see McLeod 1992).
10 Government Regulation 71/1992 on People’s Credit Banks.
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
CURRENT STATUS OF VILLAGE-ORIENTED
MICROFINANCE INSTITUTIONS
BKDs in Java and Madura
The first village credit bodies (badan kredit desa, BKDs) were established in the
1890s during the Dutch colonial period.11 At the end of May 2003, Java and
Madura had 4,518 active and 827 non-active BKDs. The active BKDs had a total of
Rp 186.8 billion of loans outstanding to 438,938 borrowers—implying an average
loan size of Rp 426,000 (about $51). Their combined equity (including retained
profits) totalled Rp 222.5 billion, resulting in a combined, system-wide capital
adequacy ratio (CAR) of more than 100%. One of the results of this high CAR is
that most BKDs do not need to mobilise savings to have sufficient loanable funds
to meet village loan demand. Nevertheless they had 524,671 savers with Rp 35.3
billion in their savings instrument, Tabungan BKD.
The elected village head is ex officio principal commissioner of the BKD, and
chooses two other commissioners. The accounts are discussed at least once a year
at a general meeting of the members of the village. Most BKDs are open only once
a week, on market days. A book-keeper serves four or five BKDs, and is trained
and paid by BRI with funds the BKDs themselves provide on the basis of their
loan portfolio size.
The BKDs are reasonably successful at delivering microenterprise loans at the
village level. Their interest rates are almost double those of the BRI village units,
but the loans involve much lower transaction costs for the borrower. They typically go to very small enterprises operating almost entirely within the village,
and owned mainly by women. If borrowers in outlying villages had to travel to
sub-district headquarters to arrange and service their loans, they would find their
transaction costs much higher than the interest they actually pay.
The BKDs also provide savings services, but savers are able to make withdrawals only on the days they are open. This is not completely satisfactory, since a
major reason for saving by low-income people is to meet family emergencies,
which cannot be programmed for a certain day of the week. But most BKDs have
little incentive to provide savings services, since additional funds are surplus to
lending requirements; the savings they collect are therefore simply deposited in
an interest-bearing account at BRI. Savings deposits in the BKDs are not insured,
though with their large equity the chances of loss through collapse of the institution are small.
BKDs are supervised by BRI branch staff ‘on behalf of BI’, which pays part of
the supervision costs. The BRI supervisor goes through the books of each BKD at
least once a month and checks on borrowers who have defaulted on their loans.
Any problems found are reported to the district government, which is charged
with ordering the action necessary to correct them. Asset and liability management is very simple. If there is a surplus of liquidity, it is deposited in a BRI branch
or village unit; if there is a shortage of loanable funds, as might happen in a relatively new BKD, the BKD may be able to borrow from BRI.
In the past there has been some misunderstanding about the financial condition of the BKDs’ credit portfolios. Because the procedures for writing off bad
loans were complicated, BKDs simply left bad loans in their portfolios, inflating
11 For further information on the BKDs, see BRI International Visitors Program (1998).
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The promise and the peril of microfinance institutions in Indonesia
93
the nominal level of loans outstanding, and displaying misleadingly high levels
of bad debt to the casual observer. In addition, they often did not fully reserve
against the bad debt in their portfolios, leading to some over-statement of profits
and equity. Under instruction from BRI, the balance sheets have recently been
cleaned up. Once the backlog of bad debt had been written off, BRI instructed the
BKDs to establish a routine, formula-based system of reserving for bad debt; they
were also instructed to automatically write off unrecoverable loans (which were
to be 100% reserved against) by moving them from the balance sheet to an offbalance ‘black list’ after a certain period. BRI also instructed its local branch managers and BKD supervisors to work with local governments to develop action
plans for the 800-odd inactive BKDs, many of which were insolvent.
To support BKDs that have not built up enough capital to fully meet loan
demand in the villages they serve, BRI has asked BI for permission to lend to
them.12 BRI’s compliance division considers special permission to be necessary
because of continuing uncertainty over the legal status of BKDs. Along with the
GMFIs, they were specifically recognised in the Banking Law of 1992. However,
subsequent decrees under this law did not differentiate between their capital
requirements and those of privately owned BPRs, even though the capital requirements of a BPR are far greater than those of an institution serving a single village.
Legal uncertainty also extends to the BKDs’ status as deposit-taking institutions,
largely preventing their spread to new areas since 1992. Because deposit taking
has typically not been a core activity for them, it should be possible to develop
a way around this legal obstacle without waiting for a new law on microfinance
institutions; one possibility would be for them to act as savings agents on behalf
of a commercial bank such as BRI.
BKKs in Central Java
Over the past decade the sub-district credit bodies (badan kredit kecamatan, BKKs)
in Central Java have employed a number of strategies with respect to the 1992
Banking Law. As of 31 December 2002, 350 of them had succeeded in achieving
the status of BPRs (or BKK–BPRs, as we call them here), while 160 continued to
operate as before (table 1).13
Two important trends can be observed for BKKs that have succeeded in becoming BPRs or are attempting to do so. First, during the process of becoming BPRs,
many BKKs consolidated their operations at the sub-district level and eliminated
the motorcycle teams that had previously provided credit at the village level.
Thus, the period since 1992 has seen a withdrawal rather than an expansion of
banking services in the villages. This tends not to show up in the statistics on the
number of village posts; instead, the level of service to the village simply drops
from weekly to monthly or less.
Second, at least since the crisis of 1997–98, payroll deduction lending to salaried
workers has been heavily emphasised. Such loans have become a much larger
12 At the time of writing, BI was still considering this request.
13 BI data do not differentiate local government-owned (perusahaan daerah, PD) BKK–BPRs
from the more numerous privately owned (perseroan terbatas, PT) BPRs. However, the authors were able to obtain detailed data on both BKK–BPRs and BKKs from the Central Java
provincial development bank.
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
TABLE 1 Microfinance in Central Java a
BPRsb
(12/02)
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Offices (no.)
City/district level
Sub-district level
Village posts
BKK–
BPRs
(12/02)
BKKs
BKDs
(12/02)
(5/03)
350
3,327
160
1,046
1,653
230
BPD
BRI Village
Units
(12/02)
(5/03)
119
80
783
27
Credit outstanding
Rp trillion
No. of loans (‘000)
1,328.9
390.4
595.2
457.4
127.8
128.7
42.4
137.2
2,351.3
625.7
2,411.8
690.8
Savings
Rp trillion
No. of accounts (‘000)
1,304.7
852.5
534.4
975.4
120.6
500.1
13.6
234.9
840.0
625.7
3,721.5
5,470.3
a
Central Java had 29 districts, six municipalities, 534 sub-districts and 8,543 villages in
2003. Its population was 31.8 million (8.24 million households) in 2002. See appendix for
an explanation of the various types of financial institutions.
b
Excluding BKK–BPRs.
Sources: Bank Indonesia; Bank Jateng; Bank Rakyat Indonesia; Badan Pusat Statistik.
part of these institutions’ loan portfolios, while the percentage of the portfolios
comprising loans to microenterprises has declined accordingly. This same trend is
apparent in the portfolios of BRI village units and provincial development banks,
as well as those of the former GMFIs in other provinces.
The operations of Central Java’s BKK–BPRs have been adversely affected by BI
regulations, which have diminished the role of the provincial development bank
in providing asset and liability management services. Connected-party exposure
limits are being applied to the deposits of local government-owned BPRs with the
provincial development bank, and to the latter’s loans to the former, because the
ownership of both types of institution is considered to be the same. In practice,
this means that a BPR must go to at least one other bank, other than the provincial
development bank and other Central Java BPRs, to place its excess liquidity if this
is more than 10% of its equity. Previously such deposits were a valuable source of
liquidity for the provincial development bank, which used part of the earnings on
these funds to help pay the cost of BKK supervision and training. With the BKKs
now forced to spread their deposits to other banks, the provincial development
bank is finding it less attractive to support local government-owned BPRs. Ultimately, this means that the bank is unwilling to supervise BKK–BPRs as carefully
as before. Application of the connected-party rules in this way makes BKK–BPRs
riskier, not less risky. The regulation that the provincial development bank is not
permitted to lend an amount more than 10% of its capital to the BPRs has not
yet restricted such lending, but it may in the future. For this calculation, all the
local government-owned BPRs are lumped together as if they were a single bank,
because their ownership is considered to be the same.
The promise and the peril of microfinance institutions in Indonesia
95
TABLE 2 Microfinance in East Java a
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Offices (no.)
City/district level
Sub-district level
Village posts
Credit outstanding
Rp trillion
No. of loans (‘000)
Savings
Rp trillion
No. of accounts (‘000)
BPRsb
LKURKs
BKDs
(12/02)
(4/03)
(5/03)
357
BPR
Jatim
(4/03)
22
39
156
2,291
BPD
BRI Village
Units
(12/02)
(5/03)
84
651
39
1,116.1
10.4
134.2
264.6
85.5
14.7
2,180.5
546.3
972.9
560.8
3.0
0.0
19.3
228.7
96.0
67.2
3,856.9
4,759.1
a
East Java had 29 districts, nine municipalities, 624 sub-districts and 8,457 villages in 2003.
Its population was 35.2 million (9.87 million households) in 2002. See appendix for an
explanation of the various types of financial institutions.
b
Excluding BPR Jatim.
Sources: Bank Indonesia; BPR Jatim; Bank Jatim; Bank Rakyat Indonesia; Badan Pusat
Statistik.
One result of the movement to transform BKKs into BPRs appears to be a significant increase in competition at the sub-district level for microcredit and savings
customers. Although BKKs (like other GMFIs) tend to make somewhat smaller
loans on average through their sub-district offices than BRI village units, there is
considerable overlap in the market segment served. Such competition is certainly
beneficial to borrowers and savers in the areas surrounding the sub-district centre. It is unfortunate, however, that this has been accompanied by a withdrawal of
services from relatively distant villages.
The overall status of microfinance activity in Central Java is shown in table 1.
LKURKs in East Java
In East Java, the change in status of the credit institutions for small-scale activities
(lembaga kredit usaha rakyat kecil, LKURKs) established in the early 1980s has gone
through two stages. First, many of the more successful ones were able to meet BI’s
criteria and become BPRs. Next, in 2001, 62 of these BPRs were consolidated into
a single institution, BPR Jatim, with one head office, 21 branches and 39 cash posts
(table 2). The main reason cited for this consolidation was to eliminate the large
number of commissioners and directors required by BI regulation for each BPR;
it would also allow the movement of personnel from branch to branch as needed
and facilitate the setting up of regular staff training courses. It was hoped that the
consolidation would protect BPR Jatim from government interference in the selection of staff, allowing it to base its choice on education, mathematical competence
and other objective criteria.
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
The consolidation into one institution has simplified the audit task of BI,
which does not have the capacity to audit a large number of small BPRs. Even if
undertaken annually, a BI audit would not be an adequate substitute for the close
supervision previously provided by the provincial development bank. It had one
supervisor in each of its branches, thus allowing the semi-monthly or monthly
checking that has been found necessary to keep microfinance institutions healthy.
Supervision of the remaining 156 LKURKs that were not consolidated into BPR
Jatim has been moved from the provincial development bank to BPR Jatim. It is
expected that in time many of these will become offices of BPR Jatim rather than
remain separate BPRs.
The same trends as were apparent in the development of BKKs in Central Java
are also found in East Java. There has been consolidation of credit and savings
operations at the sub-district level and withdrawal of the motorcycle teams that
formerly delivered credit services to more distant villages. (This occurred at the
time of conversion to BPR status, not at the time of consolidation of the 62 BPRs
into a single BPR Jatim.) There has also been the same movement towards lending
to salaried employees who agree to repay their loans through automatic payroll
deductions.
The overall status of microfinance activity in East Java is shown in table 2.
LKPs in West Nusa Tenggara
The situation in West Nusa Tenggara (Nusa Tenggara Barat, NTB) is similar to
that in East Java. The province’s rural credit institutions (lembaga kredit pedesaan,
LKPs) were set up on the same general lines as the LKURKs, with a staff of three
or four and direct supervision and support from the provincial development
bank, each branch of which had at least one officer whose job it was to visit all
LKPs on a regular basis—at least once a month. After the BI regulations for BPRs
under the 1992 Banking Law became known, the provincial government decided
to convert all LKPs to BPRs (here called LKP–BPRs), although in some cases small
or problem institutions were first merged into neighbouring LKPs. As a result, all
sub-districts in West Nusa Tenggara continue to be served by an LKP–BPR, some
serving more than one sub-district (table 3).
In the conversion to BPRs, the close supervisory role of the provincial development bank was lost. Instead, BI attempted to supervise each BPR directly, but it
simply did not have enough staff to do so; the head of one BPR told us that his
institution had been audited only twice in the five years since its establishment. A
second important problem is lack of control by BPR management and supervisory
boards over the hiring of staff. Each staff appointment is made by the provincial government as if it were an appointment to the provincial bureaucracy. As a
result, insufficient consideration is given to candidates’ specific qualifications for
bank employment.
At the time of writing, the provincial government was seriously considering
whether to consolidate the LKP–BPRs into a single BPR for the whole of the province, as was done in East Java. However, there appeared to be a difference of
opinion between the provincial and district governments, with the latter generally favouring more limited consolidation of all sub-district-level LKP–BPRs into
district-level BPRs with sub-district-level branches. The core of the disagreement
The promise and the peril of microfinance institutions in Indonesia
97
TABLE 3 Microfinance in West Nusa Tenggara a
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Privately
Owned
BPRs
(12/02)
Offices (no.)
City/district level
Sub-district level
Village posts
Credit outstanding
Rp trillion
No. of loans (‘000)
Savings
Rp trillion
No. of accounts (‘000)
Local
Governmentowned BPRs
(12/02)
LKP–
BPRs
BPD
(12/02)
(12/02)
BRI
Village
Units
(5/03)
0
15
18
46
51
17
0
13.4
69.0
34.9
49.3
139.3
21.1
88.3
399.1
197.0
41.8
527.1
209.7
391.9
0
a
West Nusa Tenggara had six districts, two municipalities, 62 sub-districts and 703 villages in 2003. Its population was 4.2 million (1.1 million households) in 2002. See appendix
for an explanation of the various types of financial institutions.
Sources: Bank Indonesia; BPD NTB; Bank Rakyat Indonesia; Badan Pusat Statistik.
had little to do with efficient operations or optimal coverage; rather, it was about
the allocation of dividends from the profits of the BPRs.
Since the implementation of regional autonomy in 2001 and the handing of
new responsibilities to the districts and provinces, most local governments have
perceived themselves to be short of funds. District governments are particularly
eager to acquire or establish sustainable, wholly owned financial institutions of
their own in the hope of realising a steady dividend stream (although considerations of prestige and patronage also play a role). Consolidation into a single
LKP–BPR at the provincial level would probably involve the provincial government taking a significant share of ownership, without paying full compensation
to the current local government owners of the merging institutions for the dilution of their equity. The latter would then receive a correspondingly smaller share
of the profits contributed to the new institution by the LKP–BPRs in their district.
As noted above, under the present set-up with individual BPRs, district governments have relatively little influence over staffing and operations. Whether consolidation into district-level BPRs would mean more government interference in
staffing and operations would depend on whether the supervisory boards of the
BPRs were given full control over such matters.
Not only has financial pressure proven to be one source of disagreement between
the provincial and district governments, but pressure to increase dividends rapidly has resulted in a repeat of the same trends observed in Central and East Java:
consolidation of operations at the sub-district level; abandonment of lending
services at the village level by eliminating motorcycle teams; and concentration
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
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on loans to salaried employees. Although in most cases village service appears to
have been profitable, regulatory pressures, combined with staff shortages, efficiency concerns and pursuit of short-term profits in faster-growing urban markets, have consistently led to withdrawal of services at the village level.
The overall status of microfinance activity in West Nusa Tenggara is shown in
table 3.
LPDs in Bali
In terms of effective access to and utilisation of microfinance services, the island
province of Bali has achieved far more than any other area in Indonesia. With
nearly as many microfinance loans as households, no other province approaches
Bali’s ratio of microfinance loans to total households. The phrase ‘Bali is different’ was a recurring one during the authors’ field visits to Bali. The success of
microfinance in Bali is not due to a single institution. Rather, it is the result of
several microfinance institutions all showing strong outreach performance. While
the BRI village units reach about the same proportion of households as elsewhere,
Bali’s privately owned BPRs are unusually active, and appear to be reaching more
borrowers in total. Indeed, Bali is in the unusual position of having more BPRs
than BRI village units (table 4).14 In addition, some privately owned commercial
banks, the best known of which is Bank Dagang Bali, are active in commercial
microfinance. While the provincial development bank makes most of its loans to
employees rather than enterprises, its wide outreach to private sector workers
makes it another important source of micro-scale finance to households.
However, the greatest difference in microfinance access between Bali and other
provinces is due to its village credit institutions (lembaga perkreditan desa, LPDs).
They are an integral part of the desa adat (traditional village), as distinct from
the desa dinas (official village)—the smallest unit of local government throughout Indonesia. On average, there are more than two desa adat for each desa dinas,
but this ratio can vary widely from area to area, and the borders of the two village types frequently cut across each other. Desa adat are highly participatory and
accountable local religious–social institutions. Bali’s generally vibrant and microenterprise-friendly economy, the strong bond of ethnic Balinese to the desa adat,
and scrupulous traditional attitudes towards fulfilling debt obligations and the
attendant maintenance of social standing, combine to create an environment that
is very nearly ideal for the success of the LPDs.
While some LPDs are quite large, with total assets in the tens of billions of
rupiah, in general they have consistently and successfully resisted changing their
status to become BPRs. According to the managers and supervisors we interviewed, their governance and focus on serving the (Balinese) residents or members of a particular desa adat do not match well with the structure and regulations
of BPRs. At least one desa adat, Sanur, owns a BPR in addition to its LPD, but the
purpose of the two institutions is quite different: while the BPR is considered a
purely commercial enterprise, the LPD is intended to ensure that all residents
have access to basic financial services.
Local government is supportive of the LPDs, and desa dinas appreciate the contribution of desa adat to the infrastructure and development budgets of the villages.
14 See Winship (2003) for a more in-depth look at the BPR sector in Bali.
The promise and the peril of microfinance institutions in Indonesia
99
TABLE 4 Microfinance in Bali a
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Privately
Owned
BPRs
(12/02)
Offices (no.)
City/district level
Sub-district level
Village posts
Local
Governmentowned BPRs
(12/02)
LPDs
BPD
(12/02)
(12/02)
144
12
34
3
1,206
BRI
Village
Units
(5/03)
95
6
Credit outstanding
Rp trillion
No. of loans (‘000)
489.1
99.5
16.3
4.3
670.6
283.5
1,440.7
159.1
342.7
69.6
Savings
Rp trillion
No. of accounts (‘000)
421.7
570.7
17.6
26.7
672.5
857.1
1,776.5
2,915.9
934.8
550.9
a Bali had eight districts, one municipality, 53 sub-districts, 678 desa dinas and 1,406 desa
adat in 2003. Its population was 3.2 million (848,000 households) in 2002. See appendix for
an explanation of the various types of financial institutions.
Sources: Bank Indonesia; Bank BPD Bali; Bank Rakyat Indonesia; Badan Pusat Statistik.
At the provincial level, the governor was active in advocating to BI that the LPDs
be allowed to maintain their special non-bank status while continuing to mobilise
savings from within the village. At present BI is quite supportive of them. The
current BI branch manager pointed out to us that the central bank already has a
big job supervising more than 140 BPRs; attempting to supervise more than 1,200
LPDs as well would be impossible.
Each LPD is staffed by a minimum of three persons—a manager, a teller and a
book-keeper—all from the desa adat. Most are open five or six days per week, and
most employ staff on a full-time basis, even during the start-up phase. This entails
a certain amount of sacrifice on the part of staff in a new LPD, who are not well
compensated for the hours worked, but also provides a strong incentive to build
up the business. Because each LPD is a stand-alone institution, its managers have
no real career path, except to develop their own LPD. To provide an indicator of
the ability of managers as well as a degree of job status, a training certification
system has been developed.
Within the desa adat, each LPD is supervised by a supervisory committee,
which receives an honorarium. Typically, the desa adat appoints more members
to the supervisory board than are required by regulation, in order to allow wider
accountability and daily supervision. In such cases, the honorarium for supervisory board members is also divided. External supervision has been relatively
weak, though the underlying strength of most LPDs at the local level has generally
prevented significant problems from developing. Recently, the provincial government has taken steps to modify the system of supervision substantially. Under the
new system, the provincial development bank will be responsible for financial
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100
Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
supervision (essentially, audit and monitoring of regular financial reports), while
a newly formed, district-level supervisory body will oversee training and operational supervision. Financing to cover the cost of this new body is intended to
be generated by the LPD system itself, though the implementation of this is still
evolving. Up to the present, much of the development of the LPD system has been
externally facilitated, with significant policy and training inputs from the Promotion of Small Financial Institutions project of Deutsche Gesellschaft für Technische
Zusammenarbeit (GTZ). With the new approach to supervision, however, most
training and much of the institutional development of LPDs will be shouldered
by the new supervisory structure.
In addition to its role as financial supervisor, the provincial development bank
fulfils a number of other functions for the LPDs: management of excess liquidity; providing a line of credit; monitoring and reporting; and playing a key role
in institutional development. According to supervisors from both the provincial
bank and the new district-level supervisory body, the provincial government
currently has plans to establish LPDs in all the desa adat that do not yet have
one—over 200 in all. This will probably create a need for a workable ‘part-time’
operating model along the lines of the BKDs, as many of the remaining desa adat
are unlikely to be able to support a full-time LPD.
Uniquely among Indonesia’s VMFIs, Bali’s LPDs were able to retain their status
and prosper throughout the 1990s, when regulatory issues created serious operational difficulties for VMFIs in every other province. A strong sense of local ownership, support from local and provincial governments, consistent support from
the provincial development bank, timely realisation by BI of the benefits of the
system, and capable technical assistance and institutional development played
mutually reinforcing roles in preserving the character and mission of the LPDs.
As a result, of all the VFMI systems in use across Indonesia, the LPD system has
come closest to achieving the goal of providing universal access to microfinance
services. While not all aspects of the LPD experience—particularly Balinese attitudes towards debt and the cohesiveness of the desa adat—can be replicated elsewhere, the ‘win–win’ institutional relationships developed in Bali could serve as
a model for any province.
The overall status of microfinance activity in Bali is shown in table 4.
BKKs and LPUKs in South Kalimantan
In contrast to the happy outcome in Bali, the story of the sub-district credit bodies (badan kredit kecamatan, BKKs) of South Kalimantan is largely one of missed
opportunities and unrealised potential. Established under a governor’s decree in
1985 (EKU 09/1985), they were intended to finance micro- and small-scale enterprises, mainly in rural areas. Over time the provincial government established 34
BKKs, which were initially permitted to mobilise savings. This changed following
the enactment of the 1992 Banking Law, when the provincial government decided
to follow the new law literally and immediately. Apparently overlooking both
article 58 of the law, which formally recognised GMFI operations such as those of
the BKKs, and the implementing regulation providing for a five-year transition
period, the provincial government prohibited BKKs from accepting savings, to
take effect immediately. For most BKKs, this left only their initial capital for use
as loanable funds.
The promise and the peril of microfinance institutions in Indonesia
101
TABLE 5 Microfinance in South Kalimantana
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Privately
Owned
BPRs
(6/03)
Offices (no.)
Headquarters & other
Sub-district level
Village posts
Local
Governmentowned BPRs
(6/03)
BKKs
LPUKs
(6/03)
(6/03)
6
20
14
1
75
1.2
6.3
4.2
12.7
Credit outstanding
Rp trillion
No. of loans (‘000)
26.2
2.9
12.1
8.1
Savings
Rp trillion
No. of accounts (‘000)
20.3
9.5
7.2
23.2
BRI
Village
Units
(6/03)
72
3
162.5
36.6
479.6
505.7
a
South Kalimantan had nine districts, two municipalities, 119 sub-districts and 1,946
villages in 2002. Its population was 3.1 million (830,000 households) in 2002. See appendix
for an explanation of the various types of financial institutions.
Sources: Bank Indonesia; BPD Kalimantan Selatan; Bank Rakyat Indonesia; Badan Pusat
Statistik.
Despite this, the provincial government went on to establish, through another’s
governor’s decree (316/1993), 75 small enterprise financing institutions (lembaga
pembiayaan usaha kecil, LPUKs) in the remaining sub-districts that did not have a
BKK, plus one special unit in the governor’s office (table 5). These provide credit
to microenterprises but do not collect savings. At the same time, some BKKs (20 at
the time of writing) have changed their status to become BPRs, because they have
grown enough to fulfil the minimum capital requirement for doing so. Of these,
15 are considered sound by BI.
The staff of most BKKs and LPUKs consist of a manager, cashier, book-keeper
and credit officer. The manager is responsible to the sub-district head for the performance of the BKK/LPUK. The sub-district head is an employee of the district
government and reports directly to the district head. The minimum staffing of a
BKK or LPUK is two persons. This is considered risky by supervisors owing to the
lack of separation of jobs, but is nevertheless implemented in some of the smallest
BKKs and LPUKs for reasons of efficiency. The local government-owned BPRs,
on the other hand, carry the full staffing structure required of BPRs: a board of
supervisors, board of directors, internal controller, funds manager, loan manager,
cashier and book-keeper.
The capital of the BKKs/LPUKs originates from provincial government equity
participatio
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
THE PROMISE AND THE PERIL OF MICROFINANCE
INSTITUTIONS IN INDONESIA
Jay K. Rosengard , Richard H. Patten , Don E. Johnston Jr & Widjojo
Koesoemo
To cite this article: Jay K. Rosengard , Richard H. Patten , Don E. Johnston Jr & Widjojo
Koesoemo (2007) THE PROMISE AND THE PERIL OF MICROFINANCE INSTITUTIONS
IN INDONESIA, Bulletin of Indonesian Economic Studies, 43:1, 87-112, DOI:
10.1080/00074910701286404
To link to this article: http://dx.doi.org/10.1080/00074910701286404
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Bulletin of Indonesian Economic Studies, Vol. 43, No. 1, 2007: 87–112
THE PROMISE AND THE PERIL OF
MICROFINANCE INSTITUTIONS IN INDONESIA
Downloaded by [Universitas Maritim Raja Ali Haji] at 20:02 18 January 2016
Jay K. Rosengard*
John F. Kennedy School of Government, Harvard University
Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo*
Independent Consultants, United States and Indonesia
After the 1997 East Asian crisis, central banks throughout the region tried to reduce
the risk of future bank failures by promulgating regulatory reforms. The results
in Indonesia have been to concentrate rather than mitigate banking risks, and to
decrease the access of low-income households and enterprises to formal financial
services, especially in rural areas. The most severe casualties of the ‘reforms’ have
been local government-owned microfinance institutions. In the provinces where
these institutions have functioned best, they have addressed a market failure by extending coverage to areas not served by conventional financial institutions. Understanding the past performance and potential for replication of these success stories
continues to be important because of the substantial gaps that remain in the access
of rural Indonesian households and microenterprises to financial services.
INTRODUCTION: THE UNINTENDED
CONSEQUENCES OF REGULATORY REFORM
After the 1997 monetary and economic crisis in East Asia, central bankers throughout the region tried to reduce the risk of future bank failures by promulgating
a series of regulatory reforms. The main assumptions behind the reforms were
that bigger financial institutions were safer than smaller ones, and that traditional
banking practices were less risky than non-conventional financial services.
Indonesia was no exception to the trend of financial sector re-regulation.
This meant that relatively small, community-based financial institutions were
instructed to merge into larger, centralised entities, and that innovative microfinance services were viewed with suspicion and hostility.
* The research for this article was commissioned by the German aid agency GTZ GmbH.
The authors thank Dr Alfred Hannig, Dr Dominique Gallman and Ibu Aimee Patalle for
their kind support of this work; the managers and staff of the regional offices of Bank Indonesia for their insights and for their assistance in arranging interviews with local financial
institutions; and the management and staff of provincial development banks and microfinance institutions for their time and patience. Finally, the authors wish to express their
appreciation to the editor and two anonymous referees for their helpful comments. We
retain full responsibility for any remaining errors.
ISSN 0007-4918 print/ISSN 1472-7234 online/07/010087-26
DOI: 10.1080/00074910701286404
© 2007 Indonesia Project ANU
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
The results have been to concentrate rather than mitigate banking risks, and to
decrease the access of low-income households and enterprises to formal financial
services, especially in rural areas. Among the casualties of the regulatory reforms
have been two broad categories of microfinance institutions, the first owned by
local governments and operating at both the sub-district (kecamatan) and village
(desa) levels, and the second owned by villages and operating at the village level
only.1 The generic terms for these are, respectively, village credit institutions (lembaga dana kredit pedesaan, LDKPs) and village credit bodies (badan kredit desa, BKDs).
But these institutions go by a variety of names in different parts of the archipelago, resulting in a bewildering array of acronyms (see appendix). To avoid confusion, in this paper for the most part we shall use the term ‘GMFIs’ to refer to local
government-owned microfinance institutions operating at the sub-district and
village levels, and ‘VMFIs’ to refer to village-owned microfinance institutions.2
The unintended consequences of the reforms are especially important because,
although Indonesia is recognised as a world leader in commercial microfinance,
it is also unique among developing countries in that its most successful microfinance institutions to date are public sector institutions such as the GMFIs and
VMFIs. In fact, the best-known microfinance provider in Indonesia is Bank Rakyat
Indonesia (BRI), a full-service commercial bank that was owned entirely by the
central government until the end of 2003, and whose majority owner is still the
state. But because BRI has been written about extensively elsewhere, it will not be
reviewed here.3
The purpose of this article is to offer suggestions on how the lessons from past
GMFI and VMFI accomplishments and failures can be utilised to guide current
efforts to expand the coverage of formal financial institutions, particularly in
provinces that do not yet have such institutions. In the provinces where they have
functioned best, GMFIs and VMFIs have proven to be sustainable, and have made
a significant contribution to increasing the access of low-income households and
microenterprises to microfinance, particularly in rural areas.
Understanding the past performance and potential for replication of GMFIs and
VMFIs continues to be important because substantial gaps remain in the access of
Indonesian households and microenterprises to microfinance services—despite
the success of a number of such institutions to date and despite the strong desire
of some senior policy makers to reduce the current degree of financial exclusion.
Indeed, recent surveys indicate that nearly 50% of Indonesian households continue to lack effective access to microcredit, while the proportion of rural households who actively use savings accounts is still below 40%.4
We begin our examination of the relevance, effectiveness and potential of the
GMFI/VMFI approach by reviewing the origins and development of these insti-
1 The new regulations also failed to address critical ambiguities and uncertainties in earlier legislation, further constraining the strategic and operational options of these local
government-owned microfinance institutions.
2 See Holloh (2001) for a survey of microfinance institutions in Indonesia.
3 For further information on BRI and its village units, see Patten and Rosengard (1991:
ch. 5) and Patten, Rosengard and Johnston (2001).
4 See, for example, BRI Survey Team and CBG Advisors (2001: section IV).
The promise and the peril of microfinance institutions in Indonesia
89
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tutions. We then assess their potential contribution and identify the key factors
determining their performance. These findings are used to develop recommendations for the development of GMFIs and VMFIs, with special attention given to
provinces that do not yet have such institutions.
DEVELOPMENT OF VILLAGE-ORIENTED
MICROFINANCE INSTITUTIONS
The development of institutions delivering banking services at the village level
can best be understood if looked at in three phases: development to the late 1970s;
development during the 1980s and up to the passage of the Banking Law of 1992;
and development (and deterioration) from 1992 to the present.
Development until the late 1970s
Indonesia’s original microfinance institutions, the VMFIs, began life in the 1890s as
bank desa (village banks) and lumbung desa (paddy banks, or facilities to store rice
rather than cash). They were first set up in Java and Madura during the Dutch colonial period as community organisations, and were supervised by BRI. Although
they proved to be highly durable, most notably by surviving the Great Depression
in good condition, nevertheless two major economic dislocations—the Japanese
occupation during World War II and hyperinflation during the mid-1960s—
resulted in the need for some to be revived with loan capital from BRI.
In the early 1970s the governor of Central Java set up a new type of organisation,
the sub-district credit body (badan kredit kecamatan, BKK), to provide microfinance
in villages where VMFIs had ceased to operate. Each BKK was headquartered in
the sub-district, with the sub-district head assigned responsibility for oversight.
These institutions reached borrowers in the villages by sending a motorcycle team
to each village once a week, or on market day in the five-day market cycle based
on the Javanese calendar. They relied on the recommendation of the village head,
who affirmed that the loan applicant was a village resident, had an enterprise
as stated and was financially reliable; their credit terms were modelled on those
of the VMFIs. Each BKK received a loan of Rp 1 million as start-up capital, to be
repaid in three years. By 1977–78 they had learned how to make loans at the village level, but in the process many of them had lost much of their original capital
and were not operating on a sustainable basis.5
Development until the passage of the Banking Law of 1992
The VMFIs experienced no significant change in their operations during the 1980s.
They continued to make very small loans at the village level for petty trading,
agriculture and handicraft enterprises. In 1988, at the initiative of BRI, the supervision of market banks and other local banks that could potentially compete with
BRI village units (the microfinance offices of BRI) was transferred to the central
bank, Bank Indonesia (BI), to avoid any conflict of interest. Unfortunately, BI misunderstood the nature of the VMFIs and took over direct supervision of them as
well. This was quite unnecessary: there was virtually no overlap between VMFIs
5 For more on the origins and evolution of the BKKs, see Patten and Rosengard (1991:
ch. 4).
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
and BRI village units in the markets they served, so the potential for conflict of
interest was negligible.6 When it became clear that BI could not directly supervise
the more than 5,000 VMFIs, it instructed BRI to again supervise them on its behalf.
Beginning in the mid-1990s, BI paid part of the costs of such supervision; before
that, the VMFIs had covered all of these costs.
In 1978–79, the central government, with assistance from the United States
Agency for International Development (USAID), launched the Provincial Area
Development Program with the objective of testing ideas on how government
might reach the poor and assist them to improve their income-earning capacity.
The program was managed by a team from the Ministry of Home Affairs, the
National Development Planning Agency, the Ministry of Finance and BRI, and
operated in selected districts7 in six provinces: West Sumatra, West Java, East Java,
South Kalimantan, West Nusa Tenggara and (later) Bali. Local governments proposed projects to the provincial development planning agencies, where they were
cleared with the appropriate technical agency. A large percentage of the projects
proposed were for the provision of loans.
The Provincial Area Development Program tested 39 different methods of delivering loans at the local level, including through technical agencies, cooperatives
and special groups organised to rotate credit among their members. Although
expansion of the existing VMFI system to additional villages was not tested, of all
the credit delivery systems that were trialled, the only one found capable of delivering credit at the village level on a sustainable basis was that of a sub-districtlevel credit institution serving its constituent villages through motorcycle teams
operating village posts. These institutions needed to be supervised, trained, supported with simple asset and liability management facilities, and inspected by
a commercial bank such as a provincial development bank.8 At the start of the
program, additional capital was injected into the BKKs in five pilot districts in
Central Java. These institutions immediately expanded, began to make a profit
and became fully sustainable. This encouraged a similar injection of capital into
the remaining BKKs outside the pilot districts, with the same result.
In the early 1980s, the basic idea of a lending organisation located in the subdistrict, and sending motorcycle teams to villages to deliver credit services, was
expanded to test districts in other provinces participating in the Provincial Area
Development Program. These bodies included the credit institutions for smallscale activities (lembaga kredit usaha rakyat kecil, LKURKs) in East Java, the rural
credit institutions (lembaga kredit pedesaan, LKPs) in West Nusa Tenggara, and the
BKKs and small enterprise financing institutions (lembaga pembiayaan usaha kecil,
LPUKs) in South Kalimantan. They were successful in delivering credit at the vil-
6 Despite their name, BRI village units actually operate at the sub-district level, so do not
compete with the VMFIs. In contrast, the market banks operate at the sub-district or district
level, thus potentially competing with BRI branches and village units.
7 For brevity, in this paper the term ‘district’ should be taken to include kabupaten (districts) and kota (municipalities). Both are Level II governments directly under the Level I
provinces.
8 Each province had one provincial development bank (bank pembangunan daerah, BPD),
jointly owned by the provincial and district governments.
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The promise and the peril of microfinance institutions in Indonesia
91
lage level on a sustainable basis, and later became known collectively as LDKPs—
or GMFIs as we refer to them here.
It soon became apparent that supervision by a provincial development bank
was crucial to the success of these GMFIs; they succeeded best where there was an
authorised and competent provincial development bank to supervise them. The
system was less successful in delivering credit to villages on a sustainable basis
in places like West Java, where the local government decided to set up its own
supervision system and use the provincial bank only to monitor financial reports.
In West Sumatra, the local GMFIs, known as pitih paddy banks (lumbung pitih
nagari, LPNs), were located in the pitih, a traditional level of local government that
was no longer active. The Provincial Area Development Program encouraged the
provincial government to give responsibility for supervision and support services
to the West Sumatra provincial development bank, but by the time this actually
occurred, many of these institutions were barely operational.
In the mid-1980s, the USAID-funded Financial Institutions Development project
expanded the development of financial institutions to additional districts in the
provinces covered by the Provincial Area Development Program (West Sumatra,
West Java, East Java, South Kalimantan and West Nusa Tenggara). In the second
phase of this project in the latter part of the decade, Bali was added to these provinces. In Bali, the operations of the village credit institutions (lembaga perkreditan
desa, LPDs) were headquartered in the village, not the sub-district, so there was
no need for mobile teams to travel to the villages. The villages in question were
Bali’s traditional villages (desa adat) rather than the official villages (desa dinas) of
the formal government organisation, and therefore gained strength from being
tied into the island’s cultural traditions.
Development (and deterioration) from 1992 to the present
The GMFIs, along with the VMFIs, village banks and other institutions delivering
microenterprise credit at the village level, were recognised in article 58 of the 1992
Banking Law.9 The law’s implementing regulation again recognised these existing community and village-level financial institutions,10 but it also lumped them
together with all other people’s credit banks (bank perkreditan rakyat, BPRs—essentially, community banks), set a minimum capital requirement of Rp 50 million and
gave them five years to become fully licensed as BPRs. At the time, Rp 50 million
was far more than the capital required by a village-level credit institution. It was
possible that the best of the GMFIs organised at the sub-district level, including
many BKKs in Central Java, would be able to achieve this requirement within
the five-year period. However, the implementing regulation did not clarify what
would happen to institutions that did not become BPRs within this period. Since
that time, further large increases in the minimum capital requirement have only
strengthened the initial impact. The 1992 Banking Law became one of the two
defining events of the decade for VMFIs and GMFIs, the other being the Indonesian
monetary and economic crisis beginning in 1997. As microfinance institutions, the
VMFIs and GMFIs turned out to be in a far better position to deal with the monetary and economic crisis than with the effects of inappropriate regulation.
9 Law 7/1992 on Banking (see McLeod 1992).
10 Government Regulation 71/1992 on People’s Credit Banks.
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92
Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
CURRENT STATUS OF VILLAGE-ORIENTED
MICROFINANCE INSTITUTIONS
BKDs in Java and Madura
The first village credit bodies (badan kredit desa, BKDs) were established in the
1890s during the Dutch colonial period.11 At the end of May 2003, Java and
Madura had 4,518 active and 827 non-active BKDs. The active BKDs had a total of
Rp 186.8 billion of loans outstanding to 438,938 borrowers—implying an average
loan size of Rp 426,000 (about $51). Their combined equity (including retained
profits) totalled Rp 222.5 billion, resulting in a combined, system-wide capital
adequacy ratio (CAR) of more than 100%. One of the results of this high CAR is
that most BKDs do not need to mobilise savings to have sufficient loanable funds
to meet village loan demand. Nevertheless they had 524,671 savers with Rp 35.3
billion in their savings instrument, Tabungan BKD.
The elected village head is ex officio principal commissioner of the BKD, and
chooses two other commissioners. The accounts are discussed at least once a year
at a general meeting of the members of the village. Most BKDs are open only once
a week, on market days. A book-keeper serves four or five BKDs, and is trained
and paid by BRI with funds the BKDs themselves provide on the basis of their
loan portfolio size.
The BKDs are reasonably successful at delivering microenterprise loans at the
village level. Their interest rates are almost double those of the BRI village units,
but the loans involve much lower transaction costs for the borrower. They typically go to very small enterprises operating almost entirely within the village,
and owned mainly by women. If borrowers in outlying villages had to travel to
sub-district headquarters to arrange and service their loans, they would find their
transaction costs much higher than the interest they actually pay.
The BKDs also provide savings services, but savers are able to make withdrawals only on the days they are open. This is not completely satisfactory, since a
major reason for saving by low-income people is to meet family emergencies,
which cannot be programmed for a certain day of the week. But most BKDs have
little incentive to provide savings services, since additional funds are surplus to
lending requirements; the savings they collect are therefore simply deposited in
an interest-bearing account at BRI. Savings deposits in the BKDs are not insured,
though with their large equity the chances of loss through collapse of the institution are small.
BKDs are supervised by BRI branch staff ‘on behalf of BI’, which pays part of
the supervision costs. The BRI supervisor goes through the books of each BKD at
least once a month and checks on borrowers who have defaulted on their loans.
Any problems found are reported to the district government, which is charged
with ordering the action necessary to correct them. Asset and liability management is very simple. If there is a surplus of liquidity, it is deposited in a BRI branch
or village unit; if there is a shortage of loanable funds, as might happen in a relatively new BKD, the BKD may be able to borrow from BRI.
In the past there has been some misunderstanding about the financial condition of the BKDs’ credit portfolios. Because the procedures for writing off bad
loans were complicated, BKDs simply left bad loans in their portfolios, inflating
11 For further information on the BKDs, see BRI International Visitors Program (1998).
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The promise and the peril of microfinance institutions in Indonesia
93
the nominal level of loans outstanding, and displaying misleadingly high levels
of bad debt to the casual observer. In addition, they often did not fully reserve
against the bad debt in their portfolios, leading to some over-statement of profits
and equity. Under instruction from BRI, the balance sheets have recently been
cleaned up. Once the backlog of bad debt had been written off, BRI instructed the
BKDs to establish a routine, formula-based system of reserving for bad debt; they
were also instructed to automatically write off unrecoverable loans (which were
to be 100% reserved against) by moving them from the balance sheet to an offbalance ‘black list’ after a certain period. BRI also instructed its local branch managers and BKD supervisors to work with local governments to develop action
plans for the 800-odd inactive BKDs, many of which were insolvent.
To support BKDs that have not built up enough capital to fully meet loan
demand in the villages they serve, BRI has asked BI for permission to lend to
them.12 BRI’s compliance division considers special permission to be necessary
because of continuing uncertainty over the legal status of BKDs. Along with the
GMFIs, they were specifically recognised in the Banking Law of 1992. However,
subsequent decrees under this law did not differentiate between their capital
requirements and those of privately owned BPRs, even though the capital requirements of a BPR are far greater than those of an institution serving a single village.
Legal uncertainty also extends to the BKDs’ status as deposit-taking institutions,
largely preventing their spread to new areas since 1992. Because deposit taking
has typically not been a core activity for them, it should be possible to develop
a way around this legal obstacle without waiting for a new law on microfinance
institutions; one possibility would be for them to act as savings agents on behalf
of a commercial bank such as BRI.
BKKs in Central Java
Over the past decade the sub-district credit bodies (badan kredit kecamatan, BKKs)
in Central Java have employed a number of strategies with respect to the 1992
Banking Law. As of 31 December 2002, 350 of them had succeeded in achieving
the status of BPRs (or BKK–BPRs, as we call them here), while 160 continued to
operate as before (table 1).13
Two important trends can be observed for BKKs that have succeeded in becoming BPRs or are attempting to do so. First, during the process of becoming BPRs,
many BKKs consolidated their operations at the sub-district level and eliminated
the motorcycle teams that had previously provided credit at the village level.
Thus, the period since 1992 has seen a withdrawal rather than an expansion of
banking services in the villages. This tends not to show up in the statistics on the
number of village posts; instead, the level of service to the village simply drops
from weekly to monthly or less.
Second, at least since the crisis of 1997–98, payroll deduction lending to salaried
workers has been heavily emphasised. Such loans have become a much larger
12 At the time of writing, BI was still considering this request.
13 BI data do not differentiate local government-owned (perusahaan daerah, PD) BKK–BPRs
from the more numerous privately owned (perseroan terbatas, PT) BPRs. However, the authors were able to obtain detailed data on both BKK–BPRs and BKKs from the Central Java
provincial development bank.
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
TABLE 1 Microfinance in Central Java a
BPRsb
(12/02)
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Offices (no.)
City/district level
Sub-district level
Village posts
BKK–
BPRs
(12/02)
BKKs
BKDs
(12/02)
(5/03)
350
3,327
160
1,046
1,653
230
BPD
BRI Village
Units
(12/02)
(5/03)
119
80
783
27
Credit outstanding
Rp trillion
No. of loans (‘000)
1,328.9
390.4
595.2
457.4
127.8
128.7
42.4
137.2
2,351.3
625.7
2,411.8
690.8
Savings
Rp trillion
No. of accounts (‘000)
1,304.7
852.5
534.4
975.4
120.6
500.1
13.6
234.9
840.0
625.7
3,721.5
5,470.3
a
Central Java had 29 districts, six municipalities, 534 sub-districts and 8,543 villages in
2003. Its population was 31.8 million (8.24 million households) in 2002. See appendix for
an explanation of the various types of financial institutions.
b
Excluding BKK–BPRs.
Sources: Bank Indonesia; Bank Jateng; Bank Rakyat Indonesia; Badan Pusat Statistik.
part of these institutions’ loan portfolios, while the percentage of the portfolios
comprising loans to microenterprises has declined accordingly. This same trend is
apparent in the portfolios of BRI village units and provincial development banks,
as well as those of the former GMFIs in other provinces.
The operations of Central Java’s BKK–BPRs have been adversely affected by BI
regulations, which have diminished the role of the provincial development bank
in providing asset and liability management services. Connected-party exposure
limits are being applied to the deposits of local government-owned BPRs with the
provincial development bank, and to the latter’s loans to the former, because the
ownership of both types of institution is considered to be the same. In practice,
this means that a BPR must go to at least one other bank, other than the provincial
development bank and other Central Java BPRs, to place its excess liquidity if this
is more than 10% of its equity. Previously such deposits were a valuable source of
liquidity for the provincial development bank, which used part of the earnings on
these funds to help pay the cost of BKK supervision and training. With the BKKs
now forced to spread their deposits to other banks, the provincial development
bank is finding it less attractive to support local government-owned BPRs. Ultimately, this means that the bank is unwilling to supervise BKK–BPRs as carefully
as before. Application of the connected-party rules in this way makes BKK–BPRs
riskier, not less risky. The regulation that the provincial development bank is not
permitted to lend an amount more than 10% of its capital to the BPRs has not
yet restricted such lending, but it may in the future. For this calculation, all the
local government-owned BPRs are lumped together as if they were a single bank,
because their ownership is considered to be the same.
The promise and the peril of microfinance institutions in Indonesia
95
TABLE 2 Microfinance in East Java a
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Offices (no.)
City/district level
Sub-district level
Village posts
Credit outstanding
Rp trillion
No. of loans (‘000)
Savings
Rp trillion
No. of accounts (‘000)
BPRsb
LKURKs
BKDs
(12/02)
(4/03)
(5/03)
357
BPR
Jatim
(4/03)
22
39
156
2,291
BPD
BRI Village
Units
(12/02)
(5/03)
84
651
39
1,116.1
10.4
134.2
264.6
85.5
14.7
2,180.5
546.3
972.9
560.8
3.0
0.0
19.3
228.7
96.0
67.2
3,856.9
4,759.1
a
East Java had 29 districts, nine municipalities, 624 sub-districts and 8,457 villages in 2003.
Its population was 35.2 million (9.87 million households) in 2002. See appendix for an
explanation of the various types of financial institutions.
b
Excluding BPR Jatim.
Sources: Bank Indonesia; BPR Jatim; Bank Jatim; Bank Rakyat Indonesia; Badan Pusat
Statistik.
One result of the movement to transform BKKs into BPRs appears to be a significant increase in competition at the sub-district level for microcredit and savings
customers. Although BKKs (like other GMFIs) tend to make somewhat smaller
loans on average through their sub-district offices than BRI village units, there is
considerable overlap in the market segment served. Such competition is certainly
beneficial to borrowers and savers in the areas surrounding the sub-district centre. It is unfortunate, however, that this has been accompanied by a withdrawal of
services from relatively distant villages.
The overall status of microfinance activity in Central Java is shown in table 1.
LKURKs in East Java
In East Java, the change in status of the credit institutions for small-scale activities
(lembaga kredit usaha rakyat kecil, LKURKs) established in the early 1980s has gone
through two stages. First, many of the more successful ones were able to meet BI’s
criteria and become BPRs. Next, in 2001, 62 of these BPRs were consolidated into
a single institution, BPR Jatim, with one head office, 21 branches and 39 cash posts
(table 2). The main reason cited for this consolidation was to eliminate the large
number of commissioners and directors required by BI regulation for each BPR;
it would also allow the movement of personnel from branch to branch as needed
and facilitate the setting up of regular staff training courses. It was hoped that the
consolidation would protect BPR Jatim from government interference in the selection of staff, allowing it to base its choice on education, mathematical competence
and other objective criteria.
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96
Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
The consolidation into one institution has simplified the audit task of BI,
which does not have the capacity to audit a large number of small BPRs. Even if
undertaken annually, a BI audit would not be an adequate substitute for the close
supervision previously provided by the provincial development bank. It had one
supervisor in each of its branches, thus allowing the semi-monthly or monthly
checking that has been found necessary to keep microfinance institutions healthy.
Supervision of the remaining 156 LKURKs that were not consolidated into BPR
Jatim has been moved from the provincial development bank to BPR Jatim. It is
expected that in time many of these will become offices of BPR Jatim rather than
remain separate BPRs.
The same trends as were apparent in the development of BKKs in Central Java
are also found in East Java. There has been consolidation of credit and savings
operations at the sub-district level and withdrawal of the motorcycle teams that
formerly delivered credit services to more distant villages. (This occurred at the
time of conversion to BPR status, not at the time of consolidation of the 62 BPRs
into a single BPR Jatim.) There has also been the same movement towards lending
to salaried employees who agree to repay their loans through automatic payroll
deductions.
The overall status of microfinance activity in East Java is shown in table 2.
LKPs in West Nusa Tenggara
The situation in West Nusa Tenggara (Nusa Tenggara Barat, NTB) is similar to
that in East Java. The province’s rural credit institutions (lembaga kredit pedesaan,
LKPs) were set up on the same general lines as the LKURKs, with a staff of three
or four and direct supervision and support from the provincial development
bank, each branch of which had at least one officer whose job it was to visit all
LKPs on a regular basis—at least once a month. After the BI regulations for BPRs
under the 1992 Banking Law became known, the provincial government decided
to convert all LKPs to BPRs (here called LKP–BPRs), although in some cases small
or problem institutions were first merged into neighbouring LKPs. As a result, all
sub-districts in West Nusa Tenggara continue to be served by an LKP–BPR, some
serving more than one sub-district (table 3).
In the conversion to BPRs, the close supervisory role of the provincial development bank was lost. Instead, BI attempted to supervise each BPR directly, but it
simply did not have enough staff to do so; the head of one BPR told us that his
institution had been audited only twice in the five years since its establishment. A
second important problem is lack of control by BPR management and supervisory
boards over the hiring of staff. Each staff appointment is made by the provincial government as if it were an appointment to the provincial bureaucracy. As a
result, insufficient consideration is given to candidates’ specific qualifications for
bank employment.
At the time of writing, the provincial government was seriously considering
whether to consolidate the LKP–BPRs into a single BPR for the whole of the province, as was done in East Java. However, there appeared to be a difference of
opinion between the provincial and district governments, with the latter generally favouring more limited consolidation of all sub-district-level LKP–BPRs into
district-level BPRs with sub-district-level branches. The core of the disagreement
The promise and the peril of microfinance institutions in Indonesia
97
TABLE 3 Microfinance in West Nusa Tenggara a
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Privately
Owned
BPRs
(12/02)
Offices (no.)
City/district level
Sub-district level
Village posts
Credit outstanding
Rp trillion
No. of loans (‘000)
Savings
Rp trillion
No. of accounts (‘000)
Local
Governmentowned BPRs
(12/02)
LKP–
BPRs
BPD
(12/02)
(12/02)
BRI
Village
Units
(5/03)
0
15
18
46
51
17
0
13.4
69.0
34.9
49.3
139.3
21.1
88.3
399.1
197.0
41.8
527.1
209.7
391.9
0
a
West Nusa Tenggara had six districts, two municipalities, 62 sub-districts and 703 villages in 2003. Its population was 4.2 million (1.1 million households) in 2002. See appendix
for an explanation of the various types of financial institutions.
Sources: Bank Indonesia; BPD NTB; Bank Rakyat Indonesia; Badan Pusat Statistik.
had little to do with efficient operations or optimal coverage; rather, it was about
the allocation of dividends from the profits of the BPRs.
Since the implementation of regional autonomy in 2001 and the handing of
new responsibilities to the districts and provinces, most local governments have
perceived themselves to be short of funds. District governments are particularly
eager to acquire or establish sustainable, wholly owned financial institutions of
their own in the hope of realising a steady dividend stream (although considerations of prestige and patronage also play a role). Consolidation into a single
LKP–BPR at the provincial level would probably involve the provincial government taking a significant share of ownership, without paying full compensation
to the current local government owners of the merging institutions for the dilution of their equity. The latter would then receive a correspondingly smaller share
of the profits contributed to the new institution by the LKP–BPRs in their district.
As noted above, under the present set-up with individual BPRs, district governments have relatively little influence over staffing and operations. Whether consolidation into district-level BPRs would mean more government interference in
staffing and operations would depend on whether the supervisory boards of the
BPRs were given full control over such matters.
Not only has financial pressure proven to be one source of disagreement between
the provincial and district governments, but pressure to increase dividends rapidly has resulted in a repeat of the same trends observed in Central and East Java:
consolidation of operations at the sub-district level; abandonment of lending
services at the village level by eliminating motorcycle teams; and concentration
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
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on loans to salaried employees. Although in most cases village service appears to
have been profitable, regulatory pressures, combined with staff shortages, efficiency concerns and pursuit of short-term profits in faster-growing urban markets, have consistently led to withdrawal of services at the village level.
The overall status of microfinance activity in West Nusa Tenggara is shown in
table 3.
LPDs in Bali
In terms of effective access to and utilisation of microfinance services, the island
province of Bali has achieved far more than any other area in Indonesia. With
nearly as many microfinance loans as households, no other province approaches
Bali’s ratio of microfinance loans to total households. The phrase ‘Bali is different’ was a recurring one during the authors’ field visits to Bali. The success of
microfinance in Bali is not due to a single institution. Rather, it is the result of
several microfinance institutions all showing strong outreach performance. While
the BRI village units reach about the same proportion of households as elsewhere,
Bali’s privately owned BPRs are unusually active, and appear to be reaching more
borrowers in total. Indeed, Bali is in the unusual position of having more BPRs
than BRI village units (table 4).14 In addition, some privately owned commercial
banks, the best known of which is Bank Dagang Bali, are active in commercial
microfinance. While the provincial development bank makes most of its loans to
employees rather than enterprises, its wide outreach to private sector workers
makes it another important source of micro-scale finance to households.
However, the greatest difference in microfinance access between Bali and other
provinces is due to its village credit institutions (lembaga perkreditan desa, LPDs).
They are an integral part of the desa adat (traditional village), as distinct from
the desa dinas (official village)—the smallest unit of local government throughout Indonesia. On average, there are more than two desa adat for each desa dinas,
but this ratio can vary widely from area to area, and the borders of the two village types frequently cut across each other. Desa adat are highly participatory and
accountable local religious–social institutions. Bali’s generally vibrant and microenterprise-friendly economy, the strong bond of ethnic Balinese to the desa adat,
and scrupulous traditional attitudes towards fulfilling debt obligations and the
attendant maintenance of social standing, combine to create an environment that
is very nearly ideal for the success of the LPDs.
While some LPDs are quite large, with total assets in the tens of billions of
rupiah, in general they have consistently and successfully resisted changing their
status to become BPRs. According to the managers and supervisors we interviewed, their governance and focus on serving the (Balinese) residents or members of a particular desa adat do not match well with the structure and regulations
of BPRs. At least one desa adat, Sanur, owns a BPR in addition to its LPD, but the
purpose of the two institutions is quite different: while the BPR is considered a
purely commercial enterprise, the LPD is intended to ensure that all residents
have access to basic financial services.
Local government is supportive of the LPDs, and desa dinas appreciate the contribution of desa adat to the infrastructure and development budgets of the villages.
14 See Winship (2003) for a more in-depth look at the BPR sector in Bali.
The promise and the peril of microfinance institutions in Indonesia
99
TABLE 4 Microfinance in Bali a
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Privately
Owned
BPRs
(12/02)
Offices (no.)
City/district level
Sub-district level
Village posts
Local
Governmentowned BPRs
(12/02)
LPDs
BPD
(12/02)
(12/02)
144
12
34
3
1,206
BRI
Village
Units
(5/03)
95
6
Credit outstanding
Rp trillion
No. of loans (‘000)
489.1
99.5
16.3
4.3
670.6
283.5
1,440.7
159.1
342.7
69.6
Savings
Rp trillion
No. of accounts (‘000)
421.7
570.7
17.6
26.7
672.5
857.1
1,776.5
2,915.9
934.8
550.9
a Bali had eight districts, one municipality, 53 sub-districts, 678 desa dinas and 1,406 desa
adat in 2003. Its population was 3.2 million (848,000 households) in 2002. See appendix for
an explanation of the various types of financial institutions.
Sources: Bank Indonesia; Bank BPD Bali; Bank Rakyat Indonesia; Badan Pusat Statistik.
At the provincial level, the governor was active in advocating to BI that the LPDs
be allowed to maintain their special non-bank status while continuing to mobilise
savings from within the village. At present BI is quite supportive of them. The
current BI branch manager pointed out to us that the central bank already has a
big job supervising more than 140 BPRs; attempting to supervise more than 1,200
LPDs as well would be impossible.
Each LPD is staffed by a minimum of three persons—a manager, a teller and a
book-keeper—all from the desa adat. Most are open five or six days per week, and
most employ staff on a full-time basis, even during the start-up phase. This entails
a certain amount of sacrifice on the part of staff in a new LPD, who are not well
compensated for the hours worked, but also provides a strong incentive to build
up the business. Because each LPD is a stand-alone institution, its managers have
no real career path, except to develop their own LPD. To provide an indicator of
the ability of managers as well as a degree of job status, a training certification
system has been developed.
Within the desa adat, each LPD is supervised by a supervisory committee,
which receives an honorarium. Typically, the desa adat appoints more members
to the supervisory board than are required by regulation, in order to allow wider
accountability and daily supervision. In such cases, the honorarium for supervisory board members is also divided. External supervision has been relatively
weak, though the underlying strength of most LPDs at the local level has generally
prevented significant problems from developing. Recently, the provincial government has taken steps to modify the system of supervision substantially. Under the
new system, the provincial development bank will be responsible for financial
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Jay K. Rosengard, Richard H. Patten, Don E. Johnston, Jr and Widjojo Koesoemo
supervision (essentially, audit and monitoring of regular financial reports), while
a newly formed, district-level supervisory body will oversee training and operational supervision. Financing to cover the cost of this new body is intended to
be generated by the LPD system itself, though the implementation of this is still
evolving. Up to the present, much of the development of the LPD system has been
externally facilitated, with significant policy and training inputs from the Promotion of Small Financial Institutions project of Deutsche Gesellschaft für Technische
Zusammenarbeit (GTZ). With the new approach to supervision, however, most
training and much of the institutional development of LPDs will be shouldered
by the new supervisory structure.
In addition to its role as financial supervisor, the provincial development bank
fulfils a number of other functions for the LPDs: management of excess liquidity; providing a line of credit; monitoring and reporting; and playing a key role
in institutional development. According to supervisors from both the provincial
bank and the new district-level supervisory body, the provincial government
currently has plans to establish LPDs in all the desa adat that do not yet have
one—over 200 in all. This will probably create a need for a workable ‘part-time’
operating model along the lines of the BKDs, as many of the remaining desa adat
are unlikely to be able to support a full-time LPD.
Uniquely among Indonesia’s VMFIs, Bali’s LPDs were able to retain their status
and prosper throughout the 1990s, when regulatory issues created serious operational difficulties for VMFIs in every other province. A strong sense of local ownership, support from local and provincial governments, consistent support from
the provincial development bank, timely realisation by BI of the benefits of the
system, and capable technical assistance and institutional development played
mutually reinforcing roles in preserving the character and mission of the LPDs.
As a result, of all the VFMI systems in use across Indonesia, the LPD system has
come closest to achieving the goal of providing universal access to microfinance
services. While not all aspects of the LPD experience—particularly Balinese attitudes towards debt and the cohesiveness of the desa adat—can be replicated elsewhere, the ‘win–win’ institutional relationships developed in Bali could serve as
a model for any province.
The overall status of microfinance activity in Bali is shown in table 4.
BKKs and LPUKs in South Kalimantan
In contrast to the happy outcome in Bali, the story of the sub-district credit bodies (badan kredit kecamatan, BKKs) of South Kalimantan is largely one of missed
opportunities and unrealised potential. Established under a governor’s decree in
1985 (EKU 09/1985), they were intended to finance micro- and small-scale enterprises, mainly in rural areas. Over time the provincial government established 34
BKKs, which were initially permitted to mobilise savings. This changed following
the enactment of the 1992 Banking Law, when the provincial government decided
to follow the new law literally and immediately. Apparently overlooking both
article 58 of the law, which formally recognised GMFI operations such as those of
the BKKs, and the implementing regulation providing for a five-year transition
period, the provincial government prohibited BKKs from accepting savings, to
take effect immediately. For most BKKs, this left only their initial capital for use
as loanable funds.
The promise and the peril of microfinance institutions in Indonesia
101
TABLE 5 Microfinance in South Kalimantana
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Privately
Owned
BPRs
(6/03)
Offices (no.)
Headquarters & other
Sub-district level
Village posts
Local
Governmentowned BPRs
(6/03)
BKKs
LPUKs
(6/03)
(6/03)
6
20
14
1
75
1.2
6.3
4.2
12.7
Credit outstanding
Rp trillion
No. of loans (‘000)
26.2
2.9
12.1
8.1
Savings
Rp trillion
No. of accounts (‘000)
20.3
9.5
7.2
23.2
BRI
Village
Units
(6/03)
72
3
162.5
36.6
479.6
505.7
a
South Kalimantan had nine districts, two municipalities, 119 sub-districts and 1,946
villages in 2002. Its population was 3.1 million (830,000 households) in 2002. See appendix
for an explanation of the various types of financial institutions.
Sources: Bank Indonesia; BPD Kalimantan Selatan; Bank Rakyat Indonesia; Badan Pusat
Statistik.
Despite this, the provincial government went on to establish, through another’s
governor’s decree (316/1993), 75 small enterprise financing institutions (lembaga
pembiayaan usaha kecil, LPUKs) in the remaining sub-districts that did not have a
BKK, plus one special unit in the governor’s office (table 5). These provide credit
to microenterprises but do not collect savings. At the same time, some BKKs (20 at
the time of writing) have changed their status to become BPRs, because they have
grown enough to fulfil the minimum capital requirement for doing so. Of these,
15 are considered sound by BI.
The staff of most BKKs and LPUKs consist of a manager, cashier, book-keeper
and credit officer. The manager is responsible to the sub-district head for the performance of the BKK/LPUK. The sub-district head is an employee of the district
government and reports directly to the district head. The minimum staffing of a
BKK or LPUK is two persons. This is considered risky by supervisors owing to the
lack of separation of jobs, but is nevertheless implemented in some of the smallest
BKKs and LPUKs for reasons of efficiency. The local government-owned BPRs,
on the other hand, carry the full staffing structure required of BPRs: a board of
supervisors, board of directors, internal controller, funds manager, loan manager,
cashier and book-keeper.
The capital of the BKKs/LPUKs originates from provincial government equity
participatio