Finished<\/p>\n
Problems and challenge in providing small credits<\/p>\n
Mohamad Nazirwan
\nContributor
\nJakarta<\/p>\n
Discussing the role of micro, small and medium enterprises
\n(MSMEs) is always interesting and often invites heated debate
\ninvolving economists, politicians and policy makers.<\/p>\n
The reason behind the phenomenon is that MSMEs are regarded as
\nthe backbone of the economy in many developing countries,
\nincluding Indonesia.<\/p>\n
This sector plays a leading role in creating jobs and
\nproviding income for the majority of Indonesians.<\/p>\n
Statistics published by the Ministry of Cooperative and Small
\nand Medium Size Companies state that there are approximately 40
\nmillion MSMEs which employ more than 73 million people and make
\nup nearly 55 percent of Indonesia's Gross Domestic Product (GDP).<\/p>\n
Interestingly, since the economic crisis struck Indonesia in
\n1997, the presence of MSMEs has become stronger and they have
\nplayed an important role in creating economic growth compared to
\nthe impact of the corporate sector.<\/p>\n
Numerous initiatives have been introduced to promote the role
\nof MSMEs in the country's economy. These have involved government
\nbodies, regional administrations, the Indonesian Chamber of
\nCommerce (KADIN), business associations, the central bank, Bank
\nIndonesia and other institutions.<\/p>\n
As a policy framework those programs look attractive. In
\npractice, however, the policies are difficult to execute since a
\nmyriad of problems need to be addressed, and a comprehensive
\nsolution involving an integrated approach needs to be put forth.<\/p>\n
The involvement of financial intermediaries (banks and
\nfinancial institutions) have actually strengthened the MSMEs
\nsector for a long time, beginning in the early 1970s.<\/p>\n
Enormous credit programs for MSMEs have been introduced but
\nonly a few have been successfully implemented. A good example was
\nthe subsidized credit for working capital and investment program
\n(KIK\/KMKP), which was designed to help indigenous people engaged
\nin businesses.<\/p>\n
In 1983 the government implemented a liberal banking policy
\nand transformed the BIMAS credit program, which targeted self-
\nsufficiency in rice production, and two off-farm credits (Kredit
\nMINI\/MIDI), into a single general rural credit (KUPEDES), and
\nadopted a more commercial approach.<\/p>\n
Differing from KIK\/KMKP, the KUPEDES, delivered by the BRI,
\ncontinues to serve millions of micro entrepreneurs and
\neconomically active poor, especially in rural areas.<\/p>\n
In 1988, the government introduced another liberal banking
\npolicy, which increased the number of private banks and banking
\nnetworks around the country.<\/p>\n
Although the number of private banks increased significantly
\nduring this period, the role of the banking sector in providing
\ncredits for MSMEs was dominated by the five state owned banks
\nuntil the government set up a policy which required that all
\nbanks allocate 20 percent of their loan portfolios for MSME in
\n1990 through Small Business Credit (KUK).<\/p>\n
Since the economic crisis hit Indonesia in 1997, the banking
\nlandscape has changed drastically as has the policy on MSME
\ndevelopment. In short, the significant change was that the
\ngovernment intervened in the banking industry less and let the
\nmarket play a larger role in MSMEs lending.<\/p>\n
In addition, the government also created a new financial
\ninstitution called Permodalan Nasional Madani responsible for
\nproviding financial assistance to MSME.<\/p>\n
Naturally, when dealing with credit transactions, regardless
\nof who the customer is, a bank will face asymmetric information
\nproblems, moral hazards and adverse selection.<\/p>\n
Asymmetric information is a situation in which bank has only
\nlimited information about a borrower. Moral hazard is a situation
\nwhere a bank suspects that a customer can not be trusted. Adverse
\nselection is a condition in which a customer has hidden
\ninformation.<\/p>\n
In practical terms, when dealing with a credit transaction,
\nthe credit officer does not know whether the customer is honest
\nor dishonest, whether the customer can be trusted, or whether the
\ncustomer will pay back the loan on time and so forth.<\/p>\n
In short, when a credit contract has been signed, a bank
\nobviously accepts risks. To overcome potential negative
\nconsequences, the bank usually uses the popular 5C's approach
\nbefore deciding to disburse the loan to a customer. These include
\nCapital, Capacity, Character, Condition of the economy and
\nCollateral. The purpose of this approach is to protect the
\nbank's interest and to minimize risk.<\/p>\n
There is a common belief that banks are reluctant to serve
\nMSMEs since this sector is not commercially viable and high risk.
\nIn the perspective of banks MSMEs are not always guaranteed to
\nreturn a profit and fail to meet the criteria of the 5Cs due to
\nnot providing accurate and reliable information on financial
\nconditions and performance, a lack of a robust business plan and
\nformal business licenses, and are unable to provide marketable
\ncollateral.<\/p>\n
On the other hand, when dealing with MSMEs, banks also deal
\nwith internal problems such as limited specialized loan officers
\nwho understand the characteristics of MSMEs, inappropriate
\nlending technologies and a lack of operational systems that allow
\nMSME to access loans easily. There is also high overhead costs
\ndue to the large number of customers with small loans.<\/p>\n
In addition, some problems arise beyond the control of banks,
\nsuch as difficulties with the legal system enforcing loan
\ncontracts and compensation.<\/p>\n
MSMEs are an important part of the economy and a potential
\nmarket for the banking industry, however, banks must consider
\ncertain issues when doing business with MSMEs.<\/p>\n
First, develop lending strategies appropriate to the
\nborrower's characteristics, i.e. use a 3C's approach (Character,
\nCapacity, Condition of the economy) instead of the 5C's.<\/p>\n
Second, the size of the loan should meet the needs of MSMEs,
\ni.e. the size of lending should be appropriate for the type of
\nbusiness and the life cycle of the enterprises.<\/p>\n
Third, simplify administrative procedures and paper work for
\nmicro and small businesses to meet the needs and education levels
\nof the borrowers.<\/p>\n
Fourth, set up a relaxed policy on collateral. Instead of
\nphysical collateral, banks should develop a loan guarantee system
\nand credit insurance.<\/p>\n
Fifth, provide technical assistance in addition to loan
\nservices to enhance the capacity of MSME in areas such as
\nmarketing and financial management.<\/p>\n
Last but not least, the role of the government must be
\nstressed in setting a market friendly economic policy, providing
\neasy access to the legal system, licensing and tax incentives.
\nBureaucratic procedures should also be relaxed in order to
\nminimize the cost of corruption, collusion and nepotism. (The
\ncontributor is a senior microfinance specialist of Bank Rakyat
\nIndonesia)<\/p>\n
.rm
\nTable<\/p>\n
Enterprises Number % Labor % GDP %<\/p>\n
(Thousand Units) (Thousand people) (Million Rp)<\/p>\n
Small 40,137 99.85 65,246 88.6 578,359 39.40
\nMedium 57 0.14 7,993 10.85 225,223 15.34
\nSub total 40,194 99.99 73,239 99.45 803,582 54.74
\nCorporate 2 0.01 406 0.55 664,517 45.26
\nTotal 40,196 100 73,645 100 1,468,199 100<\/p>",
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